Advance Accounting Exam: 1. When the parent company sells a portion of its investment in a subsidiary

Advance Accounting Exam

1. When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to adjust for the current year’s income sold to noncontrolling stockholders includes a (Points : 10)

2. The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the parent company’s share of the subsidiary’s net assets (Points : 10)

3. The purchase by a subsidiary of some of its shares from the noncontrolling stockholders results in an increase in the parent’s percentage interest in the subsidiary. The parent company’s share of the subsidiary’s net assets will increase if the shares are purchased: (Points : 10)

4. Which statement with respect to gains and losses on troubled debt restructuring is correct? (Points : 10)

5. A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to: (Points : 10)

6. Assets transferred by the debtor to a creditor to settle a debt are transferred at: (Points : 10)

7. In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring: (Points : 10)

8. The major difference between IFRS and US GAAP in accounting for inventories is that (Points : 10)

9. Accounting under IFRS and US GAAP is similar for all of the following topics except (Points : 10)

10. One difference between IFRS and GAAP in valuing inventories is that (Points : 10)

11. Accounting terminology that differs between IFRS and US GAAP include all of the following except (Points : 10)

12. A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a: (Points : 10)

13. The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract: (Points : 10)

14. A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to: (Points : 10)

15. An indirect exchange rate quotation is one in which the exchange rate is quoted: (Points : 10)

16. If the functional currency is determined to be the U.S. dollar and its financial statements are prepared in the local currency, SFAS 52, requires which of the following procedures to be followed? (Points : 10)

17. When the functional currency is identified as the U.S. dollar, land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated using the: (Points : 10)

18. The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called: (Points : 10)

19. In considering interim financial reporting, how did the Accounting Principles Board conclude that each reporting should be viewed? (Points : 10)

20. Current authoritative pronouncements require the disclosure of segment information when certain criteria are met. Which of the following reflects the type of firm and type of financial statement for which this disclosure is required? (Points : 10)

21. If annual major repairs made in the first quarter and paid for in the second quarter clearly benefit the entire year, when should they be expensed? (Points : 10)

22. During the second quarter of 2011, Dodge Company sold a piece of equipment at a gain of $90,000. What portion of the gain should Dodge report in its income statement for the second quarter of 2011? (Points : 10)

23. Pete, Joe, and Ron are partners with capital balances of $135,000, $90,000, and $60,000, respectively. The partners share profits and losses equally. For an investment of $120,000 cash, Jerry is to be admitted as a partner with a one-fourth interest in capital and profits. Based on this information, the amount of Jerry’s investment can best be justified by which of the following? (Points : 10)

24. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of operation, the partnership incurs a $20,000 loss. The partners should share the losses (Points : 10)

25. In a partnership, interest on capital investment is accounted for as a(n) (Points : 10)

26. The profit and loss sharing ratio should be (Points : 10)

27. During the liquidation of the partnership of Karr, Rice, and Long. Karr accepts, in partial settlement of his interest, a machine with a cost to the partnership of $150,000, accumulated depreciation of $70,000, and a current fair value of $110,000. The partners share net income and loss equally. The net debit to Karr's account (including any gain or loss on disposal of the machine) is (Points : 10)

28. A schedule prepared each time cash is to be distributed is called a(n) (Points : 10)

29. Offsetting a partner's loan balance against his debit capital balance is referred to as the (Points : 10)

30. If a partner with a debit capital balance during liquidation is personally solvent, the (Points : 10)

Click here for the solution: Advance Accounting Exam

Accounts are listed below for a foreign subsidiary that maintains its books in its local currency

Exercise 13-1 Identifying the Exchange Rate

Accounts are listed below for a foreign subsidiary that maintains its books in its local currency. The equity interest in the subsidiary was acquired in a purchase transaction. In the space provided, indicate the exchange rate that would be used to translate the accounts into dollars assuming that the functional currency was identified (a) as the U.S. dollar and (b) as the foreign entity’s local currency. Use the following letters to identify the exchange rate:

H—historical exchange rate
C—current exchange rate
A—average exchange rate for the current period
Exchange Rate if the
Functional Currency Is:
Account U.S. Dollar Local Currency

Cash _____ __________
Accounts receivable _____ __________
Inventory carried at cost _____ __________
Inventory carried at market _____ __________
Prepaid rent _____ __________
Property, plant, and equipment _____ __________
Goodwill _____ __________
Accounts payable _____ __________
Bonds payable _____ __________
Unamortized premium on bonds payable _____ __________
Preferred stock carried at issuance price _____ __________
Common stock _____ __________
Sales _____ __________
Cost of goods sold _____ __________
Depreciation expense

Click here for the solution: Accounts are listed below for a foreign subsidiary that maintains its books in its local currency

Comprehensive Problem: Packard Company has the following opening account balances in its general and subsidiary ledgers

Comprehensive Problem: Chapters 3, 4, 5, 6, and 7

Packard Company has the following opening account balances in its general and subsidiary ledgers on January 1 and uses the periodic inventory system. All accounts have normal debit and credit balances.

General Ledger
Account Number Account Title January 1 Opening Balance
101 Cash $33,750
112 Accounts Receivable 13,000
115 Notes Receivable 39,000
120 Merchandise Inventory 20,000
125 Office Supplies 1,000
130 Prepaid Insurance 2,000
157 Equipment 6,450
158 Accumulated Depreciation 1,500
201 Accounts Payable 35,000
301 I. Packard, Capital 78,700
Accounts
Receivable Subsidiary Ledger
Accounts
Payable Subsidiary Ledger
Customer
January 1 Opening
Balance
Creditor
January 1 Opening
Balance
R. Draves $1,500 S. Kosko $ 9,000
B. Hachinski 7,500 R. Mikush 15,000
S. Ingles 4,000 D. Moreno 11,000

Jan. 3 Sell merchandise on account to B. Remy $3,100, invoice no. 510, and J. Fine $1,800, invoice no. 511.
5 Purchase merchandise on account from S. Yost $3,000 and D. Laux $2,700.
7 Receive checks for $4,000 from S. Ingles and $2,000 from B. Hachinski.
8 Pay freight on merchandise purchased $180.
9 Send checks to S. Kosko for $9,000 and D. Moreno for $11,000.
5 Purchase merchandise on account from S. Yost $3,000 and D. Laux $2,700.
7 Receive checks for $4,000 from S. Ingles and $2,000 from B. Hachinski.
8 Pay freight on merchandise purchased $180.
9 Send checks to S. Kosko for $9,000 and D. Moreno for $11,000.
9 Issue credit of $300 to J. Fine for merchandise returned.
10 Summary cash sales total $15,500.
11 Sell merchandise on account to R. Draves for $1,900, invoice no. 512, and to S. Ingles $900, invoice no. 513.
Post all entries to the subsidiary ledgers.
12 Pay rent of $1,000 for January.
13 Receive payment in full from B. Remy and J. Fine.
15 Withdraw $800 cash by I. Packard for personal use.
16 Purchase merchandise on account from D. Moreno for $15,000, from S. Kosko for $13,900, and from S. Yost for $1,500.
17 Pay $400 cash for office supplies.
18 Return $200 of merchandise to S. Kosko and receive credit.
20 Summary cash sales total $17,500.
21 Issue $15,000 note to R. Mikush in payment of balance due.
21 Receive payment in full from S. Ingles.
Post all entries to the subsidiary ledgers.
22 Sell merchandise on account to B. Remy for $3,700, invoice no. 514, and to R. Draves for $800, invoice no. 515.
23 Send checks to D. Moreno and S. Kosko in full payment.
25 Sell merchandise on account to B. Hachinski for $3,500, invoice no. 516, and to J. Fine for $6,100, invoice no. 517.
27 Purchase merchandise on account from D. Moreno for $12,500, from D. Laux for $1,200, and from S. Yost for $2,800.
28 Pay $200 cash for office supplies.
31 Summary cash sales total $22,920.
31 Pay sales salaries of $4,300 and office salaries of $3,600.
Hint: AP, S

Instructions
(a) Record the January transactions in the appropriate journal—sales, purchases, cash receipts, cash payments, and general.
(b) Post the journals to the general and subsidiary ledgers. Add and number new accounts in an orderly fashion as needed.
(c) Prepare a trial balance at January 31, 2010, using a worksheet. Complete the worksheet using the following additional information.
1. Office supplies at January 31 total $700.
2. Insurance coverage expires on October 31, 2010.
3. Annual depreciation on the equipment is $1,500.
4. Interest of $30 has accrued on the note payable.
5. Merchandise inventory at January 31 is $15,000.
Trial balance totals $196,820;
Adj. T/B totals $196,975
(d) Prepare a multiple-step income statement and a statement of owner's equity for January and a classified balance sheet at the end of January.
Net income $9,685
Total assets $126,315
(e) Prepare and post the adjusting and closing entries.
(f) Prepare a post-closing trial balance, and determine whether the subsidiary ledgers agree with the control accounts in the general ledger.
Post-closing T/B totals $127,940


Click here for the solution: Comprehensive Problem: Packard Company has the following opening account balances in its general and subsidiary ledgers

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

Bluma Co. uses a perpetual inventory system and both an accounts receivable and an accounts payable subsidiary ledger

Bluma Co. uses a perpetual inventory system and both an accounts receivable and an accounts payable subsidiary ledger. Balances related to both the general ledger and the subsidiary ledger for Bluma are indicated in the working papers. Presented below are a series of transactions for Bluma Co. for the month of January. Credit sales terms are 2/10, n/30. The cost of all merchandise sold was 60% of the sales price.

Jan. 3 Sell merchandise on account to B. Richey $3,100, invoice no. 510, and to J. Forbes $1,800, invoice no. 511.
5 Purchase merchandise from S. Vogel $5,000 and D. Lynch $2,200, terms n/30.
7 Receive checks from S. LaDew $4,000 and B. Garcia $2,000 after discount period has lapsed.
8 Pay freight on merchandise purchased $235.
9 Send checks to S. Hoyt for $9,000 less 2% cash discount, and to D. Omara for $11,000 less 1% cash discount.
9 Issue credit of $300 to J. Forbes for merchandise returned.
10 Summary daily cash sales total $15,500.
11 Sell merchandise on account to R. Dvorak $1,600, invoice no. 512, and to S. LaDew $900, invoice no. 513.
12 Pay rent of $1,000 for January.
13 Receive payment in full from B. Richey and J. Forbes less cash discounts.
15 Withdraw $800 cash by M. Bluma for personal use.
15 Post all entries to the subsidiary ledgers.
16 Purchase merchandise from D. Omara $18,000, terms 1/10, n/30; S. Hoyt $14,200, terms 2/10, n/30; and S. Vogel $1,500, terms n/30.
17 Pay $400 cash for office supplies.
18 Return $200 of merchandise to S. Hoyt and receive credit.
20 Summary daily cash sales total $20,100.
21 Issue $15,000 note, maturing in 90 days, to R. Moses in payment of balance due.
21 Receive payment in full from S. LaDew less cash discount.
22 Sell merchandise on account to B. Richey $2,700, invoice no. 514, and to R. Dvorak $1,300, invoice no. 515.
22 Post all entries to the subsidiary ledgers.
23 Send checks to D. Omara and S. Hoyt in full payment less cash discounts.
25 Sell merchandise on account to B. Garcia $3,500, invoice no. 516, and to J. Forbes $6,100, invoice no. 517.
27 Purchase merchandise from D. Omara $14,500, terms 1/10, n/30; D. Lynch $1,200, terms n/30; and S. Vogel $5,400, terms n/30.
27 Post all entries to the subsidiary ledgers.
28 Pay $200 cash for office supplies.
31 Summary daily cash sales total $21,300.
31 Pay sales salaries $4,300 and office salaries $3,800.

Instructions
(a) Record the January transactions in a sales journal, a single-column purchases journal, a cash receipts journal as shown on page 313, a cash payments journal as shown on page 318, and a two-column general journal.
(b) Post the journals to the general ledger.
(c) Prepare a trial balance at January 31, 2010, in the trial balance columns of the worksheet. Complete the worksheet using the following additional information.
1. Office supplies at January 31 total $900.
2. Insurance coverage expires on October 31, 2010.
3. Annual depreciation on the equipment is $1,500.
4. Interest of $50 has accrued on the note payable.
TB totals $202,900; Adj. T/B totals $203,075
(d) Prepare a multiple-step income statement and an owner's equity statement for January and a classified balance sheet at the end of January.
Net income $20,755; total assets $143,505
(e) Prepare and post adjusting and closing entries.
(f) Prepare a post-closing trial balance, and determine whether the subsidiary ledgers agree with the control accounts in the general ledger.
PCTB $145,130


Click here for the solution: Bluma Co. uses a perpetual inventory system and both an accounts receivable and an accounts payable subsidiary ledger

A U.S. manufacturer wants to conduct business through a foreign subsidiary organized in a low tax jurisdiction

A U.S. manufacturer wants to conduct business through a foreign subsidiary organized in a low tax jurisdiction. How might it do so without being currently taxed on the subsidiary’s foreign earnings?


Click here for the solution: A U.S. manufacturer wants to conduct business through a foreign subsidiary organized in a low tax jurisdiction

Apply the controlled and affiliated group rules to determine whether a parent-subsidiary controlled group

Apply the controlled and affiliated group rules to determine whether a parent-subsidiary controlled group or an affiliated group exists in each of the following independent situations. Circle Y for yes and N for no.

Situation Parent- Subsidiary Controlled Group? Affiliated Group?

Throughout the year, Parent owns 65% of the stock of SubCo. Y N Y N

Parent owns 70% of SubCo. The other 30% of SubCo stock is owned by Senior, a wholly owned subsidiary of Parent. Y N Y N

For 11 months, Parent owns 75% of the stock of SubCo. For the last month of the tax year, Parent owns 100% of the SubCo stock. Y N Y N

Click here for the solution: Apply the controlled and affiliated group rules to determine whether a parent-subsidiary controlled group

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

(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

The Flying Gator Corporation and its 100%-owned subsidiary, T Corporation, have filed consolidated tax returns for many years

The Flying Gator Corporation and its 100%-owned subsidiary, T Corporation, have filed consolidated tax returns for many years. Both corporations use the hybrid method of accounting and the calendar year as their tax year. During 201 (which is the current year for this problem), they report the operating results. Note the following additional information:
• Flying Gator and T Corporations are the only members of their controlled group.
• Flying Gator’s address is 2101 W. University Ave., Gainesburg, FL 32611. Its employer identification number is 38-2345678. Flying Gator was incorporated on June 11, 2000. Its total assets are $430,000. Stephen Marks is Flying Gator’s president.
• A $50,000 consolidated NOL carryover from the preceding year is available. The NOL is wholly attributable to Flying Gator.
• Flying Gator and T use the first-in, first-out (FIFO) inventory method. T began selling inventory to Flying Gator in the preceding year, which resulted in a $40,700 deferred intercompany profit at the end of the preceding year. Flying Gator is deemed to realize this profit in the current year because it uses the FIFO method. During the current year, T sells additional inventory to Flying Gator, realizing a $300,000 profit. At the end of the current year, Flying Gator holds inventory responsible for $45,100 of this profit.
• Flying Gator receives all its dividends from T. T receives all its dividends from a 60%-owned domestic corporation. All distributions are from E&P.
• Flying Gator receives all its interest income from T. T pays Flying Gator the interest on March 31 of the current year on a loan that was outstanding from October 1 of the preceding year through March 31 of the current year. Flying Gator and T did not accrue any interest at the end of the preceding year because they use the hybrid method of accounting. T pays $5,000 of its interest expense to a third party.
• Officer’s salaries are $80,000 for Flying Gator and $65,000 for T. These amounts are included in salaries and wages in Table.
• Flying Gator’s capital losses include a $9,000 long-term loss on a sale of land to T in the current year. T holds the land at year-end.
• The corporations have no nonrecaptured net Sec. 1231 losses from prior tax years.
• Qualified production activities income for Flying Gator is $340,000 and for T is $(35,000). The applicable percentage for 2010 is 9%.
• Estimated tax payments for the current year are $150,000.
Determine the consolidated group’s 2012 tax liability. Prepare the front page of the consolidated group’s current year corporate income tax return (Form 1120).

Click here for the solution: The Flying Gator Corporation and its 100%-owned subsidiary, T Corporation, have filed consolidated tax returns for many years