On December 1, 2006, Passey Corporation sold a machine with a carrying amount of $150,000 to its 80%-owned subsidiary

ADVANCE ACCOUNTING Multiple Choice

1. On December 1, 2006, Passey Corporation sold a machine with a carrying amount of $150,000 to its 80%-owned subsidiary, Scully Company, for $200,000. Scully adopted a four-year economic life, no residual value, and the sum-of-the-years'-digits method of depreciation for the machine. If correct working paper eliminations are prepared for Passey Corporation and subsidiary on November 30, 2007, the end of the fiscal year, Passey's net income to be included in consolidated net income is (disregarding income taxes): (Points : 1)

2. In the measurement of minority interest in net income of a partially owned subsidiary, the credit for Depreciation Expense¾Parent in the working paper elimination (in journal entry format) for intercompany gain in a depreciable plant asset is attributed to net income of: (Points : 1)

3. A material realized gain on a subsidiary's open-market acquisition of its parent company's outstanding bonds at a discount is displayed in the consolidated income statement as: (Points : 1)

4. The starting point for the computation of net cash provided by operating activities in a consolidated statement of cash flows (indirect method) for a parent company and its partially owned subsidiary is: (Points : 1)

5. The realized but unrecognized gain on extinguishment of debt resulting from a parent company's open-market acquisition of the subsidiary's outstanding bonds is recorded in subsequent journal entries by: (Points : 1)

6. In the preparation of a consolidated statement of cash flows, dividends declared and paid to minority shareholders of a subsidiary are: (Points : 1)

7. Included in a working paper elimination (in journal entry format) for intercompany sales of merchandise was a debit to Minority Interest in Net Assets of Subsidiary. This debit indicates that: (Points : 1)

8. Included in a working paper elimination (in journal entry format) for intercompany sales was a credit of $60,000 to Cost of Goods Sold¾Subsidiary. The credit indicates that, for the accounting period involved: (Points : 1)

9. In the installment acquisition of a controlling interest in a subsidiary, the Retained Earnings of Subsidiary/Investee ledger account is first credited in a journal entry of the parent company/investor to: (Points : 1)

10. Intercompany loans, operating leases of property, and rendering of services do not include an element of intercompany profit gain or loss for the consolidated entity because: (Points : 1)


Click here for the solution: On December 1, 2006, Passey Corporation sold a machine with a carrying amount of $150,000 to its 80%-owned subsidiary

Traber Electronics is a small privately owned retailer of electronic equipment and household appliances

Problem 2-37 Traber Electronics is a small privately owned retailer of electronic equipment and household appliances. Traber Electronics is required to provide audited financial statements as part of a due diligence investigation in consideration of a potential acquisition of Traber by a public company. In the interest of time, Traber appointed the audit firm of Makins & Howell, CPAs, without a formal proposal process. Makins & Howell immediately accepted the audit engagement in early October and agreed to the November 1 deadline for the auditor’s report.

Katie Kammins, CPA, was recently promoted to in-charge auditor for Makins & Howell and was assigned to the Traber audit along with Joel Misten, the firm’s university intern. Prior to her assignment to the Traber audit, all of Katie’s audit experience was in the health-care industry. Because most of Katie’s health-care clients had June 30 year ends, Katie was available in October to work on the Traber engagement.

Katie and Joel got right to work. Katie informed Joel that there was no time to test controls, so she instructed him as to the proper procedures for proving the mathematical accuracy of the accounting journals and ledgers and tying the totals to the financial statements. No footnotes or other supplemental disclosures accompanied the financial statements, and there were no prior-year financial statements to be used as a basis of comparison, which helped expedite the audit process.

While Joel was busy with the mathematical tie-ins, Katie analyzed the company’s sales and inventories because these were the most significant revenue and asset accounts. For sales, Katie reviewed the monthly sales reports and learned that several large contracts had been accounted for on the percentage of completion method. Although she wasn’t sure about the propriety of the profits recognized, Katie held a series of discussions with Traber’s controller, who assured Katie that the profits had been recorded in accordance with generally accepted accounting principles.

For inventories, Katie observed the items in the retail store, noting the reasonableness of their descriptions and saleable condition. She was not present when Traber Electronics conducted its annual physical count of the inventory. She did not examine the inventory at the company’s warehouse because it represented less than half of the value of the asset account.

One week before the deadline, Makins & Howell provided its standard audit report, which included an unqualified opinion on Traber’s financial statements.

Required:
Refer to each of the 10 GAAS and indicate how the actions of Makins & Howell or its employees resulted in violations of these standards.


Click here for the solution: Traber Electronics is a small privately owned retailer of electronic equipment and household appliances

JBC Corporation is owned 20 percent by John, 30 percent by Brian, 30 percent by Charlie, and 20 percent by Z Corporation

JBC Corporation is owned 20 percent by John, 30 percent by Brian, 30 percent by Charlie, and 20 percent by Z Corporation. Z Corporation is owned 80 percent by John and 20 percent by an unrelated party. Brian and Charlie are brothers. Answer each of the following questions about JBC under the constructive ownership rules of Section 267:
a. What is John's percentage ownership?
b. What is Brian's percentage ownership?


Click here for the solution: JBC Corporation is owned 20 percent by John, 30 percent by Brian, 30 percent by Charlie, and 20 percent by Z Corporation

Emerald Health Care Inc. is owned and operated by Dr. Julie Weinstein, the sole stockholder

Emerald Health Care Inc. is owned and operated by Dr. Julie Weinstein, the sole stockholder. During March 2009, Emerald Health Care entered into the following transactions:

March 1 - Received $12,000 from Moloney Company as rent for the use of a vacant office in Emerald Health Care’s building. Moloney paid the rent six months in advance.
March 1 – Paid $5,400 for an insurance premium on a general business policy.
March 6 – Purchased supplies of $1,425 on account.
March 9 – Collected $13,500 for services provided to customers on account.
March 11 – Paid creditors $2,400 on account.
March 18 – Invested an additional $40,000 in the business in exchange for capital stock.
March 20 – Billed patients $37,200 for services provided on account.
March 25 – Received $10,000 for services provided to customers who paid cash.
March 30 – Paid expenses as follows: wages, $18,000; utilities, $5,250; rent on medical equipment, $4,000; interest, $400; and miscellaneous, $1,000.
March 30 – Paid dividends of $3,000 to stockholders (Dr. Weinstein).

Instructions:
Analyze and record the March transactions for Emerald Health Care Inc. using the integrated financial statement framework. Record each transaction by date and show the balance for each item after each transaction. The March 1, 2009 balances for the balance sheet are shown below.


Click here for the solution: Emerald Health Care Inc. is owned and operated by Dr. Julie Weinstein, the sole stockholder

Galloway Company is a small editorial services company owned and operated by Fran Briggs

Problem 3-5A Adjusting Entries and Adjusted Trial Balances

Galloway Company is a small editorial services company owned and operated by Fran Briggs. On July 31, 2012, the end of the current year, Galloway Company's accounting clerk prepared the unadjusted trial balance shown below.

AND SO ON

The data needed to determine year-end adjustments are as follows:
a. Unexpired insurance at July 31, $4,800.
b. Supplies on hand at July 31, $600.
c. Depreciation of building for the year, $3,100.
d. Depreciation of equipment for the year, $2,700.
e. Rent unearned at July 31, $1,750.
f. Accrued salaries and wages at July 31, $3,000.
g. Fees earned but unbilled on July 31, $10,750.

Required:
1. Journalize the adjusting entries using the following additional accounts: Salaries and Wages Payable; Rent Revenue; Insurance Expense; Depreciation Expense—Building; Depreciation Expense—Equipment; and Supplies Expense.
2. Determine the balances of the accounts affected by the adjusting entries, and prepare an adjusted trial balance.

Check: 2. Total of Debit Column: $819,550


Click here for the solution: Galloway Company is a small editorial services company owned and operated by Fran Briggs

On January 1, 2011, P Company purchases equipment from its 80% owned subsidiary for $600,000

Problem 7-3 On January 1, 2011, P Company purchases equipment from its 80% owned subsidiary for $600,000. The carrying value of the equipment on the books of S Company was $450,000. The equipment had a remaining useful life of six years on January 1, 2011. On January 1, 2012, P Company sold the equipment it an outside party for $550,000.

Required:
A. Prepare in general journal form the entries necessary in 2011 and 2012 on the books of P Company to account for the purchase and sale of the equipment.
B. Determine the consolidated gain or loss on the sale of the equipment and prepare in general journal from the entry necessary on the December 31, 2012, consolidated statements workpaper to property reflects this gain or loss.

Click here for the solution: On January 1, 2011, P Company purchases equipment from its 80% owned subsidiary for $600,000

Pernal owned a parcel of real estate adjacent to property owned by St. Nicholas Greek Orthodox Church

Pernal owned a parcel of real estate adjacent to property owned by St. Nicholas Greek Orthodox Church. Pernal sent a letter to the church indicating that he was offering it for sale for “$825,000 cash/mortgage ‘as is,’ with no conditions, no contingencies related to zoning and 120 days post closing occupancy for the present tenants.” This offer was dated June 3, 2003, and expressly provided that it would remain open for a two-week period. On the same day, Pernal also sent the same offer to sell the property on the same terms to another prospective purchaser, White Chapel Memorial Association Park Perpetual Care Trust. On June 4, the church sent a letter indicating that it accepted the terms of the offer that Pernal had set forth in his letter. However, the church’s letter also referenced an attached purchase agreement. The purchase agreement agreed with Pernal’s purchase price and the close occupancy period, but contrary to the offer, it contained additional terms. The church’s president signed this attached purchase agreement, but defendant did not sign it. The offer by letter dated June 3, 2003, did not reference other potential purchasers. On June 10, White Chapel, by letter, offered to pay $900,000 cash for the property, with no conditions or contingencies related to zoning and 180 days post closing occupancy rent free. On that same date (June 10), Pernal sent a letter to both potential purchasers. This letter indicated that “amended offers” had been received. The letter further provided that the offer would remain open for two weeks’ time as provided in the initial offering letter. On June 13, the church sent a letter to Pernal, stating that the offer had been accepted on June 4, and that an enforceable contract was formed. The church sued Pernal for breach of contract. Will it win?

Click here for the solution: Pernal owned a parcel of real estate adjacent to property owned by St. Nicholas Greek Orthodox Church

You are the president and chief executive officer of a family owned manufacturing firm with assets of $45 million

You are the president and chief executive officer of a family owned manufacturing firm with assets of $45 million. The company articles of incorporation and state law place no restrictions on the sale stock to outsiders. An unexpected opportunity to expand arises that will require an additional investment of $ 14 million. A commitment must be made quickly if this opportunity is to be taken. Existing stockholders are not in a position to provide the additional investment. You wish to maintain family control of the firm regardless of which form of financing you might undertake. As a first step, you decide to contact an investment banking firm.

a) What considerations might be important in the selection of an investment banking firm?
b) A member of your board has asked if you have considered competitive bids for the distribution of your securities compared to a negotiated contract with a particular firm. What factors are involved in this decision?
c) Assuming that you have decided upon a negotiated contract, what are the first questions that you would ask of the firm chosen to represent you?
d) As the investment banker, what would be your first actions before offering advice?
e) Assuming the investment banking firm is willing to distribute your securities, describe the alternative plans that might be included in a contract with the banking firm.
f) How does the investment banking firm establish a selling strategy?
g) How might the investment banking firm protect itself against a drop in the price of the security during the selling process?
h) What follow-up services will be provided by the banking firm following a successful distribution of the securities?
i) Three years later, as an individual investor, you decide to add your own holding of the security but only at a price that you consider appropriate. What form of order might you place with your broker?

Click here for the solution: You are the president and chief executive officer of a family owned manufacturing firm with assets of $45 million

Watson Technical Institute (WTI), a school owned by Tom Watson, provides training to individuals who pay tuition directly to the school

Watson Technical Institute (WTI), a school owned by Tom Watson, provides training to individuals who pay tuition directly to the school. WTI also offers training to groups in off-site locations. Its unadjusted trial balance as of December 31, 2005, follows. WTI initially records prepaid expenses and unearned revenues in balance sheet accounts. Descriptions of items a through h that require adjusting entries on December 31, 2005, follow.

Additional Information Items
a. An analysis of the school’s insurance policies shows that $3,000 of coverage has expired.
b. An inventory count shows that teaching supplies costing $2,600 are available at year-end 2005.
c. Annual depreciation on the equipment is $12,000.
d. Annual depreciation on the professional library is $6,000.
e. On November 1, the school agreed to do a special six-month course (starting immediately) for a client. The contract calls for a monthly fee of $2,200, and the client paid the first five months’ fees in advance. When the cash was received, the Unearned Training Fees account was credited. The fee for the sixth month will be recorded when it is collected in 2006.
f. On October 15, the school agreed to teach a four-month class (beginning immediately) for an individual for $3,000 tuition per month payable at the end of the class. The services are being provided as agreed, and no payment has yet been received. g. The school’s two employees are paid weekly. As of the end of the year, two days’ wages have accrued at the rate of $100 per day for each employee.
h. The balance in the Prepaid Rent account represents rent for December.

Required
1. Prepare T-accounts (representing the ledger) with balances from the unadjusted trial balance.
2. Prepare the necessary adjusting journal entries for items a through h and post them to the T-accounts. Assume that adjusting entries are made only at year-end.
3. Update balances in the T-accounts for the adjusting entries and prepare an adjusted trial balance.
4. Prepare Watson Technical Institute’s income statement and statement of owner’s equity for the year 2005 and prepare its balance sheet as of December 31, 2005.

Check (2e) Cr.Training Fees Earned, $4,400; (2f ) Cr.Tuition Fees Earned, $7,500; (3) Adj.Trial balance totals, $301,500; (4) Net income, $38,500; Ending T.Watson, Capital $62,100

Click here for the solution: Watson Technical Institute (WTI), a school owned by Tom Watson, provides training to individuals who pay tuition directly to the school

(Comprehensive Problem: Majority-Owned Subsidiary) Master Corporation acquired 80 percent ownership of Stanley Wood Products Company on January 1, 20X1, for $160,000

P5-37 (Comprehensive Problem: Majority-Owned Subsidiary) Master Corporation acquired 80 percent ownership of Stanley Wood Products Company on January 1, 20X1, for $160,000. On that date, the fair value of the noncontrolling interest was $40,000, and Stanley reported retained earnings of $50,000 and had $100,000 of common stock outstanding. Master has used the equity method in accounting for its investment in Stanley.

Trial balance data for the two companies on December 31, 20X5, are as follows:

Item
Master
Corporation
Stanley Wood
Products Company
Debit Credit Debit Credit
Cash and Receivables $ 81,000 $ 65,000
Inventory 260,000 90,000
Land 80,000 80,000
Buildings and Equipment 500,000 150,000
Investment in Stanley Wood Products Stock 188,000
Cost of Goods Sold 120,000 50,000
Depreciation Expense 25,000 15,000
Inventory Losses 15,000 5,000
Dividends Declared 30,000 10,000
Accumulated Depreciation $ 205,000 $105,000
Accounts Payable 60,000 20,000
Notes Payable 200,000 50,000
Common Stock 300,000 100,000
Retained Earnings 314,000 90,000
Sales 200,000 100,000
Income from Subsidiary 20,000
$1,299,000 $1,299,000 $465,000 $465,000

Additional Information
1. On the date of combination, the fair value of Stanley’s depreciable assets was $50,000 more than book value. The differential assigned to depreciable assets should be written off over the following 10-year period.
2. There was $10,000 of intercorporate receivables and payables at the end of 20X5.

Required:
1. Prepare all entries recorded by the parent co with respect to its investment in the sub for 20X5
2. Prepare all elimination entries for 20X5
3. Prepare a three-part worksheet as of December 31, 20X5

Click here for the solution: (Comprehensive Problem: Majority-Owned Subsidiary) Master Corporation acquired 80 percent ownership of Stanley Wood Products Company on January 1, 20X1, for $160,000