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1. Which of the following gives the owners of the business limited liability?
a. proprietorship
b. partnership
c. Corporation
d. None of the above

2. Which of the following gives priority to creditors in a dissolution?
a. A proprietorship
b. An LLC
c. A partnership
d. all of the above

3. Which statement is correct?
a. A foreign corporation is one organized in another country but does business in the US
b. A foreign corporation is one organized in one state but does business in another state
c. Any type of business entity doing business abroad is a foreign company
d. None of the above is correct

4. Which of the following is not a disadvantage of a corporate form of entity?
a. Double taxation
b. Incorporation costs
c. Accumulating or raising capital
d. Regulations

5. Which of the following statements is not true?
a. Most states allow an easy transition from a conventional partnership into an LLP
b. Most common law and statutory law from partnership law applies to LLPs
c. LLP do not require state filings
d. All corporations are either subchapter S or C corporations

6. Which of the following is a false statement about board of directors?
a. Board members may not use corporate assets
b. Board members may not profit from the company with or without permission of the entity
c. Board members can not compete directly with the entity
d. Board members can not be board members of a competing company

7. A company’s audit committee should have at least one member considered to be a financial expert. Which of these is not an example of a financial expert?
a. Prior experience as a controller of a large corporation
b. Previous work in a public accounting firm
c. Prior experience as an internal auditor
d. A member of a professional accounting/finance association

8. Which of the following is not one of the elements of COSO Internal Control Integrated Framework?
a. The audit committee of the board of directors
b. Risk assessment
c. Monitoring
d. Information/Communication

9. Which of the following is not a pass-through entity?
a. LLP
b. Subchapter S corporation
c. Chapter C corporation
d. General partnership

10. Which of the following is true and the best answer?
a. The board of directors provide advice to the entity
b. The board of directors monitors and oversees senior management
c. Maintains a level of skepticism
d. All of the following are true statements

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23. The number of equivalent units produced with respect to direct materials costs is:
a. 51,000
b. 50,000
c. 47,000
d. 56,000

Department J had no work in process at the beginning of the period, 18,000 units were completed during the period, 2,000 units were 30% completed at the end of the period, and the following manufacturing costs were debited to the departmental work in process account during the period (Assuming the company uses FIFO and rounds average cost per unit to two decimal places):

Direct materials (20,000 at $5) $ 100,000
Direct labor 142,300
Factory overhead 57,200

24. Assuming that all direct materials are placed in process at the beginning of production, what is the total cost of the departmental work in process inventory at the end of the period?
a. $90,000
b. $283,140
c. $199,500
d. $16,438

25. Which of the following statements is correct concerning variable and fixed costs?
a. Both costs are constant when considered on a per unit basis.
b. Variable costs vary in total and fixed costs are constant on a per unit basis.
c. Fixed costs are constant in total and variable costs are constant on a per unit basis.
d. Variable costs are constant in total and fixed costs are constant on a per unit basis.

26. If fixed costs are $750,000 and variable costs are 60% of sales, what is the break-even point (dollars)?
a. $1,875,000
b. $300,000
c. $2,500,000
d. $1,250,000

27. When a business sells more than one product at varying selling prices, the business’s break-even point can be determined as long as the number of products does not exceed:
a. two
b. three
c. fifteen
d. there is no limit

28. If variable selling and administrative expenses totaled $120,000 for the year (80,000 units at $1.50 each) and the planned variable selling and administrative expenses totaled $120,900 (78,000 units at $1.55 each), the effect of the unit cost factor on the change in variable selling and administrative expenses is:
a. $900 decrease
b. $3,100 decrease
c. $4,000 decrease
d. $3,100 increase

29. A variant of fiscal-year budgeting whereby a twelve-month projection into the future is maintained at all times is termed:
a. flexible budgeting
b. continuous budgeting
c. zero-based budgeting
d. master budgeting

The Cardinal Company had a finished goods inventory of 55,000 units on January 1. Its projected sales for the next four months were: January – 200,000 units; February – 180,000 units; March – 210,000 units; and April – 230,000 units. The Cardinal Company wishes to maintain a desired ending finished goods inventory of 20% of the following months sales.

30. What would be the budgeted production for March?
a. 256,000
b. 206,000
c. 214,000
d. 298,000

Problems

31. The Cake Factory has the following information for the month of March. Prepare a schedule of cost of goods manufactured. (6 points)

Purchases $85,000
Materials inventory, March 1 6,000
Materials inventory, March 31 7,000
Direct labor 25,000
Factory overhead 34,000
Work in process, March 1 17,000
Work in process, March 31 18,500
Finished goods inventory, March 1 21,000
Finished goods inventory, March 31 23,000
Sales 235,000
Sales and administrative expenses 78,000

32. A summary of the time tickets for August follows:

Description Amount Description Amount
Job No. 321 $11,000 Job No. 342 $8,300
Job No. 329 8,200 Job No. 346 5,700
Job No. 336 2,000 Indirect labor 5,000

Present the journal entries to record (a) the labor cost incurred and (b) the application of factory overhead to production for August. The factory overhead rate is 70% of direct labor cost. (5 points)

33. The cost of direct materials transferred into the Bottling Department of the Desert Springs Water Company is $27,225. The conversion cost for the period in the Bottling Department is $7,596. The total equivalent units for direct materials and conversion are 60,500 and 63,300 respectively. Determine the direct materials and conversion cost per equivalent unit. (6 points)

34. Barrack Inc. manufactures laser printers within a relevant range of production of 50,000 to 70,000 printers per year. The following partially completed manufacturing cost schedule has been prepared: (15 points)

Number of Printers Produced
70,000 90,000 100,000
Total costs:
Total variable costs $350,000 (d) (j)
Total fixed costs 630,000 (e) (k)
Total costs $980,000 (f) (l)
Cost per unit:
Variable cost per unit (a) (g) (m)
Fixed cost per unit (b) (h) (n)
Total cost per unit (c) (i) (o)

35. On August 31, the end of the first year of operations, during which 18,000 units were manufactured and 13,500 units were sold, Finberg Inc. prepared the following income statement based on the variable costing concept:

Finberg Inc.
Income Statement
For Year Ended August 31, 20–
Sales $297,000
Variable cost of goods sold:
Variable cost of goods manufactured $279,000
Less ending inventory 67,500
Variable cost of goods sold 211,500
Manufacturing margin $ 85,500
Variable selling and administrative
expenses 40,500
Contribution margin $ 45,000
Fixed costs:
Fixed manufacturing costs $ 12,000
Fixed selling and administrative
expenses 10,800 22,800
Income from operations $ 22,200
========

Determine the unit cost of goods manufactured, based on (a) the variable costing concept and (b) the absorption costing concept. (8 points)

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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.

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.

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.

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.

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.

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?

49. FASB has specified a “75% percent
consolidated revenue test”.

Required:
a) What is the 75% test?
b) How is the 75% test impacted by the “10% Significance Rule”?

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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10. Which of the following defines a foreign-based
entity that uses a functional currency different from the local currency?

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.

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.

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.

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:

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

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.

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.

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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Essay Questions

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.

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.

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.

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.

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.

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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

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.”

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.

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

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:
.png”>
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

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:
.png”>
A. Option A
B. Option B
C. Option C
D. Option D

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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.

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.

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.

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.

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

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.

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

43. FASB 131 uses a(n) ______ approach to the
definition of segments.
A. line of business
B. entity approach
C. portfolio
D. management

Essay Questions

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14.
Journalize the following treasury stock transactions:
June 3 Reacquired 350 shares of $12 par common stock at $10 per share.

June
7 Sold 180 shares of treasury stock for $16 per share.

June 8 Sold 150 shares of treasury stock for $9 per
share.

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35.
On January 1, 20X1, Parent Company acquired 100% of
the common stock of Subsidiary Company for $750,000. On this date Subsidiary
had total owners’ equity of $540,000.

Any excess of cost over book value is attributable to land,
undervalued $10,000, and to goodwill.

During 20X1 and 20X2, Parent has appropriately accounted for its
investment in Subsidiary using the simple equity method.

On January
1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During 20X2,
Subsidiary sold merchandise to Parent for $100,000, of which $20,000 is held by
Parent on December 31, 20X2. Subsidiary’s usual gross profit on affiliated
sales is 40%.

On December 31, 20X2, Parent still owes Subsidiary $20,000 for
merchandise acquired in December.

On January
1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a
book value of $20,000. The sales price was $40,000. Subsidiary is depreciating
the equipment over a five-year life, assuming no salvage value and using the
straight-line method.

Required:

Complete the Figure 4-3 worksheet for consolidated financial
statements for the year ended December 31, 20X2.

7.
On January 1, 20X1, Parent Company acquired 80% of
the common stock of Subsidiary Company for $560,000. On this date Subsidiary
had total owners’ equity of $540,000, including retained earnings of $240,000.
During 20X1, Subsidiary had net income of $60,000 and paid no dividends.

Any excess of cost over book value is attributable to land,
undervalued $10,000, and to goodwill.

During 20X1 and 20X2, Parent has appropriately accounted for its
investment in Subsidiary using the cost method.

On January
1, 20X2, Parent held merchandise acquired from Subsidiary for $10,000. During
20X2, Subsidiary sold merchandise to Parent for $100,000, of which $20,000 is
held by Parent on December 31, 20X2. Subsidiary’s usual gross profit on
affiliated sales is 40%.

On December 31, 20X2, Parent still owes Subsidiary $20,000 for
merchandise acquired in December.

On January
1, 20X2, Parent sold to Subsidiary some equipment with a cost of $50,000 and a
book value of $20,000. The sales price was $40,000. Subsidiary is depreciating
the equipment over a five-year life, assuming no salvage value and using the
straight-line method.

Required:

Complete the Figure 4-4 worksheet for consolidated financial
statements for the year ended December 31, 20X2.

4-16

Chapter 4

8.
On January 1, 20X1, Powers Company acquired 80% of
the common stock of Sculley Company for $195,000. On this date Sculley had
total owners’ equity of $200,000 (common stock, other paid-in capital and
retained earnings of $10,000, $90,000 and $100,000 respectively).

Any excess
of cost over book value is attributable to inventory (worth $6,250 more than
cost), to equipment (worth $12,500 more than book value), and to patents. FIFO
is used for inventories. The equipment has

a
remaining life of five years and straight-line
depreciation is used. The excess to patents is to be amortized over 20 years.
The Powers company concept (pro rata fair value approach) is to be used in any
write up of assets.

Powers 7% Bonds Payable are due in 20X8 and Sculley 12% Bonds
are due in 20X5.

On July 1, 20X2 Sculley borrowed $100,000 from Powers with a 10%
1-Year Note.

During 20X1 and 20X2, Powers has appropriately accounted for its
investment in Sculley using the cost method.

On January
1, 20X2, Powers held merchandise acquired from Sculley for $10,000. During 20X2,
Sculley sold merchandise to Powers for $50,000, $20,000 of which is still held
by Powers on December 31, 20X2. Sculley’s usual gross profit on affiliated
sales is 50%.

On December
31, 20X1, Powers sold equipment to Sculley at a gain of $10,000. During 20X2,
the equipment was used by Sculley. Depreciation is being computed using the
straight-line method, a five-year life, and no salvage value.

Required:

a. Using the
information above or on the Figure 4-5 worksheet, prepare a determination and
distribution of excess schedule.

b. Complete
the Figure 4-5 worksheet for consolidated financial statements for the year
ended December 31, 20X2.

4-18

Chapter 4

Chapter 4

9.
On January 1, 20X1, Powers Company acquired 80% of
the common stock of Sculley Company for $195,000. On this date Sculley had
total owners’ equity of $200,000 (common stock, other paid-in capital, and
retained earnings of $10,000, $90,000, and $100,000 respectively).

Any excess
of cost over book value is attributable to inventory (worth $6,250 more than
cost), to equipment (worth $12,500 more than book value), and to patents. FIFO
is used for inventories. The equipment has

a
remaining life of five years and straight-line
depreciation is used. The excess to the patents is to be amortized over 20
years. The Powers company concept (pro rata fair value approach) is to be used
in any write up of assets.

During 20X1 and 20X2, Powers has appropriately accounted for its
investment in Sculley using the simple equity method.

Powers 7% Bonds Payable are due in 20X8 and Sculley 12% Bonds
are due in 20X5.

On July 1, 20X2 Sculley borrowed $100,000 from Powers with a 10%
1-Year Note.

On January
1, 20X2, Powers held merchandise acquired from Sculley for $10,000. During
20X2, Sculley sold merchandise to Powers for $50,000, $20,000 of which is still
held by Powers on December 31, 20X2. Sculley’s usual gross profit on affiliated
sales is 50%.

On December
31, 20X1, Powers sold equipment to Sculley at a gain of $10,000. During 20X2,
the equipment was used by Sculley. Depreciation is being computed using the
straight-line method, a five-year life, and no salvage value.

Required:

a. Using the
information above or on the Figure 4-6 worksheet, prepare a determination and
distribution of excess schedule.

b. Complete
the Figure 4-6 worksheet for consolidated financial statements for the year
ended December 31, 20X2.

4-21

4-23

Chapter 4

10.
On January 1, 20X1, Powers Company acquired 80% of
the common stock of Sculley Company for $195,000. On this date Sculley had
total owners’ equity of $200,000 (common stock, other paid-in capital, and
retained earning of $10,000, $90,000, and $100,000 respectively).

Any excess
of cost over book value is attributable to inventory (worth $6,250 more than
cost), to equipment (worth $12,500 more than book value), and to the patents.
FIFO is used for inventories. The equipment has a remaining life of five years
and straight-line depreciation is used. The excess attributable to the patents
is to be amortized over 20 years. The Powers company concept (pro rata fair
value approach) is to be used in any write up of assets.

During 20X1 and 20X2, Powers has appropriately accounted for its
investment in Sculley using the sophisticated equity method.

On January
1, 20X2, Powers held merchandise acquired from Sculley for $10,000. During
20X2, Sculley sold merchandise to Powers for $50,000, $20,000 of which is still
held by Powers on December 31, 20X2. Sculley’s usual gross profit on affiliated
sales is 50%.

On December
31, 20X1, Powers sold equipment to Sculley at a gain of $10,000. During 20X2,
the equipment was used by Sculley. Depreciation is being computed using the
straight-line method, a five-year life, and no salvage value.

Required:

a. Using the
information above or on the Figure 4-7 worksheet, prepare a determination and
distribution of excess schedule.

b. Complete
the Figure 4-7 worksheet for consolidated financial statements for the year
ended December 31, 20X2.

4-24

Chapter 4

4-26

Chapter 4

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Description

11. The Paris
Company purchased a 70% interest in Seine, Inc. for $278,000 on July 1, 20X1,
when Seine had the following balance sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

110,000

Land……………………………………………

80,000

Building and
Equipment……………………………

160,000

Total…………………………………………

$400,000

========

Liabilities
and Equity

$160,000

Current
liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings – 7/1…………………………..

100,000

Total…………………………………………

$400,000

========

The inventory is understated by $50,000 and is sold in the third
quarter of 20X1. The land has a fair value of $100,000. The equipment has a
fair value of $130,000 and a remaining life of 3 years. Any remaining excess is
attributed to a patent with a 10-year life.

The
following net incomes (earned evenly throughout the year) and dividends paid
(on 12/1 each year) are reported by Seine:

……………………………

Net income

20X1

20X2

$150,000

$100,000

Dividends paid………………………..

10,000

10,000

Required:

a. Prepare a
determination and distribution of excess schedule as of July 1, 20X1.

b. Prepare the
20X1 and 20X2 entries made by Paris to record the net income and dividends paid
information on its books under the sophisticated equity method.

c. Prepare the
20X1 and 20X2 entries made by Paris to record the net income and dividends paid
information on its books under the cost method.

3-28

Chapter 3

12.
The Paris Company purchased an 70% interest in
Seine, Inc. for $300,000 on July 1, 20X1, when Seine had the following balance
sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

110,000

Land……………………………………………

80,000

Building and
Equipment……………………………

160,000

Total…………………………………………

$400,000

========

Liabilities
and Equity

$160,000

Current liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings –
7/1…………………………..

100,000

Total…………………………………………

$400,000

========

Assume that
all assets and liabilities have fair values equal to their book values. Any
excess cost is attributed to patent with a 10-year life.

The
following net incomes (earned evenly throughout the year) and dividends paid
(on 12/1 each year) are reported by Seine:

……………………………

Net income

20X1

20X2

$60,000

$80,000

Dividends paid………………………..

10,000

10,000

Required:

a. Prepare the
20X1 & 20X2 entries made by Paris to record the net income and dividends
paid information on its books under the simple equity method.

b. Prepare the
20X1 & 20X2 entries made by Paris to record the net income and dividends
paid information on its books under the cost method.

13. The Paris
Company purchased a 70% interest in Seine, Inc. for $300,000 on July 1, 20X1,
when Seine had the following balance sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

110,000

Land……………………………………………

80,000

Building and
Equipment……………………………

160,000

Total…………………………………………

$400,000

========

Liabilities
and Equity

$160,000

Current
liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings –
7/1…………………………..

100,000

Total…………………………………………

$400,000

========

Assume that
all assets and liabilities have fair values equal to their book values. Any
excess cost is attributed to patent with a 10-year life.

The
following net incomes (earned evenly throughout the year) and dividends paid
(on 12/1 each year) are reported by Seine:

……………………………

Net income

20X1

20X2

$60,000

$80,000

Dividends paid………………………..

10,000

10,000

Required:

a. Prepare a
determination and distribution of excess schedule as of July 1, 20X1.

b. Prepare the
20X1 and 20X2 entries made by Paris to record the net income and dividends paid
information on its books under the sophisticated equity method.

3-31

Chapter 3

14.
Pablo Company purchased an 80% interest in Sand
Company on July 1, 20X1, for $260,000. On July 1, 20X1, Sand Company had the
following information available:

Common stock outstanding
($10

par)…………………

$100,000

Retained
earnings, January 1, 20X1…………………

120,000

Net
income, January 1-June 30, 20X1………………..

10,000

Dividends
paid, June 30, 20X1……………………..

2,000

Equipment
is undervalued by $30,000 and has a 6-year remaining life. Any remaining excess
is attributable to patent with a 20-year life.

Required:

a. Prepare a determination and
distribution of excess schedule.

b.
Complete the Figure 3-8 partial worksheet for the
year ended December 31, 20X1. Subsidiary books were not closed on the purchase
date. Provide keyed explanations for all worksheet entries and key each
amortization of excess separately. Include income distribution schedules.

3-32

Chapter 3

3-33

Chapter 3

15. Puddle
Corporation acquired 90% of Suds Company’s common stock on January 1, 20X1 for
$32,000 cash when Sud’s stockholders’ equity

consisted of:

Common Stock
$20,000 Retained Earnings $ 4,000

A
determination and distribution schedule was prepared for the difference between
the price paid by Puddles and the underlying equity acquired in Suds with the
excess of cost over book value being allocated as:

Inventory
(undervalued)

$

400

Building
& Equipment (undervalued)

2,000

Patent

8,000

Allocated
excess cost over book value

$10,400

=======

The
inventory was sold during 20X1, and the building and equipment are being
depreciated for 5 years using the straight-line method. The Patent is expected
to have a 10-year useful life.

Required:

The
separate December 31, 20X1 financial statements for Puddle and Suds is provided
in Figure 3-7. Complete the worksheet and provide supporting calculations as
needed and an explanation of the elimination and adjustment entries.

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Description

  1. Record the following transactions using the
    accounting
    equation.
    Example:
    Assets = Liabilities + Equity
    XXXX(cash) XXXX(accounts payable)
    A. Amanda invests $17,000 cash into her merchandising
    business.

B. She buys $6,500 of office equipment and $3,000 of office
supplies with cash from Office Depot.

C. Additional purchases were supplies for $35,000 on
account from various suppliers.

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Description

41. The
length of the measurement period allowed to value the assets and liabilities in
an acquired business combination starts on the date of acquisition and lasts
until:
A. All necessary information about the facts of the acquisition is
obtained
B. All necessary information about the facts of the acquisition is
obtained, not to exceed one month
C. All necessary information about the facts of the acquisition is
obtained, not to exceed one reporting period
D. All necessary information about the facts of the acquisition is
obtained, not to exceed one year


42. FASB
141R (ASC 805) requires contingent consideration in a business combination to
be classified as:
A. An asset
B. A liability or equity
C. An asset or equity
D. An asset or a liability

43. For
all acquired contingencies, the acquirer should do all of the following except:
A. Provide documentation from the acquirer’s attorney regarding pending
lawsuits and loan guarantees
B. Provide a description of each contingency
C. Disclose the amount recognized at the acquisition date
D. Describe the estimated range of possible undiscounted outcomes of the
contingency

44. FASB
141R (ASC 805) requires that ongoing research and development projects be
treated in all of the following ways except:
A. Recorded at acquisition-date fair values
B. Classified as intangible assets having indefinite lives
C. Expensed immediately
D. Tested for impairment periodically



Essay Questions

45. On
January 1, 20X8, 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:
.png”>
Required:
Prepare the journal entry to record the acquisition of Mercantile
Corporation.





46. On
January 1, 20X8, 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, 20X8, 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.
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, 20X8.




47. 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:
.png”>
Required: Determine the amount of goodwill that SeaLine should report in its
current financial statements.

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Description

1. Account
balances are as of December 31, 20X3 except where noted.

SelectedIncome Statement Amounts:

Pipe

Match

$710,000

$530,000

Sales

Cost of Goods Sold

490,000

370,000

Gain on Sale of Equipment

61,000

21,000

Earnings from Investment
in subsidiary

Interest Revenue

2,880

2,880

Interest Expense

25,000

Depreciation

20,000

SelectedBalance Sheet Amounts
{Debits/(Credits)}:

$ 50,000

$ 15,000

Cash

Notes Receivable

36,000

150,000

Inventories

229,000

Equipment

440,000

360,000

Accumulated Depreciation

(200,000)

(120,000)

Investment in Shaw

189,000

(36,000)

Notes Payable

(100,000)

Common Stock

(10,000)

Additional paid-in-capital

(250,000)

(40,000)

Retained Earnings

(402,000)

(140,000)

SelectedStatement of Retained
Earnings Amounts:

$ 272,000

$
100,000

Beginning Balance,
December 31, x2

Net Income

210,000

70,000

Dividends Paid

80,000

30,000

Additional Information:

On January
2, 20X3 Pipe purchased 90% of Match for $155,000. On that date Match’s
shareholders’ equity equaled $150,000 and the fair values of Match’s assets and
liabilities equaled their carrying amounts. Excess, if any, is attributed to
patents and is amortized over 10 years.

On September 4, 20X3 Match paid cash
dividends of $30,000.

On January 3, 20X3 Match sold equipment with an original cost of
$30,000 and a carrying value of $15,000 to Pipe for $36,000. The equipment had
a remaining useful life of 3 years. Straight-line depreciation is used.

On January
4, 20X3 Match signed an 8% Note Payable. All interest payments were made as of
December 31, 20X3.

During the year Match sold merchandise to Pipe for $60,000,
which included a profit of $20,000. At year end 50% of the merchandise remained
in Pipe’s inventory.

4-7

Chapter
4

Required:

1.
Which method is Pipe using to account for the
investment in Match? How do you know?

2.
What elimination entry(ies) are associated with the
elimination of intercompany profits due to the sale of merchandise?

3.
What elimination entry(ies) are necessary with the
sale of equipment by Match to Pipe?

4.
What elimination entry(ies) are associated with the
note to Match? Why are the entry(ies) made?

Chapter 4

2.
On January 1, 20X1, Prange Company acquired 100% of
the common stock of Seaman Company for $600,000. On this date Seaman had total
owners’ equity of $400,000. Any excess of cost over book value is attributable
to a patent, which is to be amortized over 10 years.

During 20X1 and 20X2, Prange has appropriately accounted for its
investment in Seaman using the simple equity method.

On January
1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2,
Seaman sold merchandise to Prange for $100,000, of which $20,000 is held by
Prange on December 31, 20X2. Seaman’s gross profit on all sales is 40%.

On December 31, 20X2, Prange still owes Seaman $20,000 for
merchandise acquired in December.

Required:

Complete the Figure 4-1 worksheet for consolidated financial
statements for the year ended December 31, 20X2.

3.
On January 1, 20X1, Prange Company acquired 80% of
the common stock of Seaman Company for $500,000. On this date Seaman had total
owners’ equity of $400,000. Any excess of cost over book value is attributable
to patent, which is to be amortized over 20 years.

During 20X1 and 20X2, Prange has appropriately accounted for its
investment in Seaman using the simple equity method.

On January
1, 20X2, Prange held merchandise acquired from Seaman for $30,000. During 20X2,
Seaman sold merchandise to Prange for $100,000, of which $20,000 is held by
Prange on December 31, 20X2. Seaman’s gross profit on all sales is 40%.

On December 31, 20X2, Prange still owes Seaman $20,000 for
merchandise acquired in December.

Required:

Complete the Figure 4-2 worksheet for consolidated financial
statements for the year ended December 31, 20X2.

4-10

Chapter 4

4.
Selected information from the separate and
consolidated balance sheets and income statements of Palo Alto, Inc. and its
subsidiary, Stanford Co., as of December 31, 20X1, and for the year then ended
is as follows:

Palo Alto

Stanford

Consoli-

Balance sheet accounts

dated

$ 26,000

$19,000

$
42,000

Accounts
receivable…………

Inventory………………….

30,000

25,000

50,000

Investment
in Stanford………

67,000

Goodwill…………………..

30,000

Noncontrolling
interest……..

10,000

Stockholders’
equity………..

154,000

50,000

154,000

Income statement accounts

$200,000

$140,000

$300,000

Revenues…………………..

Cost
of goods sold………….

150,000

110,000

225,000

Gross profit……………..

50,000

30,000

75,000

Equity in earnings of Stanford.

$9,000

Net
income…………………

$36,000

$20,000

$36,000

Additional information

During
20X1, Palo Alto sold goods to Stanford at the same markup on cost that Palo
Alto uses for all sales. At December 31, 20X1, Stanford had not paid for all of
these goods and still held 50% of them in inventory.

Palo Alto
acquired its interest in Stanford five years earlier (as of December 31, 20X1.)

Required:

For each of the following items, calculate
the required amount.

a. The amount
of intercompany sales from Palo Alto to Stanford during 20X1.

b. The amount
of Stanford’s payable to Palo Alto for intercompany sales as of December 31,
20X1.

c. In Palo
Alto’s December 31, 20X1, consolidated balance sheet, the carrying amount of
the inventory that Stanford purchased from Palo Alto.

d. The percent
of noncontrolling interest ownership in Stanford as of December 31, 20X1.

4-12

Chapter 4

5.
On January 1, 20X1, Pinto Company purchased an 80%
interest in Sands Inc. for $1,000,000. The equity balances of Sands at the time
of the purchase were as follows:

Common stock ($10

par)……………………………

$100,000

Paid-in
capital in excess of par…………………..

400,000

Retained
earnings………………………………..

500,000

Any excess of cost over book value is
attributable to goodwill.

No
dividends were paid by either firm during 20X6. The following trial balances
were prepared for Pinto Company and its subsidiary, Sands Inc., on December 31,
20X6:

………………………………..

Cash

Pinto

Sands

$
120,000

$
62,000

Accounts
receivable…………………..

290,000

194,000

Inventory……………………………

350,000

176,000

Land………………………………..

800,000

180,000

Buildings and
equipment……………….

1,100,000

800,000

Accumulated
depreciation………………

(180,000)

(120,000)

Investment in
Sands…………………..

600,000

Accounts payable……………………..

(110,000)

(50,000)

Common stock, $10
par…………………

(800,000)

(100,000)

Paid-in capital in
excess of par……….

(660,000)

(400,000)

Retained
earnings…………………….

(1,340,000)

(650,000)

Sales……………………………….

(600,000)

(300,000)

Other
income…………………………

(40,000)

(12,000)

Cost of goods
sold……………………

320,000

180,000

Other expenses……………………….

150,000

32,000

……………………………..Total

0

0

===========

=========

Sands sold
a machine to Pinto Company for $40,000 on January 1, 20X6. The machine cost
Sands $50,000, and $25,000 of accumulated depreciation had been recorded as of
the sale date. The machine had a 5-year remaining life and no salvage value.
Pinto Company is using straight-line depreciation.

Since the
purchase date, Pinto has sold merchandise for resale to Sands, Inc. at a
mark-up on cost of 25%. Sales during 20X6 were $150,000. The inventory of these
goods held by Sands was $15,000 on January 1, 20X6, and $18,000 on December 31,
20X6.

Required:

Prepare a
consolidated income statement for 20X6, including income distribution schedules
to support your distribution of income to the Noncontrolling and controlling
interest accounts.

4-13

Chapter
4

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22. 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 subsequently $335,000, what amount of goodwill impairment
will be recognized for this unit?
A. $0
B. $10,000
C. $25,000
D. $35,000


23. 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

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:
.png”>

24. 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

25. 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


26. Based
on the preceding information, what amount of goodwill impairment will be
recognized for this division if its fair value is determined to be
$245,000?
A. $0
B. $5,000
C. $60,000
D. $55,000

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.
.png”>

27. 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

28. Based
on the preceding information, what is the par value of Public’s common
stock?
A. $10
B. $1
C. $5
D. $4


29. 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:
.png”>

30. 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

31. 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


32. 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.

33. 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.

34. 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

35. Which
of the following observations is (are) consistent with the acquisition method
of accounting for business combinations?
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


36. 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.

37. 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.

38. Big
Company acquired the following assets and liabilities of Little Company (fair
values listed below) for $470,000 cash.
.png”>
Assuming these items are all recorded at their acquisition date fair values,
what additional item needs to be recorded and how will it be accounted for in
the future?
A. $30,000 Goodwill, capitalized and tested for impairment
B. $30,000 Bargain purchase, recognized in current earnings
C. $30,000 Bargain purchase, capitalized and recognized over time
D. $30,000 Goodwill, capitalized and amortized over time


39. Paul
Corp. acquired 100 percent of Sam Inc.’s voting stock on July 1, 20X1. The
following information was available as of December 31, 20X1:
.png”>
How much net income should be reported in Paul Corp’s income statement for
20X1?
A. $370,000
B. $720,000
C. $940,000
D. $1,090,000

40. Point
Co. purchased 90% of Sharpe Corp.’s voting stock on January 1, 20X2 for
$5,580,000. Prior to the acquisition, Point held a 10% equity position in
Sharpe Company. On January 1, 20X2 Point’s 10% investment in Sharpe has a book
value of $340,000 and a fair value of $620,000. On January 1, 20X2 Point
records the following:
A. Debit Gain on revaluation of Sharpe’s stock $280,000
B. Credit Gain on revaluation of Sharpe’s stock $280,000
C. Credit Investment in Sharpe stock $5,860,000
D. Debit Investment in Sharpe stock $6,200,000

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Description

1.
Schiff Company owns 100% of the outstanding common
stock of the Viel Company. During 20X1, Schiff sold merchandise to Viel that
Viel, in turn, sold to unrelated firms. There were no such goods in Viel’s
ending inventory. However, some of the intercompany purchases from Schiff had
not yet been paid. Which of the following amounts will be incorrect in the
consolidated statements if no adjustments are made?

a.
inventory, accounts payable, net income

b.
inventory, sales, cost of goods sold, accounts
receivable

c.
sales, cost of goods sold, accounts receivable,
accounts payable.

d. accounts receivable,
accounts payable

2.
The material sale of inventory items by a parent
company to an affiliated company

a. enters the
consolidated revenue computation only if the transfer was the result of arm’s
length bargaining.

b. affects consolidated
net income under a periodic inventory system but not under a perpetual
inventory system.

c.
does not result in consolidated income until the
merchandise is sold to outside entities.

d.
does not require a working paper adjustment if the
merchandise was transferred at cost.

23.
Williard Corporation regularly sells inventory items
to its subsidiary, Petty, Inc. If unrealized profits in Petty’s 20X1 year-end
inventory exceed the unrealized profits in its 20X2 year-end inventory,
combined

cost of sales will be less than consolidated cost of
sales in 20X2.

gross profit will be greater than consolidated gross
profit in 20X2.

sales will be less than consolidated sales in 20X2.

cost of sales will be greater than consolidated cost
of sales in 20X2.

Chapter 4

4.
Sally Corporation, an 80%-owned subsidiary of
Reynolds Company, buys half of its raw materials from Reynolds. The transfer
price is exactly the same price as Sally pays to buy identical raw materials
from outside suppliers and the same price as Reynolds sells the materials to
unrelated customers. In preparing consolidated statements for Reynolds Company
and Subsidiary

a. the
intercompany transactions can be ignored because the transfer price represents
arm’s length bargaining.

b.
any unrealized profit from intercompany sales
remaining in Reynolds’ ending inventory must be offset against the unrealized
profit in Reynolds’ beginning inventory.

c. any
unrealized profit on the intercompany transactions in Sally’s ending inventory
is eliminated in its entirety.

d. eighty
percent of any unrealized profit on the intercompany transactions in Sally’s
ending inventory is eliminated.

5.
Cattle Company sold inventory with a cost of $40,000
to its 90%-owned subsidiary, Range Corp., for $100,000 in 20X1. Range resold
$75,000 of this inventory for $100,000 in 20X1. The amount of inventory
reported on the consolidated financial statements at the end of 20X1 is
_______.

a.
$10,000

b.
$18,000

c.
$21,000

d. $30,000

6.
Diller owns 80% of Lake Company common stock. During
October 20X7, Lake sold merchandise to Diller for $300,000. On December 31,
20X7, one-half of this merchandise remained in Diller’s inventory. For 20X7, gross
profit percentages were 30% for Diller and 40% for Lake. The amount of
unrealized profit in the ending inventory on December 31, 20X7 that should be
eliminated in consolidation is _______.

a.
$80,000

b.
$60,000

c.
$32,000

d. $30,000

7.
Perry, Inc. owns a 90% interest in Brown Corp.
During 20X6, Brown sold $100,000 in merchandise to Perry at a 30% gross profit.
Ten percent of the goods are unsold by Perry at year end. The noncontrolling
interest will receive what gross profit as a result of these sales?

a.
$0

b.
$2,700

c.
$3,000

d. $27,000

4-2

Chapter 4

8.
On January 1, 20X1 Bullock, Inc. sells land to its
80%-owned subsidiary, Humphrey Corporation, at a $20,000 gain. The land is
still held by Humphrey on December 31, 20X3. What is the effect of the
intercompany sale of land on consolidated net income?

a.
Consolidated net income will be the same as it would
have been had the sale not occurred.

b.
Consolidated net income will be $20,000 less than it
would have been had the sale not occurred.

c.
Consolidated net income will be $16,000 less than it
would have been had the sale not occurred.

d.
Consolidated net income will be $20,000 greater than
it would have been had the sale not occurred.

9.
Emron Company owns a 100% interest in the common
stock of the Dietz Company. On January 1, 20X2, Emron sold Dietz a fixed asset
that Dietz will use over a 5-year period. The asset was sold at a $5,000
profit. In the consolidated statements, this profit will

a.
not be recorded.

b.
be recognized over 5 years.

c.
be recognized in the year of sale.

d. be
recognized when the asset is resold to outside parties at the end of its period
of use.

10.
Pease Corporation owns 100% of Sade Corporation common
stock. On January 2, 20X6, Pease sold machinery with a carrying amount of
$30,000 to Sade for $50,000. Sade is depreciating the acquired machinery over a
5-year life using the straight-line method. The net adjustments to compute the
20X6 and 20X7 consolidated income before income tax would be an increase
(decrease) of

a.

20X6

20X7

$(16,000)

$4,000

b.
$(16,000)

$0

c.
$(20,000)

$4,000

d. $(20,000)

$0

11.
On January 1, 20X1, Poe Corp. sold a machine for
$900,000 to Saxe Corp., its wholly-owned subsidiary. Poe paid $1,100,000 for
this machine. On the sale date, accumulated depreciation was $250,000. Poe
estimated a $100,000 salvage value and depreciated the machine on the
straight-line method over 20 years, a policy that Saxe continued. In Poe’s
December 31, 20X1, consolidated balance sheet, this machine should be included
in cost and accumulated depreciation as

Cost

Accumulated Depreciation

a.

$1,100,000

$300,000

b.
$1,100,000

$290,000

c.
$

900,000

$ 40,000

d. $

850,000

$ 42,500

4-3

Chapter 4

12.
Porch Company owns a 90% interest in the Screen
Company. Porch sold Screen a milling machine on January 1, 20X1, for $50,000
when the book value of the machine on Porch’s books was $40,000. Porch financed
the sale with Screen signing a 3-year, 8% interest, note for the entire
$50,000. The machine will be used for 10 years and depreciated using the
straight-line method. The following amounts related to this transaction

were
located

on the
companies trial balances:

Interest

Revenue

$4,000

Interest Expense

$4,000

Depreciation Expense

$5,000

Based upon
the information related to this transaction what will be the amounts eliminated
in preparing the consolidated financial statements?

a.

Interest Revenue

Interest Expense

Depreciation Expense

4,000

4,000

5,000

b.

4,000

4,000

1,000

c.

3,600

3,600

900

d.

3,600

3,600

4,500

13.
On 1/1/X1 Peck sells a machine with a $20,000 book
value to its subsidiary Shea for $30,000. Shea intends to use the machine for 4
years. On 12/31/X2 Shea sells the machine to an outside party for $14,000. What
amount of gain or (loss) for the sale of assets is reported on the consolidated
financial statements?

a.
loss of $6,000

b.
loss of $1,000

c.
gain of $4,000

d. gain of $14,000

14.
Stroud Corporation is an 80%-owned subsidiary of
Pennie, Inc., acquired by Pennie several years ago. On January 1, 20X2, Pennie
sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the
land to an unrelated party for $100,000 on September 26, 20X3. The land will be
included in the December 31, 20X2 consolidated balance sheet of Pennie, Inc.
and Subsidiary at _______.

a.
$48,000

b.
$60,000

c.
$72,000

d. $90,000

4-4

Chapter 4

15.
Stroud Corporation is an 80%-owned subsidiary of
Pennie, Inc., acquired by Pennie several years ago. On January 1, 20X2, Pennie
sold land with a book value of $60,000 to Stroud for $90,000. Stroud resold the
land to an unrelated party for $100,000 on September 26, 20X3. The gain from
sale of land that will appear in the consolidated income statements for 20X2
and 20X3, respectively, is _______.

a.
$0 and $10,000

b.
$0 and $40,000

c.
$30,000 and $10,000

d. $30,000 and $40,000

16.
Company P owns 100% of the common stock of Company
S. Company P is constructing an asset for Company S that will be used in
Company S’s manufacturing operations over a 5-year period. The asset was 50%
complete at the end of 20X1 and was completed on December 31, 20X2. Company P
is recording the construction under the percentage of completion method. The
asset was put into use by Company S on January 1, 20X3. The profit on the asset
was estimated to be $50,000. Actual results complied to the estimate. On the
consolidated statements, the profit will appear as

20X1

20X2

20X3

20X4
– 20X7

a.

0

50,000

0

0

b.
25,000

25,000

0

0

c.

0

0

10,000

10,000

d.

0

0

50,000

0

17. The
following accounts were noted in reviewing the trial balance for Parent Co. and
Subsidiary Corp.:

Assets under Construction Contracts Receivable

Billings on Construction in Progress Earned Income on Long-Term
Contracts Contracts Payable

Which of these accounts do you expect to eliminate when
producing Parent Co. consolidated financial statements?

a. Assets under
Construction; Billings on Construction in Progress; Earned Income on Long-Term
Contracts

b.
Contracts Receivable; Billings on Construction in
Progress; Earned Income on Long-Term Contracts

c.
Assets under Construction; Contracts Receivable;
Billings on Construction in Progress; Earned Income on Long-Term Contracts;
Contracts Payable

d.
Contracts Receivable; Billings on Construction in
Progress; Earned Income on Long-Term Contracts; Contracts Payable

4-5

Chapter 4

18.
During 20X3, a parent company billed its 100%-owned
subsidiary for computer services at the rate of $1,000 per month. At year end,
one month’s bill remained unpaid. As a part of the consolidation process, net
income

a.
should be reduced $12,000.

b.
should be reduced $1,000.

c.
needs no adjustment.

d. needs an
adjustment, but the amount is not provided by this information.

19.
On January 1, 20X1, a parent loaned $30,000 to its
100%-owned subsidiary on a 5-year, 8% note. The note requires a principal
payment at the end of each year of $6,000 plus payment of interest accrued to
date. The following accounts require adjustment in the consolidation process:

Assets

Debt

Controlling

Retained
Earnings

a.
Yes

Yes

Yes

b.
No

No

Yes

c.
Yes

Yes

No

d. No

No

No

20. Phelps Co.
uses the sophisticated equity method to account for the 80% investment in its
subsidiary Shore Corp. Based upon the following

information what amount does Phelps
Co. record as subsidiary income?

Phelps internally
generated income:

$250,000

Shore internally generated
income:

$ 50,000

Intercompany profit on
Shore beginning inventory:

$ 10,000

Intercompany profit on Shore ending
inventory:

$
15,000

a. $50,000

b.
$44,000

c.
$40,000

d. $36,000

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$13.00

Description

11. The Paris
Company purchased a 70% interest in Seine, Inc. for $278,000 on July 1, 20X1,
when Seine had the following balance sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

110,000

Land……………………………………………

80,000

Building and
Equipment……………………………

160,000

Total…………………………………………

$400,000

========

Liabilities
and Equity

$160,000

Current
liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings – 7/1…………………………..

100,000

Total…………………………………………

$400,000

========

The inventory is understated by $50,000 and is sold in the third
quarter of 20X1. The land has a fair value of $100,000. The equipment has a
fair value of $130,000 and a remaining life of 3 years. Any remaining excess is
attributed to a patent with a 10-year life.

The
following net incomes (earned evenly throughout the year) and dividends paid
(on 12/1 each year) are reported by Seine:

……………………………

Net income

20X1

20X2

$150,000

$100,000

Dividends paid………………………..

10,000

10,000

Required:

a. Prepare a
determination and distribution of excess schedule as of July 1, 20X1.

b. Prepare the
20X1 and 20X2 entries made by Paris to record the net income and dividends paid
information on its books under the sophisticated equity method.

c. Prepare the
20X1 and 20X2 entries made by Paris to record the net income and dividends paid
information on its books under the cost method.

3-28

Chapter 3

12.
The Paris Company purchased an 70% interest in
Seine, Inc. for $300,000 on July 1, 20X1, when Seine had the following balance
sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

110,000

Land……………………………………………

80,000

Building and
Equipment……………………………

160,000

Total…………………………………………

$400,000

========

Liabilities
and Equity

$160,000

Current liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings –
7/1…………………………..

100,000

Total…………………………………………

$400,000

========

Assume that
all assets and liabilities have fair values equal to their book values. Any
excess cost is attributed to patent with a 10-year life.

The
following net incomes (earned evenly throughout the year) and dividends paid
(on 12/1 each year) are reported by Seine:

……………………………

Net income

20X1

20X2

$60,000

$80,000

Dividends paid………………………..

10,000

10,000

Required:

a. Prepare the
20X1 & 20X2 entries made by Paris to record the net income and dividends
paid information on its books under the simple equity method.

b. Prepare the
20X1 & 20X2 entries made by Paris to record the net income and dividends
paid information on its books under the cost method.

13. The Paris
Company purchased a 70% interest in Seine, Inc. for $300,000 on July 1, 20X1,
when Seine had the following balance sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

110,000

Land……………………………………………

80,000

Building and
Equipment……………………………

160,000

Total…………………………………………

$400,000

========

Liabilities
and Equity

$160,000

Current
liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings –
7/1…………………………..

100,000

Total…………………………………………

$400,000

========

Assume that
all assets and liabilities have fair values equal to their book values. Any
excess cost is attributed to patent with a 10-year life.

The
following net incomes (earned evenly throughout the year) and dividends paid
(on 12/1 each year) are reported by Seine:

……………………………

Net income

20X1

20X2

$60,000

$80,000

Dividends paid………………………..

10,000

10,000

Required:

a. Prepare a
determination and distribution of excess schedule as of July 1, 20X1.

b. Prepare the
20X1 and 20X2 entries made by Paris to record the net income and dividends paid
information on its books under the sophisticated equity method.

3-31

Chapter 3

14.
Pablo Company purchased an 80% interest in Sand
Company on July 1, 20X1, for $260,000. On July 1, 20X1, Sand Company had the
following information available:

Common stock outstanding
($10

par)…………………

$100,000

Retained
earnings, January 1, 20X1…………………

120,000

Net
income, January 1-June 30, 20X1………………..

10,000

Dividends
paid, June 30, 20X1……………………..

2,000

Equipment
is undervalued by $30,000 and has a 6-year remaining life. Any remaining excess
is attributable to patent with a 20-year life.

Required:

a. Prepare a determination and
distribution of excess schedule.

b.
Complete the Figure 3-8 partial worksheet for the
year ended December 31, 20X1. Subsidiary books were not closed on the purchase
date. Provide keyed explanations for all worksheet entries and key each
amortization of excess separately. Include income distribution schedules.

3-32

Chapter 3

3-33

Chapter 3

15. Puddle
Corporation acquired 90% of Suds Company’s common stock on January 1, 20X1 for
$32,000 cash when Sud’s stockholders’ equity

consisted of:

Common Stock
$20,000 Retained Earnings $ 4,000

A
determination and distribution schedule was prepared for the difference between
the price paid by Puddles and the underlying equity acquired in Suds with the
excess of cost over book value being allocated as:

Inventory
(undervalued)

$

400

Building
& Equipment (undervalued)

2,000

Patent

8,000

Allocated
excess cost over book value

$10,400

=======

The
inventory was sold during 20X1, and the building and equipment are being
depreciated for 5 years using the straight-line method. The Patent is expected
to have a 10-year useful life.

Required:

The
separate December 31, 20X1 financial statements for Puddle and Suds is provided
in Figure 3-7. Complete the worksheet and provide supporting calculations as
needed and an explanation of the elimination and adjustment entries.

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$15.00

Description

2.
On January 1, 20X1, Pepper Company purchased 100% of
the common stock of Salt Company for $360,000. On this date, Salt had common
stock, other paid-in capital, and retained earnings of $50,000, $100,000 and
$150,000 respectively. Net income and dividends for two years for Salt Company
were:

…………………………….

Net income

20X1

20X2

$60,000

$90,000

Dividends……………………………..

20,000

30,000

On January
1, 20X1, the only tangible assets of Salt which were undervalued were inventory
and building. Inventory, for which FIFO is used, was worth $10,000 more than
cost. The inventory was sold in 20X1. Buildings had a fair value of $320,000, a
remaining life of 10 years and straight-line depreciation is used. The book
value of the land and building are $50,000 and $260,000 respectively. Patent,
if any, is to be amortized over 10 years.

Pepper uses
the simple equity method in accounting for its Investment in Salt Company.

3-10

Chapter 3

Required:

a.
Using the information above or on the separate
worksheet, prepare a determination and distribution of excess schedule.

b. Complete
the Figure 3-2 worksheet for consolidated financial statements for 20X2.

3.
On January 1, 20X1, Parent Company acquired 100% of
the common stock of Subsidiary Company for a cost of $294,000 in a tax-free
combination. On this date, Subsidiary had total owner’s equity of $220,000. The
excess of cost over book value is due to the undervaluation of inventory, other
long-term investments, equipment, and patent.

The
inventory is worth $10,000 more than book value and FIFO is used. The inventory
was sold during 20X1. The other long-term investments of Subsidiary are worth
$20,000 more than book value and are carried under the cost method. The
equipment is worth $30,000 more than book value, has a remaining useful life of
10 years, with no salvage value, and straight-line depreciation is used. The
patent is to be amortized over 20 years. The corporate tax rate is 30%.

During 20X1,
Subsidiary had net income after taxes of $42,000 and in December, paid
dividends of $20,000. As a result, the appropriate entries were made on
Parent’s books under the equity method.

Required:

a. Prepare a
schedule to determine and distribute the excess of cost over book value to
assets and to related deferred taxes. Include computations for the write off of
the asset increases and the related tax effect.

b. Complete
the worksheet in Figure 3-3 for consolidated financial statements for 20X1.

3-12

Chapter 3

4.
On January 1, 20X1, Port Company purchased 80% of
the common stock of Star Company for $400,000. On this date, Star had common
stock, other paid-in capital, and retained earnings of $10,000, $140,000 and
$200,000 respectively. Net income and dividends for two years for Star Company
were:

……………………………

Net income

20X1

20X2

$50,000

$90,000

Dividends…………………………….

10,000

30,000

On January
1, 20X1, the only tangible assets of Star which were undervalued were inventory
and building. Inventory, for which FIFO is used, was worth $10,000 more than
cost. The inventory was sold in 20X1. Building, which was worth $27,500 more
than book value, has a remaining life of 10 years, and straight-line
depreciation is used. Patent, if any, is to be amortized over 10 years.

3-14

Chapter 3

Required:

a.
From the information above or on the separate
vertical-form worksheet, prepare a determination and distribution of excess
schedule. Use the parent company concept (pro rata fair value approach) in any
write-up of assets.

b.
Port Company carries the Investment in Star Company
under the simple equity method. In general journal form, record the entries
that would be made to apply the equity method in 20X1 and 20X2.

c. Complete
the Figure 3-4 worksheet for consolidated financial statements for 20X2.

5.
The Paris Company purchased an 80% interest in Seine,
Inc. for $600,000 on July 1, 20X1, when Seine had the following balance sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

120,000

Land……………………………………………

80,000

Building………………………………………..

270,000

Equipment……………………………………….

80,000

…………………………………………Total

$600,000

========

Liabilities
and Equity

$100,000

Current
liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings –
7/1…………………………..

300,000

Total…………………………………………

$600,000

========

The
inventory is understated by $20,000 and is sold in the third quarter of 20X1.
The building has a fair value of $320,000 and a 10-year remaining life. The
equipment has a fair value of $120,000 and a remaining life of 5 years. Any
remaining excess is attributed to patent with a 20-year life.

On December 31, 20X4, Seine has the following
stockholders’ equity:

Common Stock, $5
par……………………………..

$
50,000

3-16

Chapter 3

Paid-in capital in excess
of par…………………..

150,000

Retained
earnings………………………………..

600,000

During
20X1, Seine had a net income of $100,000 and paid $10,000 in dividends.

Assume that
Paris uses the cost method to record its investment in Seine.

Required:

a. Prepare a
determination and distribution of excess schedule as of July 1, 20X1.

b.
Prepare the cost to equity conversion adjustment
that would be made on the December 31, 20X1, consolidated trial balance
worksheet.

c. Prepare the
eliminations and adjustments that would be made on the December 31, 20X1,
consolidated worksheet to eliminate the investment in Seine. Distribute and
amortize any excess.

6.
On January 1, 20X1, Parent Company purchased 100% of
the common stock of Subsidiary Company for $360,000. On this date, Subsidiary
had common stock, other paid-in capital, and retained earnings of $50,000,
$100,000 and $150,000 respectively. Net income and dividends for two years for
Subsidiary Company were:

……………………………

Net income

20X1

20X2

$60,000

$90,000

Dividends…………………………….

20,000

30,000

On January
1, 20X1, the only tangible assets of Subsidiary which were undervalued were
inventory and building. Inventory, for which FIFO is used, was worth $10,000
more than cost. The inventory was sold in 20X1. Land had a fair value of
$80,000. Buildings had a fair value of $320,00, a remaining life of 10 years
and straight-line depreciation is used. The book value of the land and building
are $50,000 and $260,000 respectively. Patent, if any, is to be amortized over
10 years.

Parent uses
the simple equity method in accounting for its Investment in Subsidiary Company.

3-18

Chapter 3

Required:

a.
Using the information above or on the separate
worksheet, prepare a determination and distribution of excess schedule.

b. Complete
the Figure 3-5 worksheet for consolidated financial statements for 20X2.

7.
The Paris Company purchased an 80% interest in
Seine, Inc. for $600,000 on July 1, 20X1, when Seine had the following balance
sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

120,000

Land……………………………………………

80,000

Building………………………………………..

270,000

Equipment……………………………………….

80,000

…………………………………………Total

$600,000

========

Liabilities
and Equity

$100,000

Current
liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings –
7/1…………………………..

300,000

Total…………………………………………

$600,000

========

The
inventory is understated by $20,000 and is sold in the third quarter of 20X1.
The building has a fair value of $320,000 and a 10-year remaining life. The
equipment has a fair value of $120,000 and a remaining life of 5 years. Any
remaining excess is attributed to patent with a 20-year life.

On December 31, 20X4, Seine has the following
stockholders’ equity:

Common stock, $5
par……………………………..

$
50,000

Paid-in capital in excess
of par…………………..

150,000

3-20

Chapter 3

Retained
earnings………………………………..

600,000

During
20X1, Seine had a net income of $100,000 and paid $10,000 in dividends.

Assume that
Paris uses the sophisticated equity method to record its investment in Seine.

Required:

a. Prepare a
determination and distribution of excess schedule as of July 1, 20X1.

b. Prepare the
eliminations and adjustments that would be made on the December 31, 20X1,
consolidated worksheet to eliminate the investment in Seine. Distribute and
amortize any excess.

8.
On January 1, 20X1, Parent Company purchased 80% of
the common stock of Subsidiary Company for $316,000. On this date, Subsidiary
had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for
Subsidiary Company were as follows:

……………………………

Net income

20X1

20X2

$50,000

$90,000

Dividends…………………………….

10,000

20,000

On January 1, 20X1, the only tangible assets of Subsidiary which
were undervalued were inventory and building. Inventory, for which FIFO is
used, was worth $5,000 more than cost. The inventory was sold in 20X1.
Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Patent, if any, is to be
amortized over 10 years.

Required:

a.
Using the information above or on the separate
worksheet, prepare a determination and distribution of excess schedule. Use the
parent company concept (prorata fair value approach) in any write-up of assets.

b.
Parent Company carries the Investment in Subsidiary
Company under the sophisticated equity method. In general journal form, record
the entries that would be made to apply the equity method in 20X1 and 20X2.

c.
Compute the balance which should appear in Investment
in Subsidiary Company and in Subsidiary Income on December 31, 20X2 (the second
year. Fill in these amounts on Parent Company’s trial balance for 20X2.

d. Complete
the Figure 3-6 worksheet for consolidated financial statements for 20X2.

3-22

Chapter
3

a. Determination and
Distribution of Excess Schedule:

Price paid for investment in

$316,000

Subsidiary Company……………….

ANS:

9.
Puddle Corporation acquired 90% of Suds Company’s
common stock on January 1, 20X1 for $32,000 cash when Sud’s stockholders’
equity

consisted of:

Common Stock
$20,000 Retained Earnings $ 4,000

A
determination and distribution schedule was prepared for the difference between
the price paid by Puddles and the underlying equity acquired in Suds with the
excess of cost over book value being allocated as:

Inventory
(undervalued)

$

400

Building
& Equipment (undervalued)

2,000

Patent

8,000

Allocated
excess cost over book value

$10,400

=======

The
inventory was sold during 20X1, and the building and equipment are being depreciated
for 5 years using the straight-line method. The Patent is expected to have a
10-year useful life.

3-24

Chapter 3

Required:

The
separate December 31, 20X1 financial statements for Puddle and Suds is provided
on worksheet 3-7. Based upon this information answer the following questions.

a.
Which method to account for its investment in Suds
is Puddle using? Provide supporting computations?

b.
What advantage does Puddle have in using this
method?

c.
What is a disadvantage for Puddle in using this
method?

d.
What amount is reported for Consolidated Net Income?

e. What amount
is reported for Dividends Declared on the Consolidated Statement of Retained
Earnings?

f. What amount
is reported on the December 31, 20X1 consolidated financial statements for
Noncontrolling Interest?

You do not
have to complete the worksheet but it may be helpful to answer the questions.

10.
The Paris Company purchased an 80% interest in
Seine, Inc. for $550,000 on July 1, 20X1, when Seine had the following balance
sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

120,000

Land……………………………………………

80,000

Building………………………………………..

270,000

Equipment……………………………………….

80,000

…………………………………………Total

$600,000

========

Liabilities
and Equity

$100,000

Current
liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings –
7/1…………………………..

300,000

Total…………………………………………

$600,000

========

The
inventory is understated by $20,000 and is sold in the third quarter of 20X1.
The building has a fair value of $320,000 and a 10-year remaining life. The
equipment has a fair value of $120,000 and a remaining life of 5 years. Any
remaining excess is attributed to patent with a 20-year life.

On December 31, 20X4, Seine has the following
stockholders’ equity:

Common stock, $5
par……………………………..

$
50,000

Paid-in
capital-in excess of par…………………..

150,000

Retained
earnings………………………………..

600,000

During
20X1, Seine had a net income of $100,000 and paid $10,000 in dividends.

Assume that
Paris uses the simple equity method to record its investment in Seine.

Required:

a. Prepare a
determination and distribution of excess schedule as of July 1, 20X1.

b. Prepare the
eliminations and adjustments that would be made on the December 31, 20X1,
consolidated worksheet to eliminate the investment in Seine. Distribute and
amortize any excess.

3-26

Chapter 3

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16.According
to the Internal Revenue Code §162, deductible business expenses must be one of
the following?

a)
incurred for the production of investment income

b)
ordinary and necessary

c)
minimized

d)
appropriate and measurable

e)
personal and justifiable

17.Individual
proprietors report their business income and deductions on:

a)
Form 1065

b)
Form 1120S

c)
Schedule C

d)
Schedule A

e)
Form 1041

18.Mike
started a calendar year business on September 1st of this year by paying 12
months’ rent on his shop at $1,000 per month. What

is
the maximum amount of rent that Mike can deduct this year under each type of
accounting method?

a)
$12,000 under the cash method and $12,000 under the accrual method

b)$4,000
under the cash method and $12,000 under the accrual method

c)$12,000
under the cash method and $4,000 under the accrual method

d)$4,000
under the cash method and $4,000 under the accrual method

e)$4,000
under the cash method and zero under the accrual method

19.Big
Homes Corporation is an accrual method calendar year taxpayer that manufactures
and sells modular homes. This year for the first

time
Big Homes was forced to offer a rebate on the purchase of new homes. At year
end, Big Homes had paid $12,000 in rebates and

was
liable for an additional $7,500 in rebates to buyers. What amount of the
rebates, if any, can Big Homes deduct this year?

a)
$12,000 because rebates are payment liabilities.

b)
$19,500 because Big Homes is an accrual method taxpayer.

c)
$19,500 if this amount is not material, Big Homes expects to continue the
practice of offering rebates in future years, and Big Homes

expects
to pay the accrued rebates before filing their tax return for this year.

d)
$12,000 because the $7,500 liability is not fixed and determinable.

e)
Big Homes is not entitled to a deduction because rebates are against public
policy.

20.Which
of the following is a true statement about the domestic manufacturing deduction?

a)
This deduction is determined by the amount of goods manufactured in the United
States for export abroad.

b)
The deduction is calculated as a percentage of the cost of goods manufactured
in the United States.

c)
This deduction represents a subsidy to taxpayers who manufacture or construct
goods in the United States.

d)
The domestic manufacturing deduction is not affected by the cost of labor.

e)
All of these are true.

21.Which
of the following is a true statement?

a)
Meals are never deductible as a business expense.

b)
An employer can only deduct half of any meals provided to employees.

c)
The cost of business meals must be reasonable.

d)
A taxpayer can only deduct a meal for a client if business is discussed during
the meal.

e)
None of these is true.

22.The IRS
would most likely apply the arm’s length transaction test to determine which of
the following?

a)
whether an expenditure is related to a business activity

b)
whether an expenditure will be likely to produce income

c)
timeliness of an expenditure

d)
reasonableness of an expenditure

e)
All of these

23.Jim
operates his business on the accrual method and this year he received $4,000
for services that he intends to provide to his clients

next
year. Under what circumstances can Jim defer the recognition of the $4,000 of
income until next year?

a)
Jim can defer the recognition of the income if he absolutely promises not to
provide the services until next year.

b)
Jim must defer the recognition of the income until the income is earned.

c)
Jim can defer the recognition of the income if he has requested that the client
not pay for the services until the services are provided.

d)
Jim can elect to defer the recognition of the income if the income is not
recognized for financial accounting purposes.

e)
Jim can never defer the recognition of the prepayments of income.

24.Ronald
is a cash method taxpayer who made the following expenditures this year. Which
expenditure is completely deductible in this

period
as a business expense?

a)
$4,000 for rent on his office that covers the next 24 months.

b)
$3,000 for a new watch for the mayor to keep “good relations” with
city hall.

c)
$2,500 for professional hockey tickets distributed to a customer to generate
“goodwill” for his business.

d)
$55 to collect an account receivable from a customer who has failed to pay for
services rendered.

e)
None of these is completely deductible.

25.When
does the all-events test under the accrual method require the recognition of
income from the sale of goods?

a)
when the title of the goods passes to the buyer.

b)
when the business receives payment.

c)
when payment is due from the buyer.

d)
the earliest of the above three dates.

e)
None of these.

26.Dick
pays insurance premiums for his employees. What type of insurance premium is
not deductible as compensation paid to the

employee?

a)
Health insurance with benefits payable to the employee.

b)
Whole life insurance with benefits payable to the employee’s dependents.

c)
Group term life insurance with benefits payable to the employee’s dependents.

d)
key man life insurance with benefits payable to Dick.

e)
All of these are deductible by Dick.

27.Which of the following cannot be selected as a valid tax year end?

a)
December 31st

b)
January 31st

c)
The last Friday of the last week of June

d)
December 15th

e)
A tax year can end on any of these days.

28.Joe is
a self employed electrician who operates his business on the accrual method.
This year, Joe purchased a shop for his

business
and at year end he received a bill for $4,500 of property taxes on his shop.
Joe didn’t pay the taxes until after year end.

Which
of the following is a true statement?

a)
If he elects to treat the taxes as a recurring item, Joe can accrue and deduct
$4,500 of taxes on the shop this year.

b)
The taxes are a payment liability.

c)
The taxes would not be deductible if Joe’s business was on the cash method.

d)
Unless Joe makes an election, the taxes are not deductible this year.

e)
All of these are true.

29.Bill
operates a proprietorship using the cash method of accounting, and this year he
received the following payments:

•
$100 in cash from a customer for services rendered this year

•
a promise to pay $200 from a customer for services rendered this year

•
tickets to a football game worth $250 as payment for services performed last
year

•
a check for $170 for services rendered this year that Bill forgot to cash

How
much income should Bill realize on Schedule C?

a)
$100

b)
$300

c)
$350

d)
$270

e)
$520

30.Which
of the following is a true statement about a request for a change in accounting
method?

a)
Some requests are automatically granted.

b)
Most requests require the permission of the Commissioner.

c)
Many requests require payment of a fee and a good business purpose for the
change.

d)
Form 3115 is required to be filed with a request for change in accounting
method.

e)
All of these are true.

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1.George
operates a business that generated adjusted gross income of $250,000 and
taxable income of $170,000 this year (before

the
domestic manufacturing deduction). Included in income was $70,000 of qualified
production activities income. George paid

$60,000
of wages to employees engaged in domestic manufacturing. What domestic
manufacturing deduction will George be

eligible
to claim this year?

$5,400

$6,300

$7,200

$15,300

$22,500

2.Paris
operates a talent agency as a sole proprietorship, and this year she incurred
the following expenses in operating her talent

agency.
What is the total deductible amount of these expenditures?

$1,000
dinner with a film producer where no business was discussed

$500
lunch with sister Nicky where no business was discussed

$700
business dinner with a client but Paris forgot to keep any records (oops!)

$900
tickets to the opera with a client following a business meeting

$450

$900

$1,100

$1,200

$800

3.Qualified
production activities income is defined as follows for purposes of the domestic
manufacturing deduction.

a)
net income from selling or leasing property the taxpayer manufactured in the
United States.

b)
revenue from selling or leasing property the taxpayer manufactured in the
United States.

c)
revenue from selling or leasing property the taxpayer manufactured in the
United States but the revenue was less that 50

percent
of qualifying wages used in the production.

d)
6 percent of revenue from selling or leasing property the taxpayer manufactured
in the United States.

e)
None of these.

4.Clyde operates a sole proprietorship
using the cash method. This year, Clyde made the following expenditures:

$480
to US Bank for 12 months of interest accruing on a business loan from September
1st of this year through August 31st of

next
year

$600
for 12 months of property insurance beginning on July 1 of this year.

What
is the maximum amount Clyde can deduct this year?

a)
$760

b)
$600

c)
$480

d)
$160

e)
$360

5.Which of the following types of
expenditures is not subject to capitalization under the UNICAP rules?

a)
selling expenditures.

b)
cost of manufacturing labor.

c)
compensation of managers who supervise production.

d)
cost of raw materials.

e)
All of these are subject to capitalization under the UNICAP rules.

6.Which
of the following is an explanation for why insurance premiums on a key employee
are not deductible?

a)
The insurance deduction would offset taxable income without the potential for
the proceeds generating taxable income.

b)
The federal government does not want to subsidize insurance companies.

c)
It is impractical to trace insurance premiums to the receipt of proceeds.

d)
Congress presumes that all expenses are not deductible unless specifically
allowed in the Internal Revenue Code.

e)
This rule was grandfathered from a time when the IRC disallowed all insurance
premiums deductions.

7.This
year, Clark leased a car to drive between his office and various work sites.
Clark carefully recorded that he drove the car 23,000

miles
this year and paid $7,200 of operating expenses ($2,700 for gas, oil, and
repairs, and $4,500 for lease payments). What amount

of
these expenses may Clark deduct as business expenses?

a)
$7,200.

b)
Clark cannot deduct these costs but he must use the mileage method to determine
any deduction.

c)
$4,500.

d)
$2,700.

e)
Clark is not entitled to any deduction if he used the car for any personal
trips.

8.Ajax
Computer Company is an accrual method calendar year taxpayer. Ajax has never
advertised in the national media prior to this

year.
In November of this year, however, Ajax paid $1 million for television
advertising time during a “super” sporting event scheduled

to
take place in early February of next year. In addition, in November of this
year the company paid $500,000 for advertising time

during
a professional golf tournament in April of next year. What amount of these
payments, if any, can Ajax deduct this year?

a)
$1 million.

b)
$500,000.

c)
$1.5 million.

d)
$1.5 million only if the professional golf tournament is played before April
15.

e)
No deduction can be claimed this year.

9.Ed is a
self-employed heart surgeon who has incurred the following reasonable expenses.

$1,000
in air fare to repair investment rental property in Colorado.

$500
in meals while attending a medical convention in New York.

$300
for tuition for an investment seminar “How to pick stocks.”

$100
for tickets to a football game with hospital administrators to celebrate
successful negotiation of a surgical contract earlier in the

day.

How
much can Ed deduct?

a)
$1,300 “for AGI.”

b)
$1,300 “for AGI” and $300 “from AGI.”

c)
$480 “for AGI.”

d)
$80 “for AGI” and $1,300 “from AGI.”

e)
None of these.

10.Brad operates a storage business on the accrual method. On July 1
Brad paid $48,000 for rent on his storage warehouse and $18,000

for
insurance on the contents of the warehouse. The rent and insurance covers the
next 12 months. What is Brad’s deduction for the

rent
and insurance?

a)
$48,000 for the rent and $18,000 for the insurance.

b)
$24,000 for the rent and $18,000 for the insurance.

c)
$24,000 for the rent and $9,000 for the insurance.

d)
$48,000 for the rent and $9,000 for the insurance.

e)
None of these is true.

11.Which of the following is a true statement about accounting for
business activities?

a)
An overall accounting method can only be adopted with the permission of the
Commissioner.

b)
An overall accounting method is initially adopted on the first return filed for
the business.

c)
The cash method can only be adopted by individual taxpayers.

d)
The accrual method can only be adopted by corporate taxpayers.

e)
None of these is true.

12.In
order to deduct a portion of the cost of a business meal, which of the
following conditions must be met?

a)
A client (not a supplier or vendor) must be present at the meal.

b)
The taxpayer or an employee must be present at the meal.

c)
The total cost must be extravagant.

d)
The meal must occur on the taxpayer’s business premises.

e)
None of these is a condition for a deduction.

13.Beth
operates a plumbing firm. In August of last year, she signed a contract to
provide plumbing services for a renovation. Beth began

the
work that August and finished the work in December of last year. However, Beth
didn’t bill the client until January of this year and

she
didn’t receive the payment until March when she received payment in full. When
should Beth recognize income under the accrual

method
of accounting?

a)
In August of last year

b)
In December of last year

c)
In January of this year

d)
In March of this year

e)
In April of this year

14.Colbert
operates a catering service on the accrual method. In November of year 1,
Colbert received a payment of $9,000 for 18 months

of
catering services to be rendered from December 1st of year 1 through May 31st
year 3. When must Colbert recognize the income if his

accounting
methods are selected to minimize income recognition?

a)
$500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3.

b)
$500 is recognized in year 1 and $8,500 in year 2.

c)
$9,000 is recognized in year 3.

d)
$2,500 is recognized in year 1 and $6,500 in year 2.

e)
$9,000 is recognized in year 1.

15.Shelley
is employed in Texas and recently attended a two-day business conference in New
Jersey. Shelley spent the entire time at the

conference
and documented her expenditures (described below). What amount can Shelley
deduct as an employee business expense?

Airfare
to NJ $2,000

Meals
220

Lodging
in NJ 450

Rental
Car 180

a)
$2,850.

b)
$2,740.

c)
$1,850 if Shelley’s AGI is $50,000.

d)
All of these are deductible if Shelley is reimbursed under an accountable plan.

e) None of the expenses are deductible – only
employers can deduct travel expenses

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13.
On January 1, 20X1, Parent Company purchased 90% of
the common stock of Sub-A Company for $90,000. On this date, Sub-A had common
stock, other paid-in capital, and retained earnings of $10,000, $20,000, and
$60,000 respectively.

On January
1, 20X2, Sub-A Company purchased 80% of the common stock of Sub-B Company for
$68,000. On this date, Sub-B Company had common stock, other paid-in capital,
and retained earnings of $5,000, $30,000, and $40,000 respectively.

Any excess of cost over book value on either purchase is due to
a patent, to be amortized over ten years.

Both Parent and Sub-A have accounted for their investments using
the cost method.

On December
31, 20X1, Parent sold used equipment to Sub-A Company. The equipment had a cost
of $45,000 and accumulated depreciation of $20,000. The sale price was $30,000.
During 20X2 and 20X3, Sub-A used the equipment, depreciating it over five years
using the straight-line method.

During 20X2, Sub-B sold merchandise to Sub-A for $20,000, of
which one-fourth is still held by Sub-B on December 31, 20X2. Sub-B’s usual
gross profit is 40%. During 20X3, Sub-B sold more goods to Sub-A for $30,000,
of which $10,000 is still on hand on December 31, 20X3.

Required:

Complete the Figure 8-10 worksheet for consolidated financial
statements for 20X3.

8-29

Chapter
8

19.
On January 1, 20X1, Sub-A Company purchased 80% of
the common stock of Sub-B Company for $56,000, a price equal to book value. On
this date, Sub-B Company had common stock, other paid-in capital, and retained
earnings of $5,000, $30,000, and $35,000 respectively.

On January 1, 20X2, Parent Company purchased 90% of the common
stock of Sub-A Company for $108,000. On this date, Sub-A had common stock,
other paid-in capital, and retained earnings of $10,000, $20,000, and $80,000
respectively. Any excess of cost over book value is due to a patent, to be
amortized over 10 years.

Both Parent and Sub-A have accounted for their investments using
the simple equity method.

During 20X2, Sub-B sold merchandise to Sub-A for $20,000, of
which one-fourth is still held by Sub-B on December 31, 20X2. Sub-B’s usual
gross profit is 40%. During 20X3, Sub-B sold more goods to Sub-A for $30,000,
of which $10,000 is still on hand on December 31, 20X3.

Required:

Complete the Figure 8-11 worksheet for consolidated financial
statements for 20X3.

8-31

8-32

Chapter 8

15.
On January 1, 20X1, Parent Company purchased 85% of
the common stock, 8,500 shares, of Subsidiary Company for $317,500. On this
date, Subsidiary had common stock, other paid-in capital, and retained earnings
of $50,000, $100,000, and $200,000 respectively.

On January
1, 20X2, Subsidiary purchased, from its remaining shareholders, 1,000 shares of
its common stock, 10% of the stock outstanding on that date. The price paid was
$44,000.

Any
excess of cost over book value is due to goodwill.

In both 20X1 and 20X2, Parent has accounted for the Investment
in Subsidiary using the simple equity method.

During the last quarter of 20X2, Subsidiary sold merchandise to
Parent for $40,000, $10,000 of which is still held by Parent on December 31,
20X2. Subsidiary’s usual gross profit on intercompany sales is 40%.

Required:

Complete
the Figure 8-12 worksheet for consolidated financial statements for the year
ended December 31, 20X2. Consolidation procedures should treat the purchase of
the treasury stock as an additional interest purchased by the parent.

16.
On January 1, 20X1, Parent Company purchased 85% of
the common stock of Subsidiary Company for $317,500. On this date, Subsidiary
had common stock, other paid-in capital, and retained earnings of $50,000,
$100,000, and $200,000 respectively.

Any
excess of cost over book value is due to goodwill.

In both 20X1 and 20X2, Parent has accounted for the Investment
in Subsidiary using the simple equity method.

On January
1, 20X2, Subsidiary purchased from outside investors 800 shares of the common
stock of Parent Company, 8% of Parent’s outstanding stock, for $60,000. It is
expected that the shares may be resold at a later date. Subsidiary uses the
cost method in accounting for the investment.

During the last quarter of 20X2, Subsidiary sold merchandise to
Parent for $40,000, $10,000 of which is still held by Parent on December 31,
20X2. Subsidiary’s usual gross profit on intercompany sales is 40%.

Required:

Complete the Figure 8-13 worksheet for consolidated financial statements
for the year ended December 31, 20X2. Use the treasury stock method for the
Investment in Parent Company.

8-34

Chapter 8

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7.
On January 1, 20X1, Prism Company purchased 7,500
shares of the common stock of Sight Company for $495,000. On this date, Sight
had 20,000 shares of $10 par common stock authorized, 10,000 shares issued and
outstanding. Other paid-in capital and retained earnings were $200,000 and
$300,000 respectively. On January 1, 20X1, any excess of cost over book value
is due to a patent, to be amortized over 15 years.

Sight’s
net income and dividends for two years were:

……………………………

Net income

20X1

20X2

$50,000

$80,000

Dividends…………………………….

10,000

20,000

In
November, 20X1, Sight Company also declared a 10% stock dividend at a time when
the market price of its common stock was $50 per share. The stock dividend was
distributed on December 31, 20X1.

For both
20X1 and 20X2, Prism Company has accounted for its investment in Sight using
the cost method.

During 20X1, Sight Company sold goods to Prism Company for
$40,000, of which $10,000 was on hand on December 31, 20X1. During 20X2, Sight
sold goods to Prism for $60,000 of which $15,000 was on hand on December 31,
20X2. Sight’s gross profit on intercompany sales is 40%.

Required:

Complete the Figure 8-4 worksheet for consolidated financial
statements for 20X2.

8-17

8-18

Chapter 8

8.
On January 1, 20X1, Parent Company purchased 8,000
shares of the common stock of Subsidiary Company for $350,000. On this date,
Subsidiary had 20,000 shares of $5 par common stock authorized, 10,000 shares
issued and outstanding. Other paid-in capital and retained earnings were
$150,000 and $200,000 respectively. On January 1, 20X1, any excess of cost over
book value is due to a patent, to be amortized over 15 years. Subsidiary’s net
income and dividends for two years were:

……………………………

Net income

20X1

20X2

$50,000

$90,000

Dividends…………………………….

10,000

30,000

On January
1, 20X2, Subsidiary Company sold an additional 2,000 shares of common stock to
one individual for $50 per share. The shares were not issued in a public
offering.

On this
date, Parent Company recorded the following entry on its books as a result of
its change in percentage ownership of Subsidiary Company.

Jan. 1 Investment in Subsidiary Company…

8,000

Other Paid-in Capital…………

8,000

To record increase in ownership

interest

For both
20X1 and 20X2, Parent Company has correctly applied the simple equity method.

In the last
quarter of 20X2, Subsidiary Company sold goods to Parent Company for $40,000. Subsidiary’s
usual gross profit on intercompany sales is 40%. On December 31, $7,500 of
these goods are still in Parent’s ending inventory.

Required:

Complete
the Figure 8-5 worksheet for consolidated financial statements for 20X2.

8-19

Chapter
8

8-20

Chapter 8

9.
On January 1, 20X1, Parent Company purchased 8,000
shares of the common stock of Subsidiary Company for $350,000. On this date,
Subsidiary had 20,000 shares of $5 par common stock authorized, 10,000 shares
issued and outstanding. Other paid-in capital and retained earnings were
$150,000 and $200,000 respectively. On January 1, 20X1, any excess of cost over
book value is due to a patent, to be amortized over 15 years. Subsidiary’s net income
and dividends for 2 years were:

……………………………

Net income

20X1

20X2

$50,000

$90,000

Dividends…………………………….

10,000

30,000

On January
1, 20X2, Subsidiary Company sold an additional 2,000 shares of common stock to
one individual for $50 per share. The shares were not issued in a public
offering.

For both
20X1 and 20X2, Parent Company has correctly applied the cost method.

In the last
quarter of 20X2, Subsidiary Company sold goods to Parent Company for $40,000.
Subsidiary’s usual gross profit on intercompany sales is 40%. On December 31,
$7,500 of these goods are still in Parent’s ending inventory.

Required:

Complete
the Figure 8-6 worksheet for consolidated financial statements for 20X2.

8-22

Chapter 8

10.
On January 1, 20X1, Parent Company purchased 9,000
shares of the common stock of Subsidiary Company for $405,000. On this date,
Subsidiary had 20,000 shares of $5 par common stock authorized, 10,000 shares
issued and outstanding. Other paid-in capital and retained earnings were
$150,000 and $200,000 respectively. On January 1, 20X1, any excess of cost over
book value is due to a patent, to be amortized over 15 years. Subsidiary’s net
income and dividends for two years were:

……………………………

Net income

20X1

20X2

$50,000

$80,000

Dividends…………………………….

10,000

20,000

On January
1, 20X2, Subsidiary Company sold an additional 2,000 shares of common stock for
$50 per share. The shares were not issued in a public offering. Parent
purchased 1,200 shares of the new issue, and one individual purchased the other
800.

On this
date, Parent Company recorded the following entries on its books for the
purchase and as a result of its change in percentage ownership of Subsidiary
Company.

Jan. 1

Investment in
Subsidiary Company…….

60,000

Other Paid-in Capital…………….

60,000

To record purchase of 1,200 shares

Jan. 1

Investment in
Subsidiary Company…….

3,000

Other Paid-in Capital…………….

3,000

To record increase in
ownership

interest

For both
20X1 and 20X2, Parent Company has correctly applied the simple equity method.

In the last
quarter of 20X2, Subsidiary Company sold goods to Parent Company for $40,000.
Subsidiary’s usual gross profit on intercompany sales is 40%. On December 31,
$10,000 of these goods are still in Parent’s ending inventory.

Required:

Complete
the Figure 8-7 worksheet for consolidated financial statements for 20X2.

8-23

Chapter
8

8-24

Chapter 8

11.
On January 1, 20X1, Parent Company purchased 80% of
the common stock of Sub-One Company for $87,000. On this date, Sub-One had
common stock, other paid-in capital, and retained earnings of $10,000, $20,000,
and $60,000 respectively.

On January
1, 20X2, Parent Company purchased 90% of the common stock of Sub-Two Company
for $73,500. On this date, Sub-Two had common stock, other paid-in capital, and
retained earnings of $5,000, $30,000, and $40,000 respectively.

Any excess of cost over book value on either purchase is due to
the patent, to be amortized over 15 years.

For both 20X1 and 20X2, Parent has accounted for both
subsidiaries using the simple equity method.

On July 1,
20X2, Sub-One sold used equipment to Sub-Two. The equipment had a cost of $50,000
and accumulated depreciation of $20,000. The sale price was $36,000. During the
last half of 20X2, Sub-Two used the equipment, depreciating it over five years
using the straight-line method.

During 20X2, Sub-Two sold merchandise to Sub-One for $10,000, of
which $5,000 is still held by Sub-One on December 31, 20X2. Sub-Two’s gross
profit was 40%.

Required:

Complete the Figure 8-8 worksheet for consolidated financial
statements for 20X2.

8-25

Chapter
8

8-26

Chapter 8

12.
On January 1, 20X1, Parent Company purchased 90% of
the common stock of Sub-A Company for $90,000. On this date, Sub-A had common
stock, other paid-in capital, and retained earnings of $10,000, $20,000, and
$60,000 respectively.

On January
1, 20X2, Sub-A Company purchased 80% of the common stock of Sub-B Company for
$68,000. On this date, Sub-B Company had common stock, other paid-in capital,
and retained earnings of $5,000, $30,000, and $40,000 respectively.

Any excess of cost over book value on either purchase is due to
a patent, to be amortized over ten years.

Both Parent and Sub-A have accounted for their investments using
the simple equity method.

During 20X2, Sub-B sold merchandise to Sub-A for $20,000, of
which one-fourth is still held by Sub-B on December 31, 20X2. Sub-B’s usual
gross profit is 40%. During 20X3, Sub-B sold more goods to Sub-A for $30,000,
of which $10,000 is still on hand on December 31, 20X3.

Required:

Complete the Figure 8-9 worksheet for consolidated financial
statements for 20X3.

8-27

DIF: D OBJ: 4

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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.

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

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.

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:
.png”>
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

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

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

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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13. Dyl Inc.’s bonds currently sell for
$1,180 and have a par value of $1,000.
They pay a $65 annual coupon and have a 15-year maturity, but they can
be called in 5 years at $1,100. What is
their yield to maturity (YTM)?

a. 4.79%

b. 3.69%

c. 4.65%

d. 5.08%

e. 4.36%

14. Sadik Inc.’s bonds currently sell for
$1,270 and have a par value of $1,000.
They pay a $105 annual coupon
and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)?

a. 6.89%

b. 5.89%

c. 5.18%

d. 6.54%

e. 6.30%

15. Bonds sell at a discount from par
value when market rates for similar bonds are

a. Less than the bond’s coupon rate.

b. Greater than the bond’s coupon rate.

c. Equal to the bond’s coupon rate.

d. Both lower than and equal to the bond’s
coupon rate.

e. Market rates are irrelevant in determining
a bond’s price.

16. Which of the following bonds would
have the greatest percentage increase in value if all interest rates in the
economy fall by 1%?

a. 10-year, zero coupon bond.

b. 20-year, 10% coupon bond.

c. 20-year, 5% coupon bond.

d. 1-year, 10% coupon bond.

e. 20-year, zero coupon bond.

17. O’Brien Ltd.’s outstanding bonds have
a $1,000 par value, and they mature in 25 years. Their nominal yield to maturity is 9.25%,
they pay interest semiannually, and they sell at a price of $975. What is the bond’s nominal coupon interest
rate?

a. 7.32%

b. 7.71%

c. 8.12%

d. 8.54%

e. 8.99%

18. Cooley Company’s stock has a beta of
1.32, the risk-free rate is4.25%, and the market risk premium is5.50%. What is the firm’s required rate of return?

a. 10.93%

b. 11.51%

c. 10.13%

d. 8.75%

e. 10.01%

19. Porter Inc’s stock has an expected
return of 10.75%, a beta of 1.25, and
is in equilibrium. If the risk-free rate
is 5.00%, what is the market risk premium?

a. 5.15%

b. 4.28%

c. 4.32%

d. 4.60%

e. 4.55%

20. Consider the following information and
then calculate the required rate of return for the Global Investment Fund,
which holds 4 stocks. The market’s required rate of return is
9.50%, the risk-free rate is 7.00%, and the Fund’s assets are as follows:

Stock Investment Beta

A $200,000 1.50

B $300,000 -0.50

C $500,000 1.25

D $1,000,000 0.75

a. 8.91%

b. 10.06%

c. 6.77%

d. 8.64%

e. 10.42%

21. Which of the following statements best
describes what you should expect if
you randomly select stocks and add them to your portfolio?

a. Adding more such stocks will reduce the
portfolio’s unsystematic, or
diversifiable, risk.

b. Adding more such stocks will increase the
portfolio’s expected rate of return.

c. Adding more such stocks will reduce the
portfolio’s beta coefficient and thus
its systematic risk.

d. Adding more such stocks will have no effect
on the portfolio’s risk.

e. Adding more such stocks will reduce the
portfolio’s market risk but not its
unsystematic risk.

22. Stock A has a beta of 0.7, whereas
Stock B has a beta of 1.3. Portfolio P
has 50% invested in both A and B. Which
of the following would occur if the market risk premium increased by 1% but the
risk-free rate remained constant?

a. The required return on Portfolio P would increase by 1%.

b. The required return on both stocks would increase by 1%.

c. The required return on Portfolio P would remain unchanged.

d. The required return on Stock A would increase by more than 1%, while the return
on Stock B would increase by less than 1%.

e. The required return for Stock A would fall,
but the required return for Stock B would increase.

23. Assume that you manage a $10 million
mutual fund that has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%. You now receive another $5 million, which you
invest in stocks with an average beta of 0.65.
What is the required rate of return on the new portfolio? (Hint: You must first find the market risk
premium, then find the new portfolio beta.)

a. 8.83%

b. 9.05%

c. 9.27%

d. 9.51%

e. 9.74%

24. If the current one year CD rate is 3%
and the best estimate of one year CD which will be available one year from today
is 5%, what is the current two year CD rate with 1% liquidity premium?

a.
4.00%

b.
4.50%

c.
5.00%

d.
5.50%

e.
5.75%

(

25. How long approximately does it take to
triple your investment at 6% per year?

a. 18.9 years

b. 19.5 years

c. 19.7 years

d. 20.0 years

e. 22.7 years

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1.
Two types of intercompany stock purchases
significantly complicate the consolidation process. The first occurs when the
subsidiary issues added shares of stock in a public issue and the parent buys a
portion of the shares. The second occurs when the subsidiary purchases
outstanding shares of the parent company.

Required:

a.
Discuss the current theoretical consolidation
procedure for situations in which the parent buys a portion of the newly issued
subsidiary shares that is (1) equal to its existing ownership percentage, (2)
greater than its existing ownership percentage, and (3) less than its existing
ownership percentage.

b.
Discuss the most widely supported, current
theoretical consolidation procedures used when the subsidiary purchases
outstanding common stock shares of the parent.

8-10

Chapter 8

2.
Company P owned an 80% interest in Company S on January
1, 20X6, when Company S had the following stockholders’ equity:

Common stock ($20
par)…………………………..

$180,000

Paid-in capital in excess of
par………………….

350,000

Retained
earnings……………………………….

220,000

Total stockholders’
equity……………………..

$750,000

========

On July 1,
20X6, Company S sold 1,000 additional shares to minority shareholders in a
public offering for $50 per share. Company S’s net income for 20X6 was $80,000,
and the income was earned evenly during the year.

Company P uses the simple equity method to record the investment
in Company S. Summary entries are made each December 31 to record the year’s
activity.

Required:

Prepare Company P’s equity adjustments for 20X6 that result from
changes in the investment in Company S account. Assume Company P has $500,000
of paid-in capital in excess of par.

8-11

Chapter 8

3.
Company P purchased an 80% interest in Company S on
January 1, 20X1, for $300,000. Any excess of cost was attributable to goodwill.

On January
1, 20X4, Company S purchased 2,400 shares held by noncontrolling stockholders
for $50 per share. Any excess of cost over book value is attributable to
goodwill. No other changes to the paid-in capital account have occurred.

Company S equity balances on various dates
were as follows:

January
1,

December
31,

December
31,

Capital stock ($10 par)

20X1

20X3

20X5

$120,000

$120,000

$120,000

Paid-in
capital in excess

60,000

60,000

60,000

of par………………

Retained earnings………

160,000

240,000

340,000

Treasury stock (at cost)..

(120,000)

Company P
maintains its investment at cost. Company S recorded the purchase of its shares
as treasury stock at cost.

Required:

Prepare the
necessary determination and distribution of excess schedules and all Figure 8-1
worksheet eliminations and adjustments on the following partial worksheet
prepared on December 31, 20X6:

4.
Company B purchased an 80% interest in the common
stock of Company C for $600,000 on January 1, 20X1. Any excess of cost is
attributable to a patent with a 20-year life. Company B maintains its
investment in Company C under the cost method.

Company A
purchased a 60% interest in the common stock of Company B on January 1, 20X5,
for $2,500,000. Any excess of cost is attributable to Company C equipment,
which is understated by $100,000, and a Company B building, which is
understated by $200,000. Any remaining excess is considered attributable to the
patent. Relevant stockholders’ equities are as follows:

…………

Company B

Company C

January 1,

January 1,

January 1,

Common stock

20X5

20X1

20X5

$
400,000

$100,000

$100,000

Paid-in
capital in

1,100,000

150,000

150,000

excess of par………

Retained earnings…….

2,000,000

300,000

450,000

Required:

a. Prepare a
determination and distribution of excess schedule for the investment in Company
B.

b. On January
1, 20X6, Company C sold a machine with a net book value of $40,000 to Company A
for $50,000. The machine has a 5-year life. Prepare the eliminations and adjustments
needed on the December 31, 20X7, trial balance worksheet that relate to this
intercompany sale.

8-13

Chapter 8

5.
Company P purchased an 80% interest in the Company S
for $480,000 on January 1, 20X1, when Company S had the following stockholders’
equity:

Common stock, $10

par…………………………….

$200,000

Retained earnings………………………………..

300,000

Total equity…………………………………..

$500,000

========

Any excess is attributable to goodwill.

On January
1, 20X3, Company S purchased a 10% interest in the Company P at a price equal
to book value. Both firms maintain investments under the cost method.

8-14

Chapter 8

Required:

a.
Complete the Figure 8-2 partial worksheet for
December 31, 20X3, assuming the use of the treasury stock method.

b.
Calculate the distribution of income for 20X3,
assuming that internally generated net income is $50,000 for Circus and $20,000
for Square.

6.
On January 1, 20X1, Prism Company purchased 7,500
shares of the common stock of Sight Company for $495,000. On this date, Sight
had 20,000 shares of $10 par common stock authorized, 10,000 shares issued and
outstanding. Other paid-in capital and retained earnings were $200,000 and
$300,000 respectively. On January 1, 20X1, any excess of cost over book value
is due to a patent, to be amortized over 15 years.

Sight’s
net income and dividends for two years were:

…………………………….

Net income

20X1

20X2

$50,000

$80,000

Dividends……………………………..

10,000

20,000

In
November, 20X1, Sight Company also declared a 10% stock dividend at a time when
the market price of its common stock was $50 per share. The stock dividend was
distributed on December 31, 20X1.

For both
20X1 and 20X2, Prism Company has accounted for its investment in Sight Company
using the simple equity method.

During 20X1, Sight Company sold goods to Prism Company for
$40,000, of which $10,000 was on hand on December 31, 20X1. During 20X2, Sight
sold goods to Prism for $60,000 of which $15,000 was on hand on December 31,
20X2. Sight’s gross profit on intercompany sales is 40%.

8-15

Chapter
8

Required:

Complete the Figure 8-3 worksheet for consolidated financial
statements for 20X2.

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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:
.png”>
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.

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

8. Trevor Company discloses supplementary operating segment
information for its three reportable segments. Data for 2008 are available as
follows:
.png”>
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

9. Trevor Company discloses supplementary operating
segment information for its three reportable segments. Data for 2008 are
available as follows:
.png”>
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

10. Trimester Corporation’s revenue for the year ended
December 31, 2008, was as follows:
.png”>
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

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

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:
.png”>
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.

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

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

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

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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1. If theinterest is compounded quarterly with 8% APR, which of the following statements is CORRECT?

a. The periodic rate of
interest is 2% and the effective rate
of interest is 4%.

b. The periodic rate of
interest is 8% and the effective rate
of interest is greater than 8%.

c. The periodic rate of
interest is 4% and the effective rate
of interest is less than 8%.

d. The periodic rate of
interest is 2% and the effective rate
of interest is greater than 8%.

e. The periodic rate of
interest is 8% and the effective rate
of interest is also 8%.

2. What is the coefficient of
variation for security a?

Probability

Ra(State=?)

Rb(State=?)

Boom

35%

0.30

0.06

Average

40%

0.10

0.06

Recession

25%

–0.15

-0.05

a.
1.00

b.
1.25

c.
1.36

d.
1.73

e.
1.90

3. You plan to save $6,400 per year, beginning immediately. You will make 4 deposits in an account that
pays 5.7% interest. How much will you have 4 years from today?

a. $22,980.31

b. $22,685.69

c. $26,221.12

d. $29,461.93

e. $31,524.26

4. Which
of the following investments would have the highest future value at the
end of 10 years? Assume that the
effective annual rate for all investments is the same and is greater than zero.

a. Investment A pays $250 at the beginning
of every year for the next 10 years (a total of 10 payments).

b. Investment B pays $125 at the end of
every 6-month period for the next 10 years (a total of 20 payments).

c. Investment C pays $125 at the beginning
of every 6-month period for the next 10 years (a total of 20 payments).

d. Investment D pays $2,500 at the end
of 10 years (just one payment).

e. Investment E pays $250 at the end of
every year for the next 10 years (a total of 10 payments).

-250

5. Your
uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end
of each year, starting at the end of this year.
He also wants to have $25,000 left to give you when he ceases to
withdraw funds from the account. For how
many years can he make the $35,000 withdrawals and still have $25,000 left in
the end?

a. 13.48

b. 14.96

c. 15.71

d. 16.49

e. 17.32

6. Suppose
you just won the state lottery, and you have a choice between receiving
$2,550,000 today or a 20-year annuity of $250,000, with the first payment
coming one year from today. What rate of
return is built into the annuity?
Disregard taxes.

a. 7.12%

b. 7.49%

c. 7.87%

d. 8.26%

e. 8.67%

7. Which
indenture provision may affect the price of the bond differently?

a. convertibility

b. sinking fund

c. call

d. restrictions on
dividends

e. collateral

8. Suppose
1-year Treasury bonds yield 4.00% while 2-year T-bonds yield 4.80%. Assuming the pure expectations theory is
correct, what is the yield on a 1-year T-bond expected to be one year from now?

a. 5.61%

b. 5.72%

c. 6.22%

d. 5.44%

e. 6.11%

9. Which
of the following factors would be most likely to lead to an increase in nominal
interest rates?

a. Households reduce their consumption and
increase their savings.

b. A new technology like the Internet has just
been introduced, and it increases investment opportunities.

c. There is a decrease in expected inflation.

d. The economy falls into a recession.

e. The Federal Reserve decides to try to
stimulate the economy.

10. You
are comparing saving
$100 every month for a year vis-à-vis $1,200 at the beginning of the year. How much extra will you have at the end of
the year by saving $ 1,200 at the beginning of the year instead of saving $100
each month at the end of each month. Use 6% interest rate.

a. $35.51

b. $38.44

c. $60.90

d. $63.90

e. $76.71

11. The real risk-free rate is 3.05%, inflation is expected to
be 2.75% this year, and the maturity risk premium is zero. IBM stock has a risk premium of 0.9%. What is
the equilibrium rate of return on a 1-year Treasury bond?

a. 5.51%

b. 5.80%

c. 6.09%

d. 6.39%

e. 6.71%

12. Suppose the real risk-free rate is 3.25%, the average
future inflation rate is 4.35%, and a maturity risk premium of 0.07% per year
to maturity applies to both corporate and T-bonds, i.e., MRP = 0.07%(t), where
t is the years to maturity. Suppose also
that a liquidity premium of 0.50% and a default risk premium of 0.90% apply to
A-rated corporate bonds but not to T-bonds.
How much higher would the rate of return be on a 10-year A-rated
corporate bond than on a 5-year Treasury bond?

a. 1.75%

b. 1.84%

c. 1.93%

d. 2.03%

e. 2.13%

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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.

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.

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.

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.

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.

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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Description

13. Clayton
Industries is planning its operations for next year, and the CEO wants you to forecast the firm’s
additional funds needed (AFN). Data for
use in your forecast are shown below.
Based on the AFN equation, what is the AFN for the coming year? Dollars are in millions.

Last
year’s sales = S0 $350 Last year’s accounts payable $40

Sales
growth rate = g 30% Last year’s notes payable $50

Last
year’s total assets = A*0 $500 Last year’s accruals $30

Last
year’s profit margin = M 5% Target payout ratio 60%

a. $102.8

b. $108.2

c. $113.9

d. $119.9

e. $125.9

14. Which of the following would, generally, indicate an improvement
in a company’s financial position, holding other things constant?

a. The TIE declines.

b. The DSO increases.

c. The quick ratio
increases.

d. The current
ratio declines.

e. The total assets
turnover decreases.

15. Casey Communications recently issued
new common stock and used the proceeds to pay off some of its short-term notes
payable. This action had no effect on
the company’s total assets or operating income.
Which of the following effects would occur as a result of this action?

a. The company’s current ratio increased.

b. The company’s times interest earned ratio decreased.

c. The company’s basic earning power ratio increased.

d. The company’s equity multiplier increased.

e. The company’s debt ratio increased.

16. Ajax Corp’s sales last year were
$435,000, its operating costs were $362,500, and its interest charges were
$12,500. What was the firm’s
times-interest-earned (TIE) ratio?

a. 4.72

b. 4.97

c. 5.23

d. 5.51

e. 5.80

17. Last year Harrington Inc. had sales
of $325,000 and a net income of $19,000, and its year-end assets were
$250,000. The firm’s
total-debt-to-total-assets ratio was 45.0%.
Based on the DuPont equation, what was the ROE?

a. 13.82%

b. 14.51%

c. 15.23%

d. 16.00%

e. 16.80%

18. Wie Corp’s sales last year were
$315,000, and its year-end total assets were $355,000. The average firm in the industry has a total
assets turnover ratio (TAT) of 2.4. The
firm’s new CFO believes the firm has excess assets that can be sold so as to
bring the TAT down to the industry average without affecting sales. By how much must the assets be reduced to
bring the TAT to the industry average, holding sales constant?

a. $201,934

b. $212,563

c. $223,750

d. $234,938

e. $246,684

19. Towson, Inc. currently has $1,600,000
in accounts receivables and its days sales outstanding (DSO) is 20 days. If
accounts receivable comprise 50% of the company’s current assets and Towson has
$4,800,000 in net fixed assets, what is its total asset turnover ratio?

a. 2.651x

b. 3.650x

c. 3.520x

d. 2.921x

e. 3.920x

20. Which of the following is a primary
market transaction?

a. You sell 200 shares of IBM stock on the NYSE through your broker.

b. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker–you
just give him cash and he gives you the stock.

c. IBM issues 2,000,000 shares of new stock and sells them to the
public through an investment banker.

d. One financial institution buys 200,000 shares of IBM stock from another
institution. An investment banker
arranges the transaction.

e. IBM sells 2,000,000 shares of treasury stock to its employees when they exercise
options that were granted in prior years.

21. What
is the opportunity cost of Project A if it is expected to yield 10%, while the yields
from other projects range from 6.5% to 11.5% with the mean 9% and 5% standard
deviation?

a. 10%

b. 6.5%

c. 11.5%

d. 9%

e. 9.3%

22. You
recently sold 200 shares of Disney stock, and the transfer was made through a
broker. This is an example of:

a. A money market transaction.

b. A primary market transaction.

c. A secondary market transaction.

d. A futures market transaction.

e. An over-the-counter market transaction.

23. Which
of the following statements is CORRECT?

a. Hedge funds are legal in Europe and Asia, but they are not
permitted to operate in the United States.

b. Hedge funds are legal in the United States,
but they are not permitted to operate in Europe or Asia.

c. Hedge funds have more in common with investment
banks than with any other type of financial institution.

d. Hedge funds have more in common with
commercial banks than with any other type of financial institution.

e. Hedge funds are not as highly regulated as most other types of
financial institutions. The
justification for this light regulation is that only “sophisticated”
investors (i.e., those with high net worths and high incomes) are permitted to
invest in these funds, and such investors supposedly can do any necessary
“due diligence” on their own rather than have it done by the SEC or
some other regulator.

24. Which
of the following statements is
CORRECT?

a. While the distinctions are becoming
blurred, investment banks generally specialize in lending money, whereas
commercial banks generally help companies raise capital from other parties.

b. The NYSE operates as an auction market, whereas Nasdaq is an example of a dealer
market.

c. Money market mutual funds usually invest their money in a well-diversified portfolio
of liquid common stocks.

d. Money markets are markets for long-term debt and common stocks.

e. A liquid security is a security whose value is derived from the price of some
other “underlying” asset.

25. Dell has an inventory period of 1
month, and an account receivable period of 0 (zero) months. It also has a
payable period of 6 months. What are the cash conversion cycle period and the
interest expense for Dell if they have annual net total (credit) sales volume
of $10 billion? The market interest rate is 6.0%.

a. -5.0, $-250 m

b. 6.0,
$300m

c. 1.0,
$100m

d. 3.0,
$150m

e. 0.0,
$100m

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Description

1. 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.

2. Given
the increased development of complex business structures, which of the
following regulators is responsible for the continued usefulness of accounting
reports?
A. Securities and Exchange Commission (SEC)
B. Public Company Accounting Oversight Board (PCAOB)
C. Financial Accounting Standards Board (FASB)
D. All of the above

3. A
business combination in which the acquired company’s assets and liabilities are
combined with those of the acquiring company into a single entity is defined
as:
A. Stock acquisition
B. Leveraged buyout
C. Statutory Merger
D. Reverse statutory rollup

4. In
which of the following situations do accounting standards not require that the
financial statements of the parent and subsidiary be consolidated?
A. A corporation creates a new 100 percent owned subsidiary
B. A corporation purchases 90 percent of the voting stock of another
company
C. A corporation has both control and majority ownership of an
unincorporated company
D. A corporation owns less-than a controlling interest in an unincorporated
company


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:
.png”>

5. 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

6. 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


7. 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

8. 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.

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.

9. 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.

10. 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


11. 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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12. 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.

13. 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.

Rivendell
Corporation and Foster Company merged as of January 1, 20X9. 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.

14. 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


15. 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.

16. 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

17. Using
the preceding information, what amount would have been expensed if the pooling-of-interests
method of accounting was used?
A. $0
B. $19,000
C. $53,000
D. $72,000

18. Burrough
Corporation paid $80,000 to acquire all of Helyar Company’s 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

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.


19. 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

20. 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

21. 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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2.
On January 1, 20X1, Pepper Company purchased 100% of
the common stock of Salt Company for $360,000. On this date, Salt had common
stock, other paid-in capital, and retained earnings of $50,000, $100,000 and
$150,000 respectively. Net income and dividends for two years for Salt Company
were:

…………………………….

Net income

20X1

20X2

$60,000

$90,000

Dividends……………………………..

20,000

30,000

On January
1, 20X1, the only tangible assets of Salt which were undervalued were inventory
and building. Inventory, for which FIFO is used, was worth $10,000 more than
cost. The inventory was sold in 20X1. Buildings had a fair value of $320,000, a
remaining life of 10 years and straight-line depreciation is used. The book
value of the land and building are $50,000 and $260,000 respectively. Patent,
if any, is to be amortized over 10 years.

Pepper uses
the simple equity method in accounting for its Investment in Salt Company.

3-10

Chapter 3

Required:

a.
Using the information above or on the separate
worksheet, prepare a determination and distribution of excess schedule.

b. Complete
the Figure 3-2 worksheet for consolidated financial statements for 20X2.

3.
On January 1, 20X1, Parent Company acquired 100% of
the common stock of Subsidiary Company for a cost of $294,000 in a tax-free
combination. On this date, Subsidiary had total owner’s equity of $220,000. The
excess of cost over book value is due to the undervaluation of inventory, other
long-term investments, equipment, and patent.

The
inventory is worth $10,000 more than book value and FIFO is used. The inventory
was sold during 20X1. The other long-term investments of Subsidiary are worth
$20,000 more than book value and are carried under the cost method. The
equipment is worth $30,000 more than book value, has a remaining useful life of
10 years, with no salvage value, and straight-line depreciation is used. The
patent is to be amortized over 20 years. The corporate tax rate is 30%.

During 20X1,
Subsidiary had net income after taxes of $42,000 and in December, paid
dividends of $20,000. As a result, the appropriate entries were made on
Parent’s books under the equity method.

Required:

a. Prepare a
schedule to determine and distribute the excess of cost over book value to
assets and to related deferred taxes. Include computations for the write off of
the asset increases and the related tax effect.

b. Complete
the worksheet in Figure 3-3 for consolidated financial statements for 20X1.

3-12

Chapter 3

4.
On January 1, 20X1, Port Company purchased 80% of
the common stock of Star Company for $400,000. On this date, Star had common
stock, other paid-in capital, and retained earnings of $10,000, $140,000 and
$200,000 respectively. Net income and dividends for two years for Star Company
were:

……………………………

Net income

20X1

20X2

$50,000

$90,000

Dividends…………………………….

10,000

30,000

On January
1, 20X1, the only tangible assets of Star which were undervalued were inventory
and building. Inventory, for which FIFO is used, was worth $10,000 more than
cost. The inventory was sold in 20X1. Building, which was worth $27,500 more
than book value, has a remaining life of 10 years, and straight-line
depreciation is used. Patent, if any, is to be amortized over 10 years.

3-14

Chapter 3

Required:

a.
From the information above or on the separate
vertical-form worksheet, prepare a determination and distribution of excess
schedule. Use the parent company concept (pro rata fair value approach) in any
write-up of assets.

b.
Port Company carries the Investment in Star Company
under the simple equity method. In general journal form, record the entries
that would be made to apply the equity method in 20X1 and 20X2.

c. Complete
the Figure 3-4 worksheet for consolidated financial statements for 20X2.

5.
The Paris Company purchased an 80% interest in Seine,
Inc. for $600,000 on July 1, 20X1, when Seine had the following balance sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

120,000

Land……………………………………………

80,000

Building………………………………………..

270,000

Equipment……………………………………….

80,000

…………………………………………Total

$600,000

========

Liabilities
and Equity

$100,000

Current
liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings –
7/1…………………………..

300,000

Total…………………………………………

$600,000

========

The
inventory is understated by $20,000 and is sold in the third quarter of 20X1.
The building has a fair value of $320,000 and a 10-year remaining life. The
equipment has a fair value of $120,000 and a remaining life of 5 years. Any
remaining excess is attributed to patent with a 20-year life.

On December 31, 20X4, Seine has the following
stockholders’ equity:

Common Stock, $5
par……………………………..

$
50,000

3-16

Chapter 3

Paid-in capital in excess
of par…………………..

150,000

Retained
earnings………………………………..

600,000

During
20X1, Seine had a net income of $100,000 and paid $10,000 in dividends.

Assume that
Paris uses the cost method to record its investment in Seine.

Required:

a. Prepare a
determination and distribution of excess schedule as of July 1, 20X1.

b.
Prepare the cost to equity conversion adjustment
that would be made on the December 31, 20X1, consolidated trial balance
worksheet.

c. Prepare the
eliminations and adjustments that would be made on the December 31, 20X1,
consolidated worksheet to eliminate the investment in Seine. Distribute and
amortize any excess.

6.
On January 1, 20X1, Parent Company purchased 100% of
the common stock of Subsidiary Company for $360,000. On this date, Subsidiary
had common stock, other paid-in capital, and retained earnings of $50,000,
$100,000 and $150,000 respectively. Net income and dividends for two years for
Subsidiary Company were:

……………………………

Net income

20X1

20X2

$60,000

$90,000

Dividends…………………………….

20,000

30,000

On January
1, 20X1, the only tangible assets of Subsidiary which were undervalued were
inventory and building. Inventory, for which FIFO is used, was worth $10,000
more than cost. The inventory was sold in 20X1. Land had a fair value of
$80,000. Buildings had a fair value of $320,00, a remaining life of 10 years
and straight-line depreciation is used. The book value of the land and building
are $50,000 and $260,000 respectively. Patent, if any, is to be amortized over
10 years.

Parent uses
the simple equity method in accounting for its Investment in Subsidiary Company.

3-18

Chapter 3

Required:

a.
Using the information above or on the separate
worksheet, prepare a determination and distribution of excess schedule.

b. Complete
the Figure 3-5 worksheet for consolidated financial statements for 20X2.

7.
The Paris Company purchased an 80% interest in
Seine, Inc. for $600,000 on July 1, 20X1, when Seine had the following balance
sheet:

Assets

$
50,000

Accounts
receivable………………………………

Inventory……………………………………….

120,000

Land……………………………………………

80,000

Building………………………………………..

270,000

Equipment……………………………………….

80,000

…………………………………………Total

$600,000

========

Liabilities
and Equity

$100,000

Current
liabilities………………………………

Common stock, $5
par……………………………..

50,000

Paid-in capital in excess of
par…………………..

150,000

Retained earnings –
7/1…………………………..

300,000

Total…………………………………………

$600,000

========

The
inventory is understated by $20,000 and is sold in the third quarter of 20X1.
The building has a fair value of $320,000 and a 10-year remaining life. The
equipment has a fair value of $120,000 and a remaining life of 5 years. Any
remaining excess is attributed to patent with a 20-year life.

On December 31, 20X4, Seine has the following
stockholders’ equity:

Common stock, $5
par……………………………..

$
50,000

Paid-in capital in excess
of par…………………..

150,000

3-20

Chapter 3

Retained
earnings………………………………..

600,000

During
20X1, Seine had a net income of $100,000 and paid $10,000 in dividends.

Assume that
Paris uses the sophisticated equity method to record its investment in Seine.

Required:

a. Prepare a
determination and distribution of excess schedule as of July 1, 20X1.

b. Prepare the
eliminations and adjustments that would be made on the December 31, 20X1,
consolidated worksheet to eliminate the investment in Seine. Distribute and
amortize any excess.

8.
On January 1, 20X1, Parent Company purchased 80% of
the common stock of Subsidiary Company for $316,000. On this date, Subsidiary
had common stock, other paid-in capital, and retained earnings of $40,000,
$120,000, and $190,000, respectively. Net income and dividends for 2 years for
Subsidiary Company were as follows:

……………………………

Net income

20X1

20X2

$50,000

$90,000

Dividends…………………………….

10,000

20,000

On January 1, 20X1, the only tangible assets of Subsidiary which
were undervalued were inventory and building. Inventory, for which FIFO is
used, was worth $5,000 more than cost. The inventory was sold in 20X1.
Building, which was worth $15,000 more than book value, has a remaining life of
8 years, and straight-line depreciation is used. Patent, if any, is to be
amortized over 10 years.

Required:

a.
Using the information above or on the separate
worksheet, prepare a determination and distribution of excess schedule. Use the
parent company concept (prorata fair value approach) in any write-up of assets.

b.
Parent Company carries the Investment in Subsidiary
Company under the sophisticated equity method. In general journal form, record
the entries that would be made to apply the equity method in 20X1 and 20X2.

c.
Compute the balance which should appear in Investment
in Subsidiary Company and in Subsidiary Income on December 31, 20X2 (the second
year. Fill in these amounts on Parent Company’s trial balance for 20X2.

d. Complete
the Figure 3-6 worksheet for consolidated financial statements for 20X2.

3-22

Chapter
3

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23. You have a chance to buy an annuity that pays $550 at the beginning
of each year for 3 years. You could earn
5.5% on your money in other investments with equal risk. What is the most you should pay for the
annuity?

a. $1,412.84

b. $1,487.20

c. $1,565.48

d. $1,643.75

e. $1,725.94

24. You have a chance to buy an annuity that pays $5,000 at the
beginning of each year for 5 years.
You could earn 4.5% on your money in other investments with equal
risk. What is the most you should pay
for the annuity?

a 20,701

b. $21,791

c. $22,938

d. $24,085

e. $25,289

25. Your uncle is about to retire, and he
wants to buy an annuity that will provide him with $75,000 of income a year for
20 years, with the first payment coming immediately. The going rate on such annuities is
5.25%. How much would it cost him to buy
the annuity today?

a. $825,835

b. $869,300

c. $915,052

d. $963,213

e. $1,011,374

26. Your father is about to retire, and he wants to buy an
annuity that will provide him with $85,000 of income a year for 25 years, with
the first payment coming immediately.
The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity
today?

a. $1,063,968

b. $1,119,966

c. $1,178,912

d. $1,240,960

e. $1,303,008

27. You inherited an oil well that will pay you $25,000 per
year for 25 years, with the first payment being made today. If you think a fair return on the well is
7.5%, how much should you ask for it if you decide to sell it?

a. $284,595

b. $299,574

c. $314,553

d. $330,281

e. $346,795

28. Sam was injured in an accident, and the insurance company
has offered him the choice of $25,000 per year for 15 years, with the first
payment being made today, or a lump sum.
If a fair return is 7.5%, how large must the lump sum be to leave him as
well off financially as with the annuity?

a. $225,367

b. $237,229

c. $249,090

d. $261,545

e. $274,622

29. What’s the present value of a 4-year ordinary annuity of
$2,250 per year plus an additional $3,000 at the end of Year 4 if the interest
rate is 5%?

a. $8,509

b. $8,957

c. $9,428

d. $9,924

e. $10,446

30. Suppose you inherited $275,000 and invested it at 8.25% per
year. How much could you withdraw at the
end of each of the next 20 years?

a. $28,532

b. $29,959

c. $31,457

d. $33,030

e. $34,681

31. Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and
to earn 7.5% on his invested funds. How
much could he withdraw at the end of each of the next 25 years and end
up with zero in the account?

a. $28,843.38

b. $30,361.46

c. $31,959.43

d. $33,641.50

e. $35,323.58

32. Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and
he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning
of each of the next 25 years and end up with zero in the account?

a. $28,243.21

b. $29,729.70

c. $31,294.42

d. $32,859.14

e. $34,502.10:

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Use the information for the question(s) below.

Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with

each outcome being equally likely. The initial investment required for the project is $80,000, and the project?s cost of

capital is 15%. The risk-free interest rate is 5%.

1) Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm.

The equity holders will receive the cash flows of the project in one year. The market value of the unlevered

equity for this project is closest to:

A) $94,100

B) $90,000

C) $86,250

D) $98,600

2) Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate, then

the value of the firm?s levered equity from the project is closest to:

A) $0

B) $10,000

C) $6,000

D) $8,600

3) Suppose thatto raise the
funds forthe initial investment the firm borrows $80,000 at the risk free rate,
then

the cost of capital for the firm?s levered equity is closest to:

A) 45%

B) 25%

C) 15%

D) 95%

4) Two separate firms are considering investing in this project. Firm unlevered plans to fund the entire $80,000

investment using equity, while firm levered plans to borrow $45,000 at the risk-free rate and use equity to

finance the remainder of the initial investment. Calculate the expected returns for both the levered and

unlevered firm.

5) Which of the following is not one of Modigliani and Miller?s set of conditions referred to as perfect capital

markets?

A) All investors hold the efficient portfolio of assets.

B) There are no taxes, transaction costs, or issuance costs associated with security trading.

C) A firm?s financing decisions do not change the cash flows generated by its investments, nor do they

reveal new information about them.

D) Investors and firms can trade the same set of securities at competitive market prices equal to the

present value of their future cash flows.

6) Which of the following statements is false?

A) While debt itself may be cheap, it increases the risk and therefore the cost of capital of the firm?s equity.

B) Although debt does not have a lower cost of capital than equity, we can consider this cost in isolation.

C) We can use Modigliani and Miller?s first proposition to derive an explicit relationship between leverage

and the equity cost of capital.

D) The total market value of the firm?s securities is equal to the market value of its assets, whether the firm

is unlevered or levered.

7) Which of the following statements is false?

A) The levered equity return equals the unlevered return, plus an extra?kick? due to leverage.

B) By holding a portfolio of the firm’s equity and its debt, we can replicate the cash flows from holding its

levered equity.

C) The cost of capital of levered equity is equal to the cost of capital of unlevered equity plus a premium

that is proportional to the market value debt-equity ratio.

D) If a firm is unlevered, all of the free cash flows generated by its assets are available to be paid out to its

equity holders.

8) Which of the following statements is false?

A) With no debt, the WACC is equal to the unlevered equity cost of capital.

B) With perfect capital markets, a firm?s WACC is dependent of its capital structure and is equal to its

equity cost of capital only the firm it is unlevered.

C) As the firm borrows at the low cost of capital for debt, its equity cost of capital rises, but the net effect is

that the firm?s WACC is unchanged.

D) Although debt has a lower cost of capital than equity, leverage does not lower a firm?s WACC.

Use the information for the question(s) below.

9) Suppose that you borrow only $45,000 in financing the project. According to MM proposition II, calculate

the firm?s equity cost of capital.

10) Sisyphean Bolder Movers Incorporated has no debt, a total equity capitalization of $50 billion, and a beta of

2.0. Included in Sisyphean?s assets are $12 billion in cash and risk-free securities. Calculate Sisyphean?s

enterprise value and unlevered cost of equity considering the fact that Sisyphean?s cash is risk-free.

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1. Which of the following statements
is CORRECT?

a. A time line
is not meaningful unless all cash flows occur annually.

b. Time lines
are useful for visualizing complex problems prior to doing actual calculations.

c. Time lines
cannot be constructed in situations where some of the cash flows occur annually
but others occur quarterly.

d. Time lines
cannot be constructed for annuities where the payments occur at the beginning
of the periods.

e. Some of the cash flows shown on a time line
can be in the form of annuity payments, but none can be uneven amounts.

2. Which
of the following statements is CORRECT?

a. A time line
is not meaningful unless all cash flows occur annually.

b. Time lines
are not useful for visualizing complex problems prior to doing actual
calculations.

c. Time lines
cannot be constructed in situations where some of the cash flows occur annually
but others occur quarterly.

d. Time lines
can be constructed for annuities where the payments occur at either the
beginning or the end of the periods.

e. Some of the
cash flows shown on a time line can be in the form of annuity payments, but
none can be uneven amounts.

3. Which
of the following statements is CORRECT?

a. A time line is not meaningful unless all cash flows occur annually.

b. Time lines are not useful for visualizing
complex problems prior to doing actual calculations.

c. Time lines can be constructed to deal with
situations where some of the cash flows occur annually but others occur
quarterly.

d. Time lines can only be constructed for annuities where the
payments occur at the end of the periods, i.e., for ordinary annuities.

e. Time lines cannot be constructed where some of the payments
constitute an annuity but others are unequal and thus are not part of the
annuity.

4. Which
of the following statements is CORRECT?

a. A time line is not meaningful unless all cash flows occur annually.

b. Time lines are not useful for visualizing complex problems prior to
doing actual calculations.

c. Time lines cannot be constructed to deal with situations where
some of the cash flows occur annually but others occur quarterly.

d. Time lines can only be constructed for annuities where the
payments occur at the end of the periods, i.e., for ordinary annuities.

e. Time lines can be constructed where some of the payments constitute an annuity but
others are unequal and thus are not part of the annuity.

5. You
plan to analyze the value of a potential investment by calculating the sum of
the present values of its expected cash flows.
Which of the following would lower the calculated value of the
investment?

a. The cash flows are in the form of a
deferred annuity, and they total to $100,000.
You learn that the annuity lasts for only 5 rather than 10 years, hence
that each payment is for $20,000 rather than for $10,000.

b. The discount rateincreases.

c. The riskiness of the investment’s cash flows decreases.

d. The total amount
of cash flows remains the same, but more of the cash flows are received in the
earlier years and less are received in the later years.

e. The discount rate decreases.

6. You
plan to analyze the value of a potential investment by calculating the sum of
the present values of its expected cash flows.
Which of the following would increase the calculated value of the
investment?

a. The cash flows are in the form of a
deferred annuity, and they total to $100,000.
You learn that the annuity lasts for 10 years rather than 5 years, hence
that each payment is for $10,000 rather than for $20,000.

b. The discount rate decreases.

c. The riskiness of the investment’s cash
flows increases.

d. The total amount
of cash flows remains the same, but more of the cash flows are received in the
later years and less are received in the earlier years.

e. The discount rate increases.

7. Your bank account pays a 6% nominal
rate of interest. The interest is
compounded quarterly. Which of the
following statements is CORRECT?

a. The periodic rate of interest is 1.5% and the effective rate of interest is 3%.

b. The periodic rate of interest is 6% and the
effective rate of interest is greater than 6%.

c. The periodic rate of interest is 1.5% and
the effective rate of interest is greater than 6%.

d. The periodic rate of interest is 3% and the effective rate of interest is 6%.

e. The periodic rate of interest is 6% and the effective rate of interest is also 6%.

8. Your
bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?

a. The periodic rate of interest is 2% and the
effective rate of interest is 4%.

b. The periodic rate of interest is 8% and the
effective rate of interest is greater
than 8%.

c. The periodic rate of interest is 4% and the
effective rate of interest is less
than 8%.

d. The periodic rate of interest is 2% and the
effective rate of interest is greater
than 8%.

e. The periodic rate of interest is 8% and the
effective rate of interest is also
8%.

9. A
$50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?

a. The annual payments would be larger if the
interest rate were lower.

b. If the loan were amortized over 10 years
rather than 7 years, and if the interest rate were the same in either case, the
first payment would include more dollars of interest under the 7-year
amortization plan.

c. The proportion of each payment that
represents interest as opposed to repayment of principal would be lower if the
interest rate were lower.

d. The last payment would have a higher
proportion of interest than the first payment.

e. The proportion of interest versus principal
repayment would be the same for each of the 7 payments.

10. A $150,000 loan is to be amortized over 7 years, with
annual end-of-year payments. Which of these
statements is CORRECT?

a. The annual payments would be larger if the
interest rate were lower.

b. If the loan were amortized over 10 years
rather than 7 years, and if the interest rate were the same in either case, the
first payment would include more dollars of interest under the 7-year
amortization plan.

c. The proportion of each payment that
represents interest as opposed to repayment of principal would be higher if the
interest rate were lower.

d. The proportion of each payment that
represents interest versus repayment of principal would be higher if the
interest rate were higher.

e. The proportion of interest versus principal
repayment would be the same for each of the 7 payments.

11. Which of the following statements regarding a 15-year (180-month)
$125,000, fixed-rate mortgage is CORRECT?
(Ignore taxes and transactions costs.)

a. The remaining balance after three years
will be $125,000 less one third of the interest paid during the first three
years.

b. Because it is a fixed-rate mortgage, the
monthly loan payments (which include both interest and principal payments) are
constant.

c. Interest payments on the mortgage will
increase steadily over time, but the total amount of each payment will remain
constant.

d. The proportion of the monthly payment that
goes towards repayment of principal will be lower 10 years from now than it
will be the first year.

e. The outstanding balance declines at a
slower rate in the later years of the loan’s life.

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12. Which of the following statements regarding a 15-year
(180-month) $125,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

a. The remaining balance after three years
will be $125,000 less one third of the interest paid during the first three
years.

b. Because the outstanding balance declines
over time, the monthly payments will also decline over time.

c. Interest payments on the mortgage will
increase steadily over time, but the total amount of each payment will remain
constant.

d. The proportion of the monthly payment that
goes towards repayment of principal will be lower 10 years from now than it
will be the first year.

e. The outstanding balance declines at a
faster rate in the later years of the loan’s life.

13. Which of the following statements regarding a 30-year monthly
payment amortized mortgage with a nominal interest rate of 10% is CORRECT?

a. The monthly payments will decline over
time.

b. A smaller proportion of the last monthly
payment will be interest, and a larger proportion will be principal, than for
the first monthly payment.

c. The total dollar amount of principal being
paid off each month gets smaller as the loan approaches maturity.

d. The amount representing interest in the
first payment would be higher if the nominal interest rate were 7%
rather than 10%.

e. Exactly 10% of the first monthly payment
represents interest.

14. Which of the following statements regarding a 30-year
monthly payment amortized mortgage with a nominal interest rate of 10% is
CORRECT?

a. The monthly payments will increase over
time.

b. A larger proportion of the first monthly
payment will be interest, and a smaller proportion will be principal, than for
the last monthly payment.

c. The total dollar amount of interest being
paid off each month gets larger as the loan approaches maturity.

d. The amount representing interest in the
first payment would be higher if the nominal interest rate were 7%
rather than 10%.

e. Exactly 10% of the first monthly payment
represents interest.

15. A U.S. Treasury bond will pay a lump sum of $1,000 exactly
3 years from today. The nominal interest
rate is 6%, semiannual compounding.
Which of the following statements is CORRECT?

a. The periodic interest rate is greater than
3%.

b. The periodic rate is less than 3%.

c. The present value would be greater if the
lump sum were discounted back for more periods.

d. The present value of the $1,000 would be
smaller if interest were compounded monthly rather than semiannually.

e. The PV of the $1,000 lump sum has a higher
present value than the PV of a 3-year, $333.33 ordinary annuity.

16. A U.S. Treasury bond will pay a lump sum of $1,000 exactly
3 years from today. The nominal interest
rate is 6%, semiannual compounding.
Which of the following statements is CORRECT?

a. The periodic interest rate is greater than
3%.

b. The periodic rate is less than 3%.

c. The present value would be greater if the
lump sum were discounted back for more periods.

d. The present value of the $1,000 would be
larger if interest were compounded monthly rather than semiannually.

e. The PV of the $1,000 lump sum has a smaller
present value than the PV of a 3-year, $333.33 ordinary annuity.

17. Which of the following statements is
CORRECT, assuming positive interest rates and holding other things constant?

a. The present value of a 5-year, $250 annuity
due will be lower than the PV of a similar ordinary annuity.

b. A 30-year, $150,000 amortized mortgage will
have larger monthly payments than an otherwise similar 20-year mortgage.

c. A bank loan’s nominal interest rate will
always be equal to or less than its effective annual rate.

d. If an investment pays 10% interest,
compounded annually, its effective annual rate will be less than 10%.

e. Banks A and B offer the same nominal annual
rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher
future value if you leave your funds on deposit.

18. Which of the following statements is CORRECT, assuming
positive interest rates and holding other things constant?

a. The present value of a 5-year, $250 annuity
due will be lower than the PV of a similar ordinary annuity.

b. A 30-year, $150,000 amortized mortgage will
have larger monthly payments than an otherwise similar 20-year mortgage.

c. A bank loan’s nominal interest rate will
always be equal to or greater than its effective annual rate.

d. If an investment pays 10% interest,
compounded quarterly, its effective annual rate will be greater than 10%.

e. Banks A and B offer the same nominal annual
rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher
future value if you leave your funds on deposit.

19. Which of the following statements is CORRECT?

a. The present value of a 3-year, $150 annuity
due will exceed the present value of a 3-year, $150 ordinary annuity.

b. If a loan has a nominal annual rate of 8%,
then the effective rate can never be greater than 8%.

c. If a loan or investment has annual
payments, then the effective, periodic, and nominal rates of interest will all
be different.

d. The proportion of the payment that goes
toward interest on a fully amortized loan increases over time.

e. An investment that has a nominal rate of 6%
with semiannual payments will have an effective rate that is smaller than 6%.

20. Which of the following statements is CORRECT?

a. The present value of a 3-year, $150
ordinary annuity will exceed the present value of a 3-year, $150 annuity due.

b. If a loan has a nominal annual rate of 8%,
then the effective rate will never be less than 8%.

c. If a loan or investment has annual
payments, then the effective, periodic, and nominal rates of interest will all
be different.

d. The proportion of the payment that goes
toward interest on a fully amortized loan increases over time.

e. An investment that has a nominal rate of 6%
with semiannual payments will have an effective rate that is smaller than 6%.

21. You are considering two equally risky annuities, each of
which pays $5,000 per year for 10 years.
Investment ORD is an ordinary (or deferred) annuity, while Investment
DUE is an annuity due. Which of the
following statements is CORRECT?

a. The present value of ORD must exceed the
present value of DUE, but the future value of ORD may be less than the future
value of DUE.

b. The present value of DUE exceeds the
present value of ORD, while the future value of DUE is less than the future
value of ORD.

c. The present value of ORD exceeds the
present value of DUE, and the future value of ORD also exceeds the future value
of DUE.

d. The present value of DUE exceeds the
present value of ORD, and the future value of DUE also exceeds the future value
of ORD.

e. If the going rate of interest decreases
from 10% to 0%, the difference between the present value of ORD and the present
value of DUE would remain constant.

22. You are considering two equally risky annuities, each of
which pays $5,000 per year for 10 years.
Investment ORD is an ordinary (or deferred) annuity, while Investment
DUE is an annuity due. Which of the
following statements is CORRECT?

a. A rational investor would be willing to pay
more for DUE than for ORD, so their market prices should differ.

b. The present value of DUE exceeds the
present value of ORD, while the future value of DUE is less than the future
value of ORD.

c. The present value of ORD exceeds the
present value of DUE, and the future value of ORD also exceeds the future value
of DUE.

d. The present value of ORD exceeds the
present value of DUE, while the future value of DUE exceeds the future value of
ORD.

e. If the going rate of interest decreases
from 10% to 0%, the difference between the present value of ORD and the present
value of DUE would remain constant.

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11.
The Blue Reef Company purchased the net assets of
the Pink Coral Company on January 1, 20X1, and made the following entry to
record the purchase:

Current
Assets………………………..

100,000

Equipment…………………………….

150,000

Land
………………………………..

50,000

Buildings…………………………….

300,000

Goodwill
…………………………….

100,000

Liabilities…………………………

80,000

Common Stock, $1 Par…………………

100,000

Paid-in
Capital in Excess of Par………

520,000

Required:

Make the
required entry on January 1, 20X3, for each of the two following independent
contingency agreements:

a.
An additional cash payment would be made on January
1, 20X3 equal to four times the amount by which average annual earnings of the
Pink Coral Division exceed $80,000 per year 20X1 and 20X2. Net income was
$112,000 in 20X1 and $140,000 in 20X2.

b.
Additional shares would be issued on January 1, 20X3
to compensate for any fall in the value of Blue Reef common stock below $16 per
share. The settlement would be to cure the deficiency by issuing added shares
based on their fair value on January 1, 20X3. The fair price of the shares on
January 1, 20X3 was $10.

1-22

Chapter 1

12. The balance
sheet information for Nickel Company is to be used in both parts (a) and (b),
each of which is an independent case. On January 1, 20X1, a business
combination occurred between Dime Co. and Nickel Co. On this date, a condensed
balance sheet for Nickel showed:

……………………..

Current Assets

Book
Value

$

500,000

Plant and Equipment
(net)……………

900,000

Intangibles – Patent………………..

150,000

$1,550,000

==========

Current Liabilities…………………

$

75,000

Long-Term
Debt……………………..

225,000

Common
Stock……………………….

400,000

Paid-in Capital in Excess of
Par……..

300,000

Retained Earning……………………

550,000

$1,550,000

==========

Required:

a.
Assume the combination was an asset acquisition in
which Dime purchased all of the net assets of Nickel for $1,725,000 cash.
Nickel’s current assets were undervalued $70,000; plant and equipment were
undervalued $150,000; the patent was undervalued $80,000; and long-term debt
was overvalued $45,000.

Record the entry or entries on Dime’s books to carry out the
acquisition of the net assets of Nickel.

b.
Assume that, in the combination, Dime acquired
Nickel’s net assets by issuance of new Dime common stock with a par value of
$200,000 and a fair value of $1,750,000. In addition, Dime incurred stock
issuance costs of $30,000. For financial accounting purposes, the combination
is to be accounted for as a purchase. For tax purposes, the combination is
tax-free to the shareholders of Nickel Company. Assume a tax rate of 32%.
Current assets of Nickel are undervalued by $70,000. The fair value of Nickel’s
plant and equipment was $1,050,000. The intangible is a patent with a fair
value equal to book value.

Record the entry or entries on Dime’s books to carry out the
acquisition of the net assets of Nickel. Provide supporting calculations.

1-23

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2.
On January 1, 20X5, Brown Inc. acquired Larson
Company’s net assets in exchange for Brown’s common stock with a par value of
$100,000 and a fair value of $800,000. Brown also paid $10,000 in direct
acquisition costs and $15,000 in stock issuance costs.

On
this date, Larson’s condensed account balances showed the following:

Current Assets

Book
Value

Fair
Value

$ 280,000

$ 370,000

Plant
and Equipment

440,000

480,000

Accumulated
Depreciation

(100,000)

120,000

Intangibles
– Patents

80,000

Current
Liabilities

(140,000)

(140,000)

Long-Term
Debt

(100,000)

(110,000)

Common
Stock

(200,000)

Other
Paid-in Capital

(120,000)

Retained Earnings

(140,000)

Required:

Record
Brown’s purchase of Larson Company’s net assets on the books of Brown Inc.

1-9

Chapter 1

……………

3.
The Chan Corporation purchased the net assets
(existing liabilities were assumed) of the Don Company for $900,000 cash. The
balance sheet for the Don Company on the date of acquisition showed the
following:

Assets

Current assets………………………………….

$
100,000

Equipment………………………………………

300,000

Accumulated
depreciation…………………………

(100,000)

Plant………………………………………….

600,000

Accumulated
depreciation…………………………

(250,000)

Total………………………………………….

$ 650,000

=========

Liabilities
and Equity

Bonds payable, 8%……………………………….

$
200,000

Common stock, $1
par…………………………….

100,000

Paid-in capital in excess of
par………………….

200,000

Retained earnings……………………………….

150,000

………………………………………….Total

$ 650,000

=========

1-10

Chapter 1

Required:

The
equipment has a fair value of $300,000, and the plant assets have a fair value
of $500,000. Assume that the Chan Corporation has an effective tax rate of 40%.
Prepare the entry to record the purchase of the Don Company for each of the
following separate cases with specific added information:

a.
The sale is a nontaxable exchange to the seller that
limits the buyer to depreciation and amortization on only book value for tax
purposes.

b.
The bonds have a current fair value of $190,000. The
transaction is a nontaxable exchange.

c.
There are $100,000 of prior-year losses that can be
used to claim a tax refund. The transaction is a nontaxable exchange.

d.
There are $150,000 of past losses that can be
carried forward to future years to offset taxes that will be due. The
transaction is a nontaxable exchange.

4.
On January 1, 20X5, Zebb and Nottle Companies had
condensed balance sheets as shown below:

………………………

………………….

Zebb

Nottle

Current Assets

Company

Company

$1,000,000

$

600,000

Plant and
Equipment………………….

1,500,000

800,000

$2,500,000

$1,400,000

Current Liabilities

==========

==========

$ 200,000

$

100,000

Long-Term
Debt………………………

300,000

300,000

Common
Stock, $10 par…………………

1,400,000

400,000

Paid-in
Capital in Excess of Par……….

0

100,000

Retained
Earnings…………………….

600,000

500,000

$2,500,000

$1,400,000

==========

==========

Required:

Record the
acquisition of Nottle’s net assets, the issuance of the stock and/or payment of
cash, and payment of the related costs. Assume that Zebb issued 30,000 shares
of new common stock with a fair value of $25 per share and paid $500,000 cash
for all of the net assets of Nottle. Direct acquisition costs of $50,000 and stock
issuance costs of $20,000 were paid-in cash. The combination is accounted for
as a purchase. Current assets had a fair value of $650,000, plant and equipment
had a fair value of $900,000, and long-term debt had a fair value of $330,000.

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$9.00

Description

6.
Poplar Corp. acquires the net assets of Sapling
Company, which has the following balance sheet:

Accounts
Receivable

$ 50,000

Inventory

80,000

Equipment,
Net

50,000

Land
& Building, Net

120,000

Total
Assets

$300,000

========

Bonds Payable

$
90,000

Common
Stock

100,000

Retained
Earnings

110,000

Total
Liabilities and

$300,000

Stockholders’
Equity

========

Fair values on the date of acquisition:

Inventory

$100,000

Equipment

30,000

Land
& Building

180,000

Customer
List

30,000

Bonds Payable

100,000

Direct acquisition costs: $10,000

If Poplar
paid $300,000 what journal entries would be recorded by both Poplar Corp. and
Sapling Company?

7.
Diamond acquired Heart’s net assets. At the time of
the acquisition Heart’s Balance sheet was as follows:

Accounts
Receivable

$130,000

Inventory

70,000

Equipment,
Net

50,000

Building,
Net

250,000

Land
& Building, Net

100,000

Total
Assets

$600,000

========

Bonds Payable

$100,000

Common
Stock

50,000

Retained
Earnings

450,000

Total
Liabilities and

$600,000

Stockholders’
Equity

========

Fair values on the date of acquisition:

Inventory

$100,000

Equipment

30,000

Building

350,000

Land

120,000

Brand
name copyright

50,000

Bonds payable

120,000

Direct acquisition costs: $5,000

Required:

Record the
entry for the purchase of the net assets of Heart by Diamond at the following
Cash prices:

a.
$700,000

b.
$300,000

c.
$100,000

1-15

Chapter
1

8.
Marquette Instruments Company acquired all the
assets and assumed all the liabilities of the Nelson Company on July 1, 20X1.
The fiscal year for both Marquette and Nelson ends on December 31. On the date
of acquisition, Nelson Company had the following trial balance:

Accounts
receivable……………………

$ 60,000

Inventory…………………………….

70,000

Machinery…………………………….

300,000

$100,000

Accumulated depreciation,
machinery……..

Notes
payable…………………………

80,000

Sales………………………………..

120,000

210,000

Cost of goods
sold…………………….

Operating
expenses…………………….

70,000

Depreciation expense
………………….

15,000

10,000

Common stock, $1
par…………………..

Paid-in capital in excess of
par………..

70,000

Retained earnings……………………..

165,000

……………………………..Totals

$635,000

$635,000

========

========

Marquette
issued 10,000 of its $5 par value shares for the outstanding shares of the
Nelson Company and paid $10,000 in direct acquisition costs. The fair value of
its shares was $40 per share. On the acquisition date, the inventory had a fair
value of $80,000 (sold by December 31), and the machinery had a fair value of
$400,000 with an estimated 8-year remaining life. Any value associated with
intangible assets arising from the business combination are associated with a
patent that will be amortized over 10 years.

The
following operating results were reported by the two resulting divisions:

………………….

Marquette

Nelson

Sales

January 1-December 31

July 1-December 31

$450,000

$300,000

Cost of goods sold………

230,000

160,000

Operating expenses………

120,000

80,000

Depreciation expense…….

40,000

15,000

The results
for Nelson are based on book values and do not consider adjustments resulting
from the business combination.

Required:

Prepare an income statement for the Marquette
Instruments Company.

1-17

9.
On January 1, July 1, and December 31, 20X5, a
condensed trial balance for Nelson Company showed the following debits and
(credits):

……………….

Current Assets

01/01/X5

06/30/X5

12/31/X5

$
200,000

$ 260,000

$ 340,000

Plant and Equipment
(net)……..

500,000

510,000

510,000

Current
Liabilities…………..

(50,000)

(70,000)

(60,000)

Long-Term
Debt……………….

(100,000)

(100,000)

(100,000)

Common
Stock…………………

(150,000)

(150,000)

(150,000)

Other Paid-in
Capital…………

(100,000)

(100,000)

(100,000)

Retained Earnings, January
1…..

(300,000)

(300,000)

(300,000)

Dividends Declared
…………..

(400,000)

10,000

Revenues…………………….

(900,000)

Expenses…………………….

350,000

750,000

Nelson Company’s books were NOT closed on
June 30, 20X5.

For all of
20X5, Systems’ revenues and expenses were $1,500,000 and $1,200,000,
respectively.

1-18

Chapter 1

Required:

Assume
that, on July 1, 20X5, Systems Corporation purchased the net assets of Nelson
Company for $750,000 in cash. On this date, the fair values for certain net
assets were:

Current Assets……………………………….

$280,000

Plant and
Equipment…………………………..

600,000

On July 1, 20X1, the Plant
and Equipment had a remaining life of

10 years.

(1)
Record the entry on Systems’ books for the July 1,
20X5 purchase of Nelson.

(2)
Compute the amount of net income which will be
reported for 20X5.

10.
Mans Company is about to purchase the net assets of
Eagle Incorporated, which has the following balance sheet:

Assets

Accounts receivable……………………

$
60,000

Inventory…………………………….

$ 90,000

100,000

Equipment
……………………………

40,000

Accumulated depreciation ………………

(50,000)

Land and buildings…………………….

$
300,000

200,000

Accumulated
depreciation……………….

(100,000)

Goodwill……………………………..

60,000

………………………..Totalassets

$460,000

========

Liabilities
and Stockholders’ Equity

Bonds payable…………………………

$
80,000

Common stock, $10 par………………….

200,000

Paid-in capital in excess of
par………..

100,000

Retained
earnings……………………..

80,000

Total liabilities and equity………….

$460,000

========

Mans has secured the following fair values of
Eagle’s accounts:

Inventory…………………………….

$130,000

Equipment…………………………….

60,000

Land
and buildings…………………….

260,000

Bonds
payable…………………………

60,000

Direct acquisition costs were $20,000.

Required:

Record the
entry for the purchase of the net assets of Eagle by Mans at the following cash
prices:

a. $450,000

b. $310,000

c. $80,000

1-20

Chapter 1

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Description

Lowry Landscapes had net income of $50,000 for 2010.
Land was sold for $40,000, of which $3,000 was a gain.
The beginning cash balance was $53,000, and the ending
cash balance was $151,000. Depreciation expenses were
$11,000. Prepare a statement of cash flows for the year
ended December 31, 2010, for Lowry Landscapes using the
indirect method.

13.
Prepare the general journal entries for the following transactions:
Jan. 2, 2011 Purchased land with a building on it for $750,000. The land is
worth $300,000. Paid $150,000 cash down and signed a mortgage payable for the
balance.

)

Dec.
31, 2011 Depreciation is computed using the straight-line method. The estimated
salvage value of the building is $75,000 and has an estimated life of 20 years.

July
1, 2012 The building and land are sold for $825,000 cash.

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Description

15. nBalter Inc. acquired Jersey
Company on January 1, 20X5. When the purchase occurred Jersey Company had the
following information related to fixed assets:

Land

$ 80,000

Building

200,000

Accumulated
Depreciation

(100,000)

Equipment

100,000

Accumulated Depreciation

(50,000)

The building
has a 10-year remaining useful life and the equipment has a 5-year remaining
useful life. The fair value of the assets on that

date were: Land Building Equipment

What is the
20X5 depreciation expense Balter will record related to purchasing Jersey
Company?

a. $8,000

b. $15,000

c. $28,000

d. $30,000

ANS: C DIF: M OBJ: 6

1-5

Chapter 1

16. In
performing the 20X7 impairment test for goodwill, the company had the following
20X6 and 20X7 information is available.

20X6 20X7 Implied fair value of reporting unit $350,000 $400,000
Net book value of reporting unit (including goodwill) $380,000 $360,000

.gif”>.gif”>

Based upon
this information what are the 20X6 and 20X7 adjustment to goodwill, if any?

a. 20X6 $0

20X7 $40,000 decrease

b. 20X6 $30,000
increase

20X7 $40,000 decrease

c. 20X6 $30,000
decrease

20X7 $40,000 decrease

d. 20X6 $30,000
decrease

20X7
$0

ANS: D DIF: D OBJ: 7

17.
Couples Corporation purchases Players Corporation.
The fair value of the net assets of Players is $750,000 and the fair value of
priority accounts (including a deduction for depreciation) is $600,000. Which
of the following purchase prices would require using allocation procedures?

a. $500,000

b. $600,000

c. $700,000

d. $800,000

ANS: B DIF: D OBJ: 7

18. ACME Co. paid $110,000 for
the net assets of Comb Corp. At the time of the acquisition the following
information was available related to Comb’s balance sheet:

Current Assets

Book Value

Fair Value

$50,000

$ 50,000

Building

80,000

100,000

Equipment

40,000

50,000

Liabilities

30,000

30,000

What is the amount recorded by ACME for the
Building?

a. $40,000

b. $60,000

c. $80,000

d. $100,000

ANS: B DIF: D OBJ: 7

19. Which of
the following business combination expenses would NOT qualify as a direct
acquisition expense for a purchase?

a. Fees for
purchase audit

b. Outside
legal fees

c. Stock
issuance fees

d. All are direct acquisition
expenses.

1-6

Chapter 1

ANS: C DIF: E OBJ: 8

20.
Polk issues common stock to acquire all the assets
of the Sam Company on January 1, 20X5. There is a contingent share agreement,
which states that if the income of the Sam Division exceeds a certain level
during 20X5 and 20X6, additional shares will be issued on January 1, 20X7. The
impact of issuing the additional shares is to

a. increase the
price assigned to fixed assets.

b.
have no effect on asset values, but to reassign the
amounts assigned to equity accounts.

c. reduce
retained earnings.

d. record additional goodwill.

ANS: D DIF: D OBJ: 8

21.
In a purchase, the direct acquisition, indirect
acquisition and security issuance costs are accounted for as follows:

Direct Acquisition

Indirect Acquisition

Security Issuance

a.
Added to price paid

Added to price paid

Added
to price paid

b.
Added to price paid

Expensed

Deducted
from value

c. Expensed

Expensed

of security issued

Deducted
from value

d. Expensed

Expensed

of security issued

Expensed

ANS: B

DIF:
E

OBJ:
9

22.
Orbit Inc. purchased Planet Co. in 20X3. At that
time an existing patent was not recorded as a separately identified intangible
asset. At the end of fiscal year 20X5, the patent is valued at $15,000, and
goodwill has a book value of $100,000. How should intangible assets be reported
at the beginning of fiscal year 20X6?

a. Goodwill
$100,000 Patent $0

b. Goodwill
$115,000 Patent $0

c. Goodwill
$100,000 Patent $15,000

d. Goodwill $85,000

Patent $15,000

ANS: D

DIF:

M

OBJ: 9

23.
Which of the following income factors should not be
factored into a calculation of goodwill?

a. sales for
the period

b. income tax
expense

c. extraordinary
items

d. cost of goods sold

ANS: C DIF: M OBJ: 10, Appendix A

1-7

Chapter 1

PROBLEM

1.
Internet Corporation is considering the acquisition
of Homepage Corporation and has obtained the following audited condensed
balance sheet:

Homepage Corporation

Balance Sheet

December 31, 20X5

.gif”>

Assets

$
40,000

Liabilities
and Equity

$
60,000

Current assets….

Current Liabilities……….

Land…………..

20,000

Capital Stock (50,000 shares,

50,000

Buildings
(net)…

80,000

$1 par
value)…………….

Equipment
(net)…

60,000

Other Paid-in Capital……..

20,000

Retained Earnings………….

70,000

$200,000

$200,000

========

========

Internet also acquired the following fair values for
Homepage’s assets and liabilities:

Current
assets…………………………………..

$ 55,000

Land……………………………………………

60,000

Buildings
(net)………………………………….

90,000

Equipment
(net)………………………………….

75,000

Current
Liabilities………………………………

(60,000)

$220,000

========

Internet
and Homepage agree on a price of $280,000 for Homepage’s net assets. Prepare
the necessary journal entry to record the purchase given the following
scenarios:

a.
Internet pays cash for Homepage Corporation and
incurs $5,000 of direct acquisition costs.

b.
Internet issues its $5 par value stock as
consideration. The fair value of the stock at the acquisition date is $50 per
share. Additionally, Internet incurs $5,000 of security issuance costs.

1-8

Chapter 1

ANS:

a. Current assets……………………..

$55,000

Land………………………………

60,000

Buildings………………………….

90,000

Equipment………………………….

75,000

Goodwill…………………………..

65,000

Current Liabilities………………..

$ 60,000

Cash……………………………..

285,000

b. Current assets……………………..

$55,000

Land………………………………

60,000

Buildings………………………….

90,000

Equipment………………………….

75,000

Goodwill…………………………..

65,000

Current Liabilities……………….

$ 60,000

Common Stock……………………..

28,000

Other Paid-in Capital……………..

252,000

Cash…………………………….

5,000

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$5.00

Description

1.
Pedro purchased 100% of the common stock of the
Sanburn Company on January 1, 20X1, for $500,000. On that date, the
stockholders’ equity of Sanburn Company was $380,000. On the purchase date,
inventory of Sanburn Company, which was sold during 20X1, was understated by
$20,000. Any remaining excess of cost over book value is attributable to patent
with a 20-year life. The reported income and dividends paid by Sanburn Company
were as follows:

……………………..

Net income

20X1

20X2

$80,000

$90,000

Dividends paid………………….

10,000

10,000

Using the
simple equity method, which of the following amounts are correct?

Investment
Income

Investment Account Balance

a.

20X1

December 31,
20X1

$80,000

$570,000

b.

$70,000

$570,000

c.

$70,000

$550,000

d.

$80,000

$550,000

OBJ: 1

2.
Pedro purchased 100% of the common stock of the
Sanburn Company on January 1, 20X1, for $500,000. On that date, the
stockholders’ equity of Sanburn Company was $380,000. On the purchase date,
inventory of Sanburn Company, which was sold during 20X1, was understated by
$20,000. Any remaining excess of cost over book value is attributable to patent
with a 20-year life. The reported income and dividends paid by Sanburn Company
were as follows:

……………………..

Net income

20X1

20X2

$80,000

$90,000

Dividends paid………………….

10,000

10,000

Using the
sophisticated (full) equity method, which of the following amounts are correct?

Investment
Income

Investment Account Balance

a.

20X1

December 31,
20X1

$55,000

$555,000

b.

$55,000

$545,000

c.

$75,000

$565,000

d.

$80,000

$570,000

OBJ: 1

Chapter 3

3.
Pedro purchased 100% of the common stock of the
Sanburn Company on January 1, 20X1, for $500,000. On that date, the
stockholders’ equity of Sanburn Company was $380,000. On the purchase date,
inventory of Sanburn Company, which was sold during 20X1, was understated by
$20,000. Any remaining excess of cost over book value is attributable to patent
with a 20-year life. The reported income and dividends paid by Sanburn Company
were as follows:

……………………..

Net income

20X1

20X2

$80,000

$90,000

Dividends paid………………….

10,000

10,000

Using the cost method, which of the following
amounts are correct?

Investment Income

Investment
Account Balance

a.

20X1

December 31,
20X1

$10,000

$500,000

b.

$10,000

$570,000

c.

$0

$570,000

d.

$80,000

$500,000

4.
What is the effect if an unconsolidated subsidiary
is accounted for by the equity method but consolidated statements are being
prepared for the parent company and other subsidiaries?

a. All of the
unconsolidated subsidiary’s accounts will be included individually in the
consolidated statements.

b. The
consolidated retained earnings will not reflect the earnings of the
unconsolidated subsidiary.

c. The
consolidated retained earnings will be the same as if the subsidiary had been
included in the consolidation.

d. Dividend
revenue from the unconsolidated subsidiary will be reflected in consolidated
net income.

3-2

Chapter 3

5.
On January 1, 20X1, Promo, Inc. purchased 70% of Set
Corporation for $469,000. On that date the book value of the net assets of Set
totaled $500,000. Based on the appraisal done at the time of the purchase, all
assets and liabilities had book values equal to their fair values except as
follows:

………………………

Inventory

Book Value

Fair
Value

$100,000

$120,000

Land
………………………….

75,000

85,000

Equipment (useful life 4 years)…..

125,000

165,000

The $70,000
of excess of cost over book value was allocated to a patent with a 10-year
useful life.

During 20X1
Promo reported net income of $200,000 and Set had net income of $100,000.

What is
consolidated net income if Promo includes in its net income, income from Set
using the sophisticated equity method?

a.
$42,000

b.
$70,000

c.
$200,000

d. $270,000

6.
On January 1, 20X1, Promo, Inc. purchased 70% of Set
Corporation for $469,000. On that date the book value of the net assets of Set
totaled $500,000. Based on the appraisal done at the time of the purchase, all
assets and liabilities had book values equal to their fair values except as
follows:

………………………

Inventory

Book Value

Fair
Value

$100,000

$120,000

Land
………………………….

75,000

85,000

Equipment (useful life 4 years)…..

125,000

165,000

The $70,000
of excess of cost over book value was allocated to a patent with a 10-year
useful life.

During 20X1
Promo reported net income of $200,000 and Set had net income of $100,000.

What income
from subsidiary did Promo include in its net income if Promo uses the simple equity
method?

a.
$33,000

b.
$42,000

c.
$70,000

d. $100,000

3-3

Chapter 3

7.
On January 1, 20X1, Promo, Inc. purchased 70% of Set
Corporation for $469,000. On that date the book value of the net assets of Set
totaled $500,000. Based on the appraisal done at the time of the purchase, all
assets and liabilities had book values equal to their fair values except as
follows:

………………………

Inventory

Book Value

Fair
Value

$100,000

$120,000

Land
………………………….

75,000

85,000

Equipment (useful life 4 years)…..

125,000

165,000

The $70,000
of excess of cost over book value was allocated to a patent with a 10-year
useful life.

During 20X1
Promo reported net income of $200,000 and Set had net income of $100,000.

What income
from subsidiary did Promo include in its net income if Promo uses the sophisticated
equity method?

13.$33,000

14.$42,000

15.$70,000

16.$100,000

8.
On January 1, 20X1, Rabb Corp. purchased 80% of
Sunny Corp.’s $10 par common stock for $975,000. On this date, the carrying
amount of Sunny’s net assets was $1,000,000. The fair values of Sunny’s
identifiable assets and liabilities were the same as their carrying amounts
except for plant assets (net), which were $100,000 in excess of the carrying
amount.

In the January 1, 20X1, consolidated balance sheet, goodwill
should be reported at _______.

a.
$0

b.
$75,000

c.
$95,000

d. $175,000

9.
Which of the following statements applying to the
use of the equity method versus the cost method is true?

a.
The equity method is required when one firm owns 20%
or more of the common stock of another firm.

b. If no
dividends were paid by the subsidiary, the investment account would have the
same balance under both methods.

c.
The method used has no significance to consolidated
statements.

d.
An advantage of the equity method is that no
amortization of excess adjustments needs to be made on the consolidated work
sheet.

3-4

Chapter 3

10. In consolidated financial
statements it is expected that:

a.
Dividends declared equals the sum of the total
parent company’s declared dividends and the total subsidiary’s declared
dividends.

b.
Retained Earnings equals the sum of the controlling
interest’s separate retained earnings and the noncontrolling interest’s separate
retained earnings.

c.
Common Stock equals the sum of the parent company’s
outstanding shares and the subsidiary’s outstanding shares.

d.
Net Income equals the sum of the income distributed
to the controlling interest and the income distributed to the noncontrolling
interest.

11.
How is the portion of consolidated earnings to be
assigned to noncontrolling interest in consolidated financial statements
determined?

a. The net
income of the parent is subtracted from the subsidiary’s net income to
determine the noncontrolling interest.

b. The
subsidiary’s net income is extended to the noncontrolling interest.

c.
The amount of the subsidiary’s earnings recognized
for consolidation purposes is multiplied by the noncontrolling’s percentage
ownership.

d.
The amount of consolidated earnings determined on
the consolidated working papers is multiplied by the noncontrolling interest
percentage at the balance-sheet date.

12.
Patti Corp. has several subsidiaries (Aeta, Beta,
and Gaeta) that are included in its consolidated financial statements. In its
12/31/X1 separate balance sheet, Patti had the following intercompany balances
before eliminations:

…..

Current Receivable due
from Aeta

$

Debit

Credit

40,000

Noncurrent
Receivable due from Beta…

100,000

Cash
Advance to Beta………………

26,000

75,000

Cash
Advance from Gaeta……………

Intercompany Payable to
Gaeta………

40,000

In its
12/31/X1 consolidated balance sheet, what amount should Patti report as
intercompany receivables?

a.
$166,000

b.
$51,000

c.
$26,000

d. $0

3-5

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