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Advanced Accounting 10th Edition, Beams Test Bank

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Test Bank For Advanced Accounting 10th Edition, Beams. Note: This is not a text book. Description: ISBN-13: 978-0136033974, ISBN-10: 0136033970.

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Test Bank Advanced Accounting 10th Beams, Anthony, Clement and Lowensohn

Multiple Choice Questions
Chapter 1: BUSINESS COMBINATIONS
1. Which of the following is a reason why a company would expand through a combination, rather than by building new facilities?
a. A combination might provide cost advantages.
b. A combination might provide fewer operating delays.
c. A combination might provide easier access to intangible assets.
d. All of the above are possible reasons that a company might choose a combination.
2. A business combination in which a new corporation is created and two or more existing corporations are combined into the newly created corporation is called a
a. merger.
b. purchase transaction.
c. pooling-of-interests.
d. consolidation.
3. A business combination occurs when a company acquires an equity interest in another entity and has
a. at least 20% ownership in the entity.
b. more than 50% ownership in the entity.
c. 100% ownership in the entity.
d. control over the entity, irrespective of the percentage owned.
4. FASB favors consolidation of two entities when
a. one acquires less than 20% equity ownership of the other.
b. one company’s ownership interest in another gives it control of the acquired company, yet the acquiring company does not have a majority ownership in the acquired. Typically, this is in the 20%-50% interest range.
c. one acquires two thirds equity ownership in the other.
d. one gains control over the entity, irrespective of the equity percentage owned.
5. Michangelo Co. paid $100,000 in fees to its accountants and lawyers in acquiring Florence Company. Michangelo will treat the $100,000 as
a. an expense for the current year.
b. a prior period adjustment to retained earnings.
c. additional cost to investment of Florence on the consolidated balance sheet.
d. a reduction in paid-in capital.
6. Picasso Co. issued 10,000 shares of its $1 par common stock, valued at $400,000, to acquire shares of Bull Company in an all-stock transaction. Picasso paid the investment bankers
$35,000. Picasso will treat the investment banker fee as:
a. an expense for the current year.
b. a prior period adjustment to Retained Earnings.
c. additional goodwill on the consolidated balance sheet.
d. a reduction in paid-in capital.
7. Durer Inc acquired Sea Corporation in a business combination and Sea Corp went out of existence. Sea Corp developed a patent listed as an asset on Sea Corp’s books at the patent office filing cost. In recording the combination
a. fair value is not assigned to the patent because the research and development costs have been expensed by Sea Corp.
b. Sea Corp’s prior expenses to develop the patent are recorded as an asset by Durer at purchase.
c. the patent is recorded as an asset at fair market value.
d. the patent’s market value increases goodwill.
8. In a merger, which of the following will occur?
a. A merger occurs when one corporation takes over the operations of another business entity, and the acquired entity is dissolved.
b. None of the business entities will be dissolved.
c. The acquired assets will be recorded at book value by the acquiring entity.
d. None of the above is correct.
9. According to FASB Statement 141, which one of the following items may not be accounted for as an intangible asset apart from goodwill?
a. A production backlog.
b. A talented employee workforce.
c. Noncontractual customer relationships.
d. Employment contracts.
10. Under the provisions of FASB Statement No. 141R, in a business combination, when the fair value exceeds the investment cost, which of the following statements is correct?
a. A gain from a bargain purchase is recognized for the amount that the fair value of the identifiable net assets acquired exceeds the acquisition price.
b. the value is allocated first to reduce proportionately (according to market value) non-current assets, then to non-monetary current assets, and any negative remainder is classified as a deferred credit.
c. it is allocated first to reduce proportionately (according to market value) non-current assets, and any negative remainder is classified as an extraordinary gain.
d. It is allocated first to reduce proportionately (according to market value) non-current, depreciable assets to zero, and any negative remainder is classified as a deferred credit.
11. With respect to goodwill, an impairment
a. will be amortized over the remaining useful life.
b. is a two-step process which analyzes each business unit of the entity.
c. is a one-step process considering the entire firm.
d. occurs when asset values are adjusted to fair value in a purchase.

Use the following information in answering questions 12 and 13.

Manet Corporation exchanges 150,000 shares of newly issued $1 par value common stock with a fair market value of $25 per share for all of the outstanding $5 par value common stock of Gardner Inc and Gardner is then dissolved. Manet paid the following costs and expenses related to the business combination:

Costs of special shareholders’ meeting
to vote on the merger $13,000
Registering and issuing securities 14,000
Accounting and legal fees 9,000
Salaries of Manet’s employees assigned
to the implementation of the merger 15,000
Cost of closing duplicate facilities 11,000

12. In the business combination of Manet and Gardner
a. the costs of registering and issuing the securities are included as part of the purchase price for Gardner.
b. only the salaries of Manet’s employees assigned to the merger are treated as expenses.
c. all of the costs except those of registering and issuing the securities are included in the purchase price of Gardner.
d. only the accounting and legal fees are included in the purchase price of Gardner.
13. In the business combination of Manet and Gardner
a. all of the items listed above are treated as expenses.
b. all of the items listed above except the cost of registering and issuing the securities are expensed.
c. the costs of registering and issuing the securities are deducted from the fair market value of the common stock used to acquire Gardner.
d. only the costs of closing duplicate facilities, the salaries of Manet’s employees assigned to the merger, and the costs of the shareholders’ meeting would be treated as expenses.
14. In Statement 142, which of the following methods does the FASB consider the best indicators of fair values in the evaluation of goodwill impairment?
a. Senior executive’s estimates.
b. Financial analyst forecasts.
c. Market value.
d. The present value of future cash flows discounted at the firm’s cost of capital.
15. Raphael Company paid $2,000,000 for the net assets of Paris Corporation and Paris was then dissolved. Paris had no liabilities. The fair values of Paris’ assets were $2,500,000. Paris’s only non-current assets were land and equipment with fair values of $160,000 and $640,000, respectively. At what value will the equipment be recorded by Raphael?
a. $640,000
b. $240,000
c. $400,000
d. $0
16. According to FASB 141, liabilities assumed in an acquisition will be valued at the
a. estimated fair value.
b. historical book value.
c. current replacement cost.
d. present value using market interest rates.
17. In reference to the FASB disclosure requirements, which of the following is correct?
a. Information related to several minor acquisitions may not be combined.
b. Firms are not required to disclose the business purpose for a combination
c. Notes to the financial statements of an acquiring corporation must disclose that the business combination was accounted for by the acquisition method.
d. All of the above are correct.
18. Goodwill arising from a business combination is
a. charged to Retained Earnings after the acquisition is completed.
b. amortized over 40 years or its useful life, whichever is longer.
c. amortized over 40 years or its useful life, whichever is shorter.
d. never amortized.
19. In reference to international accounting for goodwill, which of the following statements is correct?
a. U.S. companies have complained that past accounting rules for amortizing goodwill placed them at a disadvantage in competing against foreign companies for merger partners.
b. Some foreign countries permitted the immediate write-off of goodwill to stockholders’ equity.
c. The IASB and the FASB are working to eliminate differences in accounting for business combinations.
d. All of the above are correct.
20. In recording acquisition costs, which of following procedures is correct?
a. Registration costs are expensed, and not charged against the fair value of the securities issued.
b. Indirect costs are charged against the fair value of the securities issued.
c. Consulting fees are expensed.
d. None of the above procedures is correct.

Chapter 2: STOCK INVESTMENTS-INVESTOR ACCOUNTING AND REPORTING
1 When Eagle Company has less than 50% of the voting stock of Fish Corporation which of the following applies?
a. Only the fair value method may be used.
b. Only the equity method may be used.
c. Either the fair value method or the equity method may be used.
d. Neither the fair value method or the equity method may be used.
2 Which one of the following items, originally recorded in the Investment in Falcon Co. account under the equity method, would not be systematically charged to income on a periodic basis?
a. Amortization expense of goodwill.
b. Depreciation expense on the excess fair value attributed to machinery.
c. Amortization expense on the excess fair value attributed to lease agreements.
d. Interest expense on the excess fair value attributed to long-term bonds payable.
3 Which one of the following statements is correct for an investor company?
a. Once the balance in the Investment in Osprey Co. account reaches zero, it will not be reduced any further.
b. Under the equity method, the balance in the Investment in Osprey Co. account can be negative if the investee corporation operates at a loss.
c. Application of the equity method is discontinued when the investor’s share of losses reduces the carrying amount of the investment to zero.
d. Under the equity method, any goodwill inherent or contained in the Investment in Osprey Co. account will be amortized to the income earned from the investee.
4 Kestral Inc. owns 10% of Mouse Company. In the most recent year, Mouse had net earnings of $60,000 and paid dividends of $8,000. Kestral’s accountant mistakenly assumed considerable influence and used the equity method instead of the cost method. What is the impact on the investment account and net earnings, respectively?
a. By using the equity method, the accountant has understated the investment account and overstated the net earnings.
b. By using the equity method, the accountant has overstated the investment account and understated the net earnings.
c. By using the equity method, the accountant has understated the investment account and understated the net earnings.
d. By using the equity method, the accountant has overstated the investment account and overstated the net earnings.
5 Griffon Incorporated holds a 30% ownership in Duck Corporation. Griffon should use the equity method under which of the following circumstances?
a. Griffon has surrendered significant stockholder rights by agreement between Griffon and Duck.
b. Griffon has been unable to secure a position on the Duck Corporation Board of Directors.
c. Griffon’s ownership is temporary.
d. The ownership of Duck Corporation is diverse.
6 Swan Corporation uses the fair value method of accounting for its investment in Pond Company. Which one of the following events would affect the Investment in Pond Co. account?
a. Investee losses
b. Investee dividend payments
c. An increase in the investee’s share price from last period.
d. all of the above would affect the Investment in Pond Co. account
7 Mudflat Corporation’s stockholder’s equity at December 31, 2004 included the following:

8% Preferred stock, $10 par value $ 2,000,000
Common stock, no par 20,000,000
Additional paid-in capital 8,000,000
Retained earnings 8,000,000
$ 38,000,000

Brolga Corporation purchased a 30% interest in Mudflat’s common stock from other shareholders on January 1, 2005 for $11,600,000. What was the book value of Brolga’s investment in Mudflat?

a. $10,800,000
b. $11,400,000
c. $14,240,000
d. $14,880,000
8 Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1, 2002 for $300,000. This investment was accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31, 2004 was $440,000. The original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year. In 2005, Fish Corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in May. If Jabiru sold one-half of its investment in Fish on August 1, 2005 for $500,000, how much gain was recognized on this transaction?

a. $278,950
b. $280,000
c. $280,950
d. $282,000

9 An investor uses the cost method of accounting for its investment in common stock. During the current year, the investor received $25,000 in dividends, an amount that exceeded the investor’s share of the investee company’s undistributed income since the investment was acquired. The investor should report dividend income of what amount?

a. $25,000.
b. $25,000 less the amount in excess of its share of undistributed income since the investment was acquired.
c. $25,000 less the amount that is not in excess of its share of undistributed income since the investment was acquired.
d. None of the above is correct.

Use the following information in answering questions 10 and 11.

On January 1, 2005, Coot Company acquired a 15% interest in Roost Corporation for $120,000 when Roost’s stockholder’s equity consisted of $600,000 capital stock and $200,000 retained earnings. Book values of Roost’s net assets equaled their fair values on this date. Roost’s net income and dividends for 2005 through 2007 was as follows:

2005 2006 2007
Net income $ 12,000 $ 15,000 $ 25,000
Dividends paid 10,000 10,000 10,000

10 Assume that Coot Incorporated used the cost method of accounting for its investment in Roost. The balance in the Investment in Roost account at December 31, 2007 was

a. $118,000.
b. $120,000.
c. $121,800.
d. $130,800.
11 Assume that Coot has significant influence and uses the equity method of accounting for its investment in Roost. The balance in the Investment in Roost account at December 31, 2007 was
a. $118,000.
b. $120,000.
c. $121,800.
d. $123,300.
12 Swamphen Corporation accounts for its 30% investment in Frog Company using the equity method. On the date of the original investment, fair values were equal to the book values except for a patent, which cost Swamphen an additional $40,000. The patent had an estimated life of 10 years. Frog has a steady net income of $20,000 per year and its dividend payout ratio is 40%. Which one of the following statements is correct?
a. The net change in the investment account for each full year will be a debit of $400.
b. The net change in the investment account for each full year will be a debit of $3,600.
c. The net change in the investment account for each full year will be a credit of $400.
d. The net change in the investment account for each full year will be a credit of $3,600.
13 Jacana Corporation paid $200,000 for a 25% interest in Lilypad Corporation’s common stock on January 1, 2005, but was not able to exercise significant influence over Lilypad. During 2006, Jacana reported income of $120,000, excluding its income from Lilypad, and paid dividends of $50,000. Lilypad reported net income of $40,000 during 2006 and paid dividends of $20,000. Jacana should report net income for 2006 in the amount of
a. $115,000.
b. $120,000.
c. $125,000.
d. $130,000.
14 Robin Corporation purchased 150,000 previously unissued shares of Nest Company’s $10 par value common stock directly from Nest for $3,400,000. Nest’s stockholder’s equity immediately before the investment by Robin consisted of $3,000,000 of capital stock and $2,600,000 in retained earnings. What is the book value of Robin’s investment in Nest?
a. $1,500,000.
b. $1,680,000.
c. $2,800,000.
d. $3,000,000.
15 The income from an equity investee is reported on one line of the investor company’s income statement except when
a. the cost method is used.
b. the investee has extraordinary or other “below the line” items.
c. the investor company is amortizing cost-book value differentials.
d. the investor company changes from the cost to the equity method.
16 Bart Company purchased a 30% interest in Simpson Corporation on January 1, 2004, and Bart accounted for its investment in Simpson under the equity method for the next 3 years. On January 1, 2007, Bart sold one-half of its interest in Simpson after which it could no longer exercise significant influence over Simpson. Bart should
a. continue to account for its remaining investment in Dak under the equity method for the sake of consistency.
b. adjust the investment in Simpson account to one-half of its original amount and account for the remaining 15% interest using the equity method.
c. account for the remaining investment under the cost method, using the investment in Simpson account balance immediately after the sale as the new cost basis.
d. adjust the investment account to one-half of its original amount (one-half of the purchase price in 2004), and account for the remaining 15% investment under the cost method.
17 Pelican Corporation acquired a 30% interest in Crustacean Incorporated at book value several years ago. Crustacean declared $100,000 dividends in 2005 and reported its income for the year as follows:

Income from continuing operations $700,000
Loss on discontinued division (100,000)
Net income $600,000

Pelican’s Investment in Crustacean account for 2003 should increase by

a. $ 150,000
b. $ 160,000
c. $ 180,000
d. $ 210,000

18 Cormorant Corporation paid $800,000 for a 40% interest in Plumage Company on January 1, 2005 when Plumage’s stockholder’s equity was as follows:

10% cumulative preferred stock, $100 par $ 500,000
Common stock, $10 par value 300,000
Other paid-in capital 400,000
Retained earnings 800,000
Total stockholders’ equity $2,000,000

On this date, the book values of Plumage’s assets and liabilities equaled their fair values and there were no dividends in arrears. Goodwill from the investment is

a. $0.
b. $150,000.
c. $200,000.
d. None of the above is correct.

19 In reference to material transactions between an investor and an investee, when the investor can significantly influence the investee, which of the following statements is correct, assuming that the investor is using the equity method?
a. There is the presumption of arms-length bargaining between the related parties.
b. As long as the investor recognizes the effects of the transaction in its financial statements, it is not required to provide any additional disclosures.
c. In reporting its share of earnings and losses of an investee, the investor must eliminate the effect of profits and losses on the transactions until they are realized.
d. None of the above is correct.
20 In reference to the determination of goodwill impairment, which of the following statements is correct?
a. The goodwill impairment test under FASB 142 is a three-step process.
b. If the reporting unit’s fair value exceeds its carrying value, goodwill is unimpaired.
c. Under FASB 142 firms must first compare carrying values (book values) at the firm level.
d. All of the above are correct.

Chapter 3: AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS
1. What method must be used if FASB 94 prohibits full consolidation of a 70% owned subsidiary?
a. The cost method.
b. The Liquidation value.
c. Market value.
d. Equity method.
2. From the standpoint of accounting theory, which of the following statements is the best justification for the preparation of consolidated financial statements?
a. In substance the companies are separate, but in form the companies are one entity.
b. In substance the companies are one entity, but in form they are separate.
c. In substance and form the companies are one entity.
d. In substance and form the companies are separate entities.
3. Penguin Corporation owns 90% of the outstanding voting stock of Crevice Company and Burrow Corporation owns the remaining 10% of Crevice’s voting stock. On the consolidated financial statements of Penguin Corporation and Subsidiary, Burrow is
a. an affiliate. b. a minority interest. c. an equity investee. d. a related party
4. A major motivation for FASB’s creation of Statement No. 94 was
a. temporary control was not being disclosed properly.
b. the elimination off-balance sheet financing
c. situations occurred where subsidiary control did not lie with the parent company.
d. the risk of subsidiary legal reorganization or bankruptcy was not disclosed.
5. Muttonbird Inc. has 90% ownership of Beach Company, but should exclude Beach under FASB 94 if
a. Beach is in a regulated industry.
b. Muttonbird uses the equity method for Beach.
c. Muttonbird expects to sell Beach within a year.
d. Beach is in a foreign country and records its books in a foreign currency.
6. Subsequent to an acquisition, the parent company and consolidated financial statement amounts would not be the same for
a. investments in unconsolidated subsidiaries.
b. investments in consolidated subsidiaries.
c. capital stock.
d. ending retained earnings.
7. On June 1, 2005, Gull Company acquired 100% of the stock of Scrap Inc. On this date, Gull had Retained Earnings of $200,000 and Scrap had Retained Earnings of $100,000. On December 31, 2005, Gull had Retained Earnings of $240,000 and Scrap had Retained Earnings of 120,000. The amount of Retained Earnings that appeared in the December 31, 2005 consolidated balance sheet was:
a. $240,000.
b. $260,000.
c. $300,000.
d. $360,000.
8. Scrubwren Corporation acquired a 100% interest in Heath Company for $1,780,000 when Heath had no liabilities. The book values and fair values of Heath’s assets were
Book Value Fair Value
Current assets $ 400,000 $ 700,000
Equipment 200,000 400,000
Land & buildings 600,000 800,000
Total assets $1,200,000 $1,900,000

Immediately following the acquisition, equipment will be included on the consolidated balance sheet at

a. $300,000.
b. $340,000.
c. $360,000.
d. $400,000.
9. A newly acquired subsidiary had pre-existing goodwill on its books. The parent company’s consolidated balance sheet will
a. not show any value for the subsidiary’s pre-existing goodwill.
b. treat the goodwill similarly to other intangible assets of the acquired company.
c. not show any value for the pre-existing goodwill unless all ther assets of the subsidiary are stated at their full fair value.
d. always show the pre-existing goodwill of the subsidiary at its book value.
10. The unamortized excess account is
a. a contra-equity account.
b. used in allocating the amounts paid for recorded balance sheet accounts that are above or below their fair values.
c. used in allocating the amounts paid for each asset and liability that are above or below their book values, especially when numerous assets or liabilities are involved.
d. the excess purchase cost that is attributable to goodwill.
11. On January 1, 2005, Tern purchased 90% of Costal Corporation’s outstanding shares for $1,400,000 when the fair value of Costal’s assets were equal to the book values. The balance sheets of Tern and Costal Corporations at year-end 2004 are summarized as follows:

Tern Costal
Assets $ 5,900,000 $ 1,450,000
Liabilities $ 700,000 $ 250,000
Capital stock 3,600,000 1,000,000
Retained earnings 1,600,000 200,000

If a consolidated balance sheet was prepared immediately after the business combination, the minority interest, would be
a. $100,000.
b. $155,556.
c. $140,000.
d. $520,000.
12. On July 1, 2005, when Worm Company’s total stockholders’ equity was $180,000, Bird Corporation purchased 7,000 shares of Worm’s common stock at $30 per share. Worm Company had 10,000 shares of common stock outstanding both before and after the purchase by Bird, and the book value of Worm’s net assets on July 1, 2005 was equal to the fair value. On a consolidated balance sheet prepared at July 1, 2005, goodwill would be
a. $30,000.
b. $40,000.
c. $50,000.
d. $120,000.
13. Bowerbird Inc acquired 60% of the outstanding stock of Mimicry Company in a business combination. The book values of Mimicry’s net assets are equal to the fair values except for the building, whose net book value and fair value are $400,000 and 600,000, respectively. At what amount is the building reported on the consolidated balance sheet?
a. $360,000.
b. $400,000.
c. $520,000.
d. $600,000.
14. In the preparation of consolidated financial statements, which of the following intercompany transactions must be eliminated as part of the preparation of the consolidation working papers?
a. All revenues, expenses, gains, deductions, receivables, and payables.
b. All revenues, expenses, gains, and deductions but not receivables and payables.
c. Receivables and payables but not revenues, expenses, gains, and deductions.
d. only sales revenue and cost of goods sold.
15. Pardolate Corporation paid $200,000 for a 60% interest in Arthropod Inc on January 1, 2005, when Arthropod had Capital Stock of $200,000 and Retained Earnings of $100,000. Fair values of identifiable net assets were the same as recorded book values. During 2005, Arthropod had income of $30,000, declared dividends of $10,000, and paid $5,000 of dividends. On December 31, 2005, Pardolate will have
a. investment in Salem account of $240,000.
b. investment in Salem account of $218,000.
c. goodwill of $33,333.
d. dividends receivable of $3,000.
16. Spinebill Corporation bought 80% of Nectar Company’s common stock at its book value of $500,000 on January 1, 2005. During 2005, Nectar reported net income of $150,000 and paid dividends of $45,000. At what amount should Spinebill’s Investment in Nectar account be reported on December 31, 2005?
a. $500,000
b. $548,000
c. $584,000
d. $605,000
17. Weebill Corporation bought 80% of Tree Company’s common stock at its book value of $800,000 on January 2, 2005 for $700,000. The law firm of Dewey, Cheatam and Howe did $25,000 to facilitate the purchase. At what amount should Weebill’s Investment in Tree account be reported on January 2, 2005?
a. $640,000.
b. $665,000.
c. $700,000.
d. $725,000.
18. Bellbird Corporation acquired an 80% interest in Honey Inc for $130,000 on January 1, 2005, when Honey had Capital Stock of $125,000 and Retained Earnings of $25,000. Bellbird’s separate income statement and a consolidated income statement for Bellbird Corporation and Subsidiary as of December 31, 2005, are shown below.
Bellbird

Consoli- dated

Sales revenue $ 150,000 $ 234,750
Income from Corpora l 11,600
Cost of sales ( 60,000 ) ( 100,000 )
Other expenses ( 20,000 ) ( 50,000 )
Noncontrolling
interest income ( 3,150 )
Net income $ 81,600 $ 81,600

Honey’s separate income statement must have reported net income of:
a. $13,750. b. $14,750. c. $15,750. d. $15,250.
19. In the consolidated income statement of Wattlebird Corporation and its 85% owned Forest subsidiary, the noncontrolling interest income was reported at $45,000. What amount of net income did the Forest have for the year?

a. $52,941
b. $38,250
c. $235,000
d. $300,000.
20. Push-down accounting
a. requires a subsidiary to use the same accounting principles as its parent company.
b. is required by the SEC if a subsidiary is wholly owned.
c. is required when the parent company uses the cost method to ccount for its investment in the subsidiary.
d. results in a push-up residual account on the subsidiaries books.

Chapter 4: CONSOLIDATION TECHNIQUES AND PROCEDURES
1. Which of the following will be debited to the Investment account when the equity method is used?
a. Investee net losses.
b. Investee net profits.
c. Investee declaration of dividends.
d. Depreciation of excess purchase cost attributable to investee equipment.
2. A parent company uses the equity method to account for its wholly-owned subsidiary. The company correctly uses this method and has fully reflected all items of subsidiary gain, loss, income, deductions, and dividends. If the parent company is preparing the consolidation working papers, which of the following will be a correct working paper procedure for the Investment account?
a. A debit for a subsidiary loss and a credit for dividends received.
b. A credit for subsidiary income and a debit for dividends received.
c. A debit for subsidiary dividends received and a credit for a subsidiary loss.
d. A credit for a subsidiary loss and a credit for dividends received.
3. A parent corporation owns 55% of the outstanding voting common stock of one domestic subsidiary, but does not control the subsidiary because it is in bankruptcy. Which of the following statements is correct?
a. The parent corporation must still prepare consolidated financial statements for the economic entity.
b. The parent corporation must stop using the equity method of accounting for the subsidiary and start using the cost method.
c. The parent company may continue to use the equity method but the subsidiary cannot be consolidated.
d. The parent company would suspend the operation of the Investment account until notified by the bankruptcy court that the subsidiary has emerged from bankruptcy.

Use the following information to answer questions 4 through 9.

On January 1, 2005, Finch Corporation purchased 75% of the common stock of Grass Co. Separate balance sheet data for the companies at the combination date are given below:

Cash
Finch $24,000
Grass $ 206,000
Accounts Receivable 144,000 26,000
Inventory 132,000 38,000
Land 68,000 32,000
Plant assets 700,000 300,000
Accum. Depreciation ( 240,000 ) ( 60,000 )
Investment in Lapp 392,000
Total assets $ 1,230,000 $ 542,000

Accounts payable $ 206,000 $ 142,000
Capital stock 800,000 300,000
Retained earnings 224,000 100,000
Total liabilities & equities $ 1,230,000 $ 542,000

At the date of combination, the book values of Grass’s net assets were equal to the fair value except for Grass’s inventory, which had a fair value of $60,000.

Determine below what the consolidated balance would be for each of the requested accounts.
4. What amount of Inventory will be reported?
a. $170,000.
b. $169,000.
c. $186,500.
d. $192,000.
5. What amount of Goodwill will be reported?
a. $10,500.
b. $20,000.
c. $42,000.
d. $75,500.
6. What amount of total liabilities will be reported?
a. $206,000.
b. $261,000.
c. $302,500.
d. $348,000.
7. What is the reported amount for the minority interest?
a. $ 69,333.
b. $100,000.
c. $130,666.
d. $150,000.
8. What is the amount of consolidated Retained Earnings?
a. $224,000.
b. $299,000.
c. $324,000.
d. $346,666.

9. What is the amount of total assets?
a. $1,244,500.
b. $1,380,000.
c. $1,472,000.
d. $1,762,000.
10. Bird Corporation has several subsidiaries that are included in its consolidated financial statements and several other investments in corporations that are not consolidated. In its year-end trial balance, the following intercompany balances appear. Ostrich Corporation is the unconsolidated company; the rest are consolidated.

Due from Pheasant Corporation $ 25,000
Due from Turkey Corporation 5,000
Cash advance to Skylark Company 8,000
Cash advance to Starling 15,000
Current receivable from Ostrich 10,000

What amount should Bird report as intercompany receivables on its consolidated balance sheet?

a. $0.
b. $10,000.
c. $30,000.
d. $63,000.
11. The majority of errors in consolidated statements
a. result because the Investment in Subsidiary account on the parent’s books and the subsidiary equity accounts on the subsidiary’s books are reciprocal.
b. have conceptual problems from the minority interest representation of the equity investment in consolidated net assets by stockholders outside the affiliation structure.
c. involve the amortization of book/market differences.
d. appear when the consolidated balance sheet does not balance.
12. At the beginning of 2005, Starling Inc. acquired an 80% interest in Orchard Corporation when the book values of identifiable net assets equaled their fair values. On December
26, 2005, Orchard declared dividends of $50,000, and the dividends were unpaid at year-end. Starling had not recorded the dividend receivable at December 31. A consolidated working paper entry is necessary to
a. enter $50,000 dividends receivable in the consolidated balance sheet.
b. enter $40,000 dividends receivable in the consolidated balance sheet.
c. reduce the dividends payable account by $40,000 in the consolidated balance sheet.
d. eliminate the dividend payable account from the consolidated balance sheet.
13. A parent company uses the equity method to account for its wholly-owned subsidiary, but has applied it incorrectly. In each of the past four full years, the company adjusted the Investment account when it received dividends from the subsidiary but did not adjust the account for any of the subsidiary’s profits. The subsidiary had four years of profits and paid yearly dividends in amounts that were less than reported net incomes. Which one of the following statements is correct if the parent company discovered its mistake at the end of the fourth year, and is now preparing consolidation working papers?
a. The parent company’s Retained Earnings will be increased by the cumulative total of four years of subsidiary profits.
b. The parent company’s Retained Earnings will be increased by the cumulative total of the first three years of subsidiary profit, and the Subsidiary Income account will be increased by the profit for the current year.
c. The parent company’s Subsidiary Income account will be increased by the cumulative total of four years of subsidiary profits.
d. A prior period adjustment must be recorded for the cumulative effect of four years of accounting errors.
14. Pigeon Corporation acquired a 60% interest in Home Company on January 1, 2005, for $70,000 cash when Home had Capital Stock of $60,000 and Retained Earnings of $40,000. All excess purchase cost was attributable to equipment with a 10-year (straight-line) life. Home suffered a $10,000 net loss in 2005 and paid no dividends. At year-end 2005, Home owed Pigeon $12,000 on account. Pigeon’s separate income for 2005 was $150,000. Consolidated net income for 2005 was
a. $135,800.
b. $136,800.
c. $143,000.
d. $144,000.
15. On consolidated working papers, a subsidiary’s income has
a. to be reduced from beginning retained earnings.
b. to be completely eliminated.
c. to have an allocation between the noncontrolling interest share and the parent’s share (which is eliminated).
d. only an entry in the parent company’s general ledger.
16. Which one of the following will increase consolidated retained earnings?
a. An increase in the value of goodwill subsequent to the parent’s date of acquisition.
b. The amortization of a $10,000 excess in the fair value of a note payable over its recorded book value.
c. The depreciation of a $10,000 excess in the fair value of equipment over its recorded book value.
d. The sale of inventory by a subsidiary that had a $10,000 excess in fair value over recorded book value on the parent’s date of acquisition.
17. In contrast with single entity organizations, consolidated financial statements include which of the following in the calculation of cash flows from operating activities under the direct method?
a. The change in the balance sheet of the investee account. b. Noncontrolling interest dividends.
c. Noncontrolling interest income expense. d. Cash dividends from equity investees.
18. In contrast with single entity organizations, consolidated financial statements include which of the following in the calculation of cash flows from operating activities under the indirect method?
a. The change in the balance sheet of the investee account.
b. Noncontrolling interest dividends.
c. Noncontrolling interest income expense.
d. Cash dividends from equity investees.
19. In contrast with single entity organizations, in preparing consolidated financial statements which of the following is a subtraction in the calculation of cash flows from operating activities under the indirect method?
a. The change in the balance sheet of the investee account.
b. Noncontrolling interest dividends.
c. Noncontrolling interest income expense.
d. Undistributed income of equity investees.
20. new
Which of the following would be used if the trial balance approach is followed?
a. Post-closing trial balances.
b. Adjusted trial balances.
c. Unadjusted trial balances.
d. All of the above are used equally.

Chapter 5: INTERCOMPANY PROFIT TRANSACTIONS – INVENTORIES
1. 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 parties.
d. does not require a working paper adjustment if the merchandise was transferred at cost.
2. Honeyeater Corporation owns a 40% interest in Nectar Company, acquired several years ago at a cost equal to book value and fair value. Nectar sells merchandise to Honeyeater for the first time in 2005. In computing income from the investee for 2005 under the equity method, Honeyeater uses which equation?
a. 40% of Nectar’s income less 100% of the unrealized profit in Honeyeater’s ending inventory.
b. 40% of Nectar’s income plus 100% of the unrealized profit in Honeyeater’s ending inventory.
c. 40% of Nectar’s income less 40% of the unrealized profit in Honeyeater’s ending inventory.
d. 40% of Nectar’s income plus 40% of the unrealized profit in Honeyeater’s ending inventory.
3. In situations where there are routine inventory sales between parent companies and subsidiaries, when preparing the consolidation statements, which of the following line items is indifferent to the sales being either upstream or downstream?
a. Consolidated retained earnings. b. Consolidated gross profit.
c. Noncontrolling interest expense. d. Consolidated net income.
4. The consolidation procedures for intercompany sales are similar for upstream and downstream sales
a. if the merchandise is transferred at cost.
b. under a periodic inventory system but not under a perpetual inventory system.
c. if the merchandise is immediately sold to outside parties.
d. when the subsidiary is 100% owned.
Use the following information to answer questions 5 through 9. Eagle Corporation owns 80% of Flyway Inc.’s common stock that
was purchased at its underlying book value. The two companies report the following information for 2004 and 2005.

During 2004, one company sold inventory to the other company for $50,000 which cost the transferor $40,000. As of the end of
2004, 30% of the inventory was unsold. In 2005, the remaining
inventory was resold outside the consolidated entity.

2004 Selected Data:
Sales Revenue Eagle $ 600,000
Flyway $ 320,000
Cost of Goods Sold 320,000 155,000
Other Expenses 100,000 89,000
Net Income $ 1800,000 $ 76,000
Dividends Paid 19,0000

2005 Selected Data:
Eagle
Flyway
Sales Revenue $ 580,000 $ 445,000
Cost of Goods Sold 300,000 180,000
Other Expenses 130,000 171,000
Net Income $ 150,000 $ 94,000

Dividends Paid 16,000 5,000

5. If the sale referred to above was a downstream sale, the total sales revenue reported in the consolidated income statement for 2004 would be?
a. $870,000.
b. $880,000.
c. $920,000.
d. $970,000.
6. If the sale referred to above was a downstream sale, by what amount must Inventory be reduced to reflect the correct balance as of the end of 2004?
a. $ 3,000. b. $10,000. c. $14,000. d. $20,000.
7. For 2004, consolidated net income will be what amount if the intercompany sale was downstream?
a. $475,600.
b. $476,800.
c. $486,400.
d. $506,000.
8. If the intercompany sale mentioned above was an upstream sale, what will be the reported amount of total sales revenue for 2005?
a. $1,025,000.
b. $1,900,000.
c. $1,950,000.
d. $2,000,000.
9. If the intercompany sale was an upstream sale, the total amount of consolidated cost of goods sold for 2005 will be?
a. $300,000.
b. $430,000.
c. $470,000.
d. $477,000.

Use the following information to answer questions 9 and 10.

Duck Corporation acquired a 70% interest in Whistle Corporation on January 1, 2005, when Whistle’s book values were equal to their fair values. During 2005, Duck sold merchandise that cost $75,000 to Whistle for $110,000. On December 31, 2005, three-fourths of the merchandise acquired from Duck remained in Whistle’s inventory. Separate incomes (investment income not included) of Duck and Whistle are as follows:

Duck Whistle

Sales Revenue $ 150,000 $ 200,000
Cost of Goods Sold 90,000 70,000
Operating Expenses 12,000 15,000
Separate incomes $ 48,000 $ 115,000

10. The consolidated income statement for Duck Corporation and subsidiary for the year ended December 31, 2005 will show consolidated cost of sales of?
a. $ 50,000.
b. $ 76,250.
c. $133,750.
d. $160,000.
11. Duck’s income from Whistle for 2005 is?
a. $54,250.
b. $56,000.
c. $62,125.
d. $80,500.
12. Pond Co. a 55%-owned subsidiary of Goose Inc. made the following entry to record a sale of merchandise to Goose:

Accounts Receivable 60,000
Sales Revenue 60,000

All Pond sales are at 125% of cost. One-third of this merchandise remained in the Goose’s inventory at year-end. A working paper entry to eliminate unrealized profits from consolidated inventory would include a credit to Inventory in the amount of
a. $ 4,000.
b. $ 5,000.
c. $ 8,000.
d. $10,000.

Use the following information to answer questions 13, 14, and 15.

Wren Corporation acquired 80% ownership of Arid Incorporated, at a time when Wren’s investment (using the equity method) and Arid’s book values were equal. During 2005, Wren sold goods to Arid for $200,000 making a gross profit percentage of 20%. Half of these goods remained unsold in Arid’s inventory at the end of the year. Income statement information for Wren and Arid for 2005 were as follows:
Sales Revenue Wren $ 1,000,000
Arid $ 600,000
Cost of Goods Sold 500,000 400,000
Operating Expenses 500,000 80,000
Separate incomes $ 250,000 $ 120,000

13. The 2005 consolidated income statement showed cost of goods sold of
a. $720,000.
b. $880,000.
c. $900,000.
d. $920,000.
14. The 2005 consolidated income statement showed income from Arid of
a. $56,000.
b. $76,000.
c. $80,000.
d. $96,000.
15. The 2005 consolidated income statement showed noncontrolling income of
a. $ 2,000.
b. $ 8,000.
c. $20,000.
d. $24,000.
16. On January 1, 2004, Darter Industries acquired an 80% interest in Thermal Company to insure a steady supply of Thermal’s inventory that Darter uses in its own manufacturing businesses. Thermal sold 100% of its output to Darter during 2004 and 2005 at a markup of 120% of Thermal’s cost. Darter had $9,600 of these items remaining in its January 1, 2005 inventory and no items on December 31, 2005. If Darter neglected to eliminate unrealized profits from all intercompany sales from Thermal, consolidated net income for 2005 was
a. overstated by $320.
b. understated by $400.
c. overstated by $2,400.
d. unaffected because Darter buys 100% of Thermal’s output.

Use the following information for questions 17 and 18:

Grebe Company routinely receives goods from its 80%-owned subsidiary, Swamp Corporation. In 2004, Swamp sold merchandise that cost $80,000 to Grebe for $100,000. Half of this merchandise remained in Grebe’s December 31, 2004 inventory. During 2005, Swamp sold merchandise that cost $160,000 to Grebe for $200,000. $62,500 of the 2005 merchandise inventory remained in Grebe’s December 31, 2005 inventory. Selected income statement information for the two affiliates for the year 2005 was as follows:
17. Consolidated cost of goods sold for Grebe and Subsidiary for 2005 were
a. $512,000.
b. $526,000.
c. $522,500.
d. $528,000.
18. What amount of unrealized profit did Grebe Company have at the end of 2004?
a. $10,000.
b. $12,500.
c. $50,000.
d. $62,500.
19. A parent company regularly sells merchandise to its 70%-owned subsidiary. Which of the following statements describes the computation of minority interest income?
a. The subsidiary’s net income times 30%.
b. (The subsidiary’s net income x 30%) + unrealized profits in the beginning inventory – unrealized profits in the ending inventory.
c. (The subsidiary’s net income + unrealized profits in the beginning inventory – unrealized profits in the ending inventory) x 30%.
d. (The subsidiary’s net income + unrealized profits in the ending inventory – unrealized profits in the beginning inventory) x 30%.
20. Squid Corporation, a 90%-owned subsidiary of Penguin Corporation, sold inventory items to its parent at a $24,000 profit in 2005. Penguin resold one-third of this inventory to outside entities. Squid reported net income of $100,000 for 2005. Minority interest income that will appear in the consolidated income statement for 2005 is
a. $ 8,400.
b. $ 9,200.
c. $10,000.
c. $10,800.

Chapter 6: INTERCOMPANY PROFIT TRANSACTIONS – PLANT ASSETS
1. Which of the following is correct?
a. No consolidation working paper entry was necessary in 2004.
b. A consolidation working paper entry was required only if the subsidiary was less than 100% owned in 2004.
c. A consolidation working paper entry is required each year until the land is sold outside the related parties.
d. A consolidated working paper entry was required only if the land was held for resale in 2004.
2. The 2004 unrealized gain
a. was deferred until 2006.
b. was eliminated from consolidated net income by a working paper entry that credited land $2,000.
c. made consolidated net income $2,000 less than it would have been had the sale not occurred.
d. made consolidated net income $2,000 greater than it would have been had the sale not occurred.
3. On January 1, 2005, Eagle Corporation sold equipment with a book value of $40,000 and a 20-year remaining useful life to its wholly-owned subsidiary, Rabbit Corporation, for $60,000. Both Eagle and Rabbit use the straight-line depreciation method, assuming no salvage value. On December 31, 2005, the separate company financial statements held the following balances associated with the equipment:
Eagle Rabbit
Gain on sale of equipment $ 20,000
Depreciation expense $ 3,000
Equipment 60,000
Accumulated depreciation 3,000

A working paper entry to consolidate the financial statements of Eagle and Rabbit on December 31, 2005 included a

a. debit to gain on sale of equipment for $19,000.
b. credit to gain on sale of equipment for $20,000.
c. debit to accumulated depreciation for $1,000.
d. credit to depreciation expense for $3,000.

Use the following information for questions 4 and 5.

On December 31, 2005, Corella Corporation sold equipment with a three-year remaining useful life and a book value of $21,000 to its 70%-owned subsidiary Hollow Company for a price of $27,000. Corella bought the equipment four years ago for $49,000.

4. What was the intercompany sale impact on the consolidated financial statements for the year ended December 31, 2005?

Corella’s Net Income Corella’s Income from Hollow

a. No effect. No effect.
b. No effect. Decreased.
c. Decreased. No effect.
d. Increased. Decreased.
5. What was the intercompany sale impact on the consolidated financial statements for the year ended December 31, 2005?

Consolidated Net Income

Consolidated Net Assets

a. No effect. No effect.
b. No effect. Increased.
c. Decreased. Decreased.
d. Decreased. No effect.
6. On January 2, 2005 Kakapo Company sold a truck with book value of $45,000 to Flightless Corporation, its completely owned subsidiary, for $60,000. The truck had a remaining useful life of three years with zero salvage value. Both firms use the straight-line depreciation method, and assume no salvage value. If Kakapo failed to make year-end equity adjustments, Kakapo’s investment in Flightless at December 31, 2005 was
a. $5,000 too high. b. $10,000 too low. c. $10,000 too high. d. $15,000 too high.

Use the following information to answer questions 7 through 10.

On January 1, 2003, Shrimp Corporation purchased a delivery truck with an expected useful life of five years. On January 1, 2005, Shrimp sold the truck to Avocet Corporation and recorded
the following journal entry:

Debit Credit
Cash 50,000
Accumulated Truck depreciation 18,000 53,000
Gain on Sale of Truck 15,000

Avocet holds 60% of Shrimp. Shrimp reported net income of $55,000 in 2005 and Avocet’s separate net income (excludes interest in Shrimp) for 2005 was $98,000.
7. In preparing the consolidated financial statements for 2005, the elimination entry for depreciation expense was a
a. debit for $5,000. b. credit for $5,000. c. debit for $15,000. d. credit for $15,000.
8. In the consolidation working papers, the Truck account was
a. debited for $3,000. b. credited for $3,000. c. debited for $15,000. d. credited for $15,000.
9. Consolidated net income for 2005 was
a. $121,000.
b. $125,000.
c. $131,000.
d. $143,000.
10. The minority interest income for 2005 was
a. $18,000.
b. $22,000.
c. $23,000.
d. $27,000.
11. Ground Parrot Company completely owns Heathlands Inc. On January 2, 2005 Ground Parrot sold Heathlands machinery at its book value of $30,000. Ground Parrot had the machinery two years before selling it and used a five-year straight-line depreciation method, with zero salvage value. Heathlands will use a three-year straight-line method. In the 2005 consolidated income statement, the depreciation expense
a. required no adjustment.
b. decreased by $4,000.
c. increased by $4,000
d. increased by $30,000.
12. In reference to the downstream or upstream sale of depreciable assets, which of the following statements is correct?
a. Upstream sales from the subsidiary to the parent company always result in unrealized gains or losses.
b. The initial effect of unrealized gains and losses from downstream sales of depreciable assets is different from the sale of nondepreciable assets.
c. Gains, but not losses, appear in the parent-company accounts in the year of sale and must be eliminated by the parent company in determining its investment income under the equity method of accounting.
d. Gains and losses appear in the parent-company accounts in the year of sale and must be eliminated by the parent company in determining its investment income under the equity method of accounting.
13. Falcon Corporation sold equipment to its 80%-owned subsidiary, Rodent Corp., on January 1, 2005. Falcon sold the equipment for $110,000 when its book value was $85,000 and it had a 5- year remaining useful life with no expected salvage value. Separate balance sheets for Falcon and Rodent included the following equipment and accumulated depreciation amounts on December 31, 2005:

Falcon Rodent Equipment $ 750,000 $ 300,000
Less: Accumulated depreciation ( 200,000) ( 50,000)
Equipment-net $ 550,000 $ 250,000

Consolidated amounts for equipment and accumulated depreciation at December 31, 2005 were respectively

a. $1,025,000 and $245,000.
b. $1,025,000 and $250,000.
c. $1,025,000 and $245,000.
d. $1,050,000 and $250,000.
14. Peregrine Corporation acquired a 90% interest in Cliff Corporation in 2004 at a time when Cliff’s book values and fair values were equal to one another. On January 1, 2005, Cliff sold a truck with a $45,000 book value to Peregrine for $90,000. Peregrine is depreciating the truck over 10 years using the straight-line method. Separate incomes for Peregrine and Cliff for 2005 were as follows:

Peregrine Cliff Sales $ 1,800,000 $ 1,050,000
Gain on sale of truck 45,000
Cost of Goods Sold ( 750,000) ( 285,000)
Depreciation expense ( 450,000) ( 135,000)
Other expenses ( 180,000) ( 450,000)
Separate incomes $ 420,000 $ 225,000

Peregrine’s investment income from Cliff for 2005 was

a. $161,550.
b. $162,000.
c. $166,050.
d. $202,500.
15. Kestrel Company acquired an 80% interest in Reptile Corporation on January 1, 2004. On January 1, 2005, Reptile sold a building with a book value of $50,000 to Kestrel for $80,000. The building had a remaining useful life of ten years and no salvage value. The separate balance sheets of Kestrel and Reptile on December 31, 2005 included the following balances:

Kestrel Reptile Buildings $ 400,000 $ 250,000
Accumulated Depreciation – Buildings

120,000 75,000

The consolidated amounts for Buildings and Accumulated Depreciation – Buildings that appeared, respectively, on the balance sheet at December 31, 2005, were

a. $620,000 and $192,000.
b. $620,000 and $195,000.
c. $650,000 and $192,000.
d. $650,000 and $195,000.
16. Pigeon Corporation purchased land from its 60%-owned subsidiary, Seed Inc., in 2003 at a cost $30,000 greater than Seed’s book value. In 2005, Pigeon sold the land to an outside entity for $40,000 more than Pigeon’s book value. The 2005 consolidated income statement reported a gain on the sale of land of
a. $40,000.
b. $42,000.
c. $58,000.
d. $70,000.
17. Pied Imperial-Pigeon Corporation acquired a 90% interest in Offshore Corporation in 2003 when Offshore’ book values were equivalent to fair values. Offshore sold equipment with a book value of $80,000 to Pied Imperial-Pigeon for $130,000 on January 1, 2005. Pied Imperial-Pigeon is fully depreciating the equipment over a 4-year period by using the straight-line method. Offshore’ reported net income for 2005 was $320,000. Pied Imperial-Pigeon’s 2005 net income from Offshore was
a. $249,250.
b. $250,500.
c. $254,250.
d. $288,000.
18. Lorikeet Corporation acquired a 80% interest in Nectar Corporation on January 1, 2000 at a cost equal to book value and fair value. In the same year Nectar sold land costing $30,000 to Lorikeet for $50,000 On July 1, 2005, Lorikeet sold the land to an unrelated party for $110,000. What was the gain on the consolidated income statement?

a. $48,000.
b. $60,000.
c. $64,000.
d. $80,000.
19. On January 1, 2005 Rainforest Co. recorded a $30,000 profit on the upstream sale of some equipment that had a remaining four- year life under the straight-line depreciation method. The effect of this transaction on the amount recorded in 2005 by the parent company Wompoo as its investment income in the Rainforest was
a. a decrease of $18,000 if the Rainforest was 80% owned.
b. a decrease of $27,000 if the Rainforest was 90% owned.
c. an increase of $22,500 if the Rainforest was wholly owned.
d. an increase of $30,000 if the Rainforest was wholly owned.
20. Swift Parrot Corporation acquired a 60% interest in Berries Corp. on January 1, 2005, when Berries’s book values and fair values were equivalent. On January 1, 2005, Berries sold a building with a book value of $600,000 to Swift Parrot for $700,000. The building had a remaining life of 10 years, no salvage value, and was depreciated by the straight-line method. Berries reported net income of $2,000,000 for 2005. What was the noncontrolling interest for 2005?

a. $710,000.
b. $764,000.
c. $800,000.
d. $900,000.

Chapter 7: INTERCOMPANY PROFIT TRANSACTIONS – BONDS
1. The intercompany purchase of the parent company bonds by a subsidiary has the same effect on the consolidated financial statements as the
a. purchase of the bonds by a non-affiliate.
b. parent’s retirement of the bonds using funds from newly issued common stock.
c. parent’s retirement of the bonds using funds from a subsidiary loan.
d. parent’s retirement of the bonds using funds from the sale of new bonds to non-affiliates.
2. If an affiliate purchases bonds in the open market, the intercompany bond liability book value is
a. always assigned to the parent company because it has control.
b. the par value of the bonds less the discount or plus the premium and issuance costs at the time of issuance.
c. par value.
d. the par value of the bonds plus unamortized discount.
3. Material constructive gains and losses from intercompany bond holdings are
a. realized gains and losses from the issuing affiliate’s perspective.
b. always assigned to the parent company because it has control.
c. realized and recognized from the consolidated entity’s perspective.
d. excluded from the consolidated income statement until the period in which they become realized.

Use the following information in answering questions 4 and 5.

Australian Owl Company owns an 80% interest in Glider Company. On January 1, 2006, Australian Owl had $600,000, 8% bonds outstanding with an unamortized premium of $9,000. The bonds mature on December 31, 2010. Glider acquired one-third of Australian Owl’s bonds in the open market for $198,000 on January 1, 2006. On December 31, 2006, the books of the two affiliates held the following balances:

Australian Owl’s books
8% bonds payable $600,000
Premium on bonds 7,200
Interest expense 46,200

Glider’s books
Investment in Australian
Owl bonds $198,400
Interest income 16,400
4. The gain from the bond purchase that appeared on the December 31, 2006 consolidated income statement was
a. $ 0.
b. $4,400.
c. $4,800.
d. $5,000.
5. Consolidated Interest Expense and consolidated Interest Income, respectively, that appeared on the consolidated income statement for the year ended December 31, 2006 was
a. $30,800 and $ 0.
b. $30,800 and $16,400.
c. $46,200 and $ 0.
d. $46,200 and $16,400.
6. Kingfisher Corporation owns 80% the voting stock of Tunnel Corporation. On January 1, 2006, Kingfisher paid $391,000 cash for $400,000 par of Tunnel’s 10% $1,000,000 par value outstanding bonds, due on April 1, 2011. Tunnel’s bonds had a book value of $1,045,000 on January 1, 2006. Straight-line amortization is used. The gain or loss on the constructive retirement of $400,000 of Tunnel bonds on January 1, 2006 was reported in the 2006 consolidated income statement in the amount of
a. $14,000.
b. $21,000.
c. $23,000.
d. $27,000.
Use the following information in answering questions 7, 8, and 9.

Rufous Owl Inc. had $800,000 par of 10% bonds payable outstanding on January 1, 2006 due January 1, 2010 with an unamortized discount of $16,000. Bird is a 90%-owned subsidiary of Rufous. On January 1, 2006, Bird Corporation purchased $160,000 par value of Rufous’s outstanding bonds for $152,000. The bonds have interest payment dates of January 1 and July 1, and mature on January 1, 2009. Straight-line amortization is used.
7. With respect to the bond purchase, the consolidated income statement of Rufous Owl Corporation and Subsidiary for 2006 showed a gain or loss of
a. $ 4,000.
b. $ 4,800.
c. $ 8,000.
d. $10,200.
8. Bond Interest Receivable for 2006 of Owl’s bonds on Bird’s books was
a. $ 7,600.
b. $ 8,000.
c. $15,200.
d. $16,000.
9. Bonds Payable appeared in the December 31, 2006 consolidated balance sheet of Rufous Owl Corporation and Subsidiary in the amount of
a. $624,000.
b. $628,000.
c. $630,400.
d. $637,800.

Use the following information for questions 10 through 15.

Dollarbird Corporation issued five thousand, $1,000 par, 12% bonds on January 1, 2004. Interest is paid on January 1 and July 1 of each year; the bonds mature on January 1, 2009. On January 1, 2006, Branch Corporation, an 80%-owned subsidiary of Dollarbird, purchased 3,000 of the bonds on the open market at 101.50. Dollarbird’s separate net income for 2006 included the annual interest expense for all 3,000 bonds. Branch’s separate net income was $300,000, which included the bond interest received on July 1 as well as the accrual of bond interest revenue earned on December 31.
10. What was the amount of gain or (loss) from the intercompany purchase of Dollarbird’s bonds on January 1, 2006?

a. $(60,000).
b. $(45,000).
c. $ 45,000.
d. $ 60,000.

11. If the bonds were originally issued at 106, and 80% of them were purchased by Branch on January 1, 2007 at 98, the gain or (loss) from the intercompany purchase was
a. $(224,000).
b. $(176,000).
c. $ 176,000.
d. $ 224,000.
12. If the bonds were originally issued at 103, and 70% of them were purchased on January 1, 2008 at 104, the constructive gain or (loss) on the purchase was
a. $(119,000).
b. $(35,000).
c. $35,000.
d. $119,000.
13. Using the original information, the amount of consolidated Interest Expense for 2006 was
a. $ 120,000.
b. $ 240,000.
c. $ 300,000.
d. $ 600,000.
14. Using the original information, the balances for the Bonds Payable and Bond Interest Payable accounts, respectively, on the consolidated balance sheet for December 31, 2007 were
a. $2,000,000 and $120,000.
b. $2,000,000 and $240,000.
c. $5,000,000 and $120,000.
d. $5,000,000 and $240,000.
15. The elimination entries on the consolidation working papers prepared on December 31, 2006 included at least
a. debit to Bond Interest Expense for $360,000.
b. credit to Bond Interest Expense for $360,000 and a debit to Bond Interest Payable for $180,000.
c. credit to Bond Interest Receivable for $360,000.
d. debit to Bond Interest Revenue for $360,000.
16. No constructive gain or loss arises from the purchase of an affiliate’s bonds if the
a. affiliate is a 100%-owned subsidiary.
b. bonds are purchased at book value.
c. bonds are purchased with arm’s-length bargaining from outside entities.
d. gain or loss cannot be reasonably estimated.
17. Constructive gains or losses are allocated between purchasing and issuing affiliates according to
a. the agency theory.
b. the par value theory.
c. either the agency theory or the par value theory.
d. neither the agency theory nor the par value theory.
18. No allocation of gain or loss on the constructive retirement of intercompany bonds will occur
a. when the subsidiary is the issuing affiliate.
b. when the effective interest rate method is applied.
c. in the consolidated income statement.
d. when the parent company is the issuing affiliate.

Use the following information in answering questions 19 and 20. Mistletoebird Corporation owns an 80% interest in Berries Company acquired at book value several years ago. On January 1, 2006, Berries purchased $100,000 par of Mistletoebird’s outstanding bonds for $103,000. The bonds were issued at par and mature on January 1, 2009. Straight-line amortization is used. Separate incomes of Mistletoebird and Berries for 2006 are $350,000 and $120,000, respectively.
19. Consolidated net income for 2006 was
a. $443,600.
b. $444,000.
c. $444,400.
d. $448,000.
20. Minority interest income for 2006 was
a. $23,000.
b. $23,600.
c. $24,000.
d. $24,400.

Chapter 8: CONSOLIDATIONS – CHANGES IN OWNERSHIP INTERESTS
1. Which of the following is correct? The direct sale of additional shares to the parent company from a subsidiary
a. decreases the parent’s interest and decreases the noncontrolling shareholders’ interest.
b. decreases the parent’s interest and increases the noncontrolling shareholders’ interest.
c. increases the parent’s interest and increases the noncontrolling shareholders’ interest.
d. increases the parent’s interest and decreases the noncontrolling shareholders’ interest.

Use the following information in answering questions 2 and 3.

On December 31, 2006, Giant-Petrel Corporation’s Investment in Penguin Corporation account had a balance of $525,000. The balance consisted of 80% of Penguin’s $600,000 stockholders’ equity on that date and $45,000 of goodwill. On January 2, 2007, Penguin increased its outstanding common stock from 15,000 to 18,000 shares.
2. Assume that Penguin sold the additional 3,000 shares directly to Giant-Petrel for $150,000 on January 2, 2007. Giant-Petrel’s percentage ownership in Penguin immediately after the purchase of the additional stock is
a. 66-2/3%. b. 80%. c. 83-1/3%. d. 86-2/3%
3. Assume that Penguin sold the additional 3,000 shares to outside interests for $150,000 on January 2, 2007. Giant-Petrel’s percentage ownership immediately after the sale of stock would be
a. 66-2/3%. b. 75%. c. 80%. d. 83-1/3%.

Use the following information in answering questions 4 and 5. Bristlebird Corporation purchased an 80% interest in Underbrush
Corporation on July 1, 2005 at its book value, and on January 1, 2006 its Investment in Underbrush account was $300,000, equal to its book value. Underbrush’s net income for 2006 was $99,000; no dividends were declared. On March 1, 2006, Bristlebird reduced its interest in Underbrush by selling a 20% interest, one-fourth of its investment, for $84,000.
4. If Bristlebird uses a “beginning-of-the-year” sale assumption, its gain on sale and income from Underbrush for 2006 will be Gain on Sale Income from Underbrush
a. $5,700 $59,400.
b. $5,700 $62,700.
c. $9,000 $59,400.
d. $9,000 $62,700.
5. If Bristlebird uses the “actual-sale-date” sales assumption, its gain on the sale and income from Underbrush for 2006 will be:

Gain on Sale Income from Underbrush
a. $21,360 $59,400
b. $21,360 $62,700
c. $26,640 $59,400
d. $26,640 $62,700

6. On January 1, 2006, Finch Corporation owned a 90% interest in Nest Corporation at which time the Investment in Nest account had a balance of $350,000, which was 90% of Nest’s $370,000 in stockholders’ equity and $17,000 of goodwill. During 2006, Nest had income of $35,000 and paid dividends of $3,000 on June 1 and another $3,000 on November 1. On May 1, 2006, Finch sold one-fifth of its interest in Nest for $92,000. If the “beginning-of-the-period” sales assumption is used, the balance in the Investment in Nest account on December 31, 2006 is
a. $300,300.
b. $300,880.
c. $304,480.
d. $306,100.
7. On January 1, 2006, Finch Corporation owned a 90% interest in Nest Corporation at which time the Investment in Nest account had a balance of $350,000, which was 90% of Nest’s $370,000 in stockholders’ equity and $17,000 of goodwill. During 2006, Nest had income of $35,000 and paid dividends of $3,000 on June 1 and another $3,000 on November 1. What would be the balance in the Investment in Nest account on December 31, 2006 if Finch soldone-ninth of its interest in Nest on May 1, 2006 for $47,000 and the “beginning-of-the-period” sales assumption is used?

a. $333,333.
b. $334,311.
c. $336,333.
d. $336,711.

Use the following information for questions 8 and 9.

Button-quail Corporation owned a 70% interest in Savannah Corporation on December 31, 2006, and Button-quail’s Investment in Savannah account had a balance of $3,900,000. Savannah’s stockholders’ equity on this date was as follows:

Capital stock, $10 par value $ 3,000,000
Retained Earnings 2,400,000
Total Stockholders’ Equity $ 5,400,000

On January 1, 2007, Savannah issues 80,000 new shares of common stock to Button-quail for $16 each.
8. What is Button-quail’s percentage ownership in Savannah after Savannah issues its stock to Button-quail?
a. 76.32%. b. 80.43%. c. 82.57%. d. 83.43%.
9. Assuming that Savannah has no fixed assets, what is the amount of goodwill associated with the issuance of shares to Button- quail?
a. $38,176.
b. $40,232.
c. $41,302.
d. $41,732.

Use the following information for questions 10, and 11.

Great Frigatebird Corporation acquired a 90% interest in Slipstream Corporation at its $810,000 book value on December 31, 2005. A summary of the stockholders’ equity for Slipstream at the end of 2005 and 2006 is as follows:
12/31/05 12/31/06
Capital stock, $10 par $ 600,000 $ 600,000
Additional paid-in capital 30,000 30,000
Retained Earnings 270,000 420,000
Total stockholders’ equity $ 900,000 $ 1,050,000

On January 1, 2007, Slipstream sold 10,000 new shares of its $10 par value common stock for $45 per share.
10. If Slipstream sold the additional shares to the general public,
Great Frigatebird’s Investment in Slipstream account after the sale would be

a. $945,000.
b. $1,157,100.
c. $1,225,000.
d. $1,245,000.
11. If Slipstream sold the additional shares directly to Great Frigatebird, Great Frigatebird’s Investment in Slipstream account after the sale would be
a. $1,350,000.
b. $1,395,000.
c. $1,425,000.
d. $1,500,000.
12. Which of the following is correct about the treatment of preacquisition earnings on consolidated financial statements? I. Exclude the subsidiary sales and expenses prior to acquisition from consolidated sales and expenses. II. Include the subsidiary sales and expenses prior to acquisition and deduct preacquisition income as a separate item.
a. I only. b. II only. c. I or II. d. Neither I nor II.
13. If a parent company and outside investors purchase shares of a subsidiary in relation to existing stock ownership (ratably)
a. there will be no adjustment to additional paid-in capital regardless whether the stock is sold above or below book value.
b. the transaction will requirement an investment account adjustment.
c. the transaction will require the elimination of a gain if it was conducted at economic arm’s length.
d. the transaction will require the elimination of a loss if it was conducted at economic arm’s length.
14. Heron Corporation acquired 40% of WatersEdge Inc.’s common stock for $400,000 book value on January 1, 2006 when WatersEdge equity consisted of $500,000 capital stock and $500,000 retained earnings. On September 1, 2006 Heron bought an additional 30% interest in WatersEdge for $210,000. In both cases, Watersedge book value equaled the fair value.

WatersEdge had income of $120,000 earned evenly through 2006 and paid dividends quarterly of $25,000.

The consolidated income statement of Heron Corporation and Subsidiary for the year 2006 should show pre-acquisition income of:

a. $ 5,333.
b. $ 8,000.
c. $32,000.
d. $56,000.

Use the following information to answer questions 15 through 18.

Bowerbird Corporation purchased a 70% interest in Stage Corporation on June 1, 2006 at a purchase price of $390,400. On this date, Stage’s book values were equal to its fair values except for an unrecorded copyright, and its stockholders’ equity consisted of $290,000 of Common Stock and $210,000 of Retained Earnings. All cost- book differentials were attributed to the copyright, which had an estimated economic life of ten years.

During 2006, Stage earned $120,000 of net income earned uniformly throughout the year and paid $6,000 of dividends on March 1 and another $6,000 on September 1.

15. Minority interest income for 2006 is
a. $36,000.
b. $32,400.
c. $61,200.
d. $50,000.
16. Preacquisition income for 2006 is
a. $50,000.
b. $35,000.
c. $44,000.
d. $36,000.
17. The value of the copyright that is included in Bowerbird’ Investment in Stage account on June 1, 2006 is
a. $ 2,600.
b. $ 5,400.
c. $ 9,600.
d. $10,400.
18. The amortization expense recorded for the copyright in 2006 is:
a. $315.
b. $560.
c. $815.
d. $960.
19. The acquisition of treasury stock by a subsidiary above book value
a. decreases the parent’s share of subsidiary book value and decreases the parent’s ownership percentage.
b. decreases the parent’s share of subsidiary book value and increases the parent’s ownership percentage.
c. increases the parent’s share of subsidiary book value and decreases the parent’s ownership percentage.
d. increases the parent’s share of subsidiary book value and increases the parent’s ownership percentage.
20. A stock dividend by a subsidiary causes
a. the parent company investment account to decrease.
b. the parent company investment account to remain the same.
c. the parent company investment account to decrease.
d. any noncontrolling interest equity to increase.

Chapter 9: INDIRECT AND MUTUAL HOLDINGS
1. Pallet Corporation owns 80% of Adelt Corporation and Adelt owns 60% of Bajo Inc. Which of the following is correct?
a. Bajo should not be consolidated because minority interests hold 52%.
b. Bajo should be consolidated because the 60% of Bajo stock is held in the affiliate structure.
c. Pallet has 8% indirect ownership of Bajo.
d. Pallet has 80% indirect ownership of Bajo.
2. Page Corporation acquired a 60% interest in Ace Corporation at a price $40,000 in excess of book value and fair value on January 1, 2005. On the same date, Ace acquired a 70% interest in Bader Corporation at a price $30,000 in excess of book value and fair value. The excess purchase cost paid by Page and Ace was attributed to goodwill. Separate incomes (excluding investment income) for the three affiliates for 2005 are as follows: Page, $500,000, Ace, $300,000, and Bader, $400,000. Page’s net income for 2005 is
a. $808,000.
b. $848,000.
c. $920,000.
d. $960,000.

Use the following information in answering questions 3, 4, and 5.

Paint Corporation owns 82% of Achille corporation and Achille Corporation owns 80% of Badrack Corporation. For the current year, the separate incomes of Paint, Achille, and Badrack are $120,000, $100,000, and $50,000, respectively.
3. Noncontrolling interest expense from Badrack is
a. $9,000.
b. $10,000.
c. $20,000.
d. $40,000.
4. Noncontrolling interest from Achille is
5. Corporation and Subsidiaries
6. Pabari Corporation owns an 80% interest in Alders Corporation and Alders owns a 60% interest in Babao Corporation. Both interests were acquired at book value equal to fair value. During 2005, Alders sells land to Babao at a profit of $12,000. Babao still holds the land at December 31, 2005. Profits and (losses) of the three companies for 2005 are:

Pabari Corporation $180,000
Alders Corporation 72,000
Babao Corporation (30,000)

Consolidated net income and noncontrolling interest (loss), respectively, for 2005 are
7. Pablo Corporation acquired 60% of Abagia Corporation on January 1, 2004, at a cost of $20,000 in excess of book value. Also, on July 1, 2004, Pablo acquired 60% of Babin Corporation at book value. On January 1, 2005, Abagia acquired a 20% interest in Babin at a cost of $10,000 in excess of book value. The excess purchase costs paid by Pablo and Abagia were attributed to goodwill.
On July 1, 2005, Pablo sold land with a book value of $20,000 to Abagia for $40,000. The $20,000 unrealized gain is included in Pablo’s separate income. Separate incomes for the affiliated companies (excluding investment income) for 2005 are:

Pablo $250,000
Abagia 70,000
Babin 100,000

Consolidated net income for the three affiliates is

a. $304,000.
b. $324,000.
c. $344,000.
d. $364,000.

Use the following information for Questions 8, and 9.

Paisley Corporation owns 90% of Ackers Company. Akers Company owns 60% of Baglin. Paisley’s separate income for the current year is $540,000. Akers’s separate income is $240,000. Baglin’s separate income is $150,000.
8. The formula for the consolidated noncontrolling interest is calculated as
a. 10% X $240,000.
b. (10% X $240,000) + (6% X $150,000).
c. (10% X $240,000) + (40% X $150,000).
d. (10% X $240,000) + (46% X $150,000).
9. The formula for consolidated net income is calculated as

a. $930,000 – ($240,000 X 10%)
b. $930,000 – ($240,000 X 10%) – ($150,000 X 40%)
c. $930,000 – ($240,000 X 10%) – ($150,000 X 46%)
d. $930,000 – ($240,000 X 10%) – ($150,000 X 40%)
– ($150,000 X 10% X 50%)
10. Paglia Corporation owns 80% of Aburn Corporation and has separate income of $200,000 for 2005. Aburn Corporation has separate income of $100,000 and owns 70% of the outstanding stock of Badley Corporation. Badley Corporation has separate income of $80,000. The correct amount of consolidated net income is
a. $324,800.
b. $328,800.
c. $344,800.
d. $344,800.

Use the following information for Questions 11, 12, and 13.

Pace Corporation owns 70% of Abaza Corporation and 60% of Babon Corporation. Abaza Corporation owns 20% of Babon Corporation. Pace’s investment in Abaza was consummated in one transaction at a purchase price $20,000 in excess of the book value. Pace’s purchase of Babon was made in one transaction at a price $30,000 above book value. Abaza’s investment in Babon was completed in one transaction at a purchase price $10,000 in excess of the book value. The purchase price differential for all three investments was attributable to goodwill. Pace’s separate income for the current year is $100,000. Abaza’s separate income is $190,000, which includes a $10,000 unrealized loss on the sale of land to Pace. Babon’s separate income is $150,000.
11. The amount of consolidated net income for Pace Corporation and Abaza for the current year is
a. $341,000.
b. $348,400.
c. $351,000.
d. $355,000.
12. The amount of noncontrolling interest expense for the current year is
a. $69,000.
b. $85,000.
c. $95,000.
d. $99,000.
13. The amount of goodwill in Pace’s consolidated balance sheet is
a. $50,000.
b. $52,000.
c. $58,000.
d. $60,000.

Use the following information for Questions 14 through 18.

Pahm Corporation owns 80% of the outstanding voting common stock of Abussi Corporation, which was purchased for $60,000 over Abussi’s book value. The excess purchase price was attributable to goodwill. Abussi Corporation owns 60% of the outstanding common stock of Badock Corporation, which was purchased at book value. The separate incomes of Pahm, Abussi, and Badock for the year are $200,000, $240,000, and $260,000, respectively.

14. Consolidated net income for the current year is
a. $504,800. b. $516,200. c. $545,200. d. $557,200.
15. The amount of income for the current year assigned to the minority shareholders of Badock Corporation is
a. $100,000. b. $104,000. c. $120,000. d. $140,000.
16. The amount of income for the current year assigned to the minority shareholders of Abussi Corporation is
a. $48,000. b. $53,200. c. $74,000. d. $79,200.
17. The amount of income assigned to the noncontrolling interest in the current year’s consolidated income statement is
a. $142,800. b. $154,800. c. $183,200. d. $195,200.
18. The net income recorded on the books of Pahm Corporation for the current year is
a. $504,800. b. $516,800. c. $545,200. d. $557,200.

Use the following information for Questions 19 and 20.

Paiva Corporation owns 80% of Ackroyd Corporation’s outstanding common stock and Ackroyd owns 80% of the outstanding common stock of Bailey Corporation. Bailey Corporation owns 10% of the outstanding common stock of Ackroyd Corporation. The separate incomes for the three affiliated companies for the year ended December 31, 2005 (excluding investment income) are as follows: Paiva Corporation, 100,000, Ackroyd Corporation, $50,000, and Bailey Corporation, $30,000.

Notations for question 19 are:
P = Income of Paiva on a consolidated basis
A = Income of Ackroyd on a consolidated basis
B = Income of Bailey on a consolidated basis
19. The equation, in a set of simultaneous equations, that computes
Paiva Corporation is

a. P = $50,000 + .8B.
b. P = $30,000 + .2A.
c. P = $100,000 + .2A.
d. P = $100,000 + .8A.
20. Ackroyd’s noncontrolling interest in the total consolidated income for 2005 is
a. $ 7,609.
b. $ 8,044.
c. $15,652.
d. $23,696.

Chapter 10: SUBSIDIARY PREFERRED STOCK, COSOLIDATED EARNINGS PER SHARE, AND CONSOLIDATED INCOME TAXATION
1. How much should the Parminter’s Investment in Sanchez change during 2005?
a. $ 5,000.
b. $20,000.
c. $25,000.
d. $30,000.
2. What should be the noncontrolling interest expense in the consolidated financial statements of Parminter?
a. $ 5,000.
b. $20,000.
c. $25,000.
d. $30,000.

Use the following information for Questions 3, 4, and 5.

On January 1, 2005, Pardy Corporation acquired a 70% interest in the common stock of Salter Corporation for $7,000,000 when Salter’s stockholders’ equity was as follows: 10% cumulative, nonparticipating preferred stock,

3. There were no dividends in arrears on the date of the business combination. The goodwill from Pardy’s investment in Salter on January 1, 2005 is
a. $ 0.
b. $ 35,000.
c. $ 70,000.
d. $105,000.
4. Salter has a 2005 net loss of $200,000. Pardy’s share of Salter’s net loss is
a. $ 50,000.
b. $ 70,000.
c. $140,000.
d. $210,000.
5. If Salter’s net income is $220,000, what is Pardy’s share of Salter’s net income?
a. $ 84,000.
b. $119,000.
c. $154,000.
d. $189,000.
6. Pamplin Corporation stockholders’ equity consisted of $1,000,000 of $10 par value Common Stock, $750,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings on January 1, 2005. On this date, Pamplin purchased 90% of the outstanding common stock of Sage Corporation for $1,500,000 with all excess purchase cost assigned to goodwill. The stockholders’ equity of Sage on this date consisted of $800,000 of $100 par value, 8% non-cumulative, preferred stock callable at $105, $900,000 of $10 par value common stock and $500,000 of Retained Earnings. Sage’s net income for 2005 was $100,000.

In a separate transaction on January 1, 2005, Pamplin purchased 70% of Sage’s preferred stock for $600,000. At the end of 2005, the amount of Pamplin’s income from Sage (excluding dividends from preferred stock) and the balance in its Additional Paid-in Capital account, respectively, are

a. $62,400 and $710,000.
b. $62,400 and $750,000.
c. $32,400 and $710,000.
d. $32,400 and $750,000.
7. Pan Corporation has total stockholders’ equity of $5,000,000 consisting of $1,000,000 of $10 par value Common Stock, $1,000,000 of Additional Paid-in Capital, and $3,000,000 of Retained Earnings. Pan owns 80% of Sailor Corporation’s common stock purchased at book value. Sailor has $900,000 of 10% cumulative preferred stock outstanding. Pan acquired 60% of the preferred stock of Sailor for $500,000. After this transaction the balances in Pan’s Retained Earnings and Additional Paid-in Capital accounts, respectively, are
a. $2,960,000 and $1,000,000.
b. $3,000,000 and $960,000.
c. $3,000,000 and $1,040,000.
d. $3,040,000 and $1,000,000.
8. If a company’s preferred stock is cumulative with a call provision and has dividends in arrears, the amount of total preferred stockholders’ equity would be calculated as the number of shares outstanding times the
a. sum of the par value per share plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, but only if dividends have been declared.
b. sum of the par value per share, plus any liquidation premium per share, plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, regardless of whether dividends have been declared.
c. call price plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, but only if dividends have been declared.
d. call price plus the sum of any preferred dividends in arrears, plus the current year’s dividend requirement, regardless of whether dividends have been declared.
9. When a parent acquires the preferred stock of a subsidiary, there will be a constructive retirement that eliminates the equity related to the preferred stock held by the parent and
a. any difference paid above the par value first reduces additional paid-in capital and then retained earnings.
b. any difference paid above the par value first reduces retained earnings and then additional paid-in capital.
c. any difference paid above the par value increases additional paid-in capital.
d. any difference paid above the par value increases retained earnings.
10. When a parent acquires subsidiary preferred stock, no subsequent working paper entry is necessary to adjust additional paid-in capital under which of the following methods? I. The constructive retirement method. II. The cost method.
a. I only. b. II only. c. I and II. d. I or II if no redemption feature is present.
11. In a company with minority interest equity, how is the preferred stock call premium addressed?
a. It is recorded as an increase in additional paid-in capital.
b. It is recorded as a decrease in additional paid-in capital.
c. It is recorded as an increase in retained earnings.
d. It is recorded as a decrease in retained earnings.
12. If a parent company has controlling interest in a subsidiary which has no potentially dilutive securities, then in the calculation of consolidated EPS, it will be necessary to
a. only make an adjustment of subsidiary’s basic earnings.
b. replace the parent’s equity in subsidiary earnings with the parent’s equity in subsidiary’s diluted EPS.
c. make a replacement calculation in the parent’s basic earnings for the EPS.
d. only use the parent’s common shares and common share equivalents.
13. A subsidiary has some outstanding options that permit holders
to purchase the company’s common stock. How will the options affect consolidated EPS?
a. If the exercise price per share is greater than average market price then the basic consolidated EPS will be decreased.
b. If the exercise price per share is greater than average market price then the basic consolidated EPS will be increased.
c. If the exercise price per share is greater than average market price then the diluted consolidated EPS will be increased.
d. If the exercise price per share is greater than average market price then the diluted consolidated EPS will be decreased.
14. Parnaby has 25,000 common stock shares outstanding and its 100%-owned subsidiary Sandal has 5,000 common stock shares outstanding. The separate income for Parnaby and Sandal is $150,000 and $75,000 respectively. EPS for the consolidated company is
a. $5.00.
b. $6.00.
c. $7.50.
d. $9.00.
15. In computing the diluted EPS of the parent, any replacement computation of subsidiary income may be affected by
a. the constructive gain from purchase of parent bonds.
b. the constructive loss from purchase of parent bonds.
c. the current amortization from investment in the subsidiary.
d. the parent’s equity in subsidiary realized income.
16. An 80%-owned subsidiary has outstanding bonds payable that are convertible into the subsidiary’s common stock. No bonds are held by the parent corporation. In calculating the subsidiary’s diluted EPS, the amount of bond interest expense that will be added back to the subsidiary’s income to the common stockholders will be
a. the face amount of the convertible bonds times the bond coupon rate times the subsidiary’s marginal tax rate.
b. the face amount of the convertible bonds times the effective rate of interest on the bonds times the subsidiary’s marginal tax rate.
c. the face amount of the convertible bonds times the bond coupon rate times (100% minus the subsidiary’s marginal tax rate).
d. the face amount of the convertible bonds times the effective rate of interest on the bonds times (100% minus the subsidiary’s marginal tax rate).
17. When a subsidiary has outstanding options to purchase common stock, the number of shares added to the denominator of the subsidiary’s EPS calculation is equal to the number of
a. shares that can be purchased with the current market value of the options.
b. shares into which the options can be converted minus the number of shares purchased at the average market price that are assumed to be repurchased from the money received from the option shares.
c. shares into which the options can be converted.
d. shares into which the options can be converted minus the number of shares purchased at the exercise price that are assumed to be purchased from the money received from the option shares.
18. When a subsidiary has preferred stock that is convertible into common stock, the parent’s equity in the subsidiary’s diluted earnings is calculated by the number of
a. subsidiary shares into which the subsidiary’s dilutive securities can be converted times the subsidiary’s basic EPS figure.
b. parent shares into which the subsidiary’s dilutive securities can be converted times the parent’s basic EPS figure.
c. subsidiary shares held by the parent times the subsidiary’s diluted EPS figure.
d. parent shares into which the subsidiary’s dilutive securities can be converted times the subsidiary’s basic EPS figure.
19. Palm owns a 70% interest in Sable, a domestic subsidiary. Palm will pay taxes on
a. none of the dividends it receives from Sable.
b. 20% of the dividends it receives from Sable.
c. 66% of the dividends it receives from Sable.
d. 80% of the dividends it receives from Sable.
20. Palmer Company owns a 25% interest in Sad, Incorporated, a domestic company. Sad had income of $60,000 and paid dividends of $20,000. Palmer’s tax rate is 35%. For simplicity, assume that Sad’s undistributed earnings are Palmer’s only temporary timing difference. Which of the following statements is correct?
a. Under the Internal revenue Code, Palmer pays current taxes of $700.
b. Under the Internal revenue Code, Palmer pays current taxes of $1,050.
c. Under GAAP, Palmer provides for income taxes on Sad’s\ undistributed earnings with a credit to deferred income taxes of $700.
d. Under GAAP, Palmer provides for income taxes on Sad’s undistributed earnings with a credit to deferred income taxes of $1,050.

AND MUCH MORE