TB Fisch AA9 WM

Chapter 1 Business Combinations: America's Most Popular
Business Activity, Bringing an End to the Controversy

MULTIPLE CHOICE

1. An economi c advant age of a busi ness combi nat i on i ncl udes
a. Ut i l i zi ng dupl i cat i ve asset s.
b. Cr eat i ng separ at e management t eams.
c. Coor di nat ed mar ket i ng campai gns.
d. Hor i zont al l y combi ni ng l evel s wi t hi n t he mar ket i ng chai n.

ANS: C DI F: E OBJ : 1

2. A t ax advant age of busi ness combi nat i on can occur when t he exi st i ng
owner of a company sel l s out and r ecei ves:
a. cash t o def er t he t axabl e gai n as a " t ax- f r ee r eor gani zat i on. "
b. st ock t o def er t he t axabl e gai n as a " t ax- f r ee r eor gani zat i on. "
c. cash t o cr eat e a t axabl e gai n.
d. st ock t o cr eat e a t axabl e gai n.

ANS: B DI F: E OBJ : 1

3. A cont r ol l i ng i nt er est i n a company i mpl i es t hat t he par ent company
a. owns al l of t he subsi di ar y' s st ock.
b. has i nf l uence over a maj or i t y of t he subsi di ar y' s asset s.
c. has pai d cash f or a maj or i t y of t he subsi di ar y' s st ock.
d. has t r ansf er r ed common st ock f or a maj or i t y of t he subsi di ar y' s
out st andi ng bonds and debent ur es.

ANS: B DI F: M OBJ : 2

4. Whi ch of t he f ol l owi ng i s a pot ent i al abuse t hat may ar i se when a
busi ness combi nat i on i s account ed f or as a pool i ng of i nt er est s?
a. Asset s of t he buyer may be over val ued when t he pr i ce pai d by t he
i nvest or i s al l ocat ed among speci f i c asset s.
b. Ear ni ngs of t he pool ed ent i t y may be i ncr eased because of t he
combi nat i on onl y and not as a r esul t of ef f i ci ent oper at i ons.
c. Li abi l i t i es may be under val ued when t he pr i ce pai d by t he i nvest or
i s al l ocat ed t o speci f i c l i abi l i t i es.
d. An undue amount of cost may be assi gned t o goodwi l l , t hus
pot ent i al l y al l owi ng an under st at ement of pool ed ear ni ngs.

ANS: B DI F: M OBJ : 3, Appendi x A

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Chapt er 1
1- 2
5. Company B acqui r ed t he asset s ( net of l i abi l i t i es) of Company S i n
exchange f or cash. The acqui si t i on pr i ce exceeds t he f ai r val ue of t he
net asset s acqui r ed. How shoul d Company B det er mi ne t he amount s t o be
r epor t ed f or t he pl ant and equi pment , and f or l ong- t er mdebt of t he
acqui r ed Company S?

Pl ant and Equi pment Long- Ter mDebt
a. Fai r val ue S' s car r yi ng amount
b. Fai r val ue Fai r val ue
c. S' s car r yi ng amount Fai r val ue
d. S' s car r yi ng amount S' s car r yi ng amount


6. Publ i cs Company acqui r ed t he net asset s of Ci t i zen Company dur i ng 20X5.
The pur chase pr i ce was $800, 000. On t he dat e of t he t r ansact i on,
Ci t i zen had no l ong- t er mi nvest ment s i n mar ket abl e equi t y secur i t i es
and $400, 000 i n l i abi l i t i es. The f ai r val ue of Ci t i zen asset s on t he
acqui si t i on dat e was as f ol l ows:

Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 800, 000
Noncur r ent asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600, 000
$1, 400, 000
==========

How shoul d Publ i cs account f or t he $200, 000 di f f er ence bet ween t he f ai r
val ue of t he net asset s acqui r ed, $1, 000, 000, and t he cost , $800, 000?
a. Ret ai ned ear ni ngs shoul d be r educed by $200, 000.
b. Cur r ent asset s shoul d be r ecor ded at $685, 000 and noncur r ent
asset s r ecor ded at $515, 000.
c. The noncur r ent asset s shoul d be r ecor ded at $400, 000.
d. A def er r ed cr edi t of $200, 000 shoul d be set up and subsequent l y
amor t i zed t o f ut ur e net i ncome over a per i od not t o exceed 40
year s.

ANS: C DI F: M OBJ : 4

7. ABC Co. i s acqui r i ng XYZ I nc. XYZ has t he f ol l owi ng I nt angi bl e asset s:
Pat ent on a pr oduct t hat i s deemed t o have no usef ul l i f e $10, 000.
Cust omer Li st wi t h an obser vabl e f ai r val ue of $50, 000.
A 5- year oper at i ng l ease wi t h f avor abl e t er ms wi t h a di scount ed
pr esent val ue of $8, 000.
I dent i f i abl e R & D of $100, 000.

ABC wi l l r ecor d how much f or acqui r ed I nt angi bl e Asset s f r omt he
Pur chase of XYZ I nc?
a. $168, 000
b. $58, 000
c. $158, 000
d. $150, 000

ANS: B DI F: D OBJ : 4

Chapt er 1
1- 3
8. Vi be Company pur chased t he net asset s of At l ant i c Company i n a busi ness
combi nat i on account ed f or as a pur chase. As a r esul t , goodwi l l was
r ecor ded. For t ax pur poses, t hi s combi nat i on was consi der ed t o be a
t ax- f r ee mer ger . I ncl uded i n t he asset s i s a bui l di ng wi t h an appr ai sed
val ue of $210, 000 on t he dat e of t he busi ness combi nat i on. Thi s asset
had a net book val ue of $70, 000, based on t he use of accel er at ed
depr eci at i on f or account i ng pur poses. The bui l di ng had an adj ust ed t ax
basi s t o At l ant i c ( and t o Vi be as a r esul t of t he mer ger ) of $120, 000.
Assumi ng a 36%i ncome t ax r at e, at what amount shoul d Vi be r ecor d t hi s
bui l di ng on i t s books af t er t he pur chase?
a. $120, 000
b. $134, 400
c. $140, 000
d. $210, 000

ANS: D DI F: M OBJ : 4

9. Goodwi l l r epr esent s t he excess cost of an acqui si t i on over t he
a. sumof t he f ai r val ues assi gned t o i nt angi bl e asset s l ess
l i abi l i t i es assumed.
b. sumof t he f ai r val ues assi gned t o t angi bl e and i nt angi bl e asset s
acqui r ed l ess l i abi l i t i es assumed.
c. sumof t he f ai r val ues assi gned t o i nt angi bl es acqui r ed l ess
l i abi l i t i es assumed.
d. book val ue of an acqui r ed company.


10. When pur chasi ng a company occur s, FASB r ecommends di scl osi ng al l of t he
f ol l owi ng EXCEPT:
a. goodwi l l r el at ed t o each r epor t i ng segment .
b. cont i ngent payment agr eement s, opt i ons, or commi t ment s i ncl uded i n
t he pur chase agr eement , i ncl udi ng account i ng met hods t o be
f ol l owed.
c. r esul t s of oper at i ons f or t he cur r ent per i od i f bot h compani es had
r emai ned separ at e.
d. amount of i n- pr ocess R&D pur chased and wr i t t en- of f dur i ng t he
per i od.


Chapt er 1
1- 4
11. Cozzi Company i s bei ng pur chased and has t he f ol l owi ng bal ance sheet as
of t he pur chase dat e:

Cur r ent asset s. . . . . . . . . . $200, 000 Li abi l i t i es. . . . $ 90, 000
Fi xed asset s. . . . . . . . . . . . 180, 000 Equi t y. . . . . . . . . 290, 000
Tot al . . . . . . . . . . . . . . . . . $380, 000 Tot al . . . . . . . . $380, 000
======== ========

The pr i ce pai d f or Cozzi ' s net asset s ( t he pur chaser assumes t he
l i abi l i t i es) i s $500, 000. The f i xed asset s have a f ai r val ue of
$220, 000, and t he l i abi l i t i es have a f ai r val ue of $110, 000. The amount
of goodwi l l t o be r ecor ded i n t he pur chase i s __________.
a. $0
b. $50, 000
c. $70, 000
d. $90, 000


12. Separ at el y i dent i f i ed i nt angi bl e asset s ar e account ed f or by
amor t i zi ng:
a. excl usi vel y by usi ng i mpai r ment t est i ng.
b. based upon a pat t er n t hat r ef l ect s t he benef i t s conveyed by t he
asset .
c. over t he usef ul economi c l i f e l ess r esi dual val ue usi ng onl y t he
st r ai ght - l i ne met hod.
d. amor t i zi ng over a per i od not t o exceed a maxi mumof 40 year s.


13. Acme Co. i s pr epar i ng a pr o- f or ma set of f i nanci al st at ement s af t er an
acqui si t i on of Coyot e Co. The pur chase pr i ce i s l ess t han t he f ai r
val ue of t he asset s acqui r ed. However , t he pur chase pr i ce i s gr eat er
t han net book val ue of t he acqui r ed company.
a. Acme' s goodwi l l wi l l decr ease over t i me.
b. Acme' s amor t i zat i on of i nt angi bl e asset s wi l l i ncr ease over t i me.
c. Depr eci at i on expense wi l l be gr eat er t han Coyot e Company' s
expense.
d. Coyot e' s l oss on t he sal e of t he asset s wi l l cr eat e a net l oss
car r yf or war d.

ANS: C DI F: D OBJ : 6

Chapt er 1
1- 5
14. Whi l e per f or mi ng a goodwi l l i mpai r ment t est , t he company had t he
f ol l owi ng i nf or mat i on:
Est i mat ed i mpl i ed f ai r val ue of r epor t i ng uni t
( wi t hout goodwi l l ) $420, 000
Exi st i ng net book val ue of r epor t i ng uni t
( wi t hout goodwi l l ) $380, 000
Book val ue of goodwi l l $60, 000

Based upon t hi s i nf or mat i on t he pr oper concl usi on i s:
a. The exi st i ng net book val ue pl us goodwi l l i s i n excess of t he
i mpl i ed f ai r val ue, t her ef or e, no adj ust ment i s r equi r ed.
b. The exi st i ng net book val ue pl us goodwi l l i s l ess t han t he i mpl i ed
f ai r val ue pl us goodwi l l , t her ef or e, no adj ust ment i s r equi r ed.
c. The exi st i ng net book val ue pl us goodwi l l i s i n excess of t he
i mpl i ed f ai r val ue, t her ef or e, goodwi l l needs t o be decr eased.
d. The exi st i ng net book val ue i s l ess t han t he est i mat ed i mpl i ed
f ai r val ue; t her ef or e, goodwi l l needs t o be decr eased.


15. Bal t er I nc. acqui r ed J er sey Company on J anuar y 1, 20X5. When t he
pur chase occur r ed J er sey Company had t he f ol l owi ng i nf or mat i on r el at ed
t o f i xed asset s:
Land $ 80, 000
Bui l di ng 200, 000
Accumul at ed Depr eci at i on ( 100, 000)
Equi pment 100, 000

The bui l di ng has a 10- year r emai ni ng usef ul l i f e and t he equi pment has
a 5- year r emai ni ng usef ul l i f e. The f ai r val ue of t he asset s on t hat
dat e wer e:
Land $100, 000
Equi pment 75, 000

What i s t he 20X5 depr eci at i on expense Bal t er wi l l r ecor d r el at ed t o
pur chasi ng J er sey Company?
a. $8, 000
b. $15, 000
c. $28, 000
d. $30, 000


Chapt er 1
1- 6
16. I n per f or mi ng t he 20X7 i mpai r ment t est f or goodwi l l , t he company had
t he f ol l owi ng 20X6 and 20X7 i nf or mat i on i s avai l abl e.

20X6 20X7
I mpl i ed f ai r val ue of r epor t i ng uni t $350, 000 $400, 000
Net book val ue of r epor t i ng uni t ( i ncl udi ng goodwi l l ) $380, 000 $360, 000

Based upon t hi s i nf or mat i on what ar e t he 20X6 and 20X7 adj ust ment t o
goodwi l l , i f any?
a. 20X6 $0
20X7 $40, 000 decr ease
b. 20X6 $30, 000 i ncr ease
20X7 $40, 000 decr ease
c. 20X6 $30, 000 decr ease
20X7 $40, 000 decr ease
d. 20X6 $30, 000 decr ease
20X7 $0

ANS: D DI F: D OBJ : 7

17. Coupl es Cor por at i on pur chases Pl ayer s Cor por at i on. The f ai r val ue of
t he net asset s of Pl ayer s i s $750, 000 and t he f ai r val ue of pr i or i t y
account s ( i ncl udi ng a deduct i on f or depr eci at i on) i s $600, 000. Whi ch of
t he f ol l owi ng pur chase pr i ces woul d r equi r e usi ng al l ocat i on
pr ocedur es?
a. $500, 000
b. $600, 000
c. $700, 000
d. $800, 000


18. ACME Co. pai d $110, 000 f or t he net asset s of Comb Cor p. At t he t i me of
t he acqui si t i on t he f ol l owi ng i nf or mat i on was avai l abl e r el at ed t o
Comb' s bal ance sheet :
Book Val ue Fai r Val ue
Cur r ent Asset s $50, 000 $ 50, 000
Bui l di ng 80, 000 100, 000
Equi pment 40, 000 50, 000
Li abi l i t i es 30, 000 30, 000

What i s t he amount r ecor ded by ACME f or t he Bui l di ng?
a. $40, 000
b. $60, 000
c. $80, 000
d. $100, 000


19. Whi ch of t he f ol l owi ng busi ness combi nat i on expenses woul d NOT qual i f y
as a di r ect acqui si t i on expense f or a pur chase?
a. Fees f or pur chase audi t
b. Out si de l egal f ees
c. St ock i ssuance f ees
d. Al l ar e di r ect acqui si t i on expenses.

Chapt er 1
1- 7
20. Pol k i ssues common st ock t o acqui r e al l t he asset s of t he SamCompany
on J anuar y 1, 20X5. Ther e i s a cont i ngent shar e agr eement , whi ch st at es
t hat i f t he i ncome of t he SamDi vi si on exceeds a cer t ai n l evel dur i ng
20X5 and 20X6, addi t i onal shar es wi l l be i ssued on J anuar y 1, 20X7. The
i mpact of i ssui ng t he addi t i onal shar es i s t o
a. i ncr ease t he pr i ce assi gned t o f i xed asset s.
b. have no ef f ect on asset val ues, but t o r eassi gn t he amount s
assi gned t o equi t y account s.
c. r educe r et ai ned ear ni ngs.
d. r ecor d addi t i onal goodwi l l .


21. I n a pur chase, t he di r ect acqui si t i on, i ndi r ect acqui si t i on and
secur i t y i ssuance cost s ar e account ed f or as f ol l ows:

Di r ect Acqui si t i on I ndi r ect Acqui si t i on Secur i t y I ssuance
a. Added t o pr i ce pai d Added t o pr i ce pai d Added t o pr i ce pai d
b. Added t o pr i ce pai d Expensed Deduct ed f r omval ue
of secur i t y i ssued
c. Expensed Expensed Deduct ed f r omval ue
of secur i t y i ssued
d. Expensed Expensed Expensed


22. Or bi t I nc. pur chased Pl anet Co. i n 20X3. At t hat t i me an exi st i ng
pat ent was not r ecor ded as a separ at el y i dent i f i ed i nt angi bl e asset . At
t he end of f i scal year 20X5, t he pat ent i s val ued at $15, 000, and
goodwi l l has a book val ue of $100, 000. How shoul d i nt angi bl e asset s be
r epor t ed at t he begi nni ng of f i scal year 20X6?
a. Goodwi l l $100, 000 Pat ent $0
b. Goodwi l l $115, 000 Pat ent $0
c. Goodwi l l $100, 000 Pat ent $15, 000
d. Goodwi l l $85, 000 Pat ent $15, 000


23. Whi ch of t he f ol l owi ng i ncome f act or s shoul d not be f act or ed i nt o a
cal cul at i on of goodwi l l ?
a. sal es f or t he per i od
b. i ncome t ax expense
c. ext r aor di nar y i t ems
d. cost of goods sol d

ANS: C DI F: M OBJ : 10, Appendi x A

Chapt er 1
1- 8
PROBLEM

1. I nt er net Cor por at i on i s consi der i ng t he acqui si t i on of Homepage
Cor por at i on and has obt ai ned t he f ol l owi ng audi t ed condensed bal ance
sheet :

Homepage Cor por at i on
Bal ance Sheet
December 31, 20X5

Asset s Li abi l i t i es and Equi t y
Cur r ent asset s. . . . $ 40, 000 Cur r ent Li abi l i t i es. . . . . . . . . . $ 60, 000
Land. . . . . . . . . . . . . . 20, 000 Capi t al St ock ( 50, 000 shar es,
Bui l di ngs ( net ) . . . 80, 000 $1 par val ue) . . . . . . . . . . . . . . . . 50, 000
Equi pment ( net ) . . . 60, 000 Ot her Pai d- i n Capi t al . . . . . . . . 20, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . 70, 000
$200, 000 $200, 000
======== ========

I nt er net al so acqui r ed t he f ol l owi ng f ai r val ues f or Homepage' s asset s
and l i abi l i t i es:

Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Bui l di ngs ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 000
Equi pment ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000
Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 60, 000)
$220, 000
========

I nt er net and Homepage agr ee on a pr i ce of $280, 000 f or Homepage' s net
asset s. Pr epar e t he necessar y j our nal ent r y t o r ecor d t he pur chase
gi ven t he f ol l owi ng scenar i os:

a. I nt er net pays cash f or Homepage Cor por at i on and i ncur s $5, 000
of di r ect acqui si t i on cost s.

b. I nt er net i ssues i t s $5 par val ue st ock as consi der at i on. The
f ai r val ue of t he st ock at t he acqui si t i on dat e i s $50 per
shar e. Addi t i onal l y, I nt er net i ncur s $5, 000 of secur i t y
i ssuance cost s.

Chapt er 1
1- 9
ANS:

a. Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . . . . . $55, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Bui l di ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65, 000
Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . . . $ 60, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285, 000

b. Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . . . . . $55, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Bui l di ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65, 000
Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . . $ 60, 000
Common St ock. . . . . . . . . . . . . . . . . . . . . . . . . . 28, 000
Ot her Pai d- i n Capi t al . . . . . . . . . . . . . . . . . 252, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 000

DI F: M OBJ : 5

2. On J anuar y 1, 20X5, Br own I nc. acqui r ed Lar son Company' s net asset s i n
exchange f or Br own s common st ock wi t h a par val ue of $100, 000 and a
f ai r val ue of $800, 000. Br own al so pai d $10, 000 i n di r ect acqui si t i on
cost s and $15, 000 i n st ock i ssuance cost s.

On t hi s dat e, Lar son s condensed account bal ances showed t he f ol l owi ng:

Cur r ent Asset s $ 280, 000 $ 370, 000
Pl ant and Equi pment 440, 000 480, 000
I nt angi bl es - Pat ent s 80, 000 120, 000
Cur r ent Li abi l i t i es ( 140, 000) ( 140, 000)
Long- Ter mDebt ( 100, 000) ( 110, 000)
Common St ock ( 200, 000)
Ot her Pai d- i n Capi t al ( 120, 000)
Ret ai ned Ear ni ngs ( 140, 000)

Requi r ed:

Recor d Br own s pur chase of Lar son Company s net asset s on t he books of
Br own I nc.

Chapt er 1
1- 10
ANS:

Debi t Cr edi t
Cur r ent Asset s. . . . . . . . . . . . . . . $370, 000
Pl ant and Equi pment . . . . . . . . . . 480, 000
I nt angi bl es - Pat ent s. . . . . . . . 120, 000
I nt angi bl es - Goodwi l l . . . . . . . 90, 000

Cur r ent Li abi l i t i es. . . . . . . . $140, 000
Long- t er mDebt . . . . . . . . . . . . . 110, 000
Common St ock. . . . . . . . . . . . . . . 100, 000
Ot her Pai d- i n Capi t al . . . . . . 685, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . 25, 000

To r ecor d t he acqui si t i on of Lar son s net asset .

DI F: M OBJ : 3, 11, 12, Appendi x B

3. The Chan Cor por at i on pur chased t he net asset s ( exi st i ng l i abi l i t i es
wer e assumed) of t he Don Company f or $900, 000 cash. The bal ance sheet
f or t he Don Company on t he dat e of acqui si t i on showed t he f ol l owi ng:

Asset s

Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Accumul at ed depr eci at i on. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 100, 000)
Pl ant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600, 000
Accumul at ed depr eci at i on. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 250, 000)
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 650, 000
=========

Li abi l i t i es and Equi t y

Bonds payabl e, 8%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200, 000
Common st ock, $1 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Pai d- i n capi t al i n excess of par . . . . . . . . . . . . . . . . . . . . . . 200, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 650, 000
=========

Chapt er 1
1- 11
Requi r ed:

The equi pment has a f ai r val ue of $300, 000, and t he pl ant asset s have a
f ai r val ue of $500, 000. Assume t hat t he Chan Cor por at i on has an
ef f ect i ve t ax r at e of 40%. Pr epar e t he ent r y t o r ecor d t he pur chase of
t he Don Company f or each of t he f ol l owi ng separ at e cases wi t h speci f i c
added i nf or mat i on:

a. The sal e i s a nont axabl e exchange t o t he sel l er t hat l i mi t s
t he buyer t o depr eci at i on and amor t i zat i on on onl y book val ue
f or t ax pur poses.

b.

The bonds have a cur r ent f ai r val ue of $190, 000. The
t r ansact i on i s a nont axabl e exchange.

c. Ther e ar e $100, 000 of pr i or - year l osses t hat can be used t o
cl ai ma t ax r ef und. The t r ansact i on i s a nont axabl e exchange.

d. Ther e ar e $150, 000 of past l osses t hat can be car r i ed f or war d
t o f ut ur e year s t o of f set t axes t hat wi l l be due. The
t r ansact i on i s a nont axabl e exchange.

ANS:

a. Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Pl ant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000
Goodwi l l ( $300, 000 x . 6) . . . . . . . . . . . . . . . . 500, 000
Def er r ed Tax Li abi l i t y*. . . . . . . . . . . . . . . $300, 000
Bonds Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900, 000
* . 4 x ( $800, 000 Fai r Val ue - $550, 000 Book Val ue of f i xed asset s) + . 4
x $500, 000 Goodwi l l

b. Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Pl ant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190, 000
Bonds Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . $190, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900, 000

c. Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Pl ant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000
Tax Ref und Recei vabl e. . . . . . . . . . . . . 40, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160, 000
Bonds Payabl e. . . . . . . . . . . . . . . . . . . . $200, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900, 000

d. Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Pl ant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000
Def er r ed Tax Expense ( $150, 000 x . 4) . . 60, 000
Goodwi l l ( $240, 000 . 6) . . . . . . . . . . . . . . . . 400, 000
Bonds Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . $200, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900, 000
Def er r ed Tax Li abi l i t y
( $250, 000 x . 4) + ( $400, 000 x . 4) . . . 260, 000

Chapt er 1
1- 12

DI F: D OBJ : 8

4. On J anuar y 1, 20X5, Zebb and Not t l e Compani es had condensed bal ance
sheet s as shown bel ow:

Zebb Not t l e
Company Company
Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 000, 000 $ 600, 000
Pl ant and Equi pment . . . . . . . . . . . . . . . . . . . . . . 1, 500, 000 800, 000
$2, 500, 000 $1, 400, 000
========== ==========
Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . . $ 200, 000 $ 100, 000
Long- Ter mDebt . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000 300, 000
Common St ock, $10 par . . . . . . . . . . . . . . . . . . . . . 1, 400, 000 400, 000
Pai d- i n Capi t al i n Excess of Par . . . . . . . . . . 0 100, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . 600, 000 500, 000
$2, 500, 000 $1, 400, 000
========== ==========

Requi r ed:

Recor d t he acqui si t i on of Not t l e s net asset s, t he i ssuance of t he
st ock and/ or payment of cash, and payment of t he r el at ed cost s. Assume
t hat Zebb i ssued 30, 000 shar es of new common st ock wi t h a f ai r val ue of
$25 per shar e and pai d $500, 000 cash f or al l of t he net asset s of
Not t l e. Di r ect acqui si t i on cost s of $50, 000 and st ock i ssuance cost s of
$20, 000 wer e pai d- i n cash. The combi nat i on i s account ed f or as a
pur chase. Cur r ent asset s had a f ai r val ue of $650, 000, pl ant and
equi pment had a f ai r val ue of $900, 000, and l ong- t er mdebt had a f ai r
val ue of $330, 000.

ANS:

Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . $650, 000
Pl ant and Equi pment . . . . . . . . . . . . . . . . . 900, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180, 000
Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . $100, 000
Long- Ter mDebt . . . . . . . . . . . . . . . . . . . . . . . . 330, 000
Common St ock. . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Pai d- i n Capi t al i n Excess of Par ( 1) 430, 000
Cash ( 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570, 000

( 1) 30, 000 x ( $25 - 10) - $20, 000
( 2) $500, 000 + 70, 000 = $570, 000

DI F: M OBJ : 5

Chapt er 1
1- 13
5. On J anuar y 1, 20X1, Honey Bee Cor por at i on pur chased t he net asset s of
Gr een Hor net Company f or $1, 500, 000. On t hi s dat e, a condensed bal ance
sheet f or Gr een Hor net showed:

Book Fai r
Val ue Val ue
Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500, 000 $800, 000
Long- Ter mI nvest ment s i n Secur i t i es. 200, 000 150, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000 600, 000
Bui l di ngs ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700, 000 900, 000
$1, 500, 000
==========

Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . $ 300, 000 $300, 000
Long- Ter mDebt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550, 000 600, 000
Common St ock ( no- par ) . . . . . . . . . . . . . . . . . . . . . . 300, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . 350, 000
$1, 500, 000
==========

Requi r ed:

Recor d t he ent r y on Honey Bee' s books f or t he acqui si t i on of Gr een
Hor net ' s net asset s. Pr epar e suppor t i ng schedul es as necessar y.

ANS:

Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800, 000
Long- Ter mI nvest ment s i n Secur i t i es. . . . . . . . 150, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580, 000
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 870, 000
Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . $ 300, 000
Long- Ter mDebt . . . . . . . . . . . . . . . . . . . . . . . 600, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 500, 000

Remai ni ng amount assi gnabl e t o Land and Bui l di ng:

Fai r Per cent of Tot al Tot al Cost Assi gned
Val ue Fai r Val ue Assi gnabl e Val ue
Land. . . . . . . $ 600, 000 40% $1, 450, 000 $ 580, 000
Bui l di ng. . . 900, 000 60% 1, 450, 000 870, 000
Tot al . . . . . . $1, 500, 000 $1, 450, 000

DI F: M OBJ : 7
Chapt er 1
1- 14

6. Popl ar Cor p. acqui r es t he net asset s of Sapl i ng Company, whi ch has t he
f ol l owi ng bal ance sheet :

Account s Recei vabl e $ 50, 000
I nvent or y 80, 000
Equi pment , Net 50, 000
Land & Bui l di ng, Net 120, 000
Tot al Asset s $300, 000
========

Bonds Payabl e $ 90, 000
Common St ock 100, 000
Ret ai ned Ear ni ngs 110, 000
Tot al Li abi l i t i es and
St ockhol der s' Equi t y $300, 000
========

Fai r val ues on t he dat e of acqui si t i on:
I nvent or y $100, 000
Equi pment 30, 000
Land & Bui l di ng 180, 000
Cust omer Li st 30, 000
Bonds Payabl e 100, 000

Di r ect acqui si t i on cost s: $10, 000

I f Popl ar pai d $300, 000 what j our nal ent r i es woul d be r ecor ded by bot h
Popl ar Cor p. and Sapl i ng Company?

ANS:

Poplar Corp:

Equi pment 30, 000
Cust omer Li st 30, 000
Goodwi l l 20, 000
Bonds Payabl e $ 90, 000
Pr emi umon Bonds Payabl e 10, 000
Cash ( f or di r ect acqui si t i on cost s) 10, 000
Cash 300, 000

Pr i ce pai d
( i ncl udi ng di r ect acqui si t i on cost s) $310, 000
Fai r val ue of cur r ent asset s
l ess l i abi l i t i es $ 50, 000
Fai r val ue of r ecor ded f i xed asset s 210, 000 260, 000
Excess at t r i but abl e t o I nt angi bl e Asset s $ 50, 000
Fai r val ue of Cust omer Li st 30, 000
Goodwi l l $ 20, 000
========

Chapt er 1
1- 15
Sapling Company:
Cash $300, 000
Equi pment 50, 000
Gai n on Sal e of Busi ness 90, 000

Cash Recei ved: $300, 000
Net Asset val ue sol d 210, 000
Gai n $ 90, 000
========

DI F: M OBJ : 6

7. Di amond acqui r ed Hear t ' s net asset s. At t he t i me of t he acqui si t i on
Hear t ' s Bal ance sheet was as f ol l ows:

Account s Recei vabl e $130, 000
Equi pment , Net 50, 000
Bui l di ng, Net 250, 000
Land & Bui l di ng, Net 100, 000
Tot al Asset s $600, 000
========

Bonds Payabl e $100, 000
Common St ock 50, 000
Tot al Li abi l i t i es and
St ockhol der s' Equi t y $600, 000
========

Fai r val ues on t he dat e of acqui si t i on:
I nvent or y $100, 000
Equi pment 30, 000
Land 120, 000
Br and name copyr i ght 50, 000
Bonds payabl e 120, 000

Di r ect acqui si t i on cost s: $5, 000

Requi r ed:
Recor d t he ent r y f or t he pur chase of t he net asset s of Hear t by Di amond
at t he f ol l owi ng Cash pr i ces:

a. $700, 000
b. $300, 000
c. $100, 000

Chapt er 1
1- 16
ANS:

a.
Equi pment 30, 000
Land 120, 000
Br and Name 50, 000
Goodwi l l 45, 000
Cash 705, 000

Pr i ce pai d
l ess l i abi l i t i es $110, 000
Fai r Val ue of r ecor ded f i xed asset s 500, 000 610, 000
Excess at t r i but abl e t o I nt angi bl e Asset s $ 95, 000
Fai r val ue of Cust omer Li st 50, 000
========

b.
Equi pment 11, 700
Land 46, 800
Cash 305, 000

Pr i ce pai d
l ess l i abi l i t i es 110, 000
At t r i but abl e t o l ong- l i ved asset s $195, 000
========

c.
Ext r aor di nar y Gai n $ 5, 000
Cash 105, 000

Pr i ce pai d
l ess l i abi l i t i es 110, 000
Def er r ed cr edi t on pur chase $ ( 5, 000)
========

DI F: M OBJ : 5, 7

Chapt er 1
1- 17
8. Mar quet t e I nst r ument s Company acqui r ed al l t he asset s and assumed al l
t he l i abi l i t i es of t he Nel son Company on J ul y 1, 20X1. The f i scal year
f or bot h Mar quet t e and Nel son ends on December 31. On t he dat e of
acqui si t i on, Nel son Company had t he f ol l owi ng t r i al bal ance:

Account s r ecei vabl e. . . . . . . . . . . . . . . . . . . . . . . . $ 60, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70, 000
Machi ner y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Accumul at ed depr eci at i on, machi ner y. . . . . . . . $100, 000
Not es payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210, 000
Cost of goods sol d. . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Oper at i ng expenses. . . . . . . . . . . . . . . . . . . . . . . . . 70, 000
Depr eci at i on expense . . . . . . . . . . . . . . . . . . . . . . 15, 000
Common st ock, $1 par . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Pai d- i n capi t al i n excess of par . . . . . . . . . . . 70, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . 165, 000
Tot al s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $635, 000 $635, 000
======== ========

Mar quet t e i ssued 10, 000 of i t s $5 par val ue shar es f or t he out st andi ng
shar es of t he Nel son Company and pai d $10, 000 i n di r ect acqui si t i on
cost s. The f ai r val ue of i t s shar es was $40 per shar e. On t he
acqui si t i on dat e, t he i nvent or y had a f ai r val ue of $80, 000 ( sol d by
December 31) , and t he machi ner y had a f ai r val ue of $400, 000 wi t h an
est i mat ed 8- year r emai ni ng l i f e. Any val ue associ at ed wi t h i nt angi bl e
asset s ar i si ng f r omt he busi ness combi nat i on ar e associ at ed wi t h a
pat ent t hat wi l l be amor t i zed over 10 year s.

The f ol l owi ng oper at i ng r esul t s wer e r epor t ed by t he t wo r esul t i ng
di vi si ons:

Mar quet t e Nel son
J anuar y 1- December 31 J ul y 1- December 31
Sal es. . . . . . . . . . . . . . . . . . . . . . $450, 000 $300, 000
Cost of goods sol d. . . . . . . . . 230, 000 160, 000
Oper at i ng expenses. . . . . . . . . 120, 000 80, 000
Depr eci at i on expense. . . . . . . 40, 000 15, 000

The r esul t s f or Nel son ar e based on book val ues and do not consi der
adj ust ment s r esul t i ng f r omt he busi ness combi nat i on.

Requi r ed:

Pr epar e an i ncome st at ement f or t he Mar quet t e I nst r ument s Company.

Chapt er 1
1- 18
ANS:

Pur chase ( i ncl udes Nel son f or onl y l ast 6 mont hs)
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $750, 000
Less:
Cost of goods sol d
( I ncr ease Nel son $10, 000) . . . . . . . . . . . . . $400, 000
Oper at i ng expenses. . . . . . . . . . . . . . . . . . . . . . 200, 000
Depr eci at i on expense ( $25, 000 f or Nel son
f or hal f year ) . . . . . . . . . . . . . . . . . . . . . . . . 67, 500*
Pat ent amor t i zat i on ( $10, 000 10 year s
f or hal f year ) . . . . . . . . . . . . . . . . . . . . . . . . 500 668, 000
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82, 000
========
*$40, 000 + $15, 000 + ( $200, 000 i ncr ease 8 x 1/ 2 yr . ) = $67, 500

Al l ocat i on of pur chase pr i ce:
Tot al pr i ce ( 10, 000 shar es x $40 + $10, 000) . . . . . . . $410, 000
Less i nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 80, 000)
Pl us l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Avai l abl e f or f i xed asset s. . . . . . . . . . . . . . . . . . . . . . . . $410, 000
Fai r val ue of machi ner y. . . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000
Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000
========

DI F: M OBJ : 6

9. On J anuar y 1, J ul y 1, and December 31, 20X5, a condensed t r i al bal ance
f or Nel son Company showed t he f ol l owi ng debi t s and ( cr edi t s) :

01/ 01/ X5 06/ 30/ X5 12/ 31/ X5
Cur r ent Asset s. . . . . . . . . . . . . . . . . . . $ 200, 000 $ 260, 000 $ 340, 000
Pl ant and Equi pment ( net ) . . . . . . . . 500, 000 510, 000 510, 000
Cur r ent Li abi l i t i es. . . . . . . . . . . . . . ( 50, 000) ( 70, 000) ( 60, 000)
Long- Ter mDebt . . . . . . . . . . . . . . . . . . . ( 100, 000) ( 100, 000) ( 100, 000)
Common St ock. . . . . . . . . . . . . . . . . . . . . ( 150, 000) ( 150, 000) ( 150, 000)
Ot her Pai d- i n Capi t al . . . . . . . . . . . . ( 100, 000) ( 100, 000) ( 100, 000)
Ret ai ned Ear ni ngs, J anuar y 1. . . . . ( 300, 000) ( 300, 000) ( 300, 000)
Di vi dends Decl ar ed . . . . . . . . . . . . . . 10, 000
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . ( 400, 000) ( 900, 000)
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 350, 000 750, 000

Nel son Company' s books wer e NOT cl osed on J une 30, 20X5.

For al l of 20X5, Syst ems r evenues and expenses wer e $1, 500, 000 and
$1, 200, 000, r espect i vel y.

Chapt er 1
1- 19
Requi r ed:

Assume t hat , on J ul y 1, 20X5, Syst ems Cor por at i on pur chased
t he net asset s of Nel son Company f or $750, 000 i n cash. On t hi s
dat e, t he f ai r val ues f or cer t ai n net asset s wer e:

Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $280, 000
Pl ant and Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600, 000

On J ul y 1, 20X1, t he Pl ant and Equi pment had a r emai ni ng l i f e of
10 year s.
( 1) Recor d t he ent r y on Syst ems books f or t he J ul y 1, 20X5
pur chase of Nel son.
( 2) Comput e t he amount of net i ncome whi ch wi l l be r epor t ed
f or 20X5.

ANS:

1.
Debi t Cr edi t
Cur r ent Asset s. . . . . . . . . $280, 000
Pl ant and Equi pment . . . . 600, 000
Goodwi l l . . . . . . . . . . . . . . . 40, 000
Cur r ent Li abi l i t i es. . $ 70, 000
Long- Ter mDebt . . . . . . . 100, 000
Cash . . . . . . . . . . . . . . . . 750, 000

2. Net i ncome f or 20X5:

Symant i c Nor t on Tot al
Revenues. . . . . . . . . . . . . . . . . . . . $1, 500, 000 + $500, 000 = $2, 000, 000
Expenses. . . . . . . . . . . . . . . . . . . . 1, 200, 000 + 400, 000 = 1, 600, 000
I ncome bef or e ext r a expenses $ 400, 000
Depr eci at i on of Pl ant and
Equi pment 4, 500
Net I ncome f or 20X1. . . . . . . . . $ 395, 500
==========

The ext r a depr eci at i on on Pl ant and Equi pment woul d be:
$90, 000 10 year s x 1/ 2 = $4, 500

DI F: D OBJ :

Chapt er 1
1- 20
10. Mans Company i s about t o pur chase t he net asset s of Eagl e I ncor por at ed,
whi ch has t he f ol l owi ng bal ance sheet :

Asset s

Account s r ecei vabl e. . . . . . . . . . . . . . . . . . . . . . . . $ 60, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90, 000
Accumul at ed depr eci at i on . . . . . . . . . . . . . . . . . . ( 50, 000) 40, 000

Land and bui l di ngs. . . . . . . . . . . . . . . . . . . . . . . . . $ 300, 000
Accumul at ed depr eci at i on. . . . . . . . . . . . . . . . . . . ( 100, 000) 200, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Tot al asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $460, 000
========

Li abi l i t i es and St ockhol der s' Equi t y

Bonds payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80, 000
Common st ock, $10 par . . . . . . . . . . . . . . . . . . . . . . 200, 000
Tot al l i abi l i t i es and equi t y. . . . . . . . . . . . . $460, 000
========

Mans has secur ed t he f ol l owi ng f ai r val ues of Eagl e' s account s:

I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $130, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Land and bui l di ngs. . . . . . . . . . . . . . . . . . . . . . . . . 260, 000
Bonds payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000

Di r ect acqui si t i on cost s wer e $20, 000.

Requi r ed:

Recor d t he ent r y f or t he pur chase of t he net asset s of Eagl e by Mans at
t he f ol l owi ng cash pr i ces:

a. $450, 000

b. $310, 000

c. $80, 000

Chapt er 1
1- 21
ANS:

a. Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . $ 60, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Land and Bui l di ngs. . . . . . . . . . . . . . . . . . . . . . 260, 000
Di scount on Bonds Payabl e. . . . . . . . . . . . 20, 000
Goodwi l l *. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Bonds Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . $ 80, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470, 000

* Pr i ce pai d
( i ncl udi ng di r ect acqui si t i on cost s) . . . $470, 000
l ess l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . 130, 000
At t r i but abl e t o l ong- l i ved asset s. . . . . . . $340, 000
Fai r val ue of l ong- l i ved asset s. . . . . . . 320, 000
Excess at t r i but abl e t o goodwi l l . . . . . . . . . $ 20, 000
========

b. Account s Recei vabl e. . . . . . . . . . . . . . . . . $ 60, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130, 000
Equi pment *. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37, 500
Land and Bui l di ngs*. . . . . . . . . . . . . . . . . . 162, 500
Di scount on Bonds Payabl e. . . . . . . . 20, 000
Bonds Payabl e. . . . . . . . . . . . . . . . . . . . $ 80, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330, 000

* Pr i ce pai d
( i ncl udi ng di r ect acqui si t i on cost s) . . $330, 000
l ess l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . 130, 000
At t r i but abl e t o l ong- l i ved asset s. . . . . . . $200, 000
========

Fai r Per cent of Val ue Assi gned
Asset Val ue Fai r Avai l abl e Val ue
Equi pment . . . . . . . . . . . . . . $ 60, 000 18. 75 $200, 000 $ 37, 500
Land and bui l di ngs. . . . . 260, 000 81. 25 200, 000 162, 500
Tot al . . . . . . . . . . . . . . . . . . $320, 000 100. 00 $200, 000
======== ========

c.
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . $ 60, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130, 000
Di scount on Bonds Payabl e. . . . . . . . . . . . . . . 20, 000
Ext r aor di nar y Gai n. . . . . . . . . . . . . . . . $ 30, 000
Bonds Payabl e. . . . . . . . . . . . . . . . . . . . . 80, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000

* Pr i ce pai d
( i ncl udi ng di r ect acqui si t i on cost s) . . $100, 000
l ess l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . 130, 000
Ext r aor di nar y Gai n. . . . . . . . . . . . . . . . . . . . . $( 30, 000)
========

DI F: M OBJ : 5, 7

Chapt er 1
1- 22
11. The Bl ue Reef Company pur chased t he net asset s of t he Pi nk Cor al
Company on J anuar y 1, 20X1, and made t he f ol l owi ng ent r y t o r ecor d t he
pur chase:

Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Bui l di ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Common St ock, $1 Par . . . . . . . . . . . . . . . . . . . . . 100, 000
Pai d- i n Capi t al i n Excess of Par . . . . . . . . . 520, 000

Requi r ed:

Make t he r equi r ed ent r y on J anuar y 1, 20X3, f or each of t he t wo
f ol l owi ng i ndependent cont i ngency agr eement s:

a. An addi t i onal cash payment woul d be made on J anuar y 1, 20X3
equal t o f our t i mes t he amount by whi ch aver age annual
ear ni ngs of t he Pi nk Cor al Di vi si on exceed $80, 000 per year
20X1 and 20X2. Net i ncome was $112, 000 i n 20X1 and $140, 000 i n
20X2.

b. Addi t i onal shar es woul d be i ssued on J anuar y 1, 20X3 t o
compensat e f or any f al l i n t he val ue of Bl ue Reef common st ock
bel ow $16 per shar e. The set t l ement woul d be t o cur e t he
def i ci ency by i ssui ng added shar es based on t hei r f ai r val ue
on J anuar y 1, 20X3. The f ai r pr i ce of t he shar es on J anuar y 1,
20X3 was $10.

ANS:

a. Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184, 000
4 x ( aver age i ncome of $126, 000 - $80, 000)

b. Pai d- i n Capi t al i n Excess of Par . . . . . . . . . . . 600, 000
Common St ock, $1 par . . . . . . . . . . . . . . . . . . . . 60, 000
Pai d- i n Capi t al i n Excess of Par . . . . . . . . 540, 000

Def i ci ency, $6 x 100, 000 shar es. . . . . . . . . . . . . . $600, 000
Di vi de by $10 f ai r val ue. . . . . . . . . . . . . . . . . . . 10
Added number of shar es. . . . . . . . . . . . . . . . . . . . . . . $ 60, 000

DI F: M OBJ : 8

Chapt er 1
1- 23
12. The bal ance sheet i nf or mat i on f or Ni ckel Company i s t o be used i n bot h
par t s ( a) and ( b) , each of whi ch i s an i ndependent case. On J anuar y 1,
20X1, a busi ness combi nat i on occur r ed bet ween Di me Co. and Ni ckel Co.
On t hi s dat e, a condensed bal ance sheet f or Ni ckel showed:

Book Val ue
Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . $ 500, 000
Pl ant and Equi pment ( net ) . . . . . . . . . . . . . . . 900, 000
I nt angi bl es - Pat ent . . . . . . . . . . . . . . . . . . . . 150, 000
$1, 550, 000
==========

Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . $ 75, 000
Long- Ter mDebt . . . . . . . . . . . . . . . . . . . . . . . . . . 225, 000
Common St ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000
Ret ai ned Ear ni ng. . . . . . . . . . . . . . . . . . . . . . . . 550, 000
$1, 550, 000
==========

Requi r ed:

a. Assume t he combi nat i on was an asset acqui si t i on i n whi ch Di me
pur chased al l of t he net asset s of Ni ckel f or $1, 725, 000 cash.
Ni ckel ' s cur r ent asset s wer e under val ued $70, 000; pl ant and
equi pment wer e under val ued $150, 000; t he pat ent was
under val ued $80, 000; and l ong- t er mdebt was over val ued
$45, 000.

Recor d t he ent r y or ent r i es on Di me' s books t o car r y out t he
acqui si t i on of t he net asset s of Ni ckel .

b. Assume t hat , i n t he combi nat i on, Di me acqui r ed Ni ckel ' s net
asset s by i ssuance of new Di me common st ock wi t h a par val ue
of $200, 000 and a f ai r val ue of $1, 750, 000. I n addi t i on, Di me
i ncur r ed st ock i ssuance cost s of $30, 000. For f i nanci al
account i ng pur poses, t he combi nat i on i s t o be account ed f or as
a pur chase. For t ax pur poses, t he combi nat i on i s t ax- f r ee t o
t he shar ehol der s of Ni ckel Company. Assume a t ax r at e of 32%.
Cur r ent asset s of Ni ckel ar e under val ued by $70, 000. The f ai r
val ue of Ni ckel ' s pl ant and equi pment was $1, 050, 000. The
i nt angi bl e i s a pat ent wi t h a f ai r val ue equal t o book val ue.

Recor d t he ent r y or ent r i es on Di me' s books t o car r y out t he
acqui si t i on of t he net asset s of Ni ckel . Pr ovi de suppor t i ng
cal cul at i ons.

Chapt er 1
1- 24
ANS:

a. Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . $ 570, 000
Pl ant and Equi pment . . . . . . . . . . . . . . . . . . . . . 1, 050, 000
I nt angi bl es - Pat ent s. . . . . . . . . . . . . . . . . . . 230, 000
I nt angi bl es - Goodwi l l . . . . . . . . . . . . . . . . . . 130, 000*
Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . . $ 75, 000
Long- Ter mDebt . . . . . . . . . . . . . . . . . . . . . . . . 180, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 725, 000

*Goodwi l l = $1, 725, 000 pr i ce - $1, 595, 000 sumof net asset
f ai r val ue.

b. Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 750, 000

Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . . . $ 570, 000
Def er r ed t ax l i abi l i t y. . . . . . . . . . . . . . . . ( 22, 400)
32%x ( $570, 000 - 500, 000)
Pl ant and equi pment . . . . . . . . . . . . . . . . . . . 1, 050, 000
Def er r ed t ax l i abi l i t y. . . . . . . . . . . . . . . . ( 48, 000)
32%x ( $1, 050, 000 - 900, 000)
I nt angi bl es - Pat ent s. . . . . . . . . . . . . . . . . 150, 000
Cur r ent l i abi l i t i es. . . . . . . . . . . . . . . . . . . ( 75, 000)
Long- t er mdebt . . . . . . . . . . . . . . . . . . . . . . . . ( 225, 000) 1, 399, 600
Net - of - t ax val ue of goodwi l l . . . . . . . . . . $ 350, 400
==========
Goodwi l l r ecor ded as f ol l ows:
Goodwi l l ( $350, 400 68%) . . . . . . . . . . . $515, 294
Def er r ed t ax l i abi l i t y
( 32%x $515, 294) . . . . . . . . . . . . . . . . . . 164, 894
Net - of - t ax val ue of goodwi l l $350, 400
========

Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . $ 570, 000
Pl ant and Equi pment . . . . . . . . . . . . . . . . . . . . . 1, 050, 000
I nt angi bl es - Pat ent s. . . . . . . . . . . . . . . . . . . 150, 000
I nt angi bl es - Goodwi l l . . . . . . . . . . . . . . . . . . 515, 294
Def er r ed Taxes Li abi l i t y. . . . . . . . . . . . . . $ 235, 294*
Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . . 75, 000
Long- Ter mDebt . . . . . . . . . . . . . . . . . . . . . . . . 225, 000
Common St ock. . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Pai d- i n Capi t al i n Excess of Par . . . . . . 1, 520, 000**
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000

* $22, 400 + 48, 000 + 164, 894 = $235, 294
** $1, 750, 000 f ai r - $200, 000 par - $30, 000 i ssuance cost s

DI F: D OBJ : 8

Chapt er 1
1- 25
ESSAY

1. Goodwi l l i s an i nt angi bl e asset . Ther e ar e a var i et y of r ecommendat i ons
about how i nt angi bl e asset s shoul d be i ncl uded i n t he f i nanci al
st at ement s. Di scuss t he r ecommendat i ons f or pr oper di scl osur e of
goodwi l l . I ncl ude a compar i son wi t h di scl osur e of ot her i nt angi bl e
asset s.

ANS:

Goodwi l l ar i ses when a company i s pur chased and t he val ue assi gned t o
i dent i f i abl e asset s, i ncl udi ng i nt angi bl e asset s, i s i n excess of t he
pr i ce pai d. As such goodwi l l r epr esent s t he val ue of i nt angi bl e asset s
t hat coul d not be val ued i ndi vi dual l y.

Dur i ng a pur chase some i nt angi bl e asset s such as pat ent s, cust omer
l i st s, br and names, and f avor abl e l ease agr eement s may exi st but have
not been r ecor ded. The f ai r val ue of t hese i nt angi bl e asset s shoul d be
det er mi ned and r ecor ded separ at e f r omt he val ue of goodwi l l associ at ed
wi t h t he pur chase.

I nt angi bl e asset s ot her t han goodwi l l wi l l be amor t i zed over t hei r
economi c l i ves. The amor t i zat i on met hod shoul d r ef l ect t he pat t er n of
benef i t s conveyed by t he asset , so t hat a st r ai ght - l i ne met hod i s t o be
used unl ess anot her syst emat i c met hod i s appr opr i at e.

I nt angi bl e asset s may be r epor t ed i ndi vi dual l y, i n gr oups, or i n t he
aggr egat e on t he bal ance sheet af t er f i xed asset s and ar e di spl ayed net
of cumul at i ve amor t i zat i on. Det ai l s f or cur r ent and cumul at i ve
amor t i zat i on, al ong wi t h si gni f i cant r esi dual val ues, ar e shown i n t he
f oot not es t o t he bal ance sheet .

Goodwi l l i s subj ect t o i mpai r ment pr ocedur es. These concer ns must be
addr essed r el at ed t o goodwi l l :
1. Goodwi l l must be al l ocat ed t o r epor t i ng uni t s i f t he pur chased
company cont ai ns mor e t han one r epor t i ng uni t .
2. A r epor t i ng uni t val uat i on pl an must be est abl i shed wi t hi n one year
of a pur chase. Thi s wi l l be used as t he measur ement pr ocess i n
f ut ur e per i ods.
3. I mpai r ment t est i ng i s nor mal l y done on an annual basi s.
4. The pr ocedur e f or det er mi ni ng i mpai r ment must be est abl i shed.
5. The pr ocedur e f or det er mi ni ng t he amount of t he i mpai r ment l oss,
whi ch i s al so t he decr ease i n t he goodwi l l amount r ecor ded, must be
est abl i shed.

Goodwi l l i s consi der ed i mpai r ed when t he i mpl i ed f ai r val ue of
r epor t i ng uni t i s l ess t han t he car r yi ng val ue of t he r epor t i ng uni t ' s
net asset s. Once goodwi l l i s wr i t t en down, i t cannot be adj ust ed t o a
hi gher amount .

Changes t o goodwi l l must be di scl osed. The di scl osur e woul d i ncl ude t he
amount of goodwi l l acqui r ed, t he goodwi l l i mpai r ment l osses, and t he
goodwi l l wr i t t en of f as par t of a di sposal of a r epor t i ng uni t .

DI F: D OBJ : 4, 5, 6, 9

Chapt er 1
1- 26
2. Whi l e acqui si t i ons ar e of t en f r i endl y, t her e ar e numer ous occasi ons
when a par t y does not want t o be acqui r ed. Di scuss possi bl e def ensi ve
st r at egi es t hat f i r ms can i mpl ement t o f end of f a host i l e t akeover
at t empt .

ANS:

GREENMAI L: A st r at egy i s whi ch t he t ar get company pays a pr emi umpr i ce
t o pur chase t r easur y shar es. The shar es pur chased ar e owned by t he
host i l e acqui r er or shar ehol der s who mi ght sel l t o t he host i l e
acqui r er .

WHI TE KNI GHT: A st r at egy i n whi ch t he t ar get company l ocat es a
di f f er ent company t o t ake i t over , a company t hat i s mor e l i kel y t o
keep cur r ent management and empl oyees i n pl ace.

SELLI NG THE CROWN J EWELS: A st r at egy i n whi ch t he t ar get company sel l s
of f vi t al asset s i n or der t o make t he company l ess at t r act i ve t o
pr ospect i ve acqui r er s.

POI SON PI LL: A st r at egy i n whi ch t he t ar get company i ssues st ock r i ght s
t o exi st i ng shar ehol der s at a pr i ce f ar bel ow f ai r val ue. The r i ght s
ar e onl y exer ci sabl e i f an acqui r er makes a bi d f or t he t ar get company.
The r esul t i ng new shar es make t he acqui si t i on mor e expensi ve.

LEVERAGED BUYOUT: A st r at egy i n whi ch t he management of t he t ar get
company at t empt s t o pur chase a cont r ol l i ng i nt er est i n t he t ar get
company, i n or der t o cont i nue cont r ol of t he company.

DI F: M OBJ : 2
Chapter 2 Consolidated Statements: Date of Acquisition

MULTIPLE CHOICE

1.
Account I nvest or I nvest ee

Sal es $500, 000 $300, 000
Cost of Goods Sol d 230, 000 170, 000
Gr oss Pr of i t $270, 000 $130, 000
Sel l i ng & Admi n.
Expenses 120, 000 100, 000
Net I ncome $150, 000 $ 30, 000
======== ========

Di vi dends pai d 50, 000 10, 000

Assumi ng I nvest or owns 70%of I nvest ee. What i s t he amount t hat wi l l be
r ecor ded as Net I ncome f or t he Cont r ol l i ng I nt er est ?
a. $164, 000
b. $171, 000
c. $178, 000
d. $180, 000


2. Consol i dat ed f i nanci al st at ement s ar e desi gned t o pr ovi de:
a. i nf or mat i ve i nf or mat i on t o al l shar ehol der s.
b. t he r esul t s of oper at i ons, cash f l ow, and t he bal ance sheet i n an
under st andabl e and i nf or mat i ve manor f or cr edi t or s.
c. t he r esul t s of oper at i ons, cash f l ow, and t he bal ance sheet as i f
t her e was a si ngl e ent i t y.
d. subsi di ar y i nf or mat i on f or t he subsi di ar y shar ehol der s.


3. The FASB Exposur e Dr af t assumes consol i dat i on f i nanci al st at ement s ar e
appr opr i at e even wi t hout a maj or i t y of cont r ol l i ng shar e i f whi ch of t he
f ol l owi ng exi st s:
a. t he subsi di ar y has t he r i ght t o appoi nt member ' s of t he par ent
company' s boar d of di r ect or s.
b. t he par ent company has t he r i ght t o appoi nt a maj or i t y of t he
member s of t he subsi di ar y' s boar d of di r ect or s t hr ough a l ar ge
mi nor i t y vot i ng i nt er est .
c. t he subsi di ar y owns a l ar ge mi nor i t y vot i ng i nt er est i n t he par ent
company.
d. The par ent company has an abi l i t y t o assume t he r ol e of gener al
par t ner i n a l i mi t ed par t ner shi p wi t h t he appr oval of t he
subsi di ar y' s boar d of di r ect or s.


Chapt er 2
2- 2
4. The SEC and FASB has r ecommended t hat a par ent cor por at i on shoul d
consol i dat e t he f i nanci al st at ement s of t he subsi di ar y i nt o i t s
f i nanci al st at ement s when i t exer ci ses cont r ol over t he subsi di ar y, even
wi t hout maj or i t y owner shi p. I n whi ch of t he f ol l owi ng si t uat i ons woul d
cont r ol NOT be evi dent ?
a. Access t o subsi di ar y asset s i s avai l abl e t o al l shar ehol der s.
b. Di vi dend pol i cy i s set by t he par ent .
c. The subsi di ar y does not det er mi ne compensat i on f or i t s mai n
empl oyees.
d. Subst ant i al l y al l cash f l ows of t he subsi di ar y f l ow t o t he
cont r ol l i ng shar ehol der s.

ANS: A DI F: E OBJ : 3

5. The goal of t he consol i dat i on pr ocess i s f or :
a. asset acqui si t i ons and st ock acqui si t i ons t o r esul t i n t he same
bal ance sheet .
b. goodwi l l t o appear on t he bal ance sheet of t he consol i dat ed
ent i t y.
c. t he asset s of t he noncont r ol l i ng i nt er est t o be pr edomi nat el y
di spl ayed on t he bal ance sheet .
d. t he i nvest ment i n t he subsi di ar y t o be pr oper l y val ued on t he
consol i dat ed bal ance sheet .


6. A subsi di ar y was acqui r ed f or cash i n a busi ness combi nat i on on December
31, 20X1. The pur chase pr i ce exceeded t he f ai r val ue of i dent i f i abl e net
asset s. The acqui r ed company owned equi pment wi t h a f ai r val ue i n excess
of t he book val ue as of t he dat e of t he combi nat i on. A consol i dat ed
bal ance sheet pr epar ed on December 31, 20X1, woul d
a. r epor t t he excess of t he f ai r val ue over t he book val ue of t he
equi pment as par t of goodwi l l .
b. r epor t t he excess of t he f ai r val ue over t he book val ue of t he
equi pment as par t of t he pl ant and equi pment account .
c. r educe r et ai ned ear ni ngs f or t he excess of t he f ai r val ue of t he
equi pment over i t s book val ue.
d. make no adj ust ment f or t he excess of t he f ai r val ue of t he
equi pment over book val ue. I nst ead, i t i s an adj ust ment t o expense
over t he l i f e of t he equi pment .


Chapt er 2
2- 3
7. Par r Company pur chased 100%of t he vot i ng common st ock of Super Company
f or $2, 000, 000. Ther e ar e no l i abi l i t i es. The f ol l owi ng book and f ai r
val ues ar e avai l abl e:

Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . $300, 000 $600, 000
Land and bui l di ng. . . . . . . . . . . . . . . . . . . 600, 000 900, 000
Machi ner y. . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000 600, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000 ?

The machi ner y wi l l appear on t he consol i dat ed bal ance sheet at ________.
a. $560, 000
b. $860, 000
c. $600, 000
d. $900, 000

ANS: A DI F: M OBJ : 5

8. Pagach Company pur chased 100%of t he vot i ng common st ock of Rage Company
f or $1, 800, 000. The f ol l owi ng book and f ai r val ues ar e avai l abl e:

Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . $ 150, 000 $300, 000
Machi ner y. . . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000 700, 000
Bonds payabl e. . . . . . . . . . . . . . . . . . . . . . . ( 300, 000) ( 250, 000)
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000 ?

The bonds payabl e wi l l appear on t he consol i dat ed bal ance sheet
a. at $300, 000 ( wi t h no pr emi umor di scount shown) .
b. at $300, 000 l ess a di scount of $50, 000.
c. at $0; asset s ar e r ecor ded net of l i abi l i t i es.
d. under a net amount of $250, 000 si nce i t i s a bar gai n pur chase.


9. The i nvest ment i n a subsi di ar y r ecor ded as a pur chase by t he par ent
shoul d be r ecor ded on t he par ent ' s books at
a. under l yi ng book val ue of t he subsi di ar y' s net asset s.
b. t he f ai r val ue of t he subsi di ar y' s net i dent i f i abl e asset s.
c. t he f ai r val ue of t he consi der at i on gi ven.
d. t he f ai r val ue of t he consi der at i on gi ven pl us an est i mat ed val ue
f or goodwi l l .


10. Whi ch of t he f ol l owi ng cost s of a busi ness combi nat i on ar e i ncl uded i n
t he val ue char ged t o pai d- i n- capi t al i n excess of par ?
a. di r ect and i ndi r ect acqui si t i on cost s
b. di r ect acqui si t i on cost s
c. di r ect acqui si t i on cost s and st ock i ssue cost s i f st ock i s i ssued
as consi der at i on
d. st ock i ssue cost s i f st ock i s i ssued as consi der at i on


Chapt er 2
2- 4
11. When i t pur chased Sut t on, I nc. on J anuar y 1, 20X1, Pavi n Cor por at i on
i ssued 500, 000 shar es of i t s $5 par vot i ng common st ock. On t hat dat e
t he f ai r val ue of t hose shar es t ot al ed $4, 200, 000. Rel at ed t o t he
acqui si t i on, Pavi n had payment s t o t he at t or neys and account ant s of
$200, 000, and st ock i ssuance f ees of $100, 000. I mmedi at el y pr i or t o t he
pur chase, t he equi t y sect i ons of t he t wo f i r ms appear ed as f ol l ows:

Pavi n Sut t on
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . $ 4, 000, 000 $ 700, 000
Pai d- i n capi t al i n excess of par . . . . 7, 500, 000 900, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . 5, 500, 000 500, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17, 000, 000 $2, 100, 000
=========== ==========

I mmedi at el y af t er t he pur chase, t he consol i dat ed bal ance sheet shoul d
r epor t pai d- i n capi t al i n excess of par of
a. $8, 900, 000
b. $9, 100, 000
c. $9, 200, 000
d. $9, 300, 000


12. J udd Company i ssued nonvot i ng pr ef er r ed st ock wi t h a f ai r val ue of
$1, 500, 000 i n exchange f or al l t he out st andi ng common st ock of t he Bat h
Cor por at i on. On t he dat e of t he exchange, Bat h had t angi bl e net asset s
wi t h a book val ue of $900, 000 and a f ai r val ue of $1, 400, 000. I n
addi t i on, J udd i ssued pr ef er r ed st ock val ued at $100, 000 t o an
i ndi vi dual as a f i nder ' s f ee f or ar r angi ng t he t r ansact i on. As a r esul t
of t hese t r ansact i ons, J udd shoul d r epor t an i ncr ease i n net asset s of
__________.
a. $900, 000
b. $1, 400, 000
c. $1, 500, 000
d. $1, 600, 000


13. I n an 80%pur chase account ed f or as a t ax- f r ee exchange, t he excess of
cost over book val ue i s $200, 000. The equi pment ' s book val ue f or t ax
pur poses i s $100, 000 and i t s f ai r val ue i s $150, 000. Al l ot her
i dent i f i abl e asset s and l i abi l i t i es have f ai r val ues equal t o t hei r book
val ues. The t ax r at e i s 30%. What i s t he t ot al def er r ed t ax l i abi l i t y
t hat shoul d be r ecogni zed on t he consol i dat ed bal ance sheet on t he dat e
of pur chase?
a. $12, 000
b. $60, 000
c. $72, 857
d. $85, 714


Chapt er 2
2- 5
14. On J une 30, 20X1, Naeder Cor por at i on pur chased f or cash at $10 per shar e
al l 100, 000 shar es of t he out st andi ng common st ock of t he Tedd Company.
The t ot al f ai r val ue of al l i dent i f i abl e net asset s of Tedd was
$1, 400, 000. The onl y noncur r ent asset i s pr oper t y wi t h a f ai r val ue of
$350, 000. The consol i dat ed bal ance sheet of Naeder and i t s whol l y owned
subsi di ar y on J une 30, 20X1, shoul d r ef l ect
a. an ext r aor di nar y gai n of $50, 000.
b. goodwi l l of $50, 000.
c. an ext r aor di nar y gai n of $350, 000.
d. goodwi l l of $350, 000.

ANS: A DI F: M OBJ : 6, 7

________________________________________________________________

Pinehollow-Stonebriar Scenario

Pi nehol l ow acqui r ed al l of t he out st andi ng st ock of St onebr i ar by
i ssui ng 100, 000 shar es of i t s $1 par val ue st ock. The shar es have a f ai r
val ue of $15 per shar e. Pi nehol l ow al so pai d $25, 000 i n di r ect
acqui si t i on cost s. Pr i or t o t he t r ansact i on, t he have compani es has t he
f ol l owi ng bal ance sheet s:

Asset s
Pi nehol l ow St onebr i ar
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150, 000 $ 50, 000
Account s r ecei vabl e. . . . . . . . . . . . . . . . . 500, 000 350, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . 900, 000 600, 000
Pr oper t y, pl ant , and equi pment ( net ) . 1, 850, 000 900, 000
Tot al asset s. . . . . . . . . . . . . . . . . . . . . . . . $3, 400, 000 $1, 900, 000
========== ==========

Cur r ent l i abi l i t i es. . . . . . . . . . . . . . . . . $ 300, 000 $ 100, 000
Bonds payabl e. . . . . . . . . . . . . . . . . . . . . . . 1, 000, 000 600, 000
Common st ock ( $1 par ) . . . . . . . . . . . . . . . 300, 000 100, 000
Pai d- i n capi t al i n excess of par . . . . 800, 000 900, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . 1, 000, 000 200, 000
Tot al l i abi l i t i es and equi t y. . . . . . . . $3, 400, 000 $1, 900, 000
========== ==========

The f ai r val ues of St onebr i ar ' s i nvent or y and pl ant , pr oper t y and
equi pment ar e $700, 000 and $1, 000, 000, r espect i vel y.
________________________________________________________________

15. Ref er t o t he Pi nehol l ow- St onebr i ar Scenar i o. The j our nal ent r y t o r ecor d
t he pur chase of St onebr i ar woul d i ncl ude a
a. cr edi t t o common st ock f or $1, 500, 000.
b. cr edi t t o addi t i onal pai d- i n capi t al f or $1, 100, 000.
c. cr edi t t o cash f or $1, 525, 000.
d. debi t t o i nvest ment f or $1, 525, 000.

ANS: D DI F: M OBJ : 6, 7

Chapt er 2
2- 6
16. Goodwi l l associ at ed wi t h t he pur chase of St onebr i ar i s __________.
a. $100, 000
b. $125, 000
c. $300, 000
d. $325, 000

ANS: B DI F: M OBJ : 6, 7

17. On Apr i l 1, 20X1, Paape Company pai d $950, 000 f or al l t he i ssued and
out st andi ng st ock of Si mon Cor por at i on i n a t r ansact i on pr oper l y
r ecor ded as a pur chase. The r ecor ded asset s and l i abi l i t i es of t he Pr i me
Cor por at i on on Apr i l 1, 20X1, f ol l ow:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240, 000
Pr oper t y and equi pment
( net of accumul at ed depr eci at i on
of $320, 000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480, 000
Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 180, 000)

On Apr i l 1, 20X1, i t was det er mi ned t hat t he i nvent or y of Paape had a
f ai r val ue of $190, 000, and t he pr oper t y and equi pment ( net ) had a f ai r
val ue of $560, 000. What i s t he amount of goodwi l l r esul t i ng f r omt he
busi ness combi nat i on?
a. $0
b. $120, 000
c. $300, 000
d. $230, 000


18. Par o Company pur chased 80%of t he vot i ng common st ock of Sabon Company
f or $900, 000. Ther e ar e no l i abi l i t i es. The f ol l owi ng book and f ai r
val ues ar e avai l abl e:

Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . $100, 000 $200, 000
Machi ner y. . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000 600, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000 ?

Usi ng t he par ent company concept , t he machi ner y wi l l appear on t he
consol i dat ed bal ance sheet at __________.
a. $600, 000
b. $540, 000
c. $480, 000
d. $300, 000


Chapt er 2
2- 7
19. When a company pur chases anot her company t hat has exi st i ng goodwi l l and
t he t r ansact i on i s account ed f or as a st ock acqui si t i on, t he goodwi l l
shoul d be t r eat ed i n t he f ol l owi ng manner .
a. Goodwi l l on t he books of an acqui r ed company shoul d be
di sr egar ded.
b. Goodwi l l i s r ecor ded pr i or t o r ecor di ng f i xed asset s.
c. Goodwi l l i s not r ecor ded unt i l al l asset s ar e st at ed at f ul l f ai r
val ue.
d. Goodwi l l i s t r eat ed consi st ent wi t h ot her t angi bl e asset s.


20. The SEC r equi r es t he use of push- down account i ng i n some speci f i c
si t uat i ons. Push- down account i ng r esul t s i n:
a. goodwi l l be r ecor ded i n t he par ent company separ at e account s.
b. el i mi nat i ng subsi di ar y r et ai ned ear ni ngs and pai d- i n capi t al i n
excess of par .
c. r ef l ect i ng f ai r val ues on t he subsi di ar y' s separ at e account s.
d. changi ng t he consol i dat i on wor ksheet pr ocedur e because no
adj ust ment i s necessar y t o el i mi nat e t he i nvest ment i n subsi di ar y
account .


PROBLEM

1. The I ncome St at ement s of Ruger I nc. and Ni na Co. ar e:

Ruger Ni na

Sal es $1, 000, 000 $400, 000
Gr oss Pr of i t 500, 000 250, 000
Sal es and Admi ni st r at i on Expenses 300, 000 170, 000
Net I ncome $ 200, 000 $ 80, 000
========== ========

Di vi dends Pai d $60, 000 $20, 000

Comput e Ruger ' s Net I ncome based upon t he f ol l owi ng owner shi p of Ni na
Co.
a. 10%
b. 40%
c. 80%

Chapt er 2
2- 8
ANS:

a. Ruger Net I ncome f r omOper at i ons $200, 000
Di vi dend Revenue ( 10%x $20, 000) 2, 000
Net I ncome $202, 000
========

b. Ruger Net I ncome f r omOper at i ons $200, 000
I ncome f r omI nvest ment ( 40%x $80, 000) 32, 000
Net I ncome $232, 000
========

c. Cont r ol l i ng I ncome Ruger + Ni na $280, 000
Noncont r ol l i ng I nt er est ( 20%x $80, 000) ( 16, 000)
Cont r ol l i ng I nt er est $264, 000
========

DI F: E OBJ : 1

2. Super nova Company had t he f ol l owi ng summar i zed bal ance sheet on December
31, 20X1:

Asset s
Account s r ecei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450, 000
Pr oper t y and pl ant ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 400, 000
==========

Not es payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600, 000
Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Pai d- i n capi t al i n excess of par . . . . . . . . . . . . . . . . . . . . . . . 400, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 400, 000
==========

The f ai r val ue of t he i nvent or y and pr oper t y and pl ant i s $600, 000 and
$850, 000, r espect i vel y.

Assume t hat Redst ar Cor por at i on exchanges 45, 000 of i t s $3 par val ue
shar es of common st ock, when t he f ai r pr i ce i s $4/ shar e, f or 100%of t he
common st ock of Super nova Company. Redst ar i ncur r ed di r ect acqui si t i on
cost s of $5, 000 and st ock i ssuance cost s of $5, 000.

Requi r ed:

a. What j our nal ent r y wi l l Redst ar Cor por at i on r ecor d f or t he
i nvest ment i n Super nova?

b. Pr epar e a suppor t i ng det er mi nat i on and di st r i but i on of excess
schedul e

c. Pr epar e Redst ar ' s el i mi nat i on and adj ust ment ent r y f or t he
acqui si t i on of Super nova.

Chapt er 2
2- 9
ANS:

( 100%pur chase wi t h Ext r aor di nar y Gai n)

a. I nvest ment i n Super nova ( 45, 000 x $4) + $5, 000 185, 000
Common St ock $3 par val ue 135, 000
Pai d- i n- capi t al excess of par 45, 000
Cash ( di r ect acqui si t i on cost s) 5, 000

Pai d- i n capi t al excess of par 5, 000
Cash ( t o i nvest ment company) 5, 000

b. Det er mi nat i on and Di st r i but i on of Excess Schedul e

Pr i ce pai d f or i nvest ment $ 185, 000
Less book val ue of
i nt er est pur chased:

Common St ock $5 par $ 300, 000
Pai d- i n capi t al i n excess
of par
400, 000
Tot al Equi t y $ 800, 000
Owner shi p i nt er est 100% 800, 000
Book value exceeds cost $( 615, 000) Debi t
=========
Adj ust ment s
Account s Recei vabl e - - - - -
I nvent or y ( $600, 000 -
$450, 000)
150, 000 Debi t
Pr oper t y and Pl ant ( 600, 000) Cr edi t
Goodwi l l ( 150, 000) Cr edi t
Ext r aor di nar y Gai n ( 15, 000) Cr edi t
Total Adjustments $( 615, 000)
=========

c. Wor ksheet ent r y.
Common St ock $5 Par $300, 000
Pai d- i n capi t al i n excess of par 400, 000
I nvest ment $800, 000

( Al t er nat i ve Cr edi t s:
I nvest ment i n Super nova 185, 000
Excess ( 615, 000)

I nvest ment i n Super nova 615, 000
Pr oper t y and Pl ant 600, 000
Goodwi l l 150, 000
Ext r aor di nar y Gai n 15, 000

( Al t er nat i ve Debi t :
Excess 615, 000)

DI F: M OBJ : 2, 3, 4, 5, 6
Chapt er 2
2- 10
3. On December 31, 20X1, Pr i or i t y Company pur chased 80%of t he common st ock
of Subsi di ar y Company f or $1, 550, 000. On t hi s dat e, Subsi di ar y had t ot al
owner s' equi t y of $650, 000 ( common st ock $100, 000; ot her pai d- i n
capi t al , $200, 000; and r et ai ned ear ni ngs, $350, 000) . Any excess of cost
over book val ue i s due t o t he under or over val uat i on of cer t ai n asset s
and l i abi l i t i es. Asset s and l i abi l i t i es wi t h di f f er ences i n book and
f ai r val ues ar e pr ovi ded i n t he f ol l owi ng t abl e:

Book Fai r
Val ue Val ue
Cur r ent Asset s. . . . . . . . . . . . . . . . . . . . . . . . $500, 000 $800, 000
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . 200, 000 150, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800, 000 800, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000 600, 000
Bui l di ngs ( net ) . . . . . . . . . . . . . . . . . . . . . . . 700, 000 900, 000
Cur r ent Li abi l i t i es. . . . . . . . . . . . . . . . . . . 800, 000 875, 000
Long- Ter mDebt . . . . . . . . . . . . . . . . . . . . . . . . 850, 000 930, 000

Remai ni ng excess, i f any, i s due t o goodwi l l .

Requi r ed:

a. Usi ng t he i nf or mat i on above and on t he separ at e wor ksheet ,
pr epar e a schedul e t o det er mi ne and di st r i but e t he excess of
cost over book val ue.

b. Compl et e t he Fi gur e 2- 1 wor ksheet f or a consol i dat ed bal ance
sheet as of December 31, 20X1.

Chapt er 2
2- 11
ANS:

a. Det er mi nat i on and Di st r i but i on of Excess of Cost over Book
Val ue Schedul e:

Pr i ce pai d f or i nvest ment i n
Subsi di ar y Company. . . . . . . . . . . . . . . . . $1, 550, 000
Less Book val ue of i nt er est acqui r ed:
Common st ock. . . . . . . . . . . . . . . . . . . . . . . $100, 000
Ot her pai d- i n capi t al . . . . . . . . . . . . . . 200, 000
Ret ai ned ear ni ngs . . . . . . . . . . . . . . . . . 350, 000
Tot al st ockhol der s' equi t y. . . . . . . . . $650, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . 80% 520, 000
Excess of cost over book val ue
( debi t bal ance) $1, 030, 000
==========
Al l ocabl e t o:
Cur r ent asset s ( $300, 000 x . 80) . . . . . $240, 000 Dr .
Account s Recei vabl e ( $50, 000 x . 80) . 40, 000 Cr .
Land ( $500, 000 x . 80) . . . . . . . . . . . . . . . 400, 000 Dr .
Bui l di ng and Equi pment . . ( $200, 000 x . 80) 160, 000 Dr .
Cur r ent Li abi l i t i es ( $75, 000 x . 80) . 60, 000 Cr .
Pr emi umon Bonds ( $80, 000 x . 80) . . . . 64, 000 Cr .
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . $394, 000 Dr .
========

b. For t he wor ksheet sol ut i on, pl ease r ef er t o Answer 2- 1.

El i mi nat i ons and Adj ust ment s:

( EL) El i mi nat e 80%of t he subsi di ar y' s equi t y account s agai nst
t he i nvest ment i n subsi di ar y account .

( D) Al l ocat e t he excess of cost over book val ue t o net asset s
as r equi r ed by t he det er mi nat i on and di st r i but i on of excess
schedul e.

DI F: M OBJ : 4, 5, 6, 7, 8

4. On December 31, 20X1, Par ent Company pur chased 80%of t he common st ock
of Subsi di ar y Company f or $280, 000. On t hi s dat e, Subsi di ar y had t ot al
owner s' equi t y of $250, 000 ( common st ock $20, 000; ot her pai d- i n capi t al ,
$80, 000; and r et ai ned ear ni ngs, $150, 000) . Any excess of cost over book
val ue i s due t o t he under or over val uat i on of cer t ai n asset s and
l i abi l i t i es. I nvent or y i s under val ued $5, 000. Land i s under val ued
$20, 000. Bui l di ngs and equi pment have a f ai r val ue whi ch exceeds book
val ue by $30, 000. Bonds payabl e ar e over val ued $5, 000. The r emai ni ng
excess, i f any, i s due t o goodwi l l .

Requi r ed:

pr epar e a schedul e t o det er mi ne and di st r i but e t he excess of
cost over book val ue. Use t he par ent company concept ( pr o r at a
f ai r val ue appr oach) i n any r eval uat i on of net asset s.

sheet as of December 31, 20X1.
Chapt er 2
2- 12

ANS:

a. Det er mi nat i on and Di st r i but i on of Excess of Cost over Book
Val ue Schedul e:

Pr i ce pai d f or i nvest ment i n Subsi di ar y
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $280, 000
Less book val ue of i nt er est acqui r ed:
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20, 000
Ot her pai d- i n capi t al . . . . . . . . . . . . . . . . . . . . 80, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . . . . . . . . $250, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . . . . . . . . 80% 200, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80, 000
========
Al l ocabl e t o:
I nvent or y ( $5, 000 x 80%) . . . . . . . . . . . . . . . . . $ 4, 000
Land ( $20, 000 x 80%) . . . . . . . . . . . . . . . . . . . . . 16, 000
Bui l di ng and Equi pment ( $30, 000 x 80%) . . . 24, 000
Di scount on Bonds ( $5, 000 x 80%) . . . . . . . . . 4, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32, 000
=======



( EL) El i mi nat e 80%of t he subsi di ar y' s equi t y account s agai nst t he
i nvest ment i n subsi di ar y account .

( D) Al l ocat e t he excess of cost over book val ue t o net asset s as
r equi r ed by t he det er mi nat i on and di st r i but i on of excess
schedul e.

DI F: M OBJ : 4, 5, 6, 7, 8

5. On J anuar y 1, 20X1, Pant her Company pur chased 100%of t he common st ock
of Seahawk Company f or $1, 410, 000. On t hi s dat e, Seahawk had t ot al
owner s' equi t y of $1, 150, 000.

On December 31, 20X4, Seahawk Company had r epor t ed an oper at i ng l oss
bef or e t axes of $175, 000. Assume a t ax r at e of 35%. Si nce a car r yback of
$75, 000 was avai l abl e, a t ax r ef und r ecei vabl e of $26, 250 was r ecor ded
and a net - of - t ax l oss of $148, 750 was r epor t ed. At t he dat e of pur chase,
Pant her Company has concl uded t hat t he bal ance of t he t ax benef i t of t he
oper at i ng l oss wi l l be r eal i zed i n 20X1 when a consol i dat ed t ax r et ur n
i s pr epar ed.

On J anuar y 1, 20X1, t he excess of cost over book val ue i s due t o t he t ax
benef i t above, t o a $30, 000 under val uat i on of Bonds Payabl e, t o an
under val uat i on of l and, bui l di ng and equi pment , and t o goodwi l l . The
f ai r val ue of l and i s $500, 000. The f ai r val ue of bui l di ng and equi pment
i s $750, 000. The book val ue of t he l and i s $400, 750. The book val ue of
t he bui l di ng and equi pment i s $613, 000.

Chapt er 2
2- 13
Requi r ed:

compl et e a schedul e f or det er mi nat i on and di st r i but i on of t he
excess of cost over book val ue.

sheet as of J anuar y 1, 20X1.

ANS:

a. Det er mi nat i on and Di st r i but i on of Excess of Cost Over Book
Val ue Schedul e:

Seahawk Company. . . . . . . . . . . . . . . . . . . . $1, 410, 000
Common st ock. . . . . . . . . . . . . . . . . . . . . . . $ 200, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . 650, 000
Tot al st ockhol der s' equi t y. . . . . . . . . $1, 150, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . 100% 1, 150, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . $ 260, 000
==========

Al l ocabl e t o:
Tax Benef i t of Oper at i ng Loss
Car r yf or war d. . . . . . . . . . . . . . . . . . . . . $ 26, 250
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99, 250 Dr .
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . 137, 000 Dr .
Pr emi umon bonds payabl e . . . . . . . . . . ( 30, 000) Cr .
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27, 500 Dr .
========




as r equi r ed by t he det er mi nat i on and di st r i but i on of
excess schedul e.

DI F: D OBJ : 4, 5, 6, 7

Chapt er 2
2- 14
6. On J anuar y 1, 20X1, Par ent Company pur chased 80%of t he common st ock of
Subsi di ar y Company f or $248, 800. On t hi s dat e, Subsi di ar y had t ot al
owner s' equi t y of $240, 000.

On December 31, 20X4, Subsi di ar y Company had r epor t ed an oper at i ng l oss
bef or e t axes of $40, 000. Assume a t ax r at e of 30%. Si nce a car r yback of
$20, 000 was avai l abl e, a t ax r ef und r ecei vabl e of $6, 000 was r ecor ded
and a net - of - t ax l oss of $34, 000 was r epor t ed. At t he dat e of pur chase,
Par ent Company has concl uded t hat t he bal ance of t he t ax benef i t of t he
oper at i ng l oss wi l l be r eal i zed i n 20X1 when a consol i dat ed t ax r et ur n
i s pr epar ed.

On J anuar y 1, 20X1, t he excess of cost over book val ue i s due t o t he t ax
benef i t above, t o a $5, 000 under val uat i on of Bonds Payabl e, t o an
under val uat i on of l and, bui l di ng and equi pment , and t o goodwi l l . The

Requi r ed:

a. Fr omt he i nf or mat i on above and on t he separ at e wor ksheet ,
excess of cost over book val ue. Use t he par ent company concept
( pr o r at a f ai r val ue appr oach) i n any r eval uat i on of net
asset s.


Chapt er 2
2- 15
ANS:

Val ue Schedul e:

Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $248, 800
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Ot her pai d- i n capi t al . . . . . . . . . . . . . . . . 70, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . 120, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . . $240, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . . 80% 192, 000

( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . $ 56, 800
========

Al l ocabl e t o:
Tax Benef i t of Oper at i ng Loss
Car r yf or war d ( $6, 000 x 80%) . . . . . . . . $ 4, 800 Dr .
Land ( $10, 000 x 80%) . . . . . . . . . . . . . . . . 8, 000 Dr .
Bui l di ng ( $20, 000 x 80%) . . . . . . . . . . . . . 16, 000 Dr .
Pr emi umon Bonds Payabl e ( $5, 000 x 80%) ( 4, 000) Cr .
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32, 000 Dr .
=======




schedul e.

DI F: D OBJ : 4, 5, 6, 7, 8


On J anuar y 1, 20X1, t he excess of cost over book val ue i s due t o a
$15, 000 under val uat i on of i nvent or y, t o a $5, 000 over val uat i on of Bonds
Payabl e, and t o an under val uat i on of l and, bui l di ng and equi pment . The

Requi r ed:


Chapt er 2
2- 16

ANS:

Val ue Schedul e:

Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . $280, 000
Less Book val ue of i nt er est acqui r ed:
Common st ock. . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . 120, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240, 000
Less i nt er est acqui r ed. . . . . . . . . . . . . 100% 240, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . $ 40, 000
========

Al l ocabl e t o:
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . $15, 000 Dr .
Di scount on bonds payabl e. . . . . . . . . . 5, 000 Dr .
Remai nder t o ot her l ong- l i ved asset s: $20, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 000 Dr .
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000 Dr .
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0
=======

100%of Fr act i on Tot al Al l ocat ed 100%
Fai r of Fai r Assi gned Assi gned Book I ncr ease
Asset Val ue Val ue Val ue* Val ue Val ue ( Decr ease)
Land $ 50, 000 1/ 5 $230, 000 $ 46, 000 $ 30, 000 $16, 000
Bui l di ng 200, 000 4/ 5 230, 000 184, 000 180, 000 4, 000
$250, 000 $230, 000 $210, 000 $20, 000
======== ======== ======== =======

* Book val ue of Land ( $30, 000) and Bui l di ng ( $180, 000) pl us $20, 000
r emai ni ng excess of cost over book val ue.




excess schedul e.

DI F: M OBJ : 4, 5, 6, 7

Chapt er 2
2- 17

On J anuar y 1, 20X1, t he excess of cost over book val ue i s due t o a
$15, 000 under val uat i on of i nvent or y, t o a $5, 000 over val uat i on of Bonds
Payabl e, and t o an under val uat i on of l and, bui l di ng and equi pment . The

Requi r ed:

( pr o r at a f ai r val ue appr oach) i n any r eval uat i on of net
asset s.


Chapt er 2
2- 18
ANS:

Val ue Schedul e:

Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $252, 000
Common St ock. . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Ot her Pai d- i n Capi t al . . . . . . . . . . . . . . . 70, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . 120, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240, 000
Less I nt er est acqui r ed. . . . . . . . . . . . . . 90% 216, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . $ 36, 000
========

Al l ocabl e t o:
I nvent or y ( $15, 000 x 90%) . . . . . . . . . . . . $13, 500 Dr .
Di scount on bonds payabl e
( $5, 000 x 90%) . . . . . . . . . . . . . . . . . . . . . . 4, 500 Dr .
Remai nder t o ot her l ong- l i ved asset s: $18, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 400 Dr .
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 600 Dr .
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0
=======

Al t er nat i ve 1 100%of Fr act i on Tot al Al l ocat ed 100%of
Fai r of Fai r Assi gned Assi gned Book
Asset Val ue Val ue Val ue* Val ue Val ue _
Land. . . . . . . . $ 50, 000 1/ 5 $230, 000 $ 46, 000 $ 30, 000
Bui l di ng. . . . 200, 000 4/ 5 230, 000 184, 000 180, 000
$250, 000 $230, 000 $210, 000
======== ======== ========

Al t er nat i ve 1 cont i nued
100% 90%
I ncr ease I ncr ease
Asset ( Decr ease) ( Decr ease)
Land. . . . . . . . $16, 000 $14, 400
Bui l di ng. . . . 4, 000 3, 600
$20, 000 $18, 000
======= =======

* I f r emai ni ng al l ocabl e cost on a 90%pur chase i s $18, 000, i t woul d be
$20, 000 on a 100%pur chase. Book val ue of $210, 000 must be i ncr eased by
$20, 000 t o get t ot al al l ocabl e cost . I ncr ease of decr ease f or 100%
pur chase must t hen be mul t i pl i ed by 90%t o der i ve cor r ect wr i t eup.

Chapt er 2
2- 19
Al t er nat i ve 2
90%of Fr act i on Tot al Al l ocat ed 90%of 90%
Asset Val ue Val ue Val ue** Val ue Val ue ( Decr ease)
Land $ 45, 000 1/ 5 $207, 000 $ 41, 400 $ 27, 000 $14, 400

Bui l di ng 180, 000 4/ 5 207, 000 165, 600 162, 000 3, 600
$225, 000 $207, 000 $189, 000 $18, 000
======== ======== ======== =======

** The r emai ni ng al l ocabl e cost on a 90%pur chase i s $18, 000.
The book val ue of t he cont r ol l i ng i nt er est i n l and and
bui l di ng i s $189, 000 ( 90%of $210, 000) . Thi s book val ue of
$189, 000 must be i ncr eased by $18, 000 t o get t he t ot al
assi gned val ue.




excess schedul e.

DI F: D OBJ : 4, 5, 6, 7, 8

Chapt er 2
2- 20
9.
Consol i dat ed
Fi nanci al
Pepper Co. Sal t I nc. St at ement s
Cash $ 26, 000 $ 20, 000 $ 46, 000
Account s Recei vabl e, net 20, 000 30, 000 50, 000
I nvent or y 125, 000 110, 000 270, 000
Land 30, 000 80, 000 124, 000
Bui l di ng and Equi pment 320, 000 160, 000 459, 000
I nvest ment i n Subsi di ar y 279, 000 - -
Goodwi l l - - 41, 000
Tot al Asset s $800, 000 $400, 000 $990, 000
======== ======== ========

Account s Payabl e $ 40, 000 $ 40, 000 $ 80, 000
Ot her Li abi l i t i es 70, 000 60, 000 130, 000
Common St ock 400, 000 200, 000 400, 000
Ret ai ned Ear ni ngs 290, 000 100, 000 290, 000
Noncont r ol l i ng I nt er est - - 90, 000
Tot al Li abi l i t i es &
St ockhol der s' Equi t y $800, 000 $400, 000 $990, 000
======== ======== ========

Answer t he f ol l owi ng based upon t he above f i nanci al st at ement s:
a. How much di d Pepper Co. pay t o acqui r e Sal t I nc. ?
b. What per cent age owner shi p di d Pepper Co. acqui r e of Sal t I nc. ?
c. What was t he f ai r val ue of Sal t ' s I nvent or y at t he t i me of
acqui si t i on?
d. Was t he book val ue of Sal t ' s Bui l di ng and Equi pment over val ued or
under val ued r el at i ve t o t he Bui l di ng and Equi pment ' s f ai r val ue at
t he t i me of acqui si t i on?

ANS:
a. I nvest ment i n Subsi di ar y $279, 000

b. Noncont r ol l i ng I nt er est 90, 000
Subsi di ar y Equi t y 200, 000 + 100, 000 = 30%

100%- 30%= 70%

c. Consol i dat ed I nvent or y $270, 000
Pepper Co. I nvent or y $125, 000
Sal t I nc. I nvent or y 110, 000
Tot al I nvent or y Book Val ue $235, 000
Adj ust ment $ 35, 000
Owner shi p % 70% = 50, 000

d. The Bui l di ng and Equi pment ' s book val ue was over val ued r el at i ve t o
t he f ai r val ue.
$320, 000 + $160, 000 = $480, 000 > $459, 000. ( $21, 000/ 70%= $30, 000)

DI F: D OBJ : 4, 5, 6

Chapt er 2
2- 21
10. On J anuar y 1, 20X1, Par ent Company acqui r ed 80%of t he common st ock of
Subsi di ar y Company by i ssui ng Par ent common st ock wi t h a f ai r val ue of
$250, 800. On t hi s dat e, Subsi di ar y had t ot al owner s' equi t y of $240, 000.

Even t hough t he combi nat i on must be account ed f or as a pur chase, i t i s a
t ax- f r ee combi nat i on f or Feder al i ncome t ax pur poses. The cor por at e t ax
r at e i s 30%.

On J anuar y 1, 20X1, t he excess of cost over book val ue i s due t o an
under val uat i on of l and, bui l di ng, and goodwi l l . The f ai r val ue of l and
i s $40, 000. The f ai r val ue of bui l di ng i s $200, 000. The book val ue of
t he l and i s $30, 000. The book val ue of t he bui l di ng i s $180, 000.

Requi r ed:

( pr or at a f ai r val ue appr oach) i n any wr i t eup of net asset s.


Chapt er 2
2- 22
ANS:

Val ue Schedul e:

Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250, 800
Common St ock. . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Ot her Pai d- i n Capi t al . . . . . . . . . . . . . . . . 70, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . 120, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240, 000
Less I nt er est acqui r ed. . . . . . . . . . . . . . . 80% 192, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . $ 58, 800
========

Land ( $10, 000 x 80%) . . . . . . . . . . . . . . . . . $ 8, 000 Dr .
Def er r ed Tax Li abi l i t y ( $8, 000 x 30%) . ( 2, 400) Cr .
Bui l di ng ( $20, 000 x 80%) . . . . . . . . . . . . . . 16, 000 Dr .
Def er r ed Tax Li abi l i t y ( $16, 000 x 30%) ( 4, 800) Cr .
Goodwi l l ( Net of def er r ed t ax l i abi l i t y) $42, 000 Dr .

To be di st r i but ed
Goodwi l l ( $42, 000 70%) . . . . . . . . . . . . . $ 60, 000 Dr .
Def er r ed Tax Li abi l i t y. . 30%x $60, 000) ( 18, 000) Cr .
Net of t ax val ue of Goodwi l l . . . . . . . . . $ 42, 000
========




excess schedul e.

DI F: D OBJ : 4, 5, 6, 7, 8

Chapt er 2
2- 23
11. Super nova Company had t he f ol l owi ng summar i zed bal ance sheet on December
31, 20X1:

Asset s
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 400, 000
==========

Not es payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600, 000
Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 400, 000
==========


Requi r ed:

a. Assume t hat Redst ar Cor por at i on pur chases 100%of t he common
st ock of Super nova Company f or $1, 800, 000. What val ue wi l l be
assi gned t o t he f ol l owi ng account s of t he Super nova Company
when pr epar i ng a consol i dat ed bal ance sheet on December 31,
20X1?

( 1) I nvent or y _________
( 2) Pr oper t y and pl ant _________
( 3) Goodwi l l _________
( 4) Noncont r ol l i ng i nt er est _________

schedul e.

Chapt er 2
2- 24
ANS:

a. ( 1) I nvent or y $600, 000 $450, 000 BV + $150, 000
( 2) Pr oper t y and pl ant $850, 000 $600, 000 BV + $250, 000
( 3) Goodwi l l $750, 000
( 4) Noncont r ol l i ng i nt er est 0 No NCI

b. Det er mi nat i on and Di st r i but i on of Excess Schedul e:

Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 800, 000
Equi t y of Super nova:
Common st ock, $5 par . . . . . . . . . . . . . . . . . . $300, 000
Pai d- i n capi t al i n excess of par . . . . . . 400, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . 100, 000
Tot al equi t y. . . . . . . . . . . . . . . . . . . . . . . . $800, 000
I nt er est pur chased. . . . . . . . . . . . . . . . . . . . 100% 800, 000
Excess cost over book val ue. . . . . . . . . . . . . 1, 000, 000
I ncr ease i nvent or y. . . . . . . . . . . . . . . . . . . . . . 150, 000
Avai l abl e f or f i xed asset s. . . . . . . . . . . . $ 850, 000
Add exi st i ng goodwi l l . . . . . . . . . . . . . . . . . . . 150, 000
Adj ust ed avai l abl e f or f i xed asset s. . . . . $1, 000, 000
I ncr ease pr oper t y and pl ant . . . . . . . . . . . . . 250, 000
Goodwi l l ( t ot al ) . . . . . . . . . . . . . . . . . . . . . . $ 750, 000
==========

DI F: M OBJ : 6, 7, 9

12. Sat ur n Company had t he f ol l owi ng summar i zed bal ance sheet on December
31, 20X1:

Asset s
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 400, 000
==========

Not es payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600, 000
Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 400, 000
==========


Chapt er 2
2- 25
Requi r ed:

a. Assume t hat Ret ur n Cor por at i on pur chases 80%of t he common
st ock of Sat ur n Company f or $600, 000. What val ue wi l l be
assi gned t o t he f ol l owi ng account s of t he Sat ur n Company when
pr epar i ng a consol i dat ed bal ance sheet on December 31, 20X1?

( 1) I nvent or y _________
( 3) Goodwi l l _________
( 4) Noncont r ol l i ng i nt er est _________

schedul e.

ANS:

a. ( 1) I nvent or y $580, 000 $500, 000 BV + $80, 000
( 2) Pr oper t y and pl ant $576, 000 $600, 000 BV - $24, 000
( 3) Goodwi l l $ 24, 000 $120, 000 BV - $96, 000
( 4) Noncont r ol l i ng i nt er est $160, 000 20%of $800, 000 equi t y


Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600, 000
Equi t y of Sat ur n:
Common st ock, $5 par . . . . . . . . . . . . . . . . . . $300, 000
Tot al equi t y. . . . . . . . . . . . . . . . . . . . . . . . $800, 000
Excess cost over book val ue. . . . . . . . . . . . . $ ( 40, 000)
I ncr ease i nvent or y, 80%x $100, 000. . . . . . 80, 000
Avai l abl e f or f i xed asset s. . . . . . . . . . . . $( 120, 000)
Add exi st i ng goodwi l l , 80%x $120, 000. . . 96, 000
Adj ust ed avai l abl e f or f i xed asset s. . . $ ( 24, 000)
Decr ease pr oper t y and pl ant . . . . . . . . . . . . . $ 24, 000
=========

DI F: M OBJ : 6, 7, 8, 9

Chapt er 2
2- 26
13. Pl ut o pur chased 100%of t he common st ock of t he Sat ur n Company f or
$325, 000 when Sat ur n had t he f ol l owi ng bal ance sheet :

Asset s
Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Pr oper t y and pl ant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Accumul at ed depr eci at i on. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 110, 000)
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300, 000
=========

Cur r ent l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Pai n- i n capi t al i n excess of par . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300, 000
========

The f ai r val ue of t he pl ant i s $250, 000.

The pur chase i s a t ax f r ee exchange as t o t he sel l er ; t hus, t he
pur chaser wi l l be abl e t o depr eci at e onl y t he book val ue of t he asset s
pur chased. The appl i cabl e t ax r at e i s 30%.

Requi r ed:

a. At what amount wi l l t he f ol l owi ng account s be l i st ed on t he
consol i dat ed bal ance sheet pr epar ed on t he dat e of pur chase?

( 1) I nvent or y _________
( 3) Def er r ed t ax l i abi l i t y _________
( 4) Goodwi l l _________

schedul e.

Chapt er 2
2- 27
ANS:

a. ( 1) I nvent or y $ 60, 000
( 2) Pr oper t y and pl ant $250, 000
( 3) Def er r ed t ax l i abi l i t y $( 32, 143)
( 4) Goodwi l l $ 47, 143


Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $325, 000
Equi t y of Super nova:
Common st ock, $5 par . . . . . . . . . . . . . . . . . . $100, 000
Tot al equi t y. . . . . . . . . . . . . . . . . . . . . . . . $250, 000
Excess cost over book val ue. . . . . . . . . . . . . $ 75, 000
I ncr ease pr oper t y and pl ant . . . . . . . . . . . . . $ 50, 000
Def er r ed t ax l i abi l i t y ( . 3 x $50, 000) . . . ( 15, 000) 35, 000
Goodwi l l ( net ) . . . . . . . . . . . . . . . . . . . . . . . . $ 40, 000
========
Di st r i but ed:
Goodwi l l ( $40, 000 . 7) $ 57, 143
Def er r ed t ax ( $57, 143 x . 3) ( 17, 143)
$ 40, 000
=======

DI F: D OBJ : 6, 7

14. For t una Company i ssued 51, 500 shar es of $1 par st ock, wi t h a f ai r val ue
of $21 per shar e, f or 80%of t he out st andi ng shar es of Acappel l a
Company. The f i r ms had t he f ol l owi ng separ at e bal ance sheet s pr i or t o
t he acqui si t i on:

Asset s
For t una Acappel l a
Cur r ent asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2, 100, 000 $ 960, 000
Pr oper t y, pl ant , and equi pment ( net ) . . . . . . . . 4, 600, 000 1, 300, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240, 000
Tot al asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6, 700, 000 $2, 500, 000
========== ==========

Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3, 000, 000 $ 800, 000
Common st ock ( $1 par ) . . . . . . . . . . . . . . . . . . . . . . 800, 000
Common st ock ( $5 par ) . . . . . . . . . . . . . . . . . . . . . . 200, 000
Pai d- i n capi t al i n excess of par . . . . . . . . . . . 2, 200, 000 300, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . 700, 000 1, 200, 000
Tot al l i abi l i t i es and equi t y. . . . . . . . . . . . . . . $6, 700, 000 $2, 500, 000
========== ==========

Book val ues equal f ai r val ues f or t he asset s and l i abi l i t i es of
Acappel l a Company, except f or t he pr oper t y, pl ant , and equi pment , whi ch
has a f ai r val ue of $1, 600, 000.

Chapt er 2
2- 28
Requi r ed:

a. Pr epar e a det er mi nat i on and di st r i but i on of excess schedul e.

b. Pr ovi de al l el i mi nat i ons on t he par t i al bal ance sheet
wor ksheet pr ovi ded i n Fi gur e 2- 8 and compl et e t he
noncont r ol l i ng i nt er est col umn.

ANS:

a. Det er mi nat i on and Di st r i but i on of Excess Schedul e:

Pr i ce pai d ( 51, 500 shar es x $21 f ai r val ue) $1, 081, 500
Less i nt er est acqui r ed:
Common st ock ( $10 par ) . . . . . . . . . . . . . . . . $ 200, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . 1, 200, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . $1, 700, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . 80% 1, 360, 000
Excess book val ue over cost . . . . . . . . . . . . . $ 278, 500
Less needed pr evi ousl y r ecor ded goodwi l l
( 80%x $240, 000) . . . . . . . . . . . . . . . . . . . . . . 192, 000
Lef t t o decr ease pr oper t y, pl ant , and
equi pment $ 86, 500
==========



( 1) El i mi nat e 80%of subsi di ar y equi t y agai nst t he i nvest ment
account .
( 2) Di st r i but e excess accor di ng t o t he det er mi nat i on and
di st r i but i on of excess schedul e.

DI F: M OBJ : 4, 6, 7, 8, 9

ESSAY

1. Hi st or i cal l y t he SEC and t he FASB have consi der ed maj or i t y owner shi p t o
def i ne cont r ol as a necessar y condi t i on pr i or t o pr epar i ng consol i dat i ng
f i nanci al st at ement s. Now, bot h of t hese or gani zat i ons ar e consi der i ng a
change i n t he def i ni t i on of cont r ol .

Di scuss t he hi st or i cal per spect i ve on consol i dat i on and now under what
si t uat i ons cont r ol woul d be consi der ed appr opr i at e wi t hout maj or i t y
owner shi p. I n your r esponse descr i be t he f unct i on of consol i dat ed
f i nanci al st at ement s.

Chapt er 2
2- 29
ANS:

Consol i dat ed f i nanci al st at ement s ar e desi gned t o pr esent t he r esul t s of
oper at i ons, cash f l ow and t he bal ance sheet of t he par ent and i t s
subsi di ar i es as i f t hey wer e a si ngl e company. Hi st or i cal l y, owner shi p
i n excess of 50%was consi der ed necessar y f or cont r ol . Pr i or t o FAS 94
non- homogeneous subsi di ar i es wer e not consol i dat ed. Under FAS 94 t he
onl y except i ons f or consol i dat i on r el at e t o cont r ol bei ng necessar y, or
i t does not r est wi t h t he maj or i t y owner .

Cur r ent l y, FASB woul d pr esume cont r ol t o exi st , wi t hout maj or i t y
owner shi p, i f any of t he f ol l owi ng si t uat i ons exi st :
* The par ent company has t he r i ght t o appoi nt t he maj or i t y of member s
t o t he boar d of di r ect or s.
* The par ent can el ect t he maj or i t y of member s t o t he boar d of
di r ect or s wi t h a l ar ge mi nor i t y ( l ess t han 50%) vot i ng i nt er est .
* The par ent company i s t he onl y gener al par t ner i n a l i mi t ed
par t ner shi p and no ot her par t ner gr oup may di ssol ve t he par t ner shi p
or r emove t he gener al par t ner .
The par ent has t he uni l at er al abi l i t y t o assume t he r ol e of gener al
par t ner i n a l i mi t ed par t ner shi p.

DI F: M OBJ : 2, 3

2. Di scuss t he condi t i ons under whi ch t he FASB woul d assume a pr esumpt i on
of cont r ol . Addi t i onal l y, under what ci r cumst ances mi ght t he FASB
r equi r e consol i dat i on even t hough t he par ent does not cont r ol t he
subsi di ar y?

ANS:

The FASB pr esumes t hat cont r ol exi st s i f one company owns over 50%of
t he vot i ng i nt er est i n anot her company or has an uncondi t i onal r i ght t o
appoi nt a maj or i t y of t he member s of anot her company' s cont r ol l i ng body.
Addi t i onal l y, i n t he absence of evi dence t o t he cont r ar y, one or mor e of
t he f ol l owi ng condi t i ons woul d l ead t o a pr esumpt i on of cont r ol :

1. Owner shi p of a l ar ge noncont r ol l i ng i nt er est wher e no ot her
par t y has a si gni f i cant i nt er est .
2. Owner shi p of secur i t i es or uncondi t i onal r i ght s i n t he company
t hat can be conver t ed i nt o secur i t i es t hat woul d cause a
cont r ol l i ng i nt er est t o exi st .
3. The acqui r i ng company has t he uncondi t i onal r i ght t o di ssol ve
t he ent i t y whose i nt er est was acqui r ed and assume cont r ol of
t he asset s.
4. A r el at i onshi p wi t h anot her ent i t y t hat assur es cont r ol
t hr ough pr ovi si ons i n a char t er , byl aws, or t r ust agr eement .
5. A l egal obl i gat i on cr eat ed wi t h t he cont r ol l ed ent i t y t hat
r equi r es subst ant i al l y al l cash f l ows and ot her economi c
benef i t s t o f l ow t o t he cont r ol l i ng ent i t y.
6. A sol e gener al par t ner i n a l i mi t ed par t ner shi p wher e no ot her
par t y may di ssol ve t he par t ner shi p or r emove t he gener al
par t ner .

DI F: M OBJ : 3

Chapt er 2
2- 30
3. A par ent company pur chases an 80%i nt er est i n a subsi di ar y at a pr i ce
hi gh enough t o r eval ue al l asset s and al l ow f or goodwi l l on t he i nt er est
pur chased. I f " push down account i ng" wer e used i n conj unct i on wi t h t he
" economi c ent i t y concept , " what uni que pr ocedur es woul d be used t hat ar e
not nor mal l y used f or such an 80%pur chase?

ANS:

Al l asset s i ncl udi ng goodwi l l woul d be adj ust ed 100%, r at her t han 80%,
of t he way t o f ai r val ue. Thi s woul d mean t hat t he noncont r ol l i ng
i nt er est woul d be i ncr eased f or 20%of t he t ot al wr i t e- ups t hr ough t he
noncont r ol l i ng i nt er est i n r et ai ned ear ni ngs. The met hod woul d al so be
uni que i n t hat t he asset adj ust ment s woul d be made di r ect l y on t he books
of t he subsi di ar y r at her t han on t he consol i dat ed wor ksheet .

DI F: D OBJ : 8, 10
Chapt er 2
2- 31
[[Insert FIGURE 2-1 from Excel Spreadsheet]]
Chapt er 2
2- 32
[[Insert ANSWER 2-1 from Excel spreadsheet]]
Chapt er 2
2- 33
[[Insert FIGURE 2-2 from Excel spreadsheet]]
Chapt er 2
2- 34
Chapt er 2
2- 35
Chapt er 2
2- 36
Chapt er 2
2- 37
Chapt er 2
2- 38
Chapt er 2
2- 39
Chapt er 2
2- 40
Chapt er 2
2- 41
Chapt er 2
2- 42
Chapt er 2
2- 43
Chapt er 2
2- 44
Chapt er 2
2- 45
Chapt er 2
2- 46
Chapter 3 Consolidated Statements: Subsequent to Acquisition

MULTIPLE CHOICE

1. Pedr o pur chased 100%of t he common st ock of t he Sanbur n Company on
J anuar y 1, 20X1, f or $500, 000. On t hat dat e, t he st ockhol der s' equi t y of
Sanbur n Company was $380, 000. On t he pur chase dat e, i nvent or y of Sanbur n
Company, whi ch was sol d dur i ng 20X1, was under st at ed by $20, 000. Any
r emai ni ng excess of cost over book val ue i s at t r i but abl e t o pat ent wi t h
a 20- year l i f e. The r epor t ed i ncome and di vi dends pai d by Sanbur n
Company wer e as f ol l ows:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . $80, 000 $90, 000
Di vi dends pai d. . . . . . . . . . . . . . . . . . . . . . 10, 000 10, 000

Usi ng t he si mpl e equi t y met hod, whi ch of t he f ol l owi ng amount s ar e
cor r ect ?

I nvest ment I ncome I nvest ment Account Bal ance
20X1 December 31, 20X1
a. $80, 000 $570, 000
b. $70, 000 $570, 000
c. $70, 000 $550, 000
d. $80, 000 $550, 000



20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . $80, 000 $90, 000
Di vi dends pai d. . . . . . . . . . . . . . . . . . . . . . 10, 000 10, 000

Usi ng t he sophi st i cat ed ( f ul l ) equi t y met hod, whi ch of t he f ol l owi ng
amount s ar e cor r ect ?

a. $55, 000 $555, 000
b. $55, 000 $545, 000
c. $75, 000 $565, 000
d. $80, 000 $570, 000


Chapt er 3
3- 2

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . $80, 000 $90, 000
Di vi dends pai d. . . . . . . . . . . . . . . . . . . . . . 10, 000 10, 000

Usi ng t he cost met hod, whi ch of t he f ol l owi ng amount s ar e cor r ect ?

a. $10, 000 $500, 000
b. $10, 000 $570, 000
c. $0 $570, 000
d. $80, 000 $500, 000


4. What i s t he ef f ect i f an unconsol i dat ed subsi di ar y i s account ed f or by
t he equi t y met hod but consol i dat ed st at ement s ar e bei ng pr epar ed f or t he
par ent company and other subsi di ar i es?
a. Al l of t he unconsol i dat ed subsi di ar y' s account s wi l l be i ncl uded
i ndi vi dual l y i n t he consol i dat ed st at ement s.
b. The consol i dat ed r et ai ned ear ni ngs will not r ef l ect t he ear ni ngs
of t he unconsol i dat ed subsi di ar y.
c. The consol i dat ed r et ai ned ear ni ngs wi l l be t he same as i f t he
subsi di ar y had been i ncl uded i n t he consol i dat i on.
d. Di vi dend r evenue f r omt he unconsol i dat ed subsi di ar y wi l l be
r ef l ect ed i n consol i dat ed net i ncome.

ANS: C DI F: M OBJ : 1, 2, 4

Chapt er 3
3- 3
5. On J anuar y 1, 20X1, Pr omo, I nc. pur chased 70%of Set Cor por at i on f or
$469, 000. On t hat dat e t he book val ue of t he net asset s of Set t ot al ed
$500, 000. Based on t he appr ai sal done at t he t i me of t he pur chase, al l
asset s and l i abi l i t i es had book val ues equal t o t hei r f ai r val ues except
as f ol l ows:

I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000 $120, 000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000 85, 000
Equi pment ( usef ul l i f e 4 year s) . . . . . 125, 000 165, 000

The $70, 000 of excess of cost over book val ue was al l ocat ed t o a pat ent
wi t h a 10- year usef ul l i f e.

Dur i ng 20X1 Pr omo r epor t ed net i ncome of $200, 000 and Set had net i ncome
of $100, 000.

What i s consol i dat ed net i ncome i f Pr omo i ncl udes i n i t s net i ncome,
i ncome f r omSet usi ng t he sophi st i cat ed equi t y met hod?
a. $42, 000
b. $70, 000
c. $200, 000
d. $270, 000

ANS: C DI F: M OBJ : 1, 4, 6

as f ol l ows:

I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000 $120, 000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000 85, 000


of $100, 000.

What i ncome f r omsubsi di ar y di d Pr omo i ncl ude i n i t s net i ncome i f Pr omo
uses t he si mpl e equi t y met hod?
a. $33, 000
b. $42, 000
c. $70, 000
d. $100, 000

ANS: C DI F: D OBJ : 1, 6

Chapt er 3
3- 4
as f ol l ows:

I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000 $120, 000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000 85, 000


of $100, 000.

What i ncome f r omsubsi di ar y di d Pr omo i ncl ude i n i t s net i ncome i f Pr omo
uses t he sophi st i cat ed equi t y met hod?
a. $33, 000
b. $42, 000
c. $70, 000
d. $100, 000

ANS: B DI F: D OBJ : 1, 6

8. On J anuar y 1, 20X1, Rabb Cor p. pur chased 80%of Sunny Cor p. ' s $10 par
common st ock f or $975, 000. On t hi s dat e, t he car r yi ng amount of Sunny' s
net asset s was $1, 000, 000. The f ai r val ues of Sunny' s i dent i f i abl e
asset s and l i abi l i t i es wer e t he same as t hei r car r yi ng amount s except
f or pl ant asset s ( net ) , whi ch wer e $100, 000 i n excess of t he car r yi ng
amount .

I n t he J anuar y 1, 20X1, consol i dat ed bal ance sheet , goodwi l l shoul d be
r epor t ed at _______.
a. $0
b. $75, 000
c. $95, 000
d. $175, 000

ANS: C DI F: E OBJ : 2, 3, 4

9. Whi ch of t he f ol l owi ng st at ement s appl yi ng t o t he use of t he equi t y
met hod ver sus t he cost met hod i s t r ue?
a. The equi t y met hod i s r equi r ed when one f i r mowns 20%or mor e of
t he common st ock of anot her f i r m.
b. I f no di vi dends wer e pai d by t he subsi di ar y, t he i nvest ment
account woul d have t he same bal ance under bot h met hods.
c. The met hod used has no si gni f i cance t o consol i dat ed st at ement s.
d. An advant age of t he equi t y met hod i s t hat no amor t i zat i on of
excess adj ust ment s needs t o be made on t he consol i dat ed wor k
sheet .

ANS: C DI F: E OBJ : 2, 3

Chapt er 3
3- 5
10. I n consol i dat ed f i nanci al st at ement s i t i s expect ed t hat :
a. Di vi dends decl ar ed equal s t he sumof t he t ot al par ent company' s
decl ar ed di vi dends and t he t ot al subsi di ar y' s decl ar ed di vi dends.
b. Ret ai ned Ear ni ngs equal s t he sumof t he cont r ol l i ng i nt er est ' s
separ at e r et ai ned ear ni ngs and t he noncont r ol l i ng i nt er est ' s
separ at e r et ai ned ear ni ngs.
c. Common St ock equal s t he sumof t he par ent company' s out st andi ng
shar es and t he subsi di ar y' s out st andi ng shar es.
d. Net I ncome equal s t he sumof t he i ncome di st r i but ed t o t he
cont r ol l i ng i nt er est and t he i ncome di st r i but ed t o t he
noncont r ol l i ng i nt er est .

ANS: D DI F: E OBJ : 2, 3, 4

11. How i s t he por t i on of consol i dat ed ear ni ngs t o be assi gned t o
noncont r ol l i ng i nt er est i n consol i dat ed f i nanci al st at ement s det er mi ned?
a. The net i ncome of t he par ent i s subt r act ed f r omt he subsi di ar y' s
net i ncome t o det er mi ne t he noncont r ol l i ng i nt er est .
b. The subsi di ar y' s net i ncome i s ext ended t o t he noncont r ol l i ng
i nt er est .
c. The amount of t he subsi di ar y' s ear ni ngs r ecogni zed f or
consol i dat i on pur poses i s mul t i pl i ed by t he noncont r ol l i ng' s
per cent age owner shi p.
d. The amount of consol i dat ed ear ni ngs det er mi ned on t he consol i dat ed
wor ki ng paper s i s mul t i pl i ed by t he noncont r ol l i ng i nt er est
per cent age at t he bal ance- sheet dat e.

ANS: C DI F: M OBJ : 2, 3, 4

12. Pat t i Cor p. has sever al subsi di ar i es ( Aet a, Bet a, and Gaet a) t hat ar e
i ncl uded i n i t s consol i dat ed f i nanci al st at ement s. I n i t s 12/ 31/ X1
separ at e bal ance sheet , Pat t i had t he f ol l owi ng i nt er company bal ances
bef or e el i mi nat i ons:

Debi t Cr edi t
Cur r ent Recei vabl e due f r omAet a. . . . . $ 40, 000
Noncur r ent Recei vabl e due f r omBet a. . . 100, 000
Cash Advance t o Bet a. . . . . . . . . . . . . . . . . . 26, 000
Cash Advance f r omGaet a. . . . . . . . . . . . . . . 75, 000
I nt er company Payabl e t o Gaet a. . . . . . . . . 40, 000

I n i t s 12/ 31/ X1 consol i dat ed bal ance sheet , what amount shoul d Pat t i
r epor t as i nt er company r ecei vabl es?
a. $166, 000
b. $51, 000
c. $26, 000
d. $0

ANS: D DI F: E OBJ : 2, 3, 4

Chapt er 3
3- 6
________________________________________________________________

Pawnee Company Scenario

Bal ance sheet i nf or mat i on f or Pawnee Company and i t s 90%owned
subsi di ar y, Si oux Cor por at i on, at December 31, 20X1 i s summar i zed as
f ol l ows:

Pawnee Si oux
Cur r ent asset s- net . . . . . . . . . . . . . . . . . . $ 200, 000 $ 50, 000
Pr oper t y, pl ant , and equi pment - net . . 1, 000, 000 600, 000
I nvest ment i n Si oux. . . . . . . . . . . . . . . . . 558, 000
$1, 758, 000 $650, 000
========== ========

Cur r ent l i abi l i t i es. . . . . . . . . . . . . . . . . $ 100, 000 $ 30, 000
Capi t al st ock. . . . . . . . . . . . . . . . . . . . . . . 800, 000 400, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . 858, 000 220, 000
$1, 758, 000 $650, 000
========== ========

Pawnee acqui r ed i t s i nt er est i n Si oux f or cash at book val ue sever al
year s ago when Si oux' s asset s and l i abi l i t i es wer e equal t o t hei r f ai r
val ues.

13. Ref er t o t he Pawnee Company Scenar i o. Consol i dat ed t ot al asset s of
Pawnee and Si oux at December 31, 20X1 wi l l be _______.
a. $1, 785, 000
b. $1, 850, 000
c. $2, 343, 000
d. $2, 408, 000

ANS: B DI F: E OBJ : 2, 3, 4, 7

14. Ref er t o t he Pawnee Company Scenar i o. The consol i dat ed bal ance sheet of
Pawnee and Si oux at December 31, 20X1 wi l l show
a. I nvest ment i n Si oux, $558, 000.
b. Capi t al st ock, $800, 000.
c. Ret ai ned ear ni ngs, $1, 078, 000.
d. Noncont r ol l i ng i nt er est , $65, 000.

ANS: B DI F: E OBJ : 2, 3, 4, 7

15. Pahl Cor por at i on owns a 60%i nt er est i n Sauer Cor por at i on, acqui r ed at
book val ue equal t o f ai r val ue at t he begi nni ng of 20X1. On December 20,
20X1 Sauer decl ar es di vi dends of $80, 000, and t he di vi dends r emai n
unpai d at year end. Pahl has not r ecor ded t he di vi dends r ecei vabl e at
December 31. A consol i dat ed wor ki ng paper ent r y i s necessar y t o
a. Ent er t he $80, 000 di vi dends r ecei vabl e i n t he consol i dat ed bal ance
sheet .
b. Ent er $48, 000 di vi dends r ecei vabl e i n t he consol i dat ed bal ance
sheet .
c. Reduce t he di vi dend payabl e account t o $32, 000 i n t he consol i dat ed
bal ance sheet .
d. El i mi nat e t he di vi dend payabl e account i n t he consol i dat ed bal ance
sheet .

Chapt er 3
3- 7

16. I f t he i nvest ment i n subsi di ar y account i s i ncr eased or decr eased by t he
amount det er mi ned by t he f ol l owi ng cal cul at i on:

Par ent owner shi p per cent age x ( cur r ent bal ance i n t he subsi di ar y' s
r et ai ned ear ni ngs mi nus t he subsi di ar y' s r et ai ned ear ni ngs bal ance on
t he dat e of acqui si t i on) t he i nvest ment account i s bei ng conver t ed f r om
a. cost t o si mpl e equi t y.
b. cost t o sophi st i cat ed equi t y.
c. si mpl e equi t y t o sophi st i cat ed equi t y.
d. si mpl e equi t y t o cost .


17. On J anuar y 1, 20X1, Payne Cor p. pur chased 70%of Shayne Cor p. ' s $10 par
common st ock f or $900, 000. On t hi s dat e, t he car r yi ng amount of Shayne' s
net asset s was $1, 000, 000. The f ai r val ues of Shayne' s i dent i f i abl e
asset s and l i abi l i t i es wer e t he same as t hei r car r yi ng amount s except
f or pl ant asset s ( net ) , whi ch wer e $200, 000 i n excess of t he car r yi ng
amount . For t he year ended December 31, 20X1, Shayne had net i ncome of
$150, 000 and pai d cash di vi dends t ot al i ng $90, 000. Excess at t r i but abl e
t o pl ant asset s i s amor t i zed over 10 year s.

I n t he December 31, 20X1, consol i dat ed bal ance sheet , noncont r ol l i ng
i nt er est shoul d be r epor t ed at _______.
a. $282, 500
b. $300, 500
c. $318, 000
d. $345, 000


18. Al pha pur chased an 80%i nt er est i n Bet a on J une 30, 20X1. Bot h Al pha' s
and Bet a' s r epor t i ng per i ods end December 31. Whi ch of t he f ol l owi ng
r epr esent s t he cont r ol l i ng i nt er est i n consol i dat ed net i ncome f or 20X1?
a. 100%of Al pha' s J ul y 1- December 31 i ncome pl us 80%of Bet a' s
J ul y 1- December 31 i ncome
b. 100%of Al pha' s J ul y 1- December 31 i ncome pl us 100%of Bet a' s
c. 100%of Al pha' s J anuar y 1- December 31 i ncome pl us 80%of Bet a' s
d. 100%of Al pha' s J anuar y 1- December 31 i ncome pl us 80%of Bet a' s
J anuar y 1- December 31 i ncome


19. I n a mi d- year pur chase when t he subsi di ar y' s books ar e not cl osed unt i l
t he end of t he year , t he pur chased i ncome account cont ai ns t he par ent ' s
shar e of t he
a. subsi di ar y' s i ncome ear ned f or t he ent i r e year .
b. subsi di ar y' s i ncome ear ned f r omt he begi nni ng of t he year t o t he
dat e of acqui si t i on.
c. subsi di ar y' s i ncome ear ned f r omt he dat e of acqui si t i on t o t he end
of t he year .
d. Consol i dat ed Net I ncome.

Chapt er 3
3- 8


20. On J anuar y 1, 20X1, Pi st on, I nc. acqui r ed Spur Cor p. Whi l e r ecor di ng t he
acqui si t i on Pi st on est abl i shed a def er r ed t ax l i abi l i t y. I t i s most
l i kel y t hat t hi s account was cr eat ed because
a. t he t r ansact i on was a t ax- f r ee
exchange t o Pi st on.
c. t he t r ansact i on was a t ax- f r ee
exchange t o Spur .
b. Pi st on had not pai d al l of t he
i ncome t axes due t he gover nment
when acqui r i ng Spur .
d. Spur had not pai d al l of t he
i ncome t axes due t he gover nment
pr i or t o t he acqui si t i on by
Pi st on.


PROBLEM

Subsi di ar y Company f or $316, 000. On t hi s dat e, Subsi di ar y had common
st ock, ot her pai d- i n capi t al , and r et ai ned ear ni ngs of $40, 000,
$120, 000, and $190, 000, r espect i vel y. Net i ncome and di vi dends f or 2
year s f or Subsi di ar y Company wer e as f ol l ows:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $90, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 20, 000

On J anuar y 1, 20X1, t he onl y t angi bl e asset s of Subsi di ar y whi ch wer e
under val ued wer e i nvent or y and bui l di ng. I nvent or y, f or whi ch FI FO i s
used, was wor t h $5, 000 mor e t han cost . The i nvent or y was sol d i n 20X1.
Bui l di ng, whi ch was wor t h $15, 000 mor e t han book val ue, has a r emai ni ng
l i f e of 8 year s, and st r ai ght - l i ne depr eci at i on i s used. Pat ent , i f any,
i s t o be amor t i zed over 10 year s.

Requi r ed:

a. Usi ng t he i nf or mat i on above or on t he separ at e wor ksheet ,
pr epar e a det er mi nat i on and di st r i but i on of excess schedul e.
Use t he par ent company concept ( pr o- r at a f ai r val ue appr oach)
i n any wr i t e- up of asset s.

b. Par ent Company car r i es t he I nvest ment i n Subsi di ar y Company
under t he si mpl e equi t y met hod. I n gener al j our nal f or m,
r ecor d t he ent r i es t hat woul d be made t o appl y t he equi t y
met hod i n 20X1 and 20X2.

c. Comput e t he bal ance whi ch shoul d appear i n I nvest ment i n
Subsi di ar y Company and i n Subsi di ar y I ncome on December 31,
20X2 ( t he second year ) . Fi l l i n t hese amount s on Par ent
Company' s t r i al bal ance f or 20X2.

d. Compl et e t he Fi gur e 3- 1 wor ksheet f or consol i dat ed f i nanci al
st at ement s f or 20X2.

Chapt er 3
3- 9
ANS:


Subsi di ar y Company. . . . . . . . . . . . . . . . . . $316, 000
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . $ 40, 000
Pai d- i n capi t al i n excess of par . . . . 120, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . 190, 000
Tot al st ockhol der s' equi t y. . . . . . . . $350, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . 80% 280, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . $ 36, 000
========

Al l ocabl e t o:
I nvent or y ( $5, 000 x 80%) . . . . . . . . . . . . . $ 4, 000 Dr .
Bui l di ng ( $15, 000 x 80%) . . . . . . . . . . . . . 12, 000 Dr .
( t o Accumul at ed Depr eci at i on) . . . . .
Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20, 000 Dr .
=======

Amor t i zat i on:
20X1 20X2
Ret ai ned Ear ni ngs, J anuar y 1. . . . . . . . . . $7, 500*
I nvent or y- - t o Cost of Goods Sol d. . . . . . $4, 000
Bui l di ng- - t o Oper at i ng Expenses. . . . . . . 1, 500 1, 500
Pat ent - - t o Oper at i ng Expenses. . . . . . . . . 2, 000 2, 000

* Adj ust ment f or pr i or year s amor t i zat i on

b. Ent r i es under t he equi t y met hod.

20X1 20X2
Debi t Cr edi t Debi t Cr edi t

I nvest ment i n Subsi di ar y. . $40, 000( 1) $72, 000( 2)
Subsi di ar y I ncome. . . . . . . $40, 000 $72, 000

Cash. . . . . . . . . . . . . . . . . . . . . . 8, 000( 3) 16, 000( 4)
I nvest ment i n Subsi di ar y 8, 000 16, 000

( 1) 80%of $50, 000 net i ncome
( 2) 80%of $90, 000 net i ncome
( 3) 80%of $10, 000 di vi dends
( 4) 80%of $20, 000 di vi dends

c. Bal ance i n I nvest ment i n Subsi di ar y Company:
$316, 000 + 40, 000 - 8, 000 + 72, 000 - 16, 000 = $404, 000

d. For t he wor ksheet sol ut i on, pl ease r ef er t o Answer 3- 1.

Chapt er 3
3- 10

( CY) El i mi nat e t he cur r ent - year ent r i es made i n t he i nvest ment
account and i n t he subsi di ar y i ncome account .

( EL) El i mi nat e t he pr or at a shar e of Subsi di ar y Company equi t y
bal ances at t he begi nni ng of t he year agai nst t he
i nvest ment account .

( D) Di st r i but e t he $36, 000 excess cost as r equi r ed by t he
det er mi nat i on and di st r i but i on of excess schedul e. Si nce
FI FO i s used f or i nvent or y, al l ocat e t he $4, 000 wr i t e- up
t o t he J anuar y 1, 20X2 r et ai ned ear ni ngs of Par ent
company.

( A) Depr eci at e t he wr i t e- up t o bui l di ng over 8 year s and t o
pat ent over 10 year s. Char ge t he 20X1 depr eci at i on and
amor t i zat i on agai nst J anuar y 1, 20X1 r et ai ned ear ni ng of
Par ent Company. Char ge t he 20X2 depr eci at i on and
amor t i zat i on agai nst oper at i ng expenses.

Consol i dat ed Net I ncome:

To Noncont r ol l i ng I nt er est : . 2( 90, 000) = 18, 000

To Cont r ol l i ng I nt er est : 100, 000 + . 8( 90, 000) - 1, 500 - 2, 000 = 168, 500

DI F: M OBJ : 1, 2, 5

2. On J anuar y 1, 20X1, Pepper Company pur chased 100%of t he common st ock of
Sal t Company f or $360, 000. On t hi s dat e, Sal t had common st ock, ot her
pai d- i n capi t al , and r et ai ned ear ni ngs of $50, 000, $100, 000 and $150, 000
r espect i vel y. Net i ncome and di vi dends f or t wo year s f or Sal t Company
wer e:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60, 000 $90, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000 30, 000

On J anuar y 1, 20X1, t he onl y t angi bl e asset s of Sal t whi ch wer e
Bui l di ngs had a f ai r val ue of $320, 000, a r emai ni ng l i f e of 10 year s and
st r ai ght - l i ne depr eci at i on i s used. The book val ue of t he l and and
bui l di ng ar e $50, 000 and $260, 000 r espect i vel y. Pat ent , i f any, i s t o be
amor t i zed over 10 year s.

Pepper uses t he si mpl e equi t y met hod i n account i ng f or i t s I nvest ment i n
Sal t Company.

Chapt er 3
3- 11
Requi r ed:


b. Compl et e t he Fi gur e 3- 2 wor ksheet f or consol i dat ed f i nanci al

ANS:


Subsi di ar y Company. . . . . . . . . . . . . . . . . . . . $360, 000
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . $300, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . . . 100% 300, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . . . $ 60, 000
========

Al l ocabl e t o:
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10, 000 Dr .
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 000 Dr .
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 000 Dr .
Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0
=======

Fr act i on Tot al Al l ocat ed
Land $ 80, 000 1/ 5 $360, 000 $ 72, 000 $ 50, 000 $22, 000
Bui l di ng 320, 000 4/ 5 $360, 000 288, 000 260, 000 28, 000
$400, 000 $360, 000 $310, 000 $50, 000
======== ======== ======== =======

* Tot al assi gned val ue i s book val ue of l and ( $50, 000) and
bui l di ng ( $260, 000) pl us r emai ni ng excess of cost over book
val ue of $50, 000.


Chapt er 3
3- 12



t o t he J anuar y 1, 20X2 r et ai ned ear ni ng of Par ent Company.

( A) Cumul at i vel y depr eci at e t he wr i t e- up bui l di ng over 10
year s. Char ge t he 20X1 depr eci at i on agai nst J anuar y 1 20X1
r et ai ned ear ni ngs of Par ent . Char ge t he 20X2 depr eci at i on
agai nst oper at i ng expenses.


To Cont r ol l i ng I nt er est : 100, 000 + 100%( 90, 000) - 2, 800 = 187, 200

DI F: M OBJ : 1, 2, 5

Subsi di ar y Company f or a cost of $294, 000 i n a t ax- f r ee combi nat i on. On
t hi s dat e, Subsi di ar y had t ot al owner ' s equi t y of $220, 000. The excess
of cost over book val ue i s due t o t he under val uat i on of i nvent or y, ot her
l ong- t er mi nvest ment s, equi pment , and pat ent .

The i nvent or y i s wor t h $10, 000 mor e t han book val ue and FI FO i s used.
The i nvent or y was sol d dur i ng 20X1. The ot her l ong- t er mi nvest ment s of
Subsi di ar y ar e wor t h $20, 000 mor e t han book val ue and ar e car r i ed under
t he cost met hod. The equi pment i s wor t h $30, 000 mor e t han book val ue,
has a r emai ni ng usef ul l i f e of 10 year s, wi t h no sal vage val ue, and
st r ai ght - l i ne depr eci at i on i s used. The pat ent i s t o be amor t i zed over
20 year s. The cor por at e t ax r at e i s 30%.

Dur i ng 20X1, Subsi di ar y had net i ncome af t er t axes of $42, 000 and i n
December , pai d di vi dends of $20, 000. As a r esul t , t he appr opr i at e
ent r i es wer e made on Par ent ' s books under t he equi t y met hod.

Requi r ed:

a. Pr epar e a schedul e t o det er mi ne and di st r i but e t he excess of
cost over book val ue t o asset s and t o r el at ed def er r ed t axes.
I ncl ude comput at i ons f or t he wr i t e of f of t he asset i ncr eases
and t he r el at ed t ax ef f ect .

b. Compl et e t he wor ksheet i n Fi gur e 3- 3 f or consol i dat ed
f i nanci al st at ement s f or 20X1.

Chapt er 3
3- 13
ANS:


Subsi di ar y Company. . . . . . . . . . . . . . . . . . . . . $294, 000
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Ot her pai d- i n capi t al . . . . . . . . . . . . . . . . . . 70, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . 100, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . . . . 100% 220, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . . . $ 74, 000
========

Al l ocabl e t o:
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000 Dr .
Def er r ed Tax Li abi l i t y. . . . . . . . . . . . . . . . . ( 3, 000) Cr .
I nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000 Dr .
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000 Dr .
Pat ent ( net of def er r ed t ax l i abi l i t y) . $ 35, 000
========

To be di st r i but ed:
Pat ent ( $35, 000 70%) . . . . . . . . . . . . . . . $ 50, 000 Dr .
Def er r ed t ax l i abi l i t y ( 30%x $50, 000 ( 15, 000) Cr .
Net - of - t ax val ue of pat ent . . . . . . . . . . . $ 35, 000
========

Wr i t e- of f :
Debi t t o Cr edi t t o
Def er r ed Pr ovi si on
Cr edi t t o Debi t t o Tax f or I ncome
Asset Expenses Li abi l i t y Taxes
I nvent or y. . . . . . . . . . $10, 000 $10, 000 $3, 000 $3, 000
Equi pment . . . . . . . . . . 3, 000 3, 000 900 900
Pat ent . . . . . . . . . . . . . 2, 500 2, 500 750 750

Si nce FI FO i s used, al l ocat i on of t he excess of cost over
book val ue t o i nvent or y shoul d debi t Cost of Goods Sol d f or
t he $10, 000 under val uat i on and cr edi t Pr ovi si on f or I ncome
Taxes f or t he $3, 000 t ax ef f ect . The def er r ed t ax l i abi l i t y
on t he ot her l ong- t er mi nvest ment s wi l l r ever se when t he
i nvest ment s ar e sol d. The def er r ed t ax l i abi l i t y on t he
equi pment wi l l r ever se over 10 year s as t he asset i s used.
The def er r ed t ax l i abi l i t y on t he pat ent wi l l r ever se over 20
year s as t he goodwi l l i s amor t i zed.


Chapt er 3
3- 14

( CY) El i mi nat e t he cur r ent year ent r i es made i n t he i nvest ment


( D) Di st r i but e t he $74, 00 excess as r equi r ed by t he
FI FO i s used f or i nvent or y, t he wr i t e- up t o i nvent or y i s
made t o cost of good sol d and t he r el at ed t ax ef f ect i s
cr edi t ed t o t he pr ovi si on f or i ncome t axes.

( A1) Depr eci at e t he wr i t e- up t o bui l di ng over 10 year s.

( A2) Amor t i ze par t of t he def er r ed t ax l i abi l i t y due t o t he
bui l di ng wr i t e- up t o t he pr ovi si on f or i ncome t axes.

( A3) Amor t i ze t he pat ent .

( A4) Amor t i ze par t of t he def er r ed t ax l i abi l i t y due t o t he
pat ent t o t he pr ovi si on f or i ncome t axes.


To Cont r ol l i ng I nt er est : 56, 000 - ( 10, 000 - 3, 000) - ( 3, 000 - 900)
- ( 2, 500 - 750) + 100%( 42, 000) = 87, 150

DI F: M OBJ : 1, 2, 5, 8

4. On J anuar y 1, 20X1, Por t Company pur chased 80%of t he common st ock of
St ar Company f or $400, 000. On t hi s dat e, St ar had common st ock, ot her
pai d- i n capi t al , and r et ai ned ear ni ngs of $10, 000, $140, 000 and $200, 000
r espect i vel y. Net i ncome and di vi dends f or t wo year s f or St ar Company
wer e:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $90, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 30, 000

On J anuar y 1, 20X1, t he onl y t angi bl e asset s of St ar whi ch wer e
l i f e of 10 year s, and st r ai ght - l i ne depr eci at i on i s used. Pat ent , i f
any, i s t o be amor t i zed over 10 year s.

Chapt er 3
3- 15
Requi r ed:

a. Fr omt he i nf or mat i on above or on t he separ at e ver t i cal - f or m
wor ksheet , pr epar e a det er mi nat i on and di st r i but i on of excess
schedul e. Use t he par ent company concept ( pr o r at a f ai r val ue
appr oach) i n any wr i t e- up of asset s.

b. Por t Company car r i es t he I nvest ment i n St ar Company under t he
si mpl e equi t y met hod. I n gener al j our nal f or m, r ecor d t he
ent r i es t hat woul d be made t o appl y t he equi t y met hod i n 20X1
and 20X2.

c. Compl et e t he Fi gur e 3- 4 wor ksheet f or consol i dat ed f i nanci al

ANS:


Pr i ce pai d f or i nvest ment . . . . . . . . . . . . . $400, 000
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000
Pai d- i n capi t al i n excess of par . . . . 140, 000
Tot al st ockhol der s' equi t y. . . . . . . . $350, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . 80% 280, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . $120, 000
========

Al l ocabl e t o:
I nvent or y ( $10, 000 x 80%) . . . . . . . . . . . . $ 8, 000 Dr .
Bui l di ng ( $27, 500 x 80%) . . . . . . . . . . . . . 22, 000 Dr .
( t o Accumul at ed Depr eci at i on) . . . . .
Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . $90, 000 Dr .
=======

Amor t i zat i on:
20X1 20X2
Ret ai ned Ear ni ngs, J anuar y 1. . . . . . . . . . $13, 200
I nvent or y- - t o Cost of Goods Sol d. . . . . . $8, 000
Bui l di ng- - t o Oper at i ng Expenses. . . . . . . 2, 200 2, 200
Pat ent - - t o Oper at i ng Expenses. . . . . . . . . 9, 000 9, 000

b. Ent r i es under t he equi t y met hod.

20X1 20X2
I nvest ment i n Subsi di ar y. . . . $40, 000( 1) $72, 000( 2)
Subsi di ar y I ncome. . . . . . . . . $40, 000 $72, 000

Cash. . . . . . . . . . . . . . . . . . . . . . . . 8, 000( 3) 24, 000( 4)
I nvest ment i n Subsi di ar y. . 8, 000 24, 000

( 1) 80%of $50, 000 net i ncome
( 2) 80%of $90, 000 net i ncome
( 3) 80%of $10, 000 di vi dends
( 4) 80%of $30, 000 di vi dends

Chapt er 3
3- 16
c. For t he wor ksheet sol ut i on, pl ease r ef er t o Answer 3- 4.



( EL) El i mi nat e t he pr o r at a shar e of St ar Company equi t y

( D) Di st r i but e t he $120, 000 excess as r equi r ed by t he
FI FO i s used f or i nvent or y, al l ocat e t he $8, 000 wr i t e- up t o
t he J anuar y 1, 20X2 r et ai ned ear ni ngs of Por t Company.

( A) Depr eci at e t he wr i t e- up t o bui l di ng over 10 year s and
amor t i ze t he pat ent over 10 year s. Char ge t he 20X1
depr eci at i on and amor t i zat i on agai nst J anuar y 1, 20X1
r et ai ned ear ni ngs of Por t Company. Char ge t he 20X2
depr eci at i on and amor t i zat i on agai nst oper at i ng expenses.




DI F: M OBJ : 1, 2, 7

5. The Par i s Company pur chased an 80%i nt er est i n Sei ne, I nc. f or $600, 000
on J ul y 1, 20X1, when Sei ne had t he f ol l owi ng bal ance sheet :

Asset s
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600, 000
========

Cur r ent l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Ret ai ned ear ni ngs - 7/ 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600, 000
========

The i nvent or y i s under st at ed by $20, 000 and i s sol d i n t he t hi r d quar t er
of 20X1. The bui l di ng has a f ai r val ue of $320, 000 and a 10- year
r emai ni ng l i f e. The equi pment has a f ai r val ue of $120, 000 and a
r emai ni ng l i f e of 5 year s. Any r emai ni ng excess i s at t r i but ed t o pat ent
wi t h a 20- year l i f e.

On December 31, 20X4, Sei ne has t he f ol l owi ng st ockhol der s' equi t y:

Common St ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Chapt er 3
3- 17

Dur i ng 20X1, Sei ne had a net i ncome of $100, 000 and pai d $10, 000 i n
di vi dends.

Assume t hat Par i s uses t he cost met hod t o r ecor d i t s i nvest ment i n
Sei ne.

Requi r ed:

a. Pr epar e a det er mi nat i on and di st r i but i on of excess schedul e as
of J ul y 1, 20X1.

b. Pr epar e t he cost t o equi t y conver si on adj ust ment t hat woul d be
made on t he December 31, 20X1, consol i dat ed t r i al bal ance
wor ksheet .

c. Pr epar e t he el i mi nat i ons and adj ust ment s t hat woul d be made on
t he December 31, 20X1, consol i dat ed wor ksheet t o el i mi nat e t he
i nvest ment i n Sei ne. Di st r i but e and amor t i ze any excess.

ANS:

a. Det er mi nat i on and Di st r i but i on of Excess Schedul e

Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600, 000
St ockhol der s' equi t y of Sei ne . . . . . . . . . . $500, 000
Owner shi p i nt er est . . . . . . . . . . . . . . . . . . . . . . 80% 400, 000
Excess of cost over book val ue. . . . . . . . $200, 000
Adj ust i nvent or y, . 8 x $20, 000. . . . . . . . . . 16, 000
Excess avai l abl e f or f i xed asset s. . . . . $184, 000
Adj ust f i xed asset s:
Bui l di ng, . 8 x $50, 000, 10- year l i f e. . ( 40, 000)
Equi pment , . 8 x $40, 000, 5- year l i f e. . ( 32, 000)
Pat ent , 20- year l i f e. . . . . . . . . . . . . . . . . . $112, 000
========

b. I nvest ment i n Sei ne . . . . . . . . . . . . . . . . . . . . 240, 000
Ret ai ned Ear ni ngs, Par i s. . . . . . . . . . . . . . 240, 000
. 8 x ( $600, 000 r et ai ned ear ni ngs on
12/ 31/ X4 - $300, 000 r et ai ned
ear ni ngs on 7/ 1/ X1)

Chapt er 3
3- 18
c. I nvest ment ( or Di vi dend) I ncome. . . . . . . . . . 8, 000
Di vi dends Decl ar ed, Sei ne . . . . . . . . . . . . 8, 000

Common St ock, $5 par . . . . . . . . . . . . . . . . . . . . 40, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . 480, 000
I nvest ment i n Sei ne . . . . . . . . . . . . . . . . . . 640, 000

Ret ai ned Ear ni ngs ( f or i nvent or y) . . . . . . . 16, 000
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 000
Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112, 000

Depr eci at i on Expense. . . . . . . . . . . . . . . . . . . . 4, 000
Ret ai ned Ear ni ngs, Par i s, 3. 5 x $4, 000. . 14, 000
Accumul at ed Depr eci at i on, Bui l di ng. . . . 18, 000

Accumul at ed Depr eci at i on. . . . . . . . . . . . . . 28, 800

Pat ent Amor t i zat i on Expense. . . . . . . . . . . . . 5, 600
Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 200

DI F: M OBJ : 1, 3, 5

st ock, ot her pai d- i n capi t al , and r et ai ned ear ni ngs of $50, 000, $100, 000
and $150, 000 r espect i vel y. Net i ncome and di vi dends f or t wo year s f or
Subsi di ar y Company wer e:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60, 000 $90, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000 30, 000

Land had a f ai r val ue of $80, 000. Bui l di ngs had a f ai r val ue of $320, 00,
a r emai ni ng l i f e of 10 year s and st r ai ght - l i ne depr eci at i on i s used. The
book val ue of t he l and and bui l di ng ar e $50, 000 and $260, 000
r espect i vel y. Pat ent , i f any, i s t o be amor t i zed over 10 year s.

Par ent uses t he si mpl e equi t y met hod i n account i ng f or i t s I nvest ment i n
Subsi di ar y Company.

Chapt er 3
3- 19
Requi r ed:



ANS:


Subsi di ar y Company. . . . . . . . . . . . . . . . . . . . $360, 000
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . . . $ 60, 000
========

Al l ocabl e t o:
I nvent or y ( $10, 000 x 100%) . . . . . . . . . . . . . $10, 000 Dr .
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 000 Dr .
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 000 Dr .
( t o Accumul at ed Depr eci at i on) . . . . . . .
Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0
=======

Fr act i on Tot al Al l ocat ed
Land $ 80, 000 1/ 5 $360, 000 $ 72, 000 $ 50, 000 $22, 000
Bui l di ng 320, 000 4/ 5 $360, 000 288, 000 260, 000 28, 000
$400, 000 $360, 000 $310, 000 $50, 000
======== ======== ======== =======

* Tot al assi gned val ue i s book val ue of l and ( $50, 000) and
bui l di ng ( 260, 000) pl us r emai ni ng excess of cost over book
val ue of $50, 000.


Chapt er 3
3- 20

( CV) Conver t t o si mpl e equi t y met hod as of J anuar y 1 20X2 ( 100%
of $40, 000 i ncr ease i n r et ai ned ear ni ngs f r omJ anuar y 1,
20X1 t o J anuar y 1, 20X2) .

( CY) El i mi nat e t he cur r ent - year di vi dend i ncome of Par ent
agai nst di vi dends decl ar ed by Subsi di ar y.


t o t he J anuar y 1, 20X2 r et ai ned ear ni ng of Par ent Company.

( A) Cumul at i vel y depr eci at e t he wr i t e- up t o bui l di ng over 10
year s. Char ge t he 20X1 depr eci at i on agai nst J anuar y 1 20X1
r et ai ned ear ni ngs of Par ent . Char ge t he 20X2 depr eci at i on


To Cont r ol l i ng I nt er est : 100, 000 + 100%( 90, 000) - 2, 800 = 187, 200

DI F: M OBJ : 1, 3, 5


Asset s
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600, 000
========

Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600, 000
========



Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Chapt er 3
3- 21

di vi dends.

Assume t hat Par i s uses t he sophi st i cat ed equi t y met hod t o r ecor d i t s
i nvest ment i n Sei ne.

Requi r ed:

of J ul y 1, 20X1.

b. Pr epar e t he el i mi nat i ons and adj ust ment s t hat woul d be made on

ANS:


Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600, 000
Adj ust i nvent or y, 8 x $20, 000. . . . . . . . . . . 16, 000
Pat ent , 20- year l i f e. . . . . . . . . . . . . . . . . . . . $112, 000
========

b. I nvest ment I ncome. . . . . . . . . . . . . . . . . . . . . . . 64, 000
Di vi dends Decl ar ed. . . . . . . . . . . . . . . . . . . . 8, 000

Common St ock, $5 par . . . . . . . . . . . . . . . . . . . . 40, 000

Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 000
Pat ent ( $112, 000 - [ 3. 5 x $5, 600] ) . . . . . . 92, 400
Accumul at ed Depr eci at i on- - Bui l di ng
( 3. 5 x $4, 000) . . . . . . . . . . . . . . . . . . . . . . 14, 000
Accumul at ed Depr eci at i on- - Equi pment
( 3. 5 x $6, 400) . . . . . . . . . . . . . . . . . . . . . . 22, 400
I nvest ment i n Sei ne. . . . . . . . . . . . . . . . . . . 128, 000

Accumul at ed Depr eci at i on, Bui l di ng. . . . 4, 000

Accumul at ed Depr eci at i on, Equi pment . . . 6, 400

Chapt er 3
3- 22
Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 600

DI F: M OBJ : 1, 4, 5

$120, 000, and $190, 000, r espect i vel y. Net i ncome and di vi dends f or 2
year s f or Subsi di ar y Company wer e as f ol l ows:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $90, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 20, 000

l i f e of 8 year s, and st r ai ght - l i ne depr eci at i on i s used. Pat ent , i f any,
i s t o be amor t i zed over 10 year s.

Requi r ed:

Use t he par ent company concept ( pr or at a f ai r val ue appr oach)
i n any wr i t e- up of asset s.

b. Par ent Company car r i es t he I nvest ment i n Subsi di ar y Company
under t he sophi st i cat ed equi t y met hod. I n gener al j our nal
f or m, r ecor d t he ent r i es t hat woul d be made t o appl y t he
equi t y met hod i n 20X1 and 20X2.

c. Comput e t he bal ance whi ch shoul d appear i n I nvest ment i n
Subsi di ar y Company and i n Subsi di ar y I ncome on December 31,
20X2 ( t he second year . Fi l l i n t hese amount s on Par ent
Company' s t r i al bal ance f or 20X2.

d. Compl et e t he Fi gur e 3- 6 wor ksheet f or consol i dat ed f i nanci al

Chapt er 3
3- 23
ANS:


Subsi di ar y Company. . . . . . . . . . . . . . . . . . . $316, 000
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . $ 40, 000
Pai d- i n capi t al i n excess of par . . . . . 120, 000
Tot al st ockhol der s' equi t y. . . . . . . . . $350, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . . 80% 280, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . $ 36, 000
========

Al l ocabl e t o:
I nvent or y ( $5, 000 x 80%) . . . . . . . . . . . . . . $ 4, 000 Dr .
Bui l di ng ( $15, 000 x 80%)
( t o Accumul at ed Depr eci at i on) . . . . . . 12, 000 Dr .
Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20, 000 Dr .
=======

Amor t i zat i on:
20X1 20X2
Ret ai ned Ear ni ngs, J anuar y 1. . . . . . . . . . . $7, 500
I nvent or y- - t o Cost of Goods Sol d. . . . . . . $4, 000
Bui l di ng- - t o Oper at i ng Expenses. . . . . . . . 1, 500 1, 500
Pat ent - - t o Oper at i ng Expenses. . . . . . . . . . 2, 000 2, 000

b. Ent r i es under t he equi t y met hod:

20X1 20X2
I nvest ment i n Subsi di ar y. . . . $32, 500( 1) $68, 500( 2)
Subsi di ar y I ncome. . . . . . . . . $32, 500 $68, 500

Cash. . . . . . . . . . . . . . . . . . . . . . . . 8, 000( 3) 16, 000( 4)
I nvest ment i n Subsi di ar y. . 8, 000 16, 000

( 1) 80%of $50, 000 net i ncome l ess amor t i zat i on of $7, 500
( 2) 80%of $90, 000 net i ncome l ess amor t i zat i on of $3, 500
( 3) 80%of $10, 000 di vi dends
( 4) 80%of $20, 000 di vi dends

c. Bal ance i n I nvest ment i n Subsi di ar y Company:
$316, 000 + 32, 500 - 8, 000 + 68, 500 - 16, 000 = $393, 000

d. For t he wor ksheet sol ut i on, pl ease r ef er t o Answer 3- 6.

Chapt er 3
3- 24



( D) Di st r i but e t he $28, 500 r emai ni ng excess cost over book
val ue ( $3, 600 l ess 20X1 char ges t o cost of goods sol d f or
i nvent or y of $4, 000 and t o oper at i ng expenses f or ext r a
depr eci at i on of $1, 500 and amor t i zat i on of pat ent f or
$2, 000) . Debi t Accumul at ed Depr eci at i on f or $10, 500 and
Pat ent f or $18, 000.

( A) For 20X2 onl y, depr eci at e t he wr i t e- up t o bui l di ng over 8
year s and t o pat ent over 10 year s. Char ge t he 20X2
depr eci at i on and amor t i zat i on agai nst oper at i ng expenses.




DI F: M OBJ : 1, 4, 5

9. Puddl e Cor por at i on acqui r ed 90%of Suds Company' s common st ock on
J anuar y 1, 20X1 f or $32, 000 cash when Sud' s st ockhol der s' equi t y
consi st ed of :
Common St ock $20, 000
Ret ai ned Ear ni ngs $ 4, 000

A det er mi nat i on and di st r i but i on schedul e was pr epar ed f or t he
di f f er ence bet ween t he pr i ce pai d by Puddl es and t he under l yi ng equi t y
acqui r ed i n Suds wi t h t he excess of cost over book val ue bei ng al l ocat ed
as:
I nvent or y ( under val ued) $ 400
Bui l di ng & Equi pment ( under val ued) 2, 000
Pat ent 8, 000
Al l ocat ed excess cost over book val ue $10, 400
=======

The i nvent or y was sol d dur i ng 20X1, and t he bui l di ng and equi pment ar e
bei ng depr eci at ed f or 5 year s usi ng t he st r ai ght - l i ne met hod. The Pat ent
i s expect ed t o have a 10- year usef ul l i f e.

Chapt er 3
3- 25
Requi r ed:

The separ at e December 31, 20X1 f i nanci al st at ement s f or Puddl e and Suds
i s pr ovi ded on wor ksheet 3- 7. Based upon t hi s i nf or mat i on answer t he
f ol l owi ng quest i ons.

a. Whi ch met hod t o account f or i t s i nvest ment i n Suds i s Puddl e
usi ng? Pr ovi de suppor t i ng comput at i ons?
b. What advant age does Puddl e have i n usi ng t hi s met hod?
c. What i s a di sadvant age f or Puddl e i n usi ng t hi s met hod?
d. What amount i s r epor t ed f or Consol i dat ed Net I ncome?
e. What amount i s r epor t ed f or Di vi dends Decl ar ed on t he
Consol i dat ed St at ement of Ret ai ned Ear ni ngs?
f . What amount i s r epor t ed on t he December 31, 20X1 consol i dat ed
f i nanci al st at ement s f or Noncont r ol l i ng I nt er est ?

You do not have t o compl et e t he wor ksheet but i t may be hel pf ul t o
answer t he quest i ons.

ANS:

a. Sophi st i cat ed Equi t y. The I ncome f r omSuds bal ance at year end =
$3, 800 = t he par ent ' s shar e of sub net i ncome ( $6, 000 x 90%=
5, 400) l ess amor t i zat i on of excess of $1, 600 ( $400 i nvent or y
excess + $400 depr eci at i on of t he bui l di ng' s excess + $800
amor t i zat i on of t he pat ent ' s excess.
b. The advant age t o Puddl e i s i f t her e i s a need f or separ at e
f i nanci al st at ement s t he use of t he sophi st i cat ed equi t y met hod
wi l l r esul t i n pr oper l y st at ed net i ncome and r et ai ned ear ni ngs.
c. A di sadvant age i s t hat t he sophi st i cat ed equi t y met hod r esul t s i n
mor e compl exi t y t han t he si mpl e equi t y met hod when compl et i ng t he
consol i dat i ng wor ksheet .
d. $29, 550 ( NCI = $600; cont r ol l i ng i nt er est net i ncome = $28, 950.
The st udent s shoul d be abl e t o comput e t hi s wi t hout compl et i ng t he
wor ksheet .
e. $4, 000. The st udent s shoul d be abl e t o comput e t hi s wi t hout
compl et i ng t he wor ksheet .
f . $2, 680. 10%x $24, 000 ( Begi nni ng Equi t y) + 10%x $6, 000 ( Cur r ent
Net I ncome) - 10%x $3, 200 ( Di vi dends) .

DI F: D OBJ : 1, 4, 5, 7

Chapt er 3
3- 26

Asset s
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600, 000
========

Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600, 000
========



Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Pai d- i n capi t al - i n excess of par . . . . . . . . . . . . . . . . . . . . . . . 150, 000

di vi dends.

Assume t hat Par i s uses t he si mpl e equi t y met hod t o r ecor d i t s i nvest ment
i n Sei ne.

Requi r ed:

of J ul y 1, 20X1.

b. Pr epar e t he el i mi nat i ons and adj ust ment s t hat woul d be made on

Chapt er 3
3- 27
ANS:


Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600, 000
Adj ust i nvent or y, . 8 x $20, 000. . . . . . . . . . 16, 000
Pat ent , 20- year l i f e. . . . . . . . . . . . . . . . . . $112, 000
========

b. I nvest ment I ncome. . . . . . . . . . . . . . . . . . . . . . . 80, 000
I nvest ment i n Sei ne . . . . . . . . . . . . . . . . . . . 72, 000
Di vi dends Decl ar ed. . . . . . . . . . . . . . . . . . . . . 8, 000

Common St ock, $5 par . . . . . . . . . . . . . . . . . . . . 40, 000

Ret ai ned Ear ni ngs ( f or i nvent or y) . . . . . . . 16, 000
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32, 000
Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112, 000

Accumul at ed Depr eci at i on, Bui l di ng. . . . . 18, 000


Pat ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 200

DI F: M OBJ : 1, 5, 6

Chapt er 3
3- 28
11. The Par i s Company pur chased a 70%i nt er est i n Sei ne, I nc. f or $278, 000

Asset s
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Bui l di ng and Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400, 000
========

Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400, 000
========

of 20X1. The l and has a f ai r val ue of $100, 000. The equi pment has a f ai r
val ue of $130, 000 and a r emai ni ng l i f e of 3 year s. Any r emai ni ng excess
i s at t r i but ed t o a pat ent wi t h a 10- year l i f e.

The f ol l owi ng net i ncomes ( ear ned evenl y t hr oughout t he year ) and
di vi dends pai d ( on 12/ 1 each year ) ar e r epor t ed by Sei ne:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150, 000 $100, 000
Di vi dends pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 10, 000

Requi r ed:

of J ul y 1, 20X1.

b. Pr epar e t he 20X1 and 20X2 ent r i es made by Par i s t o r ecor d t he
net i ncome and di vi dends pai d i nf or mat i on on i t s books under
t he sophi st i cat ed equi t y met hod.

c. Pr epar e t he 20X1 and 20X2 ent r i es made by Par i s t o r ecor d t he
t he cost met hod.

Chapt er 3
3- 29
ANS:


Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $278, 000
Excess of cost over book val ue. . . . . . . . $ 68, 000
Adj ust i nvent or y, . 7 x $50, 000. . . . . . . . . . . 35, 000
Excess avai l abl e f or f i xed asset s. . . . . $ 33, 000
Land, . 7 x $20, 000 . . . . . . . . . . . . . . . . . . . ( 14, 000)
Bui l di ng & Equi pment , . 7 x $30, 000,
3- year l i f e. . . . . . . . . . . . . . . . . . . . 21, 000
Pat ent , 10- year l i f e. . . . . . . . . . . . . . . . . . . . $ 40, 000
========

b. 20X1 I nvest ment i n Sei ne . . . . . . . . . . . . . . . 19, 000
I nvest ment I ncome. . . . . . . . . . . . . . . . . . . . . 19, 000
$52, 500 - $35, 000 + ( $21, 000 3) / 2
- ( $40, 000 10) / 2

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000

20X2 I nvest ment i n Sei ne . . . . . . . . . . . . . . . 73, 000
$70, 000 + ( $21, 000 3) - ( $40, 000 10)

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000

c. 20X1 Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000
I nvest ment ( or Di vi dend) I ncome. . . . . . . 7, 000

20X2 Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000
I nvest ment ( or Di vi dend) I ncome. . . . . . . 7, 000

DI F: M OBJ : 1, 5, 6

Chapt er 3
3- 30

Asset s
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400, 000
========

Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400, 000
========

Assume t hat al l asset s and l i abi l i t i es have f ai r val ues equal t o t hei r
book val ues. Any excess cost i s at t r i but ed t o pat ent wi t h a 10- year
l i f e.


20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60, 000 $80, 000
Di vi dends pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 10, 000

Requi r ed:

a. Pr epar e t he 20X1 & 20X2 ent r i es made by Par i s t o r ecor d t he
t he si mpl e equi t y met hod.

b. Pr epar e t he 20X1 & 20X2 ent r i es made by Par i s t o r ecor d t he
t he cost met hod.

ANS:

a. 20X1
I nvest ment i n Sei ne. . . . . . . . . . . . . . . . . . . . . . . 21, 000
I nvest ment I ncome. . . . . . . . . . . . . . . . . . . . . . . 21, 000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000
I nvest ment i n Sei ne. . . . . . . . . . . . . . . . . . . . . 7, 000

20X2
I nvest ment i n Sei ne. . . . . . . . . . . . . . . . . . . . . . . 56, 000
I nvest ment I ncome. . . . . . . . . . . . . . . . . . . . . . . 56, 000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000
I nvest ment i n Sei ne. . . . . . . . . . . . . . . . . . . . . 7, 000

Chapt er 3
3- 31
b. 20X1
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000
I nvest ment ( or Di vi dend) I ncome. . . . . . . . . . 7, 000

20X2
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000
I nvest ment ( or Di vi dend) I ncome. . . . . . . . . . 7, 000

DI F: M OBJ : 1, 6

13. The Par i s Company pur chased a 70%i nt er est i n Sei ne, I nc. f or $300, 000

Asset s
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400, 000
========

Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400, 000
========

Assume t hat al l asset s and l i abi l i t i es have f ai r val ues equal t o t hei r
book val ues. Any excess cost i s at t r i but ed t o pat ent wi t h a 10- year
l i f e.


20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60, 000 $80, 000
Di vi dends pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 10, 000

Requi r ed:

of J ul y 1, 20X1.

b. Pr epar e t he 20X1 and 20X2 ent r i es made by Par i s t o r ecor d t he
t he sophi st i cat ed equi t y met hod.

Chapt er 3
3- 32
ANS:


Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300, 000
Pat ent , amor t i ze 10 year s. . . . . . . . . . . . . . $ 90, 000

b. 20X1 I nvest ment i n Sei ne. . . . . . . . . . . . . . . . 16, 500
$21, 000 - ( $90, 000 10) x 6/ 12

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000

20X2 I nvest ment i n Sei ne . . . . . . . . . . . . . . . 45, 000
$56, 000 - ( $90, 000 10)

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000

DI F: M OBJ : 1, 6

14. Pabl o Company pur chased an 80%i nt er est i n Sand Company on J ul y 1, 20X1,
f or $260, 000. On J ul y 1, 20X1, Sand Company had t he f ol l owi ng
i nf or mat i on avai l abl e:

Common st ock out st andi ng ( $10 par ) . . . . . . . . . . . . . . . . . . . . . $100, 000
Ret ai ned ear ni ngs, J anuar y 1, 20X1. . . . . . . . . . . . . . . . . . . . . 120, 000
Net i ncome, J anuar y 1- J une 30, 20X1. . . . . . . . . . . . . . . . . . . . 10, 000
Di vi dends pai d, J une 30, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000

Equi pment i s under val ued by $30, 000 and has a 6- year r emai ni ng l i f e. Any
r emai ni ng excess i s at t r i but abl e t o pat ent wi t h a 20- year l i f e.

Requi r ed:

a. Pr epar e a det er mi nat i on and di st r i but i on of excess schedul e.

b. Compl et e t he Fi gur e 3- 8 par t i al wor ksheet f or t he year ended
December 31, 20X1. Subsi di ar y books wer e not cl osed on t he
pur chase dat e. Pr ovi de keyed expl anat i ons f or al l wor ksheet
ent r i es and key each amor t i zat i on of excess separ at el y.
I ncl ude i ncome di st r i but i on schedul es.

Chapt er 3
3- 33
ANS:


Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $260, 000
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
I ncome pur chased. . . . . . . . . . . . . . . . . . . . . . 10, 000
Di vi dends pai d, J une 30, 20X1. . . . . . . . . ( 2, 000)
Excess cost over book val ue. . . . . . . . . . . . . $ 77, 600
Less under val uat i on of equi pment
( $30, 000 80%, 6- year l i f e,
$4, 000 per year ) . . . . . . . . . . . . . . . . . . . . . . 24, 000
Pat ent ( 20- year l i f e, $2, 680 per year ) $ 53, 600
========



( CY) El i mi nat e equi t y adj ust ment s f or l ast 6 mont hs.

( EL) El i mi nat e i nvest ment agai nst subsi di ar y equi t y.

( D) Di st r i but e excess cost accor di ng t o det er mi nat i on and di st r i but i on
of excess schedul e.

( A1) I ncr ease depr eci at i on expense f or 1/ 2 year
( $4, 000 x 1/ 2 = $2, 000) .

( A2) Amor t i ze Pat ent f or 1/ 2 year ( $2, 680 x 1/ 2 = $1, 340) .

Subsi di ar y Sand Company I ncome Di st r i but i on
_________________________________________________________________
| I nt er nal l y gener at ed
| net i ncome $20, 000
_________________________________________________________________
| Adj ust ed i ncome. . . . . . . . . $20, 000
| NCI shar e. . . . . . . . . . . . . . . 20%
| NCI . . . . . . . . . . . . . . . . . . . . . $ 4, 000
| =======

Subsi di ar y Sand Company I ncome Di st r i but i on
_________________________________________________________________
Equi pment depr eci at i on. . $2, 000 | I nt er nal l y gener at ed
Pat ent amor t i zat i on. . . . . 1, 340 | net i ncome. . . . . . . . . $100, 000
Pur chased i ncome. . . . . . . . 8, 000 | 80%x Sand Co. adj .
| i ncome of $20, 000. . 16, 000
_________________________________________________________________
| Cont r ol l i ng i nt er est . $104, 660
| ========

DI F: M OBJ : 6

Chapt er 3
3- 34
15. Puddl e Cor por at i on acqui r ed 90%of Suds Company' s common st ock on
J anuar y 1, 20X1 f or $32, 000 cash when Sud' s st ockhol der s' equi t y
consi st ed of :
Common St ock $20, 000
Ret ai ned Ear ni ngs $ 4, 000

A det er mi nat i on and di st r i but i on schedul e was pr epar ed f or t he
di f f er ence bet ween t he pr i ce pai d by Puddl es and t he under l yi ng equi t y
acqui r ed i n Suds wi t h t he excess of cost over book val ue bei ng al l ocat ed
as:
I nvent or y ( under val ued) $ 400
Bui l di ng & Equi pment ( under val ued) 2, 000
Pat ent 8, 000
Al l ocat ed excess cost over book val ue $10, 400
=======

The i nvent or y was sol d dur i ng 20X1, and t he bui l di ng and equi pment ar e
bei ng depr eci at ed f or 5 year s usi ng t he st r ai ght - l i ne met hod. The Pat ent
i s expect ed t o have a 10- year usef ul l i f e.

Requi r ed:

The separ at e December 31, 20X1 f i nanci al st at ement s f or Puddl e and Suds
i s pr ovi ded i n Fi gur e 3- 7. Compl et e t he wor ksheet and pr ovi de suppor t i ng
cal cul at i ons as needed and an expl anat i on of t he el i mi nat i on and
adj ust ment ent r i es.

ANS:

For t he wor ksheet sol ut i on, pl ease r ef er t o Answer 3- 7.

Expl anat i on of el i mi nat i on and adj ust ment ent r i es:

( CY) El i mi nat e t he I ncome f r omSuds and t he par ent ' s shar e of
di vi dends t o br i ng t he i nvest ment account t o begi nni ng of year
bal ance
( EL) El i mi nat e i nvest ment i n subsi di ar y agai nst t he par ent ' s shar e
of t he subsi di ar y equi t y account s as of t he begi nni ng of t he
year .
( D) Di st r i but e t he excess.
( A) Depr eci at e Bui l di ng and Equi pment excess of $2, 000 over 5- year s
and amor t i ze t he Pat ent excess of $8, 000 over 10 year s.

DI F: D OBJ : 1, 4, 5, 7
Chapt er 3
3- 35
Chapt er 3
3- 36
Chapt er 3
3- 37
Chapt er 3
3- 38
Chapt er 3
3- 39
Chapt er 3
3- 40
Chapt er 3
3- 41
Chapt er 3
3- 42
Chapt er 3
3- 43
Chapt er 3
3- 44
Chapt er 3
3- 45
Chapt er 3
3- 46
Chapt er 3
3- 47
Chapt er 3
3- 48
Chapt er 3
3- 49
Chapt er 3
3- 50

Chapter 4 Intercompany Transactions: Merchandise, Plant
Assets, and Notes

MULTIPLE CHOICE

1. Schi f f Company owns 100%of t he out st andi ng common st ock of t he Vi el
Company. Dur i ng 20X1, Schi f f sol d mer chandi se t o Vi el t hat Vi el , i n
t ur n, sol d t o unr el at ed f i r ms. Ther e wer e no such goods i n Vi el ' s endi ng
i nvent or y. However , some of t he i nt er company pur chases f r omSchi f f had
not yet been pai d. Whi ch of t he f ol l owi ng amount s wi l l be i ncor r ect i n
t he consol i dat ed st at ement s i f no adj ust ment s ar e made?
a. i nvent or y, account s payabl e, net i ncome
b. i nvent or y, sal es, cost of goods sol d, account s r ecei vabl e
c. sal es, cost of goods sol d, account s r ecei vabl e, account s payabl e.
d. account s r ecei vabl e, account s payabl e

ANS: C DI F: M OBJ : 1, 2

2. The mat er i al sal e of i nvent or y i t ems by a par ent company t o an
af f i l i at ed company
a. ent er s t he consol i dat ed r evenue comput at i on onl y i f t he t r ansf er
was t he r esul t of ar m' s l engt h bar gai ni ng.
b. af f ect s consol i dat ed net i ncome under a per i odi c i nvent or y syst em
but not under a per pet ual i nvent or y syst em.
c. does not r esul t i n consol i dat ed i ncome unt i l t he mer chandi se i s
sol d t o out si de ent i t i es.
d. does not r equi r e a wor ki ng paper adj ust ment i f t he mer chandi se was
t r ansf er r ed at cost .


3. Wi l l i ar d Cor por at i on r egul ar l y sel l s i nvent or y i t ems t o i t s subsi di ar y,
Pet t y, I nc. I f unr eal i zed pr of i t s i n Pet t y' s 20X1 year - end i nvent or y
exceed t he unr eal i zed pr of i t s i n i t s 20X2 year - end i nvent or y, combi ned
a. cost of sal es wi l l be l ess t han consol i dat ed cost of sal es i n
20X2.
b. gr oss pr of i t wi l l be gr eat er t han consol i dat ed gr oss pr of i t i n
20X2.
c. sal es wi l l be l ess t han consol i dat ed sal es i n 20X2.
d. cost of sal es wi l l be gr eat er t han consol i dat ed cost of sal es i n
20X2.

ANS: D DI F: D OBJ : 1, 2

Chapt er 4
4- 2
4. Sal l y Cor por at i on, an 80%- owned subsi di ar y of Reynol ds Company, buys
hal f of i t s r aw mat er i al s f r omReynol ds. The t r ansf er pr i ce i s exact l y
t he same pr i ce as Sal l y pays t o buy i dent i cal r aw mat er i al s f r omout si de
suppl i er s and t he same pr i ce as Reynol ds sel l s t he mat er i al s t o
unr el at ed cust omer s. I n pr epar i ng consol i dat ed st at ement s f or Reynol ds
Company and Subsi di ar y
a. t he i nt er company t r ansact i ons can be i gnor ed because t he t r ansf er
pr i ce r epr esent s ar m' s l engt h bar gai ni ng.
b. any unr eal i zed pr of i t f r omi nt er company sal es r emai ni ng i n
Reynol ds' endi ng i nvent or y must be of f set agai nst t he unr eal i zed
pr of i t i n Reynol ds' begi nni ng i nvent or y.
c. any unr eal i zed pr of i t on t he i nt er company t r ansact i ons i n Sal l y' s
endi ng i nvent or y i s el i mi nat ed i n i t s ent i r et y.
d. ei ght y per cent of any unr eal i zed pr of i t on t he i nt er company
t r ansact i ons i n Sal l y' s endi ng i nvent or y i s el i mi nat ed.


5. Cat t l e Company sol d i nvent or y wi t h a cost of $40, 000 t o i t s 90%- owned
subsi di ar y, Range Cor p. , f or $100, 000 i n 20X1. Range r esol d $75, 000 of
t hi s i nvent or y f or $100, 000 i n 20X1. The amount of i nvent or y r epor t ed on
t he consol i dat ed f i nanci al st at ement s at t he end of 20X1 i s _______.
a. $10, 000
b. $18, 000
c. $21, 000
d. $30, 000


6. Di l l er owns 80%of Lake Company common st ock. Dur i ng Oct ober 20X7, Lake
sol d mer chandi se t o Di l l er f or $300, 000. On December 31, 20X7, one- hal f
of t hi s mer chandi se r emai ned i n Di l l er ' s i nvent or y. For 20X7, gr oss
pr of i t per cent ages wer e 30%f or Di l l er and 40%f or Lake. The amount of
unr eal i zed pr of i t i n t he endi ng i nvent or y on December 31, 20X7 t hat
shoul d be el i mi nat ed i n consol i dat i on i s _______.
a. $80, 000
b. $60, 000
c. $32, 000
d. $30, 000


7. Per r y, I nc. owns a 90%i nt er est i n Br own Cor p. Dur i ng 20X6, Br own sol d
$100, 000 i n mer chandi se t o Per r y at a 30%gr oss pr of i t . Ten per cent of
t he goods ar e unsol d by Per r y at year end. The noncont r ol l i ng i nt er est
wi l l r ecei ve what gr oss pr of i t as a r esul t of t hese sal es?
a. $0
b. $2, 700
c. $3, 000
d. $27, 000


Chapt er 4
4- 3
8. On J anuar y 1, 20X1 Bul l ock, I nc. sel l s l and t o i t s 80%- owned subsi di ar y,
Humphr ey Cor por at i on, at a $20, 000 gai n. The l and i s st i l l hel d by
Humphr ey on December 31, 20X3. What i s t he ef f ect of t he i nt er company
sal e of l and on consol i dat ed net i ncome?
a. Consol i dat ed net i ncome wi l l be t he same as i t woul d have been had
t he sal e not occur r ed.
b. Consol i dat ed net i ncome wi l l be $20, 000 l ess t han i t woul d have
been had t he sal e not occur r ed.
c. Consol i dat ed net i ncome wi l l be $16, 000 l ess t han i t woul d have
d. Consol i dat ed net i ncome wi l l be $20, 000 gr eat er t han i t woul d have


9. Emr on Company owns a 100%i nt er est i n t he common st ock of t he Di et z
Company. On J anuar y 1, 20X2, Emr on sol d Di et z a f i xed asset t hat Di et z
wi l l use over a 5- year per i od. The asset was sol d at a $5, 000 pr of i t . I n
t he consol i dat ed st at ement s, t hi s pr of i t wi l l
a. not be r ecor ded.
b. be r ecogni zed over 5 year s.
c. be r ecogni zed i n t he year of sal e.
d. be r ecogni zed when t he asset i s r esol d t o out si de par t i es at t he
end of i t s per i od of use.


10. Pease Cor por at i on owns 100%of Sade Cor por at i on common st ock. On J anuar y
2, 20X6, Pease sol d machi ner y wi t h a car r yi ng amount of $30, 000 t o Sade
f or $50, 000. Sade i s depr eci at i ng t he acqui r ed machi ner y over a 5- year
l i f e usi ng t he st r ai ght - l i ne met hod. The net adj ust ment s t o comput e t he
20X6 and 20X7 consol i dat ed i ncome bef or e i ncome t ax woul d be an i ncr ease
( decr ease) of

20X6 20X7
a. $( 16, 000) $4, 000
b. $( 16, 000) $0
c. $( 20, 000) $4, 000
d. $( 20, 000) $0

ANS: A DI F: D OBJ : 3

11. On J anuar y 1, 20X1, Poe Cor p. sol d a machi ne f or $900, 000 t o Saxe Cor p. ,
i t s whol l y- owned subsi di ar y. Poe pai d $1, 100, 000 f or t hi s machi ne. On
t he sal e dat e, accumul at ed depr eci at i on was $250, 000. Poe est i mat ed a
$100, 000 sal vage val ue and depr eci at ed t he machi ne on t he st r ai ght - l i ne
met hod over 20 year s, a pol i cy t hat Saxe cont i nued. I n Poe' s December
31, 20X1, consol i dat ed bal ance sheet , t hi s machi ne shoul d be i ncl uded i n
cost and accumul at ed depr eci at i on as

Cost Accumul at ed Depr eci at i on
a. $1, 100, 000 $300, 000
b. $1, 100, 000 $290, 000
c. $ 900, 000 $ 40, 000
d. $ 850, 000 $ 42, 500

Chapt er 4
4- 4

12. Por ch Company owns a 90%i nt er est i n t he Scr een Company. Por ch sol d
Scr een a mi l l i ng machi ne on J anuar y 1, 20X1, f or $50, 000 when t he book
val ue of t he machi ne on Por ch' s books was $40, 000. Por ch f i nanced t he
sal e wi t h Scr een si gni ng a 3- year , 8%i nt er est , not e f or t he ent i r e
$50, 000. The machi ne wi l l be used f or 10 year s and depr eci at ed usi ng t he
st r ai ght - l i ne met hod. The f ol l owi ng amount s r el at ed t o t hi s t r ansact i on
wer e l ocat ed on t he compani es t r i al bal ances:
I nt er est Revenue $4, 000
I nt er est Expense $4, 000
Depr eci at i on Expense $5, 000

Based upon t he i nf or mat i on r el at ed t o t hi s t r ansact i on what wi l l be t he
amount s el i mi nat ed i n pr epar i ng t he consol i dat ed f i nanci al st at ement s?

I nt er est Revenue I nt er est Expense Depr eci at i on Expense
a. 4, 000 4, 000 5, 000
b. 4, 000 4, 000 1, 000
c. 3, 600 3, 600 900
d. 3, 600 3, 600 4, 500


13. On 1/ 1/ X1 Peck sel l s a machi ne wi t h a $20, 000 book val ue t o i t s
subsi di ar y Shea f or $30, 000. Shea i nt ends t o use t he machi ne f or 4
year s. On 12/ 31/ X2 Shea sel l s t he machi ne t o an out si de par t y f or
$14, 000. What amount of gai n or ( l oss) f or t he sal e of asset s i s
r epor t ed on t he consol i dat ed f i nanci al st at ement s?
a. l oss of $6, 000
b. l oss of $1, 000
c. gai n of $4, 000
d. gai n of $14, 000


14. St r oud Cor por at i on i s an 80%- owned subsi di ar y of Penni e, I nc. , acqui r ed
by Penni e sever al year s ago. On J anuar y 1, 20X2, Penni e sol d l and wi t h a
book val ue of $60, 000 t o St r oud f or $90, 000. St r oud r esol d t he l and t o
an unr el at ed par t y f or $100, 000 on Sept ember 26, 20X3. The l and wi l l be
i ncl uded i n t he December 31, 20X2 consol i dat ed bal ance sheet of Penni e,
I nc. and Subsi di ar y at _______.
a. $48, 000
b. $60, 000
c. $72, 000
d. $90, 000


Chapt er 4
4- 5
15. St r oud Cor por at i on i s an 80%- owned subsi di ar y of Penni e, I nc. , acqui r ed
by Penni e sever al year s ago. On J anuar y 1, 20X2, Penni e sol d l and wi t h a
book val ue of $60, 000 t o St r oud f or $90, 000. St r oud r esol d t he l and t o
an unr el at ed par t y f or $100, 000 on Sept ember 26, 20X3. The gai n f r om
sal e of l and t hat wi l l appear i n t he consol i dat ed i ncome st at ement s f or
20X2 and 20X3, r espect i vel y, i s _______.
a. $0 and $10, 000
b. $0 and $40, 000
c. $30, 000 and $10, 000
d. $30, 000 and $40, 000


16. Company P owns 100%of t he common st ock of Company S. Company P i s
const r uct i ng an asset f or Company S t hat wi l l be used i n Company S' s
manuf act ur i ng oper at i ons over a 5- year per i od. The asset was 50%
compl et e at t he end of 20X1 and was compl et ed on December 31, 20X2.
Company P i s r ecor di ng t he const r uct i on under t he per cent age of
compl et i on met hod. The asset was put i nt o use by Company S on J anuar y 1,
20X3. The pr of i t on t he asset was est i mat ed t o be $50, 000. Act ual
r esul t s compl i ed t o t he est i mat e. On t he consol i dat ed st at ement s, t he
pr of i t wi l l appear as

20X1 20X2 20X3 20X4 - 20X7
a. 0 50, 000 0 0
b. 25, 000 25, 000 0 0
c. 0 0 10, 000 10, 000
d. 0 0 50, 000 0


17. The f ol l owi ng account s wer e not ed i n r evi ewi ng t he t r i al bal ance f or
Par ent Co. and Subsi di ar y Cor p. :
Asset s under Const r uct i on
Cont r act s Recei vabl e
Bi l l i ngs on Const r uct i on i n Pr ogr ess
Ear ned I ncome on Long- Ter mCont r act s
Cont r act s Payabl e

Whi ch of t hese account s do you expect t o el i mi nat e when pr oduci ng Par ent
Co. consol i dat ed f i nanci al st at ement s?
a. Asset s under Const r uct i on; Bi l l i ngs on Const r uct i on i n Pr ogr ess;
Ear ned I ncome on Long- Ter mCont r act s
b. Cont r act s Recei vabl e; Bi l l i ngs on Const r uct i on i n Pr ogr ess; Ear ned
I ncome on Long- Ter mCont r act s
c. Asset s under Const r uct i on; Cont r act s Recei vabl e; Bi l l i ngs on
Const r uct i on i n Pr ogr ess; Ear ned I ncome on Long- Ter mCont r act s;
Cont r act s Payabl e
d. Cont r act s Recei vabl e; Bi l l i ngs on Const r uct i on i n Pr ogr ess; Ear ned
I ncome on Long- Ter mCont r act s; Cont r act s Payabl e

ANS: D DI F: E OBJ : 4

Chapt er 4
4- 6
18. Dur i ng 20X3, a par ent company bi l l ed i t s 100%- owned subsi di ar y f or
comput er ser vi ces at t he r at e of $1, 000 per mont h. At year end, one
mont h' s bi l l r emai ned unpai d. As a par t of t he consol i dat i on pr ocess,
net i ncome
a. shoul d be r educed $12, 000.
b. shoul d be r educed $1, 000.
c. needs no adj ust ment .
d. needs an adj ust ment , but t he amount i s not pr ovi ded by t hi s
i nf or mat i on.


19. On J anuar y 1, 20X1, a par ent l oaned $30, 000 t o i t s 100%- owned subsi di ar y
on a 5- year , 8%not e. The not e r equi r es a pr i nci pal payment at t he end
of each year of $6, 000 pl us payment of i nt er est accr ued t o dat e. The
f ol l owi ng account s r equi r e adj ust ment i n t he consol i dat i on pr ocess:

Cont r ol l i ng
Asset s Debt Ret ai ned Ear ni ngs
a. Yes Yes Yes
b. No No Yes
c. Yes Yes No
d. No No No


20. Phel ps Co. uses t he sophi st i cat ed equi t y met hod t o account f or t he 80%
i nvest ment i n i t s subsi di ar y Shor e Cor p. Based upon t he f ol l owi ng
i nf or mat i on what amount does Phel ps Co. r ecor d as subsi di ar y i ncome?
Phel ps i nt er nal l y gener at ed i ncome: $250, 000
Shor e i nt er nal l y gener at ed i ncome: $ 50, 000
I nt er company pr of i t on Shor e begi nni ng i nvent or y: $ 10, 000
I nt er company pr of i t on Shor e endi ng i nvent or y: $ 15, 000

a. $50, 000
b. $44, 000
c. $40, 000
d. $36, 000


Chapt er 4
4- 7
PROBLEM

1. Account bal ances ar e as of December 31, 20X3 except wher e not ed.

Pi pe Mat ch
Selected I ncome St at ement Amount s:
Sal es $710, 000 $530, 000
Gai n on Sal e of Equi pment 21, 000
Ear ni ngs f r omI nvest ment i n subsi di ar y 61, 000
I nt er est Revenue 2, 880
I nt er est Expense 2, 880
Depr eci at i on 25, 000 20, 000

Selected Bal ance Sheet Amount s {Debi t s/ ( Cr edi t s) }:
Cash $ 50, 000 $ 15, 000
Not es Recei vabl e 36, 000
I nvent or i es 229, 000 150, 000
Equi pment 440, 000 360, 000
Accumul at ed Depr eci at i on ( 200, 000) ( 120, 000)
I nvest ment i n Shaw 189, 000
Not es Payabl e ( 36, 000)
Common St ock ( 100, 000) ( 10, 000)
Addi t i onal pai d- i n- capi t al ( 250, 000) ( 40, 000)
Ret ai ned Ear ni ngs ( 402, 000) ( 140, 000)

Selected St at ement of Ret ai ned Ear ni ngs Amount s:
Begi nni ng Bal ance, December 31, x2 $ 272, 000 $ 100, 000
Net I ncome 210, 000 70, 000
Di vi dends Pai d 80, 000 30, 000

Addi t i onal I nf or mat i on:
On J anuar y 2, 20X3 Pi pe pur chased 90%of Mat ch f or $155, 000. On t hat
dat e Mat ch' s shar ehol der s' equi t y equal ed $150, 000 and t he f ai r val ues
of Mat ch' s asset s and l i abi l i t i es equal ed t hei r car r yi ng amount s.
Excess, i f any, i s at t r i but ed t o pat ent s and i s amor t i zed over 10 year s.

On Sept ember 4, 20X3 Mat ch pai d cash di vi dends of $30, 000.

On J anuar y 3, 20X3 Mat ch sol d equi pment wi t h an or i gi nal cost of $30, 000
and a car r yi ng val ue of $15, 000 t o Pi pe f or $36, 000. The equi pment had a
r emai ni ng usef ul l i f e of 3 year s. St r ai ght - l i ne depr eci at i on i s used.

On J anuar y 4, 20X3 Mat ch si gned an 8%Not e Payabl e. Al l i nt er est
payment s wer e made as of December 31, 20X3.

Dur i ng t he year Mat ch sol d mer chandi se t o Pi pe f or $60, 000, whi ch
i ncl uded a pr of i t of $20, 000. At year end 50%of t he mer chandi se
r emai ned i n Pi pe' s i nvent or y.

Chapt er 4
4- 8
Requi r ed:

1. Whi ch met hod i s Pi pe usi ng t o account f or t he i nvest ment i n Mat ch?
How do you know?

2. What el i mi nat i on ent r y( i es) ar e associ at ed wi t h t he el i mi nat i on of
i nt er company pr of i t s due t o t he sal e of mer chandi se?

3. What el i mi nat i on ent r y( i es) ar e necessar y wi t h t he sal e of equi pment
by Mat ch t o Pi pe?

4. What el i mi nat i on ent r y( i es) ar e associ at ed wi t h t he not e t o Mat ch?
Why ar e t he ent r y( i es) made?

ANS:

1. Sophi st i cat ed Equi t y:
Mat ch Net I ncome $63, 000
Amor t i zat i on of pat ent ( 2, 000)
Ear ni ngs f r om
I nvest ment i n subsi di ar y $61, 000
=======

2. Sal es 60, 000
Cost of Goods Sol d 60, 000

Cost of Goods Sol d 10, 000
( 50%x $20, 000)

3. Gai n on Sal e of Equi pment 21, 000
Equi pment 21, 000

Accumul at ed Depr eci at i on 7, 000
Depr eci at i on Expense 7, 000
( $21, 000/ 3 year s)

4. Not es Payabl e 36, 000
Not es Recei vabl e 36, 000

I nt er est Revenue 2, 880
I nt er est Expense 2, 880

The not e r ecei vabl e and payabl e, and t he associ at ed i nt er est r evenue and
expense shoul d not be i ncl uded on t he consol i dat ed f i nanci al st at ement s.

DI F: E OBJ : 1, 2, 3, 5, 6

Chapt er 4
4- 9
2. On J anuar y 1, 20X1, Pr ange Company acqui r ed 100%of t he common st ock of
Seaman Company f or $600, 000. On t hi s dat e Seaman had t ot al owner s'
equi t y of $400, 000. Any excess of cost over book val ue i s at t r i but abl e
t o a pat ent , whi ch i s t o be amor t i zed over 10 year s.

Dur i ng 20X1 and 20X2, Pr ange has appr opr i at el y account ed f or i t s
i nvest ment i n Seaman usi ng t he si mpl e equi t y met hod.

On J anuar y 1, 20X2, Pr ange hel d mer chandi se acqui r ed f r omSeaman f or
$30, 000. Dur i ng 20X2, Seaman sol d mer chandi se t o Pr ange f or $100, 000, of
whi ch $20, 000 i s hel d by Pr ange on December 31, 20X2. Seaman' s gr oss
pr of i t on al l sal es i s 40%.

On December 31, 20X2, Pr ange st i l l owes Seaman $20, 000 f or mer chandi se
acqui r ed i n December .

Requi r ed:

Compl et e t he Fi gur e 4- 1 wor ksheet f or consol i dat ed f i nanci al st at ement s
f or t he year ended December 31, 20X2.

ANS:



account and i n t he Seaman i ncome account .

( EL) El i mi nat e t he Seaman Company equi t y bal ances at t he
begi nni ng of t he year agai nst t he i nvest ment account .

( D) Di st r i but e t he $200, 000 excess of cost over book val ue t o
pat ent .

( A) Amor t i ze t he pat ent over 10 year s, wi t h $20, 000 f or 20X1
char ged t o r et ai ned ear ni ngs, and $20, 000 f or 20X2 t o
oper at i ng expenses.

( BI ) El i mi nat e t he $12, 000 of gr oss pr of i t i n t he begi nni ng
i nvent or y.

( I S) El i mi nat e t he ent i r e i nt er company sal es of $100, 000.

( EI ) El i mi nat e t he $8, 000 of gr oss pr of i t i n t he endi ng
i nvent or y.

( I A) El i mi nat e t he $20, 000 i nt er company account s r ecei vabl e and
payabl e.

Chapt er 4
4- 10
Consol i dat ed Net I ncome

To Noncont r ol l i ng I nt er est : 0

To Cont r ol l i ng I nt er est :
100, 000 + 100%( 90, 000 + 12, 000 - 8, 000) - 20, 000 = 174, 000

DI F: M OBJ : 2

3. On J anuar y 1, 20X1, Pr ange Company acqui r ed 80%of t he common st ock of
Seaman Company f or $500, 000. On t hi s dat e Seaman had t ot al owner s'
equi t y of $400, 000. Any excess of cost over book val ue i s at t r i but abl e
t o pat ent , whi ch i s t o be amor t i zed over 20 year s.

Dur i ng 20X1 and 20X2, Pr ange has appr opr i at el y account ed f or i t s
i nvest ment i n Seaman usi ng t he si mpl e equi t y met hod.

On J anuar y 1, 20X2, Pr ange hel d mer chandi se acqui r ed f r omSeaman f or
$30, 000. Dur i ng 20X2, Seaman sol d mer chandi se t o Pr ange f or $100, 000, of
whi ch $20, 000 i s hel d by Pr ange on December 31, 20X2. Seaman' s gr oss
pr of i t on al l sal es i s 40%.

On December 31, 20X2, Pr ange st i l l owes Seaman $20, 000 f or mer chandi se

Requi r ed:


Chapt er 4
4- 11
ANS:



account and i n t he Seaman i ncome account .

( EL) El i mi nat e 80%of t he Seaman Company equi t y bal ances at t he

pat ent .

( A) Amor t i ze t he pat ent over 20 year s, wi t h $9, 000 f or 20X1

i nvent or y.


i nvent or y.

payabl e.


To Noncont r ol l i ng I nt er est : 20%( 90, 000 + 12, 000 - 8, 000) = 18, 800

100, 000 + 80%( 90, 000 + 12, 000 - 8, 000) - 9, 000 = 166, 200

OBJ : 2

Chapt er 4
4- 12
4. Sel ect ed i nf or mat i on f r omt he separ at e and consol i dat ed bal ance sheet s
and i ncome st at ement s of Pal o Al t o, I nc. and i t s subsi di ar y, St anf or d
Co. , as of December 31, 20X1, and f or t he year t hen ended i s as f ol l ows:

Consol i -
Pal o Al t o St anf or d dat ed
Bal ance sheet account s
Account s r ecei vabl e. . . . . . . . . . . . $ 26, 000 $19, 000 $ 42, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . 30, 000 25, 000 50, 000
I nvest ment i n St anf or d. . . . . . . . . 67, 000 - - - -
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . - - - - 30, 000
Noncont r ol l i ng i nt er est . . . . . . . . - - - - 10, 000
St ockhol der s' equi t y. . . . . . . . . . . 154, 000 50, 000 154, 000

I ncome st at ement account s
Revenues. . . . . . . . . . . . . . . . . . . . . . . $200, 000 $140, 000 $300, 000
Cost of goods sol d. . . . . . . . . . . . . 150, 000 110, 000 225, 000
Gr oss pr of i t . . . . . . . . . . . . . . . . . 50, 000 30, 000 75, 000

Equi t y i n ear ni ngs of St anf or d. $9, 000 - - - -
Net i ncome. . . . . . . . . . . . . . . . . . . . . $36, 000 $20, 000 $36, 000

Addi t i onal i nf or mat i on

Dur i ng 20X1, Pal o Al t o sol d goods t o St anf or d at t he same
mar kup on cost t hat Pal o Al t o uses f or al l sal es. At December
31, 20X1, St anf or d had not pai d f or al l of t hese goods and
st i l l hel d 50%of t hemi n i nvent or y.

Pal o Al t o acqui r ed i t s i nt er est i n St anf or d f i ve year s ear l i er
( as of December 31, 20X1. )

Requi r ed:

For each of t he f ol l owi ng i t ems, cal cul at e t he r equi r ed amount .

a. The amount of i nt er company sal es f r omPal o Al t o t o St anf or d
dur i ng 20X1.

b. The amount of St anf or d' s payabl e t o Pal o Al t o f or i nt er company
sal es as of December 31, 20X1.

c. I n Pal o Al t o' s December 31, 20X1, consol i dat ed bal ance sheet ,
t he car r yi ng amount of t he i nvent or y t hat St anf or d pur chased
f r omPal o Al t o.

d. The per cent of noncont r ol l i ng i nt er est owner shi p i n St anf or d
as of December 31, 20X1.

ANS:

a. $40, 000
b. $3, 000
c. $15, 000
d. 20%

DI F: M OBJ : 2, 3
Chapt er 4
4- 13

5. On J anuar y 1, 20X1, Pi nt o Company pur chased an 80%i nt er est i n Sands
I nc. f or $1, 000, 000. The equi t y bal ances of Sands at t he t i me of t he
pur chase wer e as f ol l ows:

Common st ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000

Any excess of cost over book val ue i s at t r i but abl e t o goodwi l l .

No di vi dends wer e pai d by ei t her f i r mdur i ng 20X6. The f ol l owi ng t r i al
bal ances wer e pr epar ed f or Pi nt o Company and i t s subsi di ar y, Sands I nc. ,
on December 31, 20X6:

Pi nt o Sands
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 120, 000 $ 62, 000
Account s r ecei vabl e. . . . . . . . . . . . . . . . . . . . . . . 290, 000 194, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350, 000 176, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800, 000 180, 000
Bui l di ngs and equi pment . . . . . . . . . . . . . . . . . . . 1, 100, 000 800, 000
Accumul at ed depr eci at i on. . . . . . . . . . . . . . . . . . ( 180, 000) ( 120, 000)
I nvest ment i n Sands. . . . . . . . . . . . . . . . . . . . . . . 600, 000 -
Account s payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . ( 110, 000) ( 50, 000)
Common st ock, $10 par . . . . . . . . . . . . . . . . . . . . . ( 800, 000) ( 100, 000)
Pai d- i n capi t al i n excess of par . . . . . . . . . . ( 660, 000) ( 400, 000)
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . ( 1, 340, 000) ( 650, 000)
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 600, 000) ( 300, 000)
Ot her i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 40, 000) ( 12, 000)
Cost of goods sol d. . . . . . . . . . . . . . . . . . . . . . . . 320, 000 180, 000
Ot her expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000 32, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0
=========== =========

Sands sol d a machi ne t o Pi nt o Company f or $40, 000 on J anuar y 1, 20X6.
The machi ne cost Sands $50, 000, and $25, 000 of accumul at ed depr eci at i on
had been r ecor ded as of t he sal e dat e. The machi ne had a 5- year
r emai ni ng l i f e and no sal vage val ue. Pi nt o Company i s usi ng st r ai ght -
l i ne depr eci at i on.

Si nce t he pur chase dat e, Pi nt o has sol d mer chandi se f or r esal e t o Sands,
I nc. at a mar k- up on cost of 25%. Sal es dur i ng 20X6 wer e $150, 000. The
i nvent or y of t hese goods hel d by Sands was $15, 000 on J anuar y 1, 20X6,
and $18, 000 on December 31, 20X6.

Requi r ed:

Pr epar e a consol i dat ed i ncome st at ement f or 20X6, i ncl udi ng i ncome
di st r i but i on schedul es t o suppor t your di st r i but i on of i ncome t o t he
Noncont r ol l i ng and cont r ol l i ng i nt er est account s.

Chapt er 4
4- 14
ANS:

Det er mi nat i on and Di st r i but i on of Excess Schedul e

Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 000, 000
I nt er est acqui r ed, 80%x $1, 000, 000. . . . . . . . . . . . . . . . . . . . 800, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200, 000
==========

Pi nt o Company and Subsi di ar y Sands I nc.
Consol i dat ed I ncome St at ement
For t he Year Ended December 31, 20X6

Sal es ( 600, 000 + 300, 000 - 150, 000) . . . . . . . . . . . . . . . . . . . $750, 000
Cost of goods sol d
( 320, 000 + 180, 000 - 150, 000 - 3, 000 + 3, 600) . . . . . . . . 350, 600
Gr oss pr of i t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $399, 400
Ot her expenses ( $150, 000 + $32, 000 - $3, 000) . . . . . . . . . . . 179, 000
Oper at i ng i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220, 400
Ot her i ncome ( $40, 000 + $12, 000 - $15, 000) . . . . . . . . . . . . . 37, 000
Consol i dat ed Net I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $257, 400
Less: noncont r ol l i ng i nt er est . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 600
Consol i dat ed net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $239, 800
========

Subsi di ar y Sands I nc. I ncome Di st r i but i on
____________________________________________________________________
Def er r ed gai n on sal e | I nt er nal l y gener at ed
of machi ne. . . . . . . . . . $15, 000 | net i ncome. . . . . . . . . . $100, 000
| Gai n on sal e of
| machi ne r eal i zed
| t hr ough use. . . . . . . . . 3, 000
_________________________________| __________________________________
| Adj ust ed i ncome. . . . . . $ 88, 000
| Noncont r ol l i ng shar e 20%
| Noncont r ol l i ng i nt er est $ 17, 600
========

Par ent Pi nt o Company I ncome Di st r i but i on
____________________________________________________________________
Def er r ed pr of i t i n | I nt er nal l y gener at ed
endi ng i nvent or y. . . . . $3, 600 | net i ncome. . . . . . . . . $170, 000
| Real i zed pr of i t i n
| begi nni ng i nvent or y 3, 000
| 80%x Sands i ncome of
| $88, 000. . . . . . . . . . . . 70, 400
_________________________________| __________________________________
| Cont r ol l i ng i nt er est . . $239, 800
========

DI F: M OBJ : 2, 3

Chapt er 4
4- 15
Subsi di ar y Company f or $750, 000. On t hi s dat e Subsi di ar y had t ot al

Any excess of cost over book val ue i s at t r i but abl e t o l and, under val ued
$10, 000, and t o goodwi l l .

Dur i ng 20X1 and 20X2, Par ent has appr opr i at el y account ed f or i t s
i nvest ment i n Subsi di ar y usi ng t he si mpl e equi t y met hod.

On J anuar y 1, 20X2, Par ent hel d mer chandi se acqui r ed f r omSubsi di ar y f or
$10, 000. Dur i ng 20X2, Subsi di ar y sol d mer chandi se t o Par ent f or
$100, 000, of whi ch $20, 000 i s hel d by Par ent on December 31, 20X2.
Subsi di ar y' s usual gr oss pr of i t on af f i l i at ed sal es i s 40%.

On December 31, 20X2, Par ent st i l l owes Subsi di ar y $20, 000 f or
mer chandi se acqui r ed i n December .

On J anuar y 1, 20X2, Par ent sol d t o Subsi di ar y some equi pment wi t h a cost
of $50, 000 and a book val ue of $20, 000. The sal es pr i ce was $40, 000.
Subsi di ar y i s depr eci at i ng t he equi pment over a f i ve- year l i f e, assumi ng
no sal vage val ue and usi ng t he st r ai ght - l i ne met hod.

Requi r ed:


ANS:




( EL) El i mi nat e t he Subsi di ar y Company equi t y bal ances at t he

( D) Di st r i but e t he $210, 000 excess of cost over book val ue l and
( $10, 000) and t o goodwi l l .

i nvent or y.


i nvent or y.

payabl e.

( F2) El i mi nat e t he $4, 000 of excess depr eci at i on f or 20X2 on t he
t r ansf er r ed equi pment .

( F1) El i mi nat e t he $20, 000 gai n on sal e of equi pment .
Chapt er 4
4- 16



To Cont r ol l i ng I nt er est : 130, 000 - 20, 000 + 4, 000 + 100%( 100, 000 +
4, 000 - 8, 000) = 210, 000

DI F: M OBJ : 2, 3

owner s' equi t y of $540, 000, i ncl udi ng r et ai ned ear ni ngs of $240, 000.
Dur i ng 20X1, Subsi di ar y had net i ncome of $60, 000 and pai d no di vi dends.

Any excess of cost over book val ue i s at t r i but abl e t o l and, under val ued

i nvest ment i n Subsi di ar y usi ng t he cost met hod.



On J anuar y 1, 20X2, Par ent sol d t o Subsi di ar y some equi pment wi t h a cost
Subsi di ar y i s depr eci at i ng t he equi pment over a f i ve- year l i f e, assumi ng
no sal vage val ue and usi ng t he st r ai ght - l i ne met hod.

Requi r ed:


Chapt er 4
4- 17
ANS:



( CV) Conver t t o t he si mpl e equi t y met hod as of J anuar y 1, 20X2.
( 80%of $60, 000 i ncr ease i n r et ai ned ear ni ngs f r omJ anuar y
1, 20X1 t o J anuar y 1, 20X2. )

( CY2) El i mi nat e t he cur r ent - year di vi dend i ncome agai nst
di vi dends decl ar ed by Subsi di ar y.

( EL) El i mi nat e 80%of t he Subsi di ar y Company equi t y bal ances at
t he begi nni ng of t he year agai nst t he i nvest ment account .

l and ( $8, 000) and t o goodwi l l .

i nvent or y.


i nvent or y.

payabl e.

( F2) El i mi nat e t he $4, 000 of excess depr eci at i on f or 20X2 on
t he t r ansf er r ed equi pment .

( F1) El i mi nat e t he $20, 000 gai n on sal e of equi pment , r est or e
t he asset t o $50, 000, and r est or e t he $30, 000 of
accumul at ed depr eci at i on wr i t t en of f upon t r ansf er .


To Noncont r ol l i ng I nt er est : 20%( 100, 000 + 4, 000 - 8, 000) = 19, 200

To Cont r ol l i ng I nt er est : 130, 000 - 20, 000 + 4, 000 + 80%( 100, 000 +
4, 000 - 8, 000) = 190, 800

DI F: M OBJ : 2, 3

Chapt er 4
4- 18
8. On J anuar y 1, 20X1, Power s Company acqui r ed 80%of t he common st ock of
Scul l ey Company f or $195, 000. On t hi s dat e Scul l ey had t ot al owner s'
equi t y of $200, 000 ( common st ock, ot her pai d- i n capi t al and r et ai ned
ear ni ngs of $10, 000, $90, 000 and $100, 000 r espect i vel y) .

Any excess of cost over book val ue i s at t r i but abl e t o i nvent or y ( wor t h
$6, 250 mor e t han cost ) , t o equi pment ( wor t h $12, 500 mor e t han book
val ue) , and t o pat ent s. FI FO i s used f or i nvent or i es. The equi pment has
a r emai ni ng l i f e of f i ve year s and st r ai ght - l i ne depr eci at i on i s used.
The excess t o pat ent s i s t o be amor t i zed over 20 year s. The Power s
company concept ( pr o r at a f ai r val ue appr oach) i s t o be used i n any
wr i t e up of asset s.

Power s 7%Bonds Payabl e ar e due i n 20X8 and Scul l ey 12%Bonds ar e due i n
20X5.

On J ul y 1, 20X2 Scul l ey bor r owed $100, 000 f r omPower s wi t h a 10%1- Year
Not e.

Dur i ng 20X1 and 20X2, Power s has appr opr i at el y account ed f or i t s
i nvest ment i n Scul l ey usi ng t he cost met hod.

On J anuar y 1, 20X2, Power s hel d mer chandi se acqui r ed f r omScul l ey f or
$10, 000. Dur i ng 20X2, Scul l ey sol d mer chandi se t o Power s f or $50, 000,
$20, 000 of whi ch i s st i l l hel d by Power s on December 31, 20X2. Scul l ey' s
usual gr oss pr of i t on af f i l i at ed sal es i s 50%.

On December 31, 20X1, Power s sol d equi pment t o Scul l ey at a gai n of
$10, 000. Dur i ng 20X2, t he equi pment was used by Scul l ey. Depr eci at i on i s
bei ng comput ed usi ng t he st r ai ght - l i ne met hod, a f i ve- year l i f e, and no
sal vage val ue.

Requi r ed:

a. Usi ng t he i nf or mat i on above or on t he Fi gur e 4- 5 wor ksheet ,

st at ement s f or t he year ended December 31, 20X2.

Chapt er 4
4- 19
ANS:


Pr i ce pai d f or i nvest ment i n Scul l ey Co $195, 000
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000
Ot her pai d- i n capi t al 90, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . . $ 35, 000
========

Al l ocabl e t o:
I nvent or y ( $6, 250 x 80%) . . . . . . . . . . . . . . . $ 5, 000 Dr .
Equi pment ( $12, 500 x 80%) . . . . . . . . . . . . . . 10, 000 Dr .
Pat ent s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20, 000 Dr .
=======

Amor t i zat i on:
20X1 20X2
Ret ai ned Ear ni ngs, J anuar y 1. . . . . . . . . . . . $8, 000
I nvent or y - t o Cost of Goods Sol d. . . . . . . $5, 000
Equi pment t o Oper at i ng Expenses. . . . . . . . . 2, 000 2, 000
Pat ent s - t o Oper at i ng Expenses. . . . . . . . . 1, 000 1, 000

Chapt er 4
4- 20


( CV) Conver t t o t he si mpl e equi t y met hod as of J anuar y 1, 20X2
( ( 80%of $50, 000 i ncr ease i n r et ai ned ear ni ngs f r omJ anuar y
1, 20X1 t o J anuar y 1, 20X2) .

( CY2) El i mi nat e t he cur r ent - year di vi dend i ncome agai nst
di vi dends decl ar ed by Scul l ey.

( EL) El i mi nat e 80%of t he Scul l ey Company equi t y bal ances at t he

i nvent or y, equi pment , and pat ent .

Not e: The $5, 000 ( 80%of $6, 250) wr i t e up t o i nvent or y i s
char ged t o Power s' s r et ai ned ear ni ngs si nce FI FO i s used.

( A1) Amor t i ze t he equi pment wr i t e up over 5 year s, wi t h $2, 000
f or 20X1 char ged t o r et ai ned ear ni ngs, and $2, 000 f or 20X2
t o oper at i ng expenses.

( A2) Amor t i ze t he pat ent over 20 year s, wi t h $1, 000 f or 20X1

( LN2) El i mi nat e $5, 000 i nt er company i nt er est r evenue and i nt er est
expense. ( $100, 000 x 10%x 6 mont hs)

( LN1) El i mi nat e $100, 000 i nt er company not es r ecei vabl e and not es
payabl e.

i nvent or y.


i nvent or y.

( F2) El i mi nat e t he $2, 000 of excess depr eci at i on f or 20X2 on t he

( F1) El i mi nat e t he $10, 000 20X1 gai n on sal e of equi pment and
r est or e t he equi pment account t o cost .


To Noncont r ol l i ng I nt er est : . 2( 105, 000 + 5, 000 - 10, 000) = 20, 000

To Cont r ol l i ng I nt er est : 100, 000 + 2, 000 + . 8( 105, 000 + 5, 000 -
10, 000) - 2, 000 - 1, 000 = 179, 000

DI F: D OBJ : 2, 3, 5

Chapt er 4
4- 21
equi t y of $200, 000 ( common st ock, ot her pai d- i n capi t al , and r et ai ned
ear ni ngs of $10, 000, $90, 000, and $100, 000 r espect i vel y) .

The excess t o t he pat ent s i s t o be amor t i zed over 20 year s. The Power s
company concept ( pr o r at a f ai r val ue appr oach) i s t o be used i n any
wr i t e up of asset s.

i nvest ment i n Scul l ey usi ng t he si mpl e equi t y met hod.

Power s 7%Bonds Payabl e ar e due i n 20X8 and Scul l ey 12%Bonds ar e due i n
20X5.

On J ul y 1, 20X2 Scul l ey bor r owed $100, 000 f r omPower s wi t h a 10%1- Year
Not e.


sal vage val ue.

Requi r ed:



Chapt er 4
4- 22
ANS:


Pr i ce pai d f or i nvest ment i n Scul l ey Co. $195, 000
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . . . $ 35, 000
========

Al l ocabl e t o:
I nvent or y ( $6, 250 x 80%) . . . . . . . . . . . . . . . $ 5, 000 Dr .
Equi pment ( $12, 500 x 80%) . . . . . . . . . . . . . . 10, 000 Dr .
Pat ent s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20, 000 Dr .
=======

Amor t i zat i on:

20X1 20X2

Chapt er 4
4- 23


account and i n t he Scul l ey i ncome account .

( EL) El i mi nat e 80%of t he Scul l ey Company equi t y bal ances at t he



f or 20X1 char ged t o r et ai ned ear ni ngs, and $2, 000 f or 20X2


( LN2) El i mi nat e $5, 000 i nt er company i nt er est r evenue and i nt er est
expense. ( $100, 000 x 10%x 6 mont hs)

( LN1) El i mi nat e $100, 000 i nt er company not es r ecei vabl e and not es
payabl e.

i nvent or y.


i nvent or y.

( F2)

El i mi nat e t he $2, 000 of excess depr eci at i on f or 20X1 on t he

( F1)

El i mi nat e t he $10, 000 20X1 gai n on sal e of equi pment and



To Cont r ol l i ng I nt er est : 200, 000 + 2, 000 + . 8 ( 105, 000 + 5, 000 -
10, 000) - 2, 000 - 1, 000 = 179, 000

DI F: D OBJ : 2, 3, 5

Chapt er 4
4- 24
ear ni ng of $10, 000, $90, 000, and $100, 000 r espect i vel y) .

val ue) , and t o t he pat ent s. FI FO i s used f or i nvent or i es. The equi pment
has a r emai ni ng l i f e of f i ve year s and st r ai ght - l i ne depr eci at i on i s
used. The excess at t r i but abl e t o t he pat ent s i s t o be amor t i zed over 20
year s. The Power s company concept ( pr o r at a f ai r val ue appr oach) i s t o
be used i n any wr i t e up of asset s.

i nvest ment i n Scul l ey usi ng t he sophi st i cat ed equi t y met hod.


sal vage val ue.

Requi r ed:



Chapt er 4
4- 25
ANS:


Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . . $ 35, 000
========

Al l ocabl e t o:
I nvent or y ( $6, 250 x 80%) . . . . . . . . . . . . . . . $ 5, 000 Dr .
Equi pment ( $12, 500 x 80%) . . . . . . . . . . . . . . 10, 000 Dr .
Pat ent s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20, 000 Dr .
=======

Amor t i zat i on:

20X1 20X2

Chapt er 4
4- 26


NOTE: El i mi nat i ons f or Scul l ey' s i nt er company pr of i t s ar e made f i r st ,
t o f aci l i t at e el i mi nat i on of t he J anuar y 1, 20X2 adj ust ed
r et ai ned ear ni ngs of Scul l ey.

i nvent or y.


i nvent or y.


( EL) El i mi nat e 80%of t he Scul l ey Company adj ust ed equi t y

( D) Di st r i but e t he $27, 000 r emai ni ng excess of cost over book
val ue t o i nvent or y, equi pment , and pat ent .

f or 20X2 char ged t o oper at i ng expenses.

char ged t o oper at i ng expenses.




10, 000) - 2, 000 - 1, 000 = 179, 000

DI F: M OBJ : 2, 3, 6

Chapt er 4
4- 27
ear ni ng of $10, 000, $90, 000, and $100, 000 r espect i vel y) .

The excess at t r i but abl e t o t he pat ent s i s t o be amor t i zed over 20 year s.
The Power s company concept ( pr o r at a f ai r val ue appr oach) i s t o be used
i n any wr i t e up of asset s.

i nvest ment i n Scul l ey usi ng t he si mpl e equi t y met hod.


sal vage val ue.

Requi r ed:



Chapt er 4
4- 28
ANS:


Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000
Ot her pai d- i n capi t al $ 90, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . . . . 80% 160, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . . . $ 35, 000
========

Al l ocabl e t o:
I nvent or y ( $6, 250 x 80%) . . . . . . . . . . . . . . . . $ 5, 000 Dr .
Equi pment ( $12, 500 x 80%) . . . . . . . . . . . . . . . 10, 000 Dr .
Pat ent s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20, 000 Dr .
=======

Amor t i zat i on:
20X1 20X2
Ret ai ned Ear ni ngs, J anuar y 1. . . . . . . . . . . . . $8, 000
I nvent or y - t o Cost of Goods Sol d. . . . . . . . $5, 000
Equi pment t o Oper at i ng Expenses. . . . . . . . . . 2, 000 2, 000
Pat ent s - t o Oper at i ng Expenses. . . . . . . . . . 1, 000 1, 000

Chapt er 4
4- 29



( EL) El i mi nat e 80%of t he Scul l ey Company equi t y bal ances at



f or 20X1 char ged t o r et ai ned ear ni ngs and $2, 000 f or 20X2

( A2) Amor t i ze t he pat ent s over 20 year s, wi t h $1, 000 f or 20X1

i nvent or y.


i nvent or y.


r est or e t he equi pment account t o cost



10, 000) - 2, 000 - 1, 000 = 179, 000

DI F: D OBJ : 2, 3, 7

Chapt er 4
4- 30
12. On J une 1, 20X3, Spr ung Company, a whol l y- owned subsi di ar y of Payl es
Cor por at i on, bor r owed $100, 000 f r omPayl es and si gned a one- year , 12%
not e wi t h i nt er est payabl e at mat ur i t y. On August 1, 20X3, Payl es
di scount ed t he not e at a 15%annual i nt er est r at e at a bank. The
pr oceeds wer e cal cul at ed as f ol l ows:

Pr i nci pal of not e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
I nt er est due at mat ur i t y ( 12%x $100, 000) . . . . . . . . . . . . . . 12, 000
Tot al mat ur i t y val ue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $112, 000
Di scount ( mat ur i t y val ue x 15%di scount x 10/ 12 year . . . ( 14, 000)
Net pr oceeds of not e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98, 000
========

Requi r ed:

Pr epar e t he el i mi nat i ons t hat woul d be made on t he Fi gur e 4- 9 par t i al
wor ksheet dat ed December 31, 20X3, and ext end t he appr opr i at e account s
t o t he consol i dat ed st at ement s.

ANS:



( LN1) El i mi nat e t he i nt er nal not e r ecei vabl e account agai nst t he
not e r ecei vabl e di scount ed account .

( LN2) El i mi nat e i nt er company i nt er est f or 2 mont hs pr i or t o
di scount i ng.

DI F: M OBJ : 5

ESSAY

1. For each of t he f ol l owi ng i nt er company t r ansact i ons, st at e t he pr i nci pl e
t o be used i n account i ng f or i nt er company gai ns on cur r ent and f ut ur e
consol i dat ed i ncome st at ement s:

a. Gai ns on mer chandi se sal es

b. Gai ns on t he sal e of l and

c. Gai ns on t he sal e of depr eci abl e f i xed asset s

d. I nt er est on i nt er company not es

Chapt er 4
4- 31
ANS:

a. The gai n i s def er r ed i n t he per i od of t he i nt er company sal e
and i s r ecogni zed i n t he per i od t hat t he goods ar e sol d t o
out si de par t i es. When t he sal e t o out si de par t i es occur s i n
t he same per i od as t he i nt er company sal e, bot h pr of i t s ar e
r ecogni zed.

b. The gai n i s not r ecogni zed i n t he per i od of t he i nt er company
sal e. I t i s def er r ed and r ecogni zed i n a l at er per i od, when
t he l and i s r esol d t o out si de par t i es. I n many cases, t hi s
wi l l become a per manent def er r al .

c. The gai n i s not r ecogni zed on t he dat e of sal e. I t i s def er r ed
and r ecogni zed over t he depr eci abl e l i f e of t he asset on t he
buyer ' s books. I t i s al l ocat ed over f ut ur e per i ods usi ng t he
depr eci at i on met hod used by t he buyer . However , any r emai ni ng
i nt er company gai n st i l l def er r ed at t he t i me of a sal e of t he
asset t o an out si de par t y i s r ecogni zed at t he t i me of t he
sal e.

d. The i nt er est expense i n any per i od equal s t he i nt er est r evenue
r ecor ded. Thus, t her e i s no ef f ect on consol i dat ed i ncome.
Dur i ng each per i od, however , t he i nt er est expense and r evenue
ar e el i mi nat ed f r omt he consol i dat ed st at ement s.

DI F: M OBJ : 1, 2, 3, 5
Chapt er 4
4- 32
Chapt er 4
4- 33
Chapt er 4
4- 34
Chapt er 4
4- 35
Chapt er 4
4- 36
Chapt er 4
4- 37
Chapt er 4
4- 38
Chapt er 4
4- 39
Chapt er 4
4- 40
Chapt er 4
4- 41
Chapt er 4
4- 42
Chapt er 4
4- 43
Chapt er 4
4- 44
Chapt er 4
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Chapt er 4
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Chapt er 4
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Chapt er 4
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Chapt er 4
4- 49
Chapter 5 Intercompany Transactions: Bonds and Leases

MULTIPLE CHOICE

1. The usual i mpet us f or t r ansact i ons t hat cr eat e a l ong- t er mdebt or -
cr edi t or r el at i onshi p bet ween member s of a consol i dat ed gr oup i s due t o
t he:
a. subsi di ar y' s abi l i t y t o bor r ow l ar ger amount s of capi t al at mor e
f avor abl e t er ms t han woul d be avai l abl e t o t he par ent .
b. par ent ' s abi l i t y t o bor r ow l ar ger amount s of capi t al at mor e
f avor abl e t er ms t han woul d be avai l abl e t o t he subsi di ar y.
c. par ent ' s desi r e t o decent r al i ze asset management and cr edi t
cont r ol .
d. par ent ' s desi r e t o el i mi nat e l ong- t er mdebt .


2. The mot i vat i on of a par ent company t o pur chase t he out st andi ng bonds of
a subsi di ar y coul d be t o:
a. r epl ace t he exi st i ng debt wi t h new debt at a l ower i nt er est r at e.
b. r educe t he par ent company' s acqui si t i on pr i ce f or t he subsi di ar y.
c. i ncr ease t he par ent company' s owner shi p per cent age i n t he
subsi di ar y.
d. cr eat e i nt er est r evenue t o of f set i nt er est expense i n f ut ur e
i ncome st at ement s.


3. Company S i s a 100%- owned subsi di ar y of Company P. Company S has
out st andi ng 8%, 10- year bonds sol d t o yi el d 7%. On J anuar y 1 of t he
cur r ent year , Company P pur chased al l of t he Company S out st andi ng bonds
at a pr i ce t hat r ef l ect ed t he cur r ent 9%ef f ect i ve i nt er est r at e. How
shoul d t hi s event be r ef l ect ed i n t he cur r ent year ' s consol i dat ed
st at ement s?
a. The bonds r emai n i n t he bal ance sheet and ar e account ed f or at a
7%ef f ect i ve r at e.
b. The bonds r emai n i n t he bal ance sheet and ar e account ed f or at a
c. Ret i r ement of t he bonds at an ext r aor di nar y gai n as of t he
pur chase dat e.
d. Ret i r ement of t he bonds at an ext r aor di nar y l oss as of t he
pur chase dat e.


Chapt er 5
5- 2
st at ement s?
pur chase dat e.
pur chase dat e.


st at ement s?
pur chase dat e.
pur chase dat e.


6. I nt er company debt whi ch must be el i mi nat ed f r omconsol i dat ed f i nanci al
st at ement s may r esul t s f r om:
a. one member of a consol i dat ed gr oup sel l i ng i t s bonds di r ect l y t o
anot her member of t he gr oup.
b. one member of a consol i dat ed gr oup advanci ng f unds t o anot her
member of t he gr oup so t hat t he member may r et i r e bonds i t had
i ssued t o out si de par t i es.
c. one member of a consol i dat ed gr oup pur chasi ng bonds f r omout si de
par t i es as an i nvest ment t hat had been i ssued t o out si de par i t i es
by anot her member of t he gr oup.
d. al l of t he above.


Chapt er 5
5- 3
7. El i mi nat i on pr ocedur es f or i nt er company bonds pur chased f r omout si de
par t i es by anot her member of t he consol i dat ed gr oup ar e:
a. not needed except i n t he per i od of acqui si t i on i f pur chased at
par .
b. not needed except i n t he per i od of acqui si t i on i f pur chased at a
pr emi umor di scount .
c. not needed except i n t he per i od of acqui si t i on i f onl y a por t i on
of t he out st andi ng bonds ar e pur chased.
d. needed each per i od as l ong as t her e ar e i nt er company bonds.


8. Assumi ng t he cor r ect bond el i mi nat i ons ent r y( s) ar e made f or
i nt er company bonds, i nt er company bond i nt er est expense wi l l appear on:
a. t he consol i dat ed i ncome st at ement .
b. t he i ncome st at ement of t he bond i ssuer .
c. t he i ncome st at ement of t he bond pur chaser .
d. none of t he above.


9. Assumi ng t he cor r ect bond el i mi nat i ons ent r y( s) ar e made f or
i nt er company bonds, i nt er company bond i nt er est payabl e wi l l appear on:
a. t he consol i dat ed bal ance sheet .
b. t he bal ance sheet of t he bond i ssuer .
c. t he bal ance sheet s of t he bond i ssuer and t he bond pur chaser .


10. Company S i s a 100%- owned subsi di ar y of Company P. On J anuar y 1, 20X9,
Company S has $200, 000 of 8%f ace r at e bonds out st andi ng, whi ch wer e
i ssued at f ace val ue. The bonds had 5 year s t o mat ur i t y on J anuar y 1,
20X9. Pr emi ums or di scount s woul d be amor t i zed on a st r ai ght - l i ne basi s.
On t hat dat e, Company P pur chased t he bonds f or $198, 000. The amount on
t he consol i dat ed bal ance sheet r el at i ve t o t he debt i s:
a. bonds payabl e $200, 000.
b. bonds payabl e $200, 000, di scount $2, 000.
c. bonds payabl e $200, 000, di scount $1, 600.
d. The bonds do not appear on t he bal ance sheet .


11. Company S i s a 100%- owned subsi di ar y of Company P. On J anuar y 1, 20X9,
Company S has $100, 000 of 8%f ace r at e bonds out st andi ng. The bonds had
5 year s t o mat ur i t y on J anuar y 1, 20X9, and had an amor t i zed di scount of
$5, 000. On t hat dat e, Company P pur chased t he bonds f or $99, 000. The net
adj ust ment needed t o consol i dat e r et ai ned ear ni ngs on December 31, 20X9
i s __________.
a. $( 4, 000)
b. $( 3, 200)
c. $( 800)
d. $0

Chapt er 5
5- 4

12. Sun Company i s a 100%- owned subsi di ar y of Pet er Company. On J anuar y 1,
20X1, Sun Company has $500, 000 of 8%f ace r at e bonds out st andi ng, wi t h
an unamor t i zed di scount of $5, 000 whi ch i s bei ng amor t i zed over a 5 year
r emai ni ng l i f e t o mat ur i t y. On t hat dat e, Pet er Company pur chased t he
bonds f or $497, 000. The adj ust ment t o t he consol i dat ed i ncome of t he t wo
compani es needed i n t he consol i dat i on pr ocess f or 20X2 ( t he f ol l owi ng
year ) i s __________.
a. $2, 800
b. $( 400)
c. $400
d. $( 2, 800)


13. Company S i s a 100%- owned subsi di ar y of Company P. Company P pur chased,
at a pr emi um, Company S bonds t hat ar e out st andi ng and have a r emai ni ng
di scount . Consol i dat i on t heor y t akes t he posi t i on t hat :
a. i nt er est expense shoul d be adj ust ed t o r ef l ect t he mar ket val ue of
t he bonds on t he dat e of Company P' s pur chase.
b. t he debt has been r et i r ed at an ext r aor di nar y l oss.
c. t he debt i s out st andi ng, but shoul d be shown at f ace val ue.
d. t he gai n or l oss on r et i r ement shoul d be al l ocat ed over t he
r emai ni ng l i f e of t he bonds.


14. Company S i s a 100%- owned subsi di ar y of Company P. Company P pur chased
al l t he out st andi ng bonds of Company S at a di scount . The bonds had a
r emai ni ng i ssuance pr emi umat t he t i me of Company P' s pur chase. The
bonds have 5 year s t o mat ur i t y. At t he end of 5 year s, r et ai ned
ear ni ngs:
a. i s gr eat er as a r esul t of t he pur chase.
b. i s l ess as a r esul t of t he pur chase.
c. i s not af f ect ed by t he pur chase.
d. cannot be det er mi ned f r omt he i nf or mat i on pr ovi ded.


15. Company P owns 80%of Company S. On J anuar y 1, 20X9 Company S has
out st andi ng 6%bonds wi t h a f ace val ue of $200, 000 and an unamor t i zed
di scount of $3, 000, whi ch i s bei ng amor t i zed on a st r ai ght - l i ne basi s
over a r emai ni ng t er mof 10 year s. On J anuar y 1, 20X9, Company P
pur chased al l t he bonds f or $205, 000. The pr emi umal so i s amor t i zed on a
st r ai ght - l i ne basi s. The net i mpact of t he pur chase on t he
noncont r ol l i ng i nt er est as of December 31, 20X9, i s __________.
a. $( 8, 000)
b. $( 1, 600)
c. $( 1, 440)
d. $( 1, 200)


Chapt er 5
5- 5
16. The pur chase of out st andi ng subsi di ar y bonds by t he par ent company has
t he same i mpact on consol i dat ed st at ement s as:
a. t he subsi di ar y r et i r i ng i t s own debt wi t h t he pr oceeds of new debt
i ssued t o out si de par t i es.
b. t he subsi di ar y r et i r i ng t he debt wi t h t he pr oceeds of a l oan f r om
t he par ent .
c. t he subsi di ar y r et i r i ng t he debt wi t h t he pr oceeds of a new st ock
i ssue.
d. al l owi ng t he bonds t o cont i nue t o be hel d by out si de i nt er est s.


17. A subsi di ar y has out st andi ng $100, 000 of 8%bonds t hat wer e i ssued at
f ace val ue. The par ent pur chased al l t he bonds f or $96, 000 wi t h 5 year s
r emai ni ng t o mat ur i t y. How wi l l t he par ent ' s use of t he ef f ect i ve
i nt er est amor t i zat i on r at her t han st r ai ght - l i ne amor t i zat i on of t he
di scount af f ect t he consol i dat ed st at ement s?
a. No i mpact .
b. Wi l l r esul t i n a di f f er ent gai n on r et i r ement
c. Wi l l r esul t i n mor e i nt er est expense i n t he f i r st year af t er t he
i nt er company pur chase.
d. Wi l l r esul t i n l ess i nt er est expense i n t he f i r st year af t er t he
i nt er company pur chase.


18. Powel l Company owns an 80%i nt er est i n Saut er , I nc. On J anuar y 1, 20X1,
Saut er i ssued $400, 000 of 10- year , 12%bonds at a pr emi umof $25, 000. On
December 31, 20X5, 5 year s af t er or i gi nal i ssuance, Powel l pur chased al l
of t he out st andi ng bonds f or $390, 000. Bot h f i r ms use t he st r ai ght - l i ne
met hod of amor t i zat i on.

What i s t he ext r aor di nar y gai n on r et i r ement on t he 20X5 consol i dat ed
i ncome st at ement ?
a. $12, 500
b. $22, 500
c. $10, 000
d. $35, 000


19. Powel l Company owns an 80%i nt er est i n Saut er , I nc. On J anuar y 1, 20X1,
Saut er i ssued $400, 000 of 10- year , 12%bonds at a pr emi umof $25, 000. On
December 31, 20X5, 5 year s af t er or i gi nal i ssuance, Powel l pur chased al l
of t he out st andi ng bonds f or $390, 000. Bot h f i r ms use t he st r ai ght - l i ne
met hod of amor t i zat i on.

Bond i nt er est expense i ncl uded i n t he 20X5 subsi di ar y i ncome
di st r i but i on schedul e i s __________.
a. $48, 000
b. $45, 500
c. $47, 500
d. $0


Chapt er 5
5- 6
20. Subsi di ar y Company i ssued $200, 000 of 8%, 5- year bonds on J anuar y 1,
20X6. The di scount on i ssuance was $12, 000. Bond i nt er est i s pai d
annual l y on December 31. On December 31, 20X8, Par ent Company pur chased
one- hal f of t he out st andi ng bonds f or $96, 000. Bot h compani es use t he
st r ai ght - l i ne met hod of amor t i zat i on. How much i nt er est expense wi l l
appear on t he December 31, 20X8, consol i dat ed i ncome st at ement ?
a. $18, 400
b. $16, 000
c. $9, 200
d. $8, 000


21. Subsi di ar y Company i ssued $200, 000 of 8%, 5- year bonds on J anuar y 1,
20X6. The di scount on i ssuance was $12, 000. Bond i nt er est i s pai d
annual l y on December 31. On December 31, 20X8, Par ent Company pur chased
one- hal f of t he out st andi ng bonds f or $96, 000. Bot h compani es use t he
st r ai ght - l i ne met hod of amor t i zat i on. How much i nt er est expense wi l l
appear on t he December 31, 20X9, consol i dat ed i ncome st at ement ?
a. $18, 400
b. $16, 000
c. $9, 200
d. $8, 000


22. The consol i dat ed i ncome st at ement i n t he year one member of a
consol i dat ed gr oup pur chases bonds f r omout si de par t i es i ncl udes:
a. an ext r aor di nar y gai n i f pur chased above book val ue.
b. an ext r aor di nar y gai n i f pur chased bel ow book val ue.
c. l oss i f pur chased bel ow book val ue.
d. gai n i f pur chased above book val ue.


23. The consol i dat ed i ncome st at ement i n t he year one member of a
consol i dat ed gr oup pur chases bonds f r omout si de par t i es i ncl udes a( n) :
a. ext r aor di nar y l oss i f pur chased above book val ue.
b. ext r aor di nar y l oss i f pur chased bel ow book val ue.
c. l oss i f pur chased above book val ue.
d. l oss i f pur chased above book val ue.


24. On an i ncome di st r i but i on schedul e, any gai n or l oss r esul t i ng f r om
i nt er company bonds i s absor bed by:
a. t he i ssuer of t he bonds.
b. t he pur chaser of t he bonds.
c. al l ocat i on bet ween t he i ssuer and t he pur chaser .
d. none of t he above


Chapt er 5
5- 7
25. I n year s subsequent t o t he year one member of a consol i dat ed gr oup
pur chases bonds f r omout si de par t i es, Consol i dat ed I ncome St at ement s:
a. r ecogni ze a pr or at ed shar e of any gai n or l oss f r omi nt er company
bonds.
b. r ecogni ze a pr or at ed shar e of any gai n but woul d not show a shar e
of a l oss f r omi nt er company bonds.
c. r ecogni ze a pr or at ed shar e of any l oss but woul d not show a shar e
of a gai n f r omi nt er company bonds.
d. woul d not r ecogni ze any gai n or l oss f r omi nt er company bonds.


26. When one member of a consol i dat ed gr oup pur chases onl y par t of t he
out st andi ng bonds of anot her member of t he gr oup ( f or exampl e, 80%of
t he bonds) ,
a. al l bonds, and al l t he i nt er est expense and i nt er est r evenue
appl i cabl e t o t he bonds shoul d be el i mi nat ed.
b. 20%of t he bonds, and 20%t he i nt er est expense and i nt er est
r evenue appl i cabl e t o t he bonds shoul d be el i mi nat ed.
c. 80%of t he bonds, and 80%t he i nt er est expense and i nt er est
d. none of t he bonds, and none of t he i nt er est expense and i nt er est


27. Leasi ng subsi di ar i es ar e f or med t o achi eve cent r al i zed asset management
t hr ough l easi ng t o af f i l i at ed f i r ms, and when t hey ar e consol i dat ed wi t h
t he par ent , t hey ar e consol i dat ed wi t h t he par ent
a. onl y i f t he par ent cont r ol s at l east 20%of t he l easi ng
subsi di ar y.
b. onl y i f t he par ent cont r ol s at l east 50%of t he l easi ng
subsi di ar y.
c. onl y i f t he par ent cont r ol s at l east 90%of t he l easi ng
subsi di ar y.
d. r egar dl ess of t he owner shi p per cent age of t he par ent .


28. The ef f ect of an oper at i ng l ease on t he i ncome di st r i but i on schedul e:
a. i s non- exi st ent .
b. af f ect s onl y t he l essee' s i ncome.
c. af f ect s onl y t he l essor ' s i ncome.
d. af f ect s t he amount of i ncome or di st r i but i on of i ncome bet ween t he
noncont r ol l i ng and cont r ol l i ng i nt er est s.


Chapt er 5
5- 8
29. Lease t er ms can be consi der ed t o be " si gni f i cant l y af f ect ed: "
a. when t he t er ms ar e t he same f or af f i l i at ed f i r ms as f or
i ndependent f i r ms.
b. when t he t er ms coul d not r easonabl y be expect ed t o occur bet ween
i ndependent f i r ms.
c. onl y i f t he l ease i s an oper at i ng l ease t o t he l essee and l essor .
d. onl y i f t he l ease i s a di r ect - f i nanci ng l ease t o t he l essee and
l essor .


30. Whi ch of t he f ol l owi ng st at ement s i s t r ue?
a. No adj ust ment s ar e made i n t he i ncome di st r i but i on schedul e as a
r esul t of Oper at i ng, Di r ect - Fi nanci ng, and Sal es- Type l eases.
b. No adj ust ment s ar e made i n t he i ncome di st r i but i on schedul e as a
r esul t of Oper at i ng and Di r ect - Fi nanci ng l eases.
c. No adj ust ment s ar e made i n t he i ncome di st r i but i on schedul e as a
r esul t of Oper at i ng and Sal es- Type l eases.
d. No adj ust ment s ar e made i n t he i ncome di st r i but i on schedul e as a
r esul t of Di r ect - Fi nanci ng and Sal es- Type l eases.

ANS: B DI F: E OBJ : 4, 5, 6

a. No el i mi nat i on ent r i es ar e r equi r ed on a wor ksheet as a r esul t of
Oper at i ng, Di r ect - Fi nanci ng, and Sal es- Type l eases.
b. No el i mi nat i on ent r i es ar e r equi r ed on a wor ksheet as a r esul t of
Di r ect - Fi nanci ng and Sal es- Type l eases.
c. No el i mi nat i on ent r i es ar e r equi r ed on a wor ksheet as a r esul t of
Oper at i ng l eases.
d. Al l t he pr ecedi ng ar e f al se.

ANS: D DI F: E OBJ : 4, 5, 6

32. When t her e i s an unguar ant eed r esi dual val ue f or t he l essor i n a Di r ect -
Fi nanci ng Lease, t hi s means:
a. t he t ot al payment s t o be r ecei ved by t he l essor wi l l come f r omt he
l essee.
b. t he t ot al payment s t o be r ecei ved by t he l essee wi l l come f r omt he
l essor .
c. a por t i on of t he t ot al payment s t o be r ecei ved by t he l essor wi l l
come f r ompar t i es out si de t he consol i dat ed gr oup.
d. a por t i on of t he t ot al payment s t o be r ecei ved by t he l essee wi l l
come f r ompar t i es out si de t he consol i dat ed gr oup.


Chapt er 5
5- 9
33. Consol i dat i on pr ocedur es f or Sal e- Type Leases:
a. al l ow f or t he r ecogni t i on of t he pr of i t or l oss f r omt he l ease by
t he l essee at t he i ncept i on of t he l ease.
b. al l ow f or t he r ecogni t i on of t he pr of i t or l oss f r omt he l ease by
t he l essor at t he i ncept i on of t he l ease.
c. def er t he pr of i t or l oss and t hen amor t i ze i t over t he l essee' s
per i od of usage.
d. def er t he pr of i t or l oss and t hen amor t i ze i t over t he l essor ' s
per i od of usage.


a. When one af f i l i at e pur chases anot her af f i l i at e' s bonds pr i or t o
t he busi ness combi nat i on, t he bonds become an i nt er company debt as
of t he pur chase dat e and t hus ar e vi ewed as bei ng r et i r ed on t he
pur chase dat e when consol i dat i ng i f t he acqui si t i on i s vi ewed as a
pur chase r at her t han a pool i ng of i nt er est .
b. When one af f i l i at e pur chases anot her af f i l i at e' s bonds pr i or t o
pool i ng of i nt er est r at her t han a pur chase.
c. When one af f i l i at e pur chases anot her af f i l i at e' s bonds pr i or t o
pool i ng of i nt er est or a pur chase.
d. Al l of t he above answer s ar e f al se.


35. The par ent company l eased a machi ne t o i t s subsi di ar y usi ng a di r ect
f i nanci ng l ease t hat i ncl uded a bar gai n pur chase opt i on. As a r esul t of
t he i nt er company l ease, t he f ol l owi ng i t ems shoul d be el i mi nat ed i n t he
consol i dat i on pr ocess:

Depr eci at i on
Machi ne Debt I nt er est _Expense
a. Yes Yes Yes Yes
b. Yes Yes Yes No
c. Yes No No No
d. No Yes Yes No


Chapt er 5
5- 10
36. Phi l Company l eased a machi ne t o i t s 100%- owned subsi di ar y, Scout
Company. The di r ect f i nanci ng l ease r equi r ed annual l ease payment s i n
advance of $2, 319 f or 5 year s. The pr esent val ue of t he mi ni muml ease
payment s at 8%i nt er est i s $10, 000. The adj ust ment needed t o ar r i ve at
consol i dat ed net i ncome f or t he f i r st year af t er t he l ease i s
__________.
a. $0
b. $800
c. $2, 319
d. $10, 000


37. Phi l Company l eased a machi ne t o i t s 100%- owned subsi di ar y, Scout
Company. The di r ect f i nanci ng l ease r equi r ed annual l ease payment s i n
advance of $2, 319 f or 5 year s. The pr esent val ue of t he mi ni muml ease
payment s at 8%i nt er est i s $10, 000. The adj ust ment of asset s and
l i abi l i t i es needed t o pr epar e a consol i dat ed bal ance sheet i s t o
el i mi nat e t he:
a. asset l eased.
b. asset l eased and t he obl i gat i on under t he capi t al l ease.
c. obl i gat i on under t he capi t al l ease and t he pr esent val ue of t he
mi ni muml ease payment s.
d. obl i gat i on under t he capi t al l ease.


38. Par k owns an 80%i nt er est i n t he common st ock of St abl e Company. Par k
l eased a machi ne t o St abl e under a 5- year , di r ect f i nanci ng l ease wi t h a
bar gai n pur chase opt i on. The l ease t er mbegan J anuar y 1, 20X4. The
i mpact of t he l ease on t he Noncont r ol l i ng shar e of i ncome f or 20X4:

a. i s an i ncr ease.
b. i s a decr ease.
c. i s none.
d. cannot be det er mi ned f r omt he i nf or mat i on gi ven.


Chapt er 5
5- 11
39. Li on Company l eased equi pment t o i t s whol l y owned subsi di ar y, Ti ger ,
I nc. , on J ul y 1, 20X8. The l ease i s f or a 10- year per i od ( t he usef ul
l i f e of t he asset ) , expi r i ng J une 30, 20X8. The f i r st of 10 equal annual
payment s of $600, 000 was made on J ul y 1, 20X8 and est abl i shed a l i st
sel l i ng pr i ce of $3, 900, 000 on t he equi pment . Assume t hat on J ul y 1,
20X8, t he pr esent val ue of t he r ent payment s over t he l ease t er m
di scount ed at 12%was $3, 797, 000. The book val ue of t he asset i s
$3, 100, 000.

What i s t he pr of i t on t he sal e t hat Li on shoul d r ecogni ze on t he
consol i dat ed f i nanci al st at ement s f or t he year s ended December 31, 20X8
and 20X9?
a. $800, 000 and $0
b. $697, 000 and $80, 000
c. $80, 000 and $80, 000
d. $34, 850 and $69, 700


PROBLEM

1. The Pl anes Company owns 100%of t he out st andi ng common st ock of t he
Sands Company. Sands i ssued $100, 000 of f ace val ue, 9%, 10- year bonds on
J anuar y 1, 20X3, f or $96, 000. The di scount i s bei ng amor t i zed on a
st r ai ght - l i ne basi s. On J anuar y 1, 20X8, Pl anes pur chased al l t he bonds
as an i nvest ment f or $95, 000.

Requi r ed:

Be speci f i c i n answer i ng t he f ol l owi ng quest i ons and i ncl ude numer i cal
expl anat i ons.

a. How wi l l t hi s bond i ssue be r ecor ded and account ed f or i n 20X8
on t he separ at e books of Pl anes and Sands?

b. How wi l l t hi s bond i ssue be account ed f or on t he 20X8
consol i dat ed st at ement s?

c. How wi l l t hi s bond i ssue be r ecor ded and account ed f or i n 20X9
on t he separ at e books of Pl anes and Sands?

d. How wi l l t hi s bond i ssue be account ed f or on t he 20X9
consol i dat ed st at ement s?

Chapt er 5
5- 12
ANS:

a. Pl anes wi l l show t he bonds as an i nvest ment and wi l l amor t i ze
t he pur chase di scount at t he r at e of $1, 000 per year . Pl anes
wi l l r ecor d i nt er est i ncome of $10, 000 ( $9, 000 cash + $1, 000
di scount amor t i zat i on) . Sands wi l l cont i nue t o t r eat t he bonds
as out st andi ng and wi l l r ecor d i nt er est expense of $9, 400
( $9, 000 cash + $400 di scount amor t i zat i on) .

b. The bonds ar e consi der ed as r et i r ed on J anuar y 1, 20X8, at an
ext r aor di nar y gai n of $3, 000 ( $98, 000 book val ue l ess $95, 000
pr i ce) . No i nt er est expense or r evenue shoul d appear i n t he
consol i dat ed st at ement s.

c. I n 20X9, Pl anes wi l l cont i nue t o show t he bonds as an
i nvest ment and wi l l r ecor d $10, 000 i nt er est r evenue. Sands
wi l l cont i nue t o t r eat t he bonds as out st andi ng and wi l l
r ecor d $9, 400 i nt er est expense.

d. The consol i dat ed st at ement s wi l l not i ncl ude t he bonds as an
i nvest ment or as a l i abi l i t y. No i nt er est expense or r evenue
wi l l be appl i cabl e t o t hese bonds.

DI F: E OBJ : 2

2. Smar t Cor por at i on i s a 90%- owned subsi di ar y of Phan I nc. On J anuar y 2,
20X6, Smar t agr eed t o l ease $400, 000 of const r uct i on equi pment f r omPhan
f or $3, 000 a mont h on an oper at i ng l ease. The equi pment has a 10- year
l i f e and i s bei ng depr eci at ed usi ng t he st r ai ght - l i ne met hod.

Requi r ed:

Pr epar e t he el i mi nat i ons and adj ust ment s r equi r ed by t he i nt er company
l ease on t he Fi gur e 5- 1 par t i al wor ksheet f or December 31, 20X8. Key and
expl ai n al l el i mi nat i ons and adj ust ment s.

ANS:


( OL1a) El i mi nat e i nt er company r ent expense/ r evenue of $3, 000 per
mont h.

( OL1b) El i mi nat e one mont h' s accr ued r ent r ecei vabl e and payabl e.

( OL2) Recl assi f y asset under t he i nt er company oper at i ng l ease
and r el at ed accumul at ed depr eci at i on.

DI F: E OBJ : 4

Chapt er 5
5- 13
3. Tempo I ndust r i es i s an 80%- owned subsi di ar y of Dal i e I nc. On J anuar y 1,
20X8, Dal i e l eased an asset t o Tempo and t he f ol l owi ng j our nal ent r i es
wer e made:

Tempo

Asset s Under Capi t al Lease. . . . . . . . . . . . . . . . . $21, 561
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5, 000
Obl i gat i ons Under Capi t al Lease. . . . . . . . . . 16, 561

Dal i e

Mi ni mumLease Payment s Recei vabl e. . . . . . . . . . $20, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 000
Unear ned I nt er est I ncome. . . . . . . . . . . . . . . . . $ 3, 439
Asset ( cost of asset l eased) . . . . . . . . . . . . . 18, 000
Sal es Pr of i t on Leases. . . . . . . . . . . . . . . . . . . 3, 561

The t er ms of t he l ease agr eement r equi r e Tempo t o make f i ve payment s of
$5, 000 each at t he begi nni ng of each year . The i mpl i ci t i nt er est r at e
used by bot h Dal i e and Tempo i s 8%.

Requi r ed:

Pr epar e t he el i mi nat i ons and adj ust ment s r equi r ed by t he i nt er company
l ease on t he Fi gur e 5- 2 par t i al wor ksheet of December 31, 20X8. Key and
expl ai n al l el i mi nat i ons and adj ust ment s.

ANS:



( CL1) El i mi nat e i nt er company i nt er est expense/ r evenue.

( CL2) El i mi nat e i nt er company debt and unear ned i ncome; el i mi nat e
t he asset under capi t al l ease and r ecor d t he owned asset .

( CL3) Recl assi f y depr eci at i on.

( CL4) Reduce cost of asset f or gai n on sal es- t ype l ease.

( CL5) Reduce depr eci at i on 3, 561 5 = 712 per year , t o r ecogni ze
one year ' s pr of i t .

DI F: E OBJ : 5

Chapt er 5
5- 14
4. On J anuar y 1, 20X8, Pope Company acqui r ed 100%of t he common st ock of
Si egel Company f or $300, 000. On t hi s dat e Si egel had t ot al owner s'
equi t y of $250, 000.


Al so on J ul y 1, 20X8, Si egel Company sol d t o out si de i nvest or s $300, 000
par val ue of 10- year , 10%bonds. The pr i ce r ecei ved was equal t o par .
The bonds pay i nt er est semi - annual l y on J ul y 1 and J anuar y 1.

Dur i ng 20X8 and 20X9, Pope has appr opr i at el y account ed f or i t s
i nvest ment i n Si egel usi ng t he si mpl e equi t y met hod.

Dur i ng ear l y 20X9, mar ket i nt er est r at es on bonds si mi l ar t o t hose
i ssued by Si egel decr eased t o 8%. As a r esul t , t he mar ket val ue of t he
bonds i ncr eased. On J ul y 1, 20X9, Pope pur chased $100, 000 par val ue of
Si egel ' s bonds, payi ng $163, 000. Pope st i l l hol ds t he bonds on December
31, 20X9 and has amor t i zed t he pr emi um, usi ng t he st r ai ght - l i ne met hod.

Requi r ed:

f or t he year ended December 31, 20X9. Round al l comput at i ons t o t he
near est dol l ar .

ANS:



account and i n t he Si egel i ncome account .

( EL) El i mi nat e t he Si egel Company equi t y bal ances at t he

goodwi l l .

( B1) El i mi nat e $7, 500 of i nt er company i nt er est r ecei vabl e and
payabl e.

( B2) El i mi nat e al l of t he i nt er company i nt er est i ncome and one-
hal f of t he i nt er est expense f or t he l ast one- hal f of t he
year . El i mi nat e t he bal ance i n i nvest ment i n bonds agai nst
one- hal f of t he bonds payabl e. The r esul t i ng l oss of
$13, 000 i s t he same as t he l oss on J ul y 1, 20X9 ( $163, 000
pur chase pr i ce of bonds l ess $150, 000 car r yi ng val ue) .

Chapt er 5
5- 15


To Cont r ol l i ng I nt er est : 106, 778 + ( 100%x ( 80, 000 - 13, 000 + 7, 500
- 6, 778) ) - 2, 500 = $174, 500

DI F: M OBJ : 2

equi t y of $250, 000.


Al so on J ul y 1, 20X8, Si egel Company sol d t o out si de i nvest or s $200, 000
par val ue of 10- year , 10%bonds. The pr i ce r ecei ved was equal t o par .
The bonds pay i nt er est semi - annual l y on J ul y 1 and J anuar y 1.

i nvest ment i n Si egel usi ng t he si mpl e equi t y met hod.

Dur i ng ear l y 20X9, mar ket i nt er est r at es on bonds si mi l ar t o t hose
i ssued by Si egel decr eased t o 8%. As a r esul t , t he mar ket val ue of t he
bonds i ncr eased. On J ul y 1, 20X9, Pope pur chased $100, 000 par val ue of
31, 20X9 and has amor t i zed t he pr emi um, usi ng t he ef f ect i ve- i nt er est
met hod.

Requi r ed:

near est dol l ar .

Chapt er 5
5- 16
ANS:





goodwi l l .

payabl e.

hal f of t he i nt er est expense f or t he l ast one- hal f of t he
year . El i mi nat e t he bal ance i n i nvest ment i n bonds agai nst
one- hal f of t he bonds payabl e. The r esul t i ng l oss of
$12, 695 i s t he same as t he l oss on J ul y 1, 20X9 ( $112, 695
pur chase pr i ce of bonds l ess $100, 000 car r yi ng val ue) .



To Cont r ol l i ng I nt er est : 104, 508 + ( 100%x ( 80, 000 - 12, 695 +
5, 000 - 4, 508) ) = $172, 305

DI F: M OBJ : 2

equi t y of $250, 000.


Al so on J anuar y 1, 20X8, Si egel Company sol d t o out si de i nvest or s
$300, 000 par val ue of 10- year , 10%bonds. The pr i ce r ecei ved was equal
t o par . The bonds pay i nt er est semi - annual l y on J ul y 1 and J anuar y 1.

I nvest ment i n Si egel usi ng t he si mpl e equi t y met hod.

Dur i ng 20X8, mar ket i nt er est r at es on bonds si mi l ar t o t hose i ssued by
Si egel decr eased t o 8%. As a r esul t , t he mar ket val ue of t he bonds
i ncr eased. On December 31, 20X8, Pope pur chased $150, 000 par val ue of
31, 20X9 and has amor t i zed t he pr emi um, usi ng t he st r ai ght - l i ne met hod.

Requi r ed:

near est dol l ar .
Chapt er 5
5- 17

ANS:





goodwi l l .

payabl e.

hal f of t he i nt er est expense. El i mi nat e t he bal ance i n
i nvest ment i n bonds agai nst one- hal f of t he bonds payabl e.

The r esul t i ng l oss of $13, 000 i s t he same as t he l oss on
J ul y 1, 20X9 ( $113, 000 pur chase pr i ce of bonds l ess
$100, 000 car r yi ng val ue) . Si nce t he l oss occur r ed i n 20X8,
i t i s debi t ed t o r et ai ned ear ni ngs.



To Cont r ol l i ng I nt er est : 113, 556 + ( 100%x ( 80, 000 + 15, 000 -
13, 556) ) = $195, 000

DI F: M OBJ : 2

st ock, ot her pai d i n capi t al , and r et ai ned ear ni ngs of $20, 000, $
130, 000, and $200, 000 r espect i vel y.

Any excess of cost over book val ue i s due t o goodwi l l .

I n bot h 20X8 and 20X9, Par ent has account ed f or t he I nvest ment i n
Subsi di ar y usi ng t he cost met hod.

On J anuar y 1, 20X8, Subsi di ar y sol d $100, 000 par val ue of 6%, t en- year
bonds f or $97, 000. The bonds pay i nt er est semi - annual l y on J anuar y 1 and
J ul y 1 of each year .

On J anuar y 1, 20X9, Par ent r epur chased al l of Subsi di ar y' s bonds f or
$96, 400. The bonds ar e st i l l hel d on December 31, 20X9.

Bot h compani es have cor r ect l y r ecor ded al l ent r i es r el at i ve t o bonds and
i nt er est , usi ng st r ai ght - l i ne amor t i zat i on f or pr emi umor di scount .

Chapt er 5
5- 18
Requi r ed:

f or t he year ended of December 31, 20X9. Round al l comput at i ons t o t he
near est dol l ar .

ANS:



( CV) Conver t t o si mpl e equi t y met hod as of J anuar y 1, 20X9 ( 90%
20X8 t o J anuar y 1, 20X9) .

( CY) El i mi nat e t he cur r ent - year di vi dend i ncome agai nst


goodwi l l .

payabl e.

( B2) El i mi nat e al l of t he i nt er company i nt er est i ncome and al l
of t he i nt er est expense year . El i mi nat e t he bal ances i n
i nvest ment i n bonds, bonds payabl e, and di scount on bonds
payabl e. The r esul t i ng gai n of $900 i s t he same as t he
gai n on J anuar y 1, 20X8 ( $97, 300 car r yi ng val ue of bonds
l ess $96, 400 pur chase pr i ce) .


To Noncont r ol l i ng I nt er est : . 1 x ( 69, 900 + 900 + 6, 300 - 6, 400) = $7, 070

To Cont r ol l i ng I nt er est : 123, 200 + ( . 9 x ( 69, 900 + 900 + 6, 300 -
6, 400) ) = $186, 830

DI F: M OBJ : 2

Chapt er 5
5- 19
st ock, ot her pai d i n capi t al , and r et ai ned ear ni ngs of $20, 000, $
130, 000, and $200, 000, r espect i vel y.


Subsi di ar y usi ng t he si mpl e equi t y met hod.

On J anuar y 1, 20X8, Subsi di ar y sol d $100, 000 par val ue of 6%, t en- year
bonds f or $97, 000. The bonds pay i nt er est semi - annual l y on J anuar y 1 and
J ul y 1 of each year .

On J anuar y 1, 20X9, Par ent r epur chased al l of Subsi di ar y' s bonds f or
$96, 400. The bonds ar e st i l l hel d on December 31, 20X9.

i nt er est , usi ng st r ai ght - l i ne amor t i zat i on f or pr emi umor di scount .

Requi r ed:

near est dol l ar .

ANS:





goodwi l l .

payabl e.

of t he i nt er est expense f or t he year . El i mi nat e t he
bal ances i n i nvest ment i n bonds, bonds payabl e, and
di scount on bonds payabl e. The r esul t i ng gai n of $900 i s
t he same as t he gai n on J anuar y 1, 20X8 ( $97, 300 car r yi ng
val ue of bonds l ess $96, 400 pur chase pr i ce) .

Chapt er 5
5- 20

To Noncont r ol l i ng I nt er est : . 1 x ( 69, 900 + 900 + 6, 300 - 6, 400) = $7, 070

To Cont r ol l i ng I nt er est : 123, 200 + ( . 9 x ( 69, 900 + 900 + 6, 300 -
6, 400) ) = $186, 830

DI F: M OBJ : 2

st ock, ot her pai d i n capi t al , and r et ai ned ear ni ngs of $20, 000,
$130, 000, and $200, 000 r espect i vel y.



On J ul y 1, 20X8, Subsi di ar y sol d $100, 000 par val ue of 9%, t en- year
bonds f or $106, 755, whi ch r esul t ed i n an ef f ect i ve i nt er est r at e of 8%.
The bonds pay i nt er est semi - annual l y on J anuar y 1 and J ul y 1 of each
year . Subsi di ar y uses t he ef f ect i ve- i nt er est met hod of amor t i zi ng t he
pr emi um.

An amor t i zat i on t abl e f or 20X8 and 20X9 i s pr esent ed bel ow:

Car r yi ng Car r yi ng Ef f ect i ve I nt er est Nomi nal Pr emi um
Val ue on Val ue I nt er est Expense I nt er est Wr i t e- of f
7- 1- X8 $106, 755 4% $4, 270 $4, 500 - $230
- 230
1- 1- X9 106, 525 4% 4, 261 4, 500 - 239
- 239
7- 1- X9 106, 286 4% 4, 251 4, 500 - 249
- 249
12- 31- X9 $106, 037
========

On J ul y 1, 20X9, Par ent r epur chased al l of Par ' s bonds f or $94, 153,
whi ch r esul t ed i n an ef f ect i ve i nt er est r at e of 10%. The bonds ar e st i l l
hel d at year end.

i nt er est .

Requi r ed:

near est dol l ar .

Chapt er 5
5- 21
ANS:





goodwi l l .

payabl e.

of t he i nt er est expense f or t he l ast one- hal f of t he year .
El i mi nat e t he bal ances i n i nvest ment i n bonds, bonds
payabl e, and pr emi umon bonds payabl e. The r esul t i ng gai n
of $12, 133 i s t he same as t he gai n on J ul y 1, 20X2
( $106, 286 car r yi ng val ue of bonds l ess $94, 153 pur chase
pr i ce) .


To Noncont r ol l i ng I nt er est : . 1 x ( 70, 000 + 12, 133 + 4, 251 - 4, 708) =
$8, 168

To Cont r ol l i ng I nt er est : 120, 000 + ( . 9 x ( 70, 000 + 12, 133 + 4, 251 -
4, 708) ) = $193, 508

DI F: M OBJ : 2

Chapt er 5
5- 22
10. On J anuar y 1, 20X7 Par ent Company acqui r ed 90%of t he common st ock of


On J anuar y 1, 20X8, Par ent pur chased equi pment f or $204, 120 and
i mmedi at el y l eased t he equi pment t o Subsi di ar y on a 4- year l ease. The
mi ni muml ease payment s of $60, 000 ar e t o be made annual l y on J anuar y 1,
begi nni ng i mmedi at el y, f or a t ot al of 4 payment s. The i mpl i ci t i nt er est
r at e i s 12%. The l ease pr ovi des f or an aut omat i c t r ansf er of t i t l e at
t he end of 4 year s. The est i mat ed usef ul l i f e of t he equi pment i s 6
year s. The l ease has been capi t al i zed by bot h compani es.

A l ease amor t i zat i on schedul e, appl i cabl e t o ei t her company, i s
pr esent ed bel ow:

Car r yi ng Car r yi ng I nt er est Pr i nci pal
Val ue on Val ue Rat e I nt er est Payment Reduct i on
1- 1- X8 $204, 120
- 60, 000
1- 1- X8 144, 120 12% $17, 294 $60, 000 $42, 706
- 42, 706
1- 1- X9 101, 414 12% 12, 170 60, 000 47, 830
- 47, 830
1- 1- Y0 53, 584 12% 6, 416* 60, 000 53, 584
- 53, 584
1- 1- Y1 $ 0 *Adj ust ed f or r oundi ng er r or .
========

Requi r ed:

near est dol l ar .

Chapt er 5
5- 23
ANS:


( CY) El i mi nat e t he cur r ent - year ent r y made i n t he i nvest ment


( D) Di st r i but e t he $50, 000 excess t o goodwi l l .

( CL1) El i mi nat e t he i nt er company i nt er est i ncome and expense on
t he l ease obl i gat i on.

( CL2) El i mi nat e t he i nt er company r ecei vabl e and payabl e on t he
l eased asset . The r ecei vabl e bal ance i s $161, 414 ( $180, 000
mi ni muml ease payment r ecei vabl e l ess unear ned i nt er est of
$18, 586) .

The payabl e i s al so $161, 414 ( $144, 120 l ease obl i gat i on
payabl e pl us $17, 294 i nt er est payabl e) .

( CL3) Recl assi f y t he l eased equi pment as or di nar y Bui l di ng and
Equi pment .

( CL4) Recl assi f y t he accumul at ed depr eci at i on on t he l eased
equi pment .


To Noncont r ol l i ng I nt er est : $60, 000 x 10%= $6, 000

To Cont r ol l i ng I nt er est : $80, 000 + ( 90%x $60, 000) = $134, 000

DI F: D OBJ : 5

Chapt er 5
5- 24

I n 20X7, 20X8, and 20X9, Par ent has account ed f or t he I nvest ment i n


pr esent ed bel ow:

1- 1- X8 $204, 120
- 60, 000
1- 1- X8 144, 120 12% $17, 294 $60, 000 $42, 706
- 42, 706
1- 1- X9 101, 414 12% 12, 170 60, 000 47, 830
- 47, 830
1- 1- Y0 53, 584 12% 6, 416* 60, 000 53, 584
- 53, 584
1- 1- Y1 $ 0 *Adj ust ed f or r oundi ng er r or
========

Requi r ed:

near est dol l ar .

Chapt er 5
5- 25
ANS:





( D) Di st r i but e t he $50, 000 excess t o goodwi l l .


$6, 416) .


Equi pment .

equi pment .


To Noncont r ol l i ng I nt er est : $70, 000 x 10%= $7, 000

To Cont r ol l i ng I nt er est : $100, 000 + ( 90%x $70, 000) = $163, 000

DI F: M OBJ : 5

Chapt er 5
5- 26

I n 20X7, 20X8, and 20X9, Par ent has account ed f or t he I nvest ment i n

t r ansact i on was l egal l y st r uct ur ed as a sal es- t ype l ease wi t h a pr esent
val ue f or t he mi ni muml ease payment s of $204, 120. Par ent r ecor ded t he
f ol l owi ng ent r y:

Mi ni mumLease Payment s Recei vabl e. . . . . . . . . . $240, 000
Unear ned I nt er est I ncome. . . . . . . . . . . . . . . . . $ 35, 880
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174, 120
Sal es Pr of i t on Lease. . . . . . . . . . . . . . . . . . . . 30, 000

The mi ni muml ease payment s of $60, 000 ar e t o be made annual l y on J anuar y
1, begi nni ng i mmedi at el y, f or a t ot al of 4 payment s. The i mpl i ci t
i nt er est r at e i s 12%. The l ease pr ovi des f or an aut omat i c t r ansf er of
t i t l e at t he end of 4 year s. The est i mat ed usef ul l i f e of t he equi pment
i s 6 year s. The l ease has been capi t al i zed by bot h compani es.

pr esent ed bel ow:

1- 1- X8 $204, 120
- 60, 000
1- 1- X8 144, 120 12% $17, 294 $60, 000 $42, 706
- 42, 706
1- 1- X9 101, 414 12% 12, 170 60, 000 47, 830
- 47, 830
1- 1- Y0 53, 584 12% 6, 416* 60, 000 53, 584
- 53, 584
========

Requi r ed:

near est dol l ar .

Chapt er 5
5- 27
ANS:






$18, 586) .


Equi pment .

equi pment .

( CL5) El i mi nat e t he Sal es Pr of i t on Lease and adj ust t he l eased
asset back t o cost .

( CL6) Adj ust t he r el at ed depr eci at i on account s f or t he l eased
asset . The cr edi t t o depr eci at i on expense t r eat s par t of
t he pr of i t as r eal i zed t o t he Par ent t hr ough use by
Subsi di ar y.



To Cont r ol l i ng I nt er est : 80, 000 - 30, 000 + 5, 000 + ( 100%x 60, 000)
= $115, 000

DI F: D OBJ : 5, 6

Chapt er 5
5- 28


I n bot h 20X7, 20X8, and 20X9, Par ent has account ed f or t he I nvest ment i n


pr esent ed bel ow:

1- 1- X8 $204, 120
- 60, 000
1- 1- X8 144, 120 12% $17, 294 $60, 000 $42, 706
- 42, 706
1- 1- X9 101, 414 12% 12, 170 60, 000 47, 830
- 47, 830
1- 1- Y0 53, 584 12% 6, 416* 60, 000 53, 584
- 53, 584
========

$10, 000. Dur i ng 20X9, subsi di ar y sol d mer chandi se t o Par ent f or $50, 000,
of whi ch $15, 000 i s hel d by Par ent on December 31, 20X9. Subsi di ar y' s

Requi r ed:

near est dol l ar .

Chapt er 5
5- 29
ANS:





goodwi l l .


$6, 416) .


Equi pment .

equi pment .

i nvent or y.


i nvent or y.


To Noncont r ol l i ng I nt er est : $0

To Cont r ol l i ng I nt er est : 100, 000 + ( 100%x ( 70, 000 + 4, 000 - 6, 000) ) -
= $168, 000

DI F: D OBJ : 5

Chapt er 5
5- 30
14. On J anuar y 1, 20X7, Por t er Company pur chased 80%of t he common st ock of
Si nger Company f or $372, 000. On t hi s dat e Si nger had t ot al owner s'
equi t y of $440, 000.


Dur i ng 20X7 and 20X8, Por t er has appr opr i at el y account ed f or i t s
i nvest ment i n Si nger usi ng t he si mpl e equi t y met hod.

On J anuar y 1, 20X8, Por t er hel d mer chandi se acqui r ed f r omSi nger f or
$30, 000. Dur i ng 20X8, Si nger sol d mer chandi se t o Por t er f or $90, 000, of
whi ch $20, 000 i s hel d by Por t er on December 31, 20X2. Si nger ' s usual
gr oss pr of i t on af f i l i at ed sal es i s 40%.

On December 31, 20X8, Por t er st i l l owes Si nger $10, 000 f or mer chandi se

On December 31, 20X7, Por t er sol d $100, 000 par val ue of 10%, 10- year
bonds f or $102, 000. Por t er uses t he st r ai ght - l i ne met hod of amor t i zat i on
f or t he pr emi um. The bonds pay i nt er est semi annual l y on J une 30 and
December 31.

On December 31, 20X8, Si nger r epur chased $50, 000 par val ue of t he bonds,
payi ng $49, 100. St r ai ght - l i ne amor t i zat i on i s used.

Requi r ed:

near est dol l ar .

Chapt er 5
5- 31
ANS:



account and i n t he Si nger i ncome account .

( EL) El i mi nat e 80%of t he Si nger Company equi t y bal ances at t he

goodwi l l .

i nvent or y.


i nvent or y.

payabl e.

( B) El i mi nat e one- hal f of Por t er ' s bonds payabl e and pr emi um
agai nst t he i nvest ment i n bonds account . The gai n t o Por t er
i s $1, 800.


To Noncont r ol l i ng I nt er est : . 2 x ( 75, 000 + 12, 000 - 8, 000) = $15, 800

To Cont r ol l i ng I nt er est : 90, 200 + 1, 800 + ( . 8 x ( 75, 000 + 12, 000 -
8, 000) ) = $155, 200

DI F: D OBJ : 2

Chapt er 5
5- 32
equi t y of $440, 000.


Dur i ng 20X7, 20X8, and 20X9, Por t er has appr opr i at el y account ed f or i t s



f or t he pr emi um. The bonds pay i nt er est semi - annual l y on J une 30 and
December 31.

payi ng $49, 100. Si nger uses t he st r ai ght - l i ne met hod of amor t i zat i on f or
t he di scount . The bonds ar e st i l l hel d on December 31, 20X9.

Requi r ed:

near est dol l ar .

Chapt er 5
5- 33
ANS:





goodwi l l .

i nvent or y.


i nvent or y.

payabl e.

( B) El i mi nat e t he i nt er est i ncome and t he i nvest ment i n bonds.
El i mi nat e one- hal f of t he bonds payabl e, pr emi umon bonds,
and i nt er est expense. The gai n t o Por t er of $1, 800 i s
debi t ed t o r et ai ned ear ni ngs si nce i t occur r ed i n 20X8.



To Cont r ol l i ng I nt er est : 110, 000 + 4, 900 - 5, 100 + ( . 8 x ( 100, 000 +
16, 000 - 4, 000) ) = $199, 400

DI F: D OBJ : 2

Chapt er 5
5- 34
equi t y of $440, 000.


Dur i ng 20X7, 20X8, and 20X9, Por t er has appr opr i at el y account ed f or i t s

gr oss pr of i t on af f i l i at ed sal es i s 40%

acqui r ed i n December

December 31.

payi ng $49, 100. Si nger uses t he st r ai ght - l i ne met hod of amor t i zat i on f or
t he di scount . The bonds ar e st i l l hel d on December 31, 20X9.

Requi r ed:

near est dol l ar .

Chapt er 5
5- 35
ANS:





goodwi l l .

i nvent or y.


i nvent or y.

payabl e.

and i nt er est expense. The gai n t o Por t er of $1, 800 i s



To Cont r ol l i ng I nt er est : 110, 000 + 4, 900 - 5, 100 + ( . 8 X ( 100, 000 +
16, 000 - 4, 000) ) = $199, 400

DI F: D OBJ : 2

Chapt er 5
5- 36





On December 31, 20X7, Par ent sol d $100, 000 par val ue of 11%, 10- year
The bonds pay i nt er est semi - annual l y on J une 30 and December 31. Par ent
uses t he ef f ect i ve i nt er est met hod of amor t i zat i on f or t he pr emi um.

An amor t i zat i on t abl e f or 20X2 i s pr esent ed bel ow:

12- 31- X7 $106, 232 5% $5, 312 $5, 500 - $188
- 188
6- 30- X8 106, 044 5% 5, 302 5, 500 - 198
- 198
12- 31- X8 $105, 846
========

On December 31, 20X8, Subsi di ar y r epur chased $50, 000 par val ue of t he
bonds, payi ng a pr i ce equal t o par .

Requi r ed:

near est dol l ar .

Chapt er 5
5- 37
ANS:



account and i n t he subsi di ar y i ncome account


goodwi l l .

i nvent or y.


i nvent or y.

payabl e.

( B) El i mi nat e one- hal f of Par ent ' s bonds payabl e and pr emi um
agai nst t he i nvest ment i n bonds account . The gai n t o Par ent
i s $2, 923.



To Cont r ol l i ng I nt er est : 89, 386 + 2, 923 + ( . 8 x ( 75, 000 + 8, 000
- 16, 000) ) = $145, 909

DI F: D OBJ : 2

Chapt er 5
5- 38
owner s' equi t y of $440, 000. Any excess of cost over book val ue i s due t o
goodwi l l .

Dur i ng 20X7, 20X8, and 20X9, Par ent has appr opr i at el y account ed f or i t s

$120, 000, of whi ch Par ent hol ds $30, 000 on December 31, 20X9.
Subsi di ar y' s gr oss pr of i t on sal es i s 40%. On December 31, 20X9, Par ent
st i l l owes Subsi di ar y $5, 000 f or mer chandi se.

The bonds pay i nt er est semi - annual l y on J une 30 and December 31. Par ent
uses t he ef f ect i ve- i nt er est met hod of amor t i zat i on f or t he pr emi um.

An amor t i zat i on t abl e f or 20X2 and 20X3 i s pr esent ed bel ow:

12- 31- X7 $106, 232 5% $5, 312 $5, 500 - $188
- 188
6- 30- X8 106, 044 5% 5, 302 5, 500 - 198
- 198
12- 31- X8 105, 846 5% 5, 292 5, 500 - 208
- 208
6- 30- X9 105, 638 5% 5, 282 5, 000 - 218
- 218
12- 31- X9 $105, 420
========

bonds, payi ng a pr i ce equal t o par . The bonds ar e st i l l hel d on December
31, 20X9.

On December 31, 20X9, Par ent sol d equi pment wi t h a cost of $50, 000 and
accumul at ed depr eci at i on of $30, 000 t o Subsi di ar y f or $40, 000.
Subsi di ar y wi l l use t he equi pment begi nni ng i n 20X0.

Requi r ed:

near est dol l ar .

Chapt er 5
5- 39
ANS:





goodwi l l .

i nvent or y.


i nvent or y.

payabl e.

and i nt er est expense. The gai n t o Par ent of $2, 923 i s

( F) El i mi nat e t he gai n on sal e of equi pment , r est or e t he ol d
accumul at ed depr eci at i on of $30, 000, and i ncr ease t he
equi pment by $10, 000 t o r est or e i t s or i gi nal hi st or i cal
cost of $50, 000.


To Noncont r ol l i ng I nt er est : . 2 x ( 100, 000 + 20, 000 - 12, 000 + 5, 287 -
5, 500) = $21, 557

To Cont r ol l i ng I nt er est : 130, 000 - 20, 000 + ( . 8 x ( 100, 000 + 20, 000 -
12, 000 + 5, 287 - 5, 500) ) = $196, 230

DI F: D OBJ : 2

Chapt er 5
5- 40
owner s' equi t y of $440, 000 i ncl udi ng r et ai ned ear ni ngs of $140, 000.


Dur i ng 20X7, 20X8, and 20X9, Par ent has appr opr i at el y account ed f or i t s
i nvest ment i n Subsi di ar y usi ng t he cost met hod.

Subsi di ar y' s usual gr oss pr of i t on af f i l i at ed sal es i s 40%. On December
31, 20X9, Par ent st i l l owes Subsi di ar y $5, 000 f or mer chandi se acqui r ed
i n December .

bonds f or $102, 000. Par ent uses t he st r ai ght - l i ne met hod of amor t i zat i on
December 31.

bonds, payi ng $49, 100. Subsi di ar y uses t he st r ai ght - l i ne met hod of
amor t i zat i on f or t he di scount . The bonds ar e st i l l hel d on December 31,
20X9.

Requi r ed:

near est dol l ar .

Chapt er 5
5- 41
ANS:



( CV) Conver t t o t he si mpl e equi t y met hod as of J anuar y 1, 20X9
1, 20X7 t o J anuar y 1, 20X8) .

( CY) El i mi nat e t he cur r ent - year di vi dend i ncome of Par ent


goodwi l l .

i nvent or y.


i nvent or y.

payabl e.

and i nt er est expense. The gai n t o Par ent of $1, 800 i s

Consol i dat ed Net I ncome

To Noncont r ol l i ng I nt er est : . 2 x ( 100, 000 + 20, 000 - 12, 000 + 4, 900 -
5, 100) = $21, 560

To Cont r ol l i ng I nt er est : 110, 000 + ( . 8 x ( 100, 000 + 20, 000 - 12, 000
+ 4, 900 - 5, 100) ) = $196, 240

DI F: D OBJ : 2

Chapt er 5
5- 42
ESSAY

1. The Par k Company owns 80%of t he out st andi ng common st ock of t he Sea
Company. Par k i s about t o l ease a machi ne wi t h a 5- year l i f e t o t he Sea
Company. The l ease woul d begi n J anuar y 1, 20X8.

Requi r ed:

Expl ai n t he adj ust ment s t hat wi l l be r equi r ed i n t he consol i dat i on
pr ocess i f each of t he f ol l owi ng occur s.

a. The l ease i s an oper at i ng l ease.

b. The l ease i s a di r ect f i nanci ng l ease wi t h a bar gai n pur chase
opt i on.

c. The l ease i s a sal es- t ype l ease wi t h a bar gai n pur chase
opt i on.

ANS:

a. The i nt er company r ent expense and r ent r evenue ar e el i mi nat ed.
The asset and r el at ed accumul at i on shoul d be r ecl assi f i ed as
nor mal pr oduct i ve asset s.

b. The i nt er company i nt er est expense and r evenue r ecor ded on t he
l ease obl i gat i on ar e el i mi nat ed. The l i abi l i t y obl i gat i on
under capi t al l ease i s el i mi nat ed agai nst t he asset , pr esent
val ue of mi ni muml ease payment s. The asset - - machi ne under
capi t al l ease shoul d be r ecl assi f i ed as a nor mal pr oduct i ve
asset .

c. I n addi t i on t o t he pr ocedur es out l i ned i n par t b, t he sal es
pr of i t i s el i mi nat ed and t he asset i s r educed t o i t s cost t o
t he consol i dat ed gr oup. Depr eci at i on expense i s r educed t o
t hat appl i cabl e t o t he cost of t he asset t o t he consol i dat ed
gr oup.

DI F: E OBJ : 4, 5, 6
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Chapter 6 Cash Flow, EPS, Taxation, and Unconsolidated
Investments

MULTIPLE CHOICE

1. The cash pur chase of a cont r ol l i ng i nt er est i n a f i r mon t he st at ement
of cash f l ows i s consi der ed
a. an oper at i ng act i vi t y.
b. a f i nanci ng act i vi t y.
c. an i nvest i ng act i vi t y.
d. as al l of t he pr ecedi ng.


2. The cash pur chase of a cont r ol l i ng i nt er est i n a f i r mr equi r es
di scl osur e on t he st at ement of cash f l ows i n t he f ol l owi ng as a( n)
a. f i nanci ng act i vi t y onl y.
b. f i nanci ng act i vi t y and i n t he schedul e of noncash f i nanci ng and
i nvest i ng act i vi t y.
c. i nvest i ng act i vi t y onl y.
d. i nvest i ng act i vi t y and i n t he schedul e of noncash f i nanci ng and


3. I n a noncash pur chase of a cont r ol l i ng i nt er est i n a f i r m, di scl osur e i s
r equi r ed on t he st at ement of cash f l ows di scl osur e i n t he f ol l owi ng as
a( n)
a. f i nanci ng act i vi t y onl y.
b. f i nanci ng act i vi t y and i n t he schedul e of noncash f i nanci ng and
c. i nvest i ng act i vi t y onl y.
d. i nvest i ng act i vi t y and i n t he schedul e of noncash f i nanci ng and


4. Amor t i zat i on of excesses i n per i ods subsequent t o t he pur chase woul d
af f ect whi ch sect i ons of a cash f l ow st at ement ?
a. oper at i ng act i vi t y
b. f i nanci ng act i vi t y
c. i nvest i ng act i vi t y
d. al l of t he above


5. The pur chase of addi t i onal shar es di r ect l y f r oma subsi di ar y by t he
par ent r esul t s i n di scl osur e i n whi ch sect i on of a cash f l ow st at ement ?
a. oper at i ng act i vi t i es
b. f i nanci ng act i vi t i es
c. i nvest i ng act i vi t i es
d. not r ef l ect ed on t he st at ement of cash f l ows

Chapt er 6
6- 2

6. The pur chase of addi t i onal shar es f r omt he noncont r ol l i ng i nt er est of a
subsi di ar y by t he par ent r esul t s i n di scl osur e i n whi ch sect i on of a
cash f l ow st at ement ?
a. oper at i ng act i vi t i es
b. f i nanci ng act i vi t i es
c. i nvest i ng act i vi t i es
d. not r ef l ect ed on t he st at ement of cash f l ows


7. Di vi dends pai d by a subsi di ar y have t he f ol l owi ng af f ect on t he
consol i dat ed cash f l ow
a. al l di vi dends t o t he par ent and t o noncont r ol l i ng st ockhol der s
appear on t he st at ement .
b. onl y di vi dends t o t he par ent appear on t he st at ement .
c. onl y di vi dends t o NCI appear on t he st at ement .
d. nei t her di vi dends t o t he par ent or t o noncont r ol l i ng st ockhol der s
appear on t he st at ement


a. The consol i dat ed st at ement of cash f l ows t r eat s t he pur chase of
i nt er company bonds f r ompar t i es out si de t he consol i dat ed gr oup as
a r et i r ement of consol i dat ed debt , and i ncl udes t he cash out f l ow
under cash f l ows f r omf i nanci ng act i vi t i es.
b. The consol i dat ed st at ement of cash f l ows t r eat s t he pur chase of
i nt er company bonds f r ompar t i es out si de t he consol i dat ed gr oup as
a r et i r ement of consol i dat ed debt , and i ncl udes t he cash out f l ow
under cash f l ows f r omi nvest i ng act i vi t i es.
c. The consol i dat ed st at ement of cash f l ows t r eat s t he i nt er company
i nt er est payment s and amor t i zat i on of pr emi ums and/ or di scount s on
i nt er company bonds under oper at i ng act i vi t i es.
d. The consol i dat ed st at ement of cash f l ows t r eat s t he i nt er company
i nt er est payment s and amor t i zat i on of pr emi ums and/ or di scount s on
i nt er company bonds under i nvest i ng act i vi t i es.


9. Assume i nvest ment s i n t he st ock of f i r ms not i ncl uded i n t he
consol i dat ed gr oup r esul t i n t he nonconsol i dat ed f i r mr epor t i ng i ncome
of $200, 000 and t he f i r mpai d di vi dends of $50, 000. I f t he consol i dat ed
f i r mpai d $10, 000 mor e t han book val ue f or i t s 40%i nt er est and r egar ds
t he excess as at t r i but abl e t o goodwi l l , t he oper at i ng act i vi t i es,
pr epar ed usi ng t he i ndi r ect met hod, woul d r ef l ect a net i ncr ease as a
r esul t of t hi s i nvest ment of __________.
a. $80, 000
b. $70, 000
c. $59, 000
d. $20, 000


Chapt er 6
6- 3
10. Pont i Company pur chased t he net asset s of t he Sor r i Company f or
$800, 000. The net asset s of Sor r i Company wer e r ecor ded as f ol l ows on
t he acqui si t i on dat e:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Bui l di ng ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000
Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 200, 000)
Net asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 550, 000
=========

The mar ket val ues wer e as f ol l ows: I nvent or y, $160, 000; Land, $170, 000;
Bui l di ng, $450, 000. The excess pur chase pr i ce i s al l ocat ed t o goodwi l l .
What i s t he amount t hat wi l l appear as cash appl i ed t o i nvest i ng as a
r esul t of t hi s pur chase?
a. $800, 000
b. $720, 000
c. $750, 000
d. $670, 000


11. Company P acqui r ed 80%of t he out st andi ng common st ock of t he Company S
by i ssui ng common st ock wi t h a mar ket val ue of $550, 000. The bal ance
sheet of Company S was as f ol l ows on t he acqui si t i on dat e:

Cash . . . . . . . . . . . $ 50, 000 Li abi l i t i es. . . . . . . . . . . . $120, 000
I nvent or y. . . . . . . 120, 000 Common st ock, $10 par . . 100, 000
Land. . . . . . . . . . . . 100, 000 Ot her pai d- i n capi t al . . 150, 000
Bui l di ng ( net ) . . 350, 000 Ret ai ned ear ni ngs. . . . . . 250, 000
Tot al . . . . . . . . . $620, 000 Tot al . . . . . . . . . . . . . . . . $620, 000
======== ========

Bui l di ng, $400, 000. What i s t he amount t hat wi l l appear as cash-
i nvest i ng on t he consol i dat ed st at ement of cash f l ows, as a r esul t of
t hi s pur chase?
a. $600, 000
b. $500, 000
c. $( 50, 000)
d. $0


Chapt er 6
6- 4
12. Company P acqui r ed 75%of t he out st andi ng common st ock of t he Company S
by i ssui ng common st ock wi t h a mar ket val ue of $650, 000 on J anuar y 1,
20X3. The bal ance sheet of Company S was as f ol l ows on t he acqui si t i on
dat e:

Cash . . . . . . . . . . . $100, 000 Li abi l i t i es. . . . . . . . . . . . $100, 000
Tot al . . . . . . . . . $840, 000 Tot al . . . . . . . . . . . . . . . . $840, 000
======== ========

Bui l di ng, $600, 000. What i s t he amount t hat wi l l appear as cash-
f i nanci ng as a r esul t of t hi s pur chase?
a. $560, 000
b. $100, 000
c. $75, 000
d. $0


13. Company P acqui r ed 60%of t he out st andi ng common st ock of Company S by
i ssui ng common st ock wi t h a mar ket val ue of $400, 000 on J anuar y 1, 20X3.
The bal ance sheet of Company S was as f ol l ows on t he acqui si t i on dat e:

Cash . . . . . . . . . . . $ 50, 000 Li abi l i t i es. . . . . . . . . . . . $ 80, 000
Tot al . . . . . . . . . $500, 000 Tot al . . . . . . . . . . . . . . . . $500, 000
======== ========

Bui l di ng, $400, 000. The i nvent or y was sol d dur i ng 20X3, t he bui l di ng has
a 10- year l i f e, and any excess pur chase pr i ce i s at t r i but ed t o goodwi l l .
What adj ust ment i s needed t o consol i dat ed net i ncome t o ar r i ve at cash
f l ow- oper at i ons f or 20X4, under t he i ndi r ect met hod, as a r esul t of
amor t i zat i on of excesses f r omt he pur chase?
a. $1, 000
b. $9, 000
c. $14, 800
d. $15, 000


Chapt er 6
6- 5
14. Company P pur chased an 80%i nt er est i n Company S on J anuar y 1, 20X3, at
a pr i ce i n excess of book val ue, such t hat a pat ent ar i ses i n t he
consol i dat i on pr ocess. As a r esul t of amor t i zi ng t he pat ent on t he
consol i dat ed i ncome st at ement , wher e woul d an adj ust ment be r equi r ed i n
t he f ol l owi ng sect i ons of t he consol i dat ed st at ement of cash f l ows?

Oper at i ng I nvest i ng Fi nanci ng No Adj ust ment
a. Yes No No No
b. No Yes No No
c. No No Yes No
d. No No No Yes


15. A par ent company pur chased al l t he out st andi ng bonds of i t s subsi di ar y.
Wi l l t hi s cash t r ansact i on appear i n t he f ol l owi ng sect i ons of t he
consol i dat ed st at ement of cash f l ows?

a. Yes No No No
b. No Yes No No
c. No No Yes No
d. No No No Yes


16. A par ent company owns 80%of t he common st ock of i t s subsi di ar y. Dur i ng
t he cur r ent year , t he par ent pur chases an addi t i onal 10%i nt er est f r om
noncont r ol l i ng shar ehol der s. On whi ch l i ne of t he f ol l owi ng sect i ons of
t he consol i dat ed st at ement of cash f l ows woul d t hi s cash t r ansact i on
appear ?

a. Yes No No No
b. No Yes No No
c. No No Yes No
d. No No No Yes


17. Basi c Ear ni ngs Per Shar e ( BEPS) i s cal cul at ed by di vi di ng
a. consol i dat ed net i ncome by par ent company out st andi ng st ock.
b. consol i dat ed net i ncome by par ent company out st andi ng st ock and
subsi di ar y out st andi ng st ock.
c. consol i dat ed net i ncome by par ent company out st andi ng st ock and
subsi di ar y noncont r ol l i ng out st andi ng st ock.
d. t he cont r ol l i ng i nt er est i n net i ncome by par ent company
out st andi ng st ock.


Chapt er 6
6- 6
18. When t he acqui si t i on of a subsi di ar y occur s dur i ng a r epor t i ng per i od
usi ng t he pur chase met hod, t he comput at i on of bot h BEPS and DEPS
i ncl udes subsi di ar y i ncome
a. and subsi di ar y secur i t i es f or t he ent i r e per i od.
b. f or t he ent i r e per i od and t he number of subsi di ar y shar es wei ght ed
f or t he par t i al per i od.
c. f or t he par t i al per i od and t he number of subsi di ar y shar es
wei ght ed f or t he par t i al per i od
d. f or t he par t i al per i od and t he number of subsi di ar y shar es ent i r e
per i od


19. For t wo or mor e cor por at i ons t o f i l e a consol i dat ed t ax r et ur n, t he
par ent must own what per cent age of t he vot i ng power of al l cl asses of
st ock and what per cent age of t he f ai r val ue of al l t he out st andi ng st ock
of t he cor por at i on?
a. 90%
b. 80%
c. 70%
d. 60%


20. I n cal cul at i ng t he vot i ng power and mar ket val ue f or t wo or mor e
cor por at i ons t o f i l e a consol i dat ed t ax r et ur n, pr ef er r ed st ock i s
i ncl uded onl y i f i t
a. i s ent i t l ed t o vot e.
b. i s not l i mi t ed and not pr ef er r ed as t o di vi dends.
c. does have r edempt i on r i ght s beyond i t s i ssue pr i ce pl us a
r easonabl e r edempt i on or l i qui dat i on pr emi umand i s conver t i bl e
i nt o t he ot her cl ass of st ock.
d. meet s any t he above condi t i ons.


21. Consol i dat ed f i r ms t hat meet t he t ax l aw r equi r ement s t o be an
af f i l i at ed gr oup
a. must f i l e a consol i dat ed r et ur n.
b. must r ecei ve per mi ssi on of t he I nt er nal Revenue Ser vi ce t o f i l e
separ at el y.
c. may el ect t o f i l e as a si ngl e ent i t y or as a consol i dat ed gr oup.
d. cannot change t he met hod of f i l i ng i n t he f ut ur e.


22. When an af f i l i at ed gr oup el ect s t o be t axed as a si ngl e ent i t y, t axabl e
i ncome i s cal cul at ed based on
a. consol i dat ed i ncome as det er mi ned on t he consol i dat ed wor ksheet .
b. each f i r ms separ at e i ncome.
c. each f i r ms separ at e i ncome wi t h adj ust ment s f or i nt er company
t r ansact i ons.

Chapt er 6
6- 7

23. For compani es t hat meet t he r equi r ement s of an af f i l i at ed f i r mf i l i ng
separ at el y, t he par ent may excl ude how much of t he di vi dends r ecei ved
f r omr epor t ed i ncome?
a. 100%
b. 80%
c. 70%
d. 20%


24. For owner shi p i nt er est of at l east 20%but l ess t han 80%, t he par ent may
excl ude how much of t he di vi dends r ecei ved f r omi t s r epor t ed i ncome when
f i l i ng separ at el y?
a. 100%
b. 80%
c. 70%
d. 20%


25. For owner shi p i nt er est of l ess t han 20%, t he par ent may excl ude how much
of t he di vi dends r ecei ved f r omi t s r epor t ed i ncome when f i l i ng
separ at el y?
a. 100%
b. 80%
c. 70%
d. 20%


26. Company P pur chased an 80%i nt er est i n Company S on J anuar y 1, 20X3, f or
$800, 000. On t he pur chase dat e, Company S st ockhol der s' equi t y was
$800, 000. Any excess of cost over book val ue was at t r i but ed t o a pat ent
wi t h a 10- year r emai ni ng l i f e. I n 20X3, Company P r epor t ed i nt er nal l y
gener at ed net i ncome bef or e t axes of $150, 000. Company S r epor t ed a net
i ncome bef or e t axes of $50, 000. The f i r ms f i l e a consol i dat ed t ax r et ur n
at a 30%t ax r at e. The cont r ol l i ng shar e of consol i dat ed net i ncome
i s __________.
a. $140, 000
b. $121, 800
c. $133, 000
d. $152, 000


Chapt er 6
6- 8
$700, 000. On t he pur chase dat e, Company S st ockhol der s' equi t y was
$800, 000. Any excess of cost over book val ue was at t r i but ed t o a pat ent
wi t h a 15- year l i f e. I n 20X3, Company P r epor t ed i nt er nal l y gener at ed
net i ncome bef or e t axes of $80, 000. Company S r epor t ed a net i ncome
bef or e t axes of $40, 000. The f i r ms f i l e separ at e t ax r et ur ns at a 30%
t ax r at e. Assume an 80%di vi dend excl usi on r at e on i nt er company
di vi dends. The cont r ol l i ng shar e of consol i dat ed net i ncome i s
__________.
a. $81, 200
b. $79, 280
c. $78, 480
d. $74, 256


a. When an af f i l i at ed gr oup el ect s separ at e t axat i on, an addi t i onal
t ax needs t o be cal cul at ed.
b. An af f i l i at ed gr oup f i l i ng a consol i dat ed t ax r et ur n may r ecor d on
i t s own books i t s shar e of t he consol i dat ed pr ovi si on f or i ncome
t ax.
c. Nonaf f i l i at ed t ax f i l i ng i s l ess compl ex t han f i l i ng a
consol i dat ed t ax r et ur n si nce t her e i s no i mpact of i nt er company
t r ansact i ons when separ at e r et ur ns ar e f i l ed.
d. Wi t h r egar d t o pr i or year s, subsi di ar y i ncome, no def er r ed t ax
l i abi l i t y needs t o be r ecogni zed when t he cost met hod i s used.


29. How wi l l t he i nvest or ' s i nvest ment account be af f ect ed by t he i nvest or ' s
shar e of t he ear ni ngs of t he i nvest ee af t er t he dat e of acqui si t i on
under each of t he f ol l owi ng account i ng met hods?

Cost Met hod Equi t y Met hod
a. No ef f ect No ef f ect
b. I ncr ease I ncr ease
c. I ncr ease No ef f ect
d. No ef f ect I ncr ease


30. Company P pur chased a 30%i nt er est i n t he Company S f or $345, 000 on
J anuar y 1, 20X1. At t hat t i me, Company S had st ockhol der s' equi t y of
$1, 000, 000. Any excess cost over book val ue was at t r i but ed t o a pat ent
wi t h a 15- year l i f e. Dur i ng 20X1, Company S ear ned $60, 000 and pai d
di vi dends of $15, 000. What i s t he bal ance i n t he i nvest ment account on
December 31, 20X1, usi ng t he sophi st i cat ed equi t y met hod?
a. $363, 000
b. $360, 000
c. $355, 500
d. $349, 500


Chapt er 6
6- 9
31. Company P owns a 30%i nt er est i n Company S and account s f or t he
i nvest ment under t he sophi st i cat ed equi t y met hod. The i nvest ment was
pur chased at under l yi ng book val ue, and t her e i s no excess of cost or
book val ue. Company S sel l s mer chandi se t o Company P at cost pl us 25%.
I nt er company sal es dur i ng 20X1 wer e $100, 000. Ther e wer e $20, 000 wor t h
of such goods i n Company P' s begi nni ng i nvent or y and $30, 000 wor t h of
such goods i n Company P' s endi ng i nvent or y. Company S' s r epor t ed i ncome
f or 20X1 i s $40, 000, and no di vi dends wer e pai d. What amount wi l l
Company P r ecor d as i nvest ment i ncome i n 20X1?
a. $12, 000
b. $11, 400
c. $9, 750
d. $4, 500


32. Company P Company uses t he equi t y met hod t o account f or i t s J anuar y 1,
20X1, pur chase of 30%of Company S' s common st ock. On J anuar y 1, 20X1,
t he mar ket val ues of Tun' s FI FO i nvent or y and l and exceed t hei r book
val ues. How do t hese excesses of mar ket val ues over book val ues af f ect
Company P' s r epor t ed equi t y i n Tun' s Company S' s 20X1 ear ni ngs?

I nvent or y Excess Land Excess
a. Decr ease Decr ease
b. Decr ease No ef f ect
c. I ncr ease I ncr ease
d. I ncr ease No ef f ect


33. Company P pur chased a 30%i nt er est i n Company S on J anuar y 1, 20X1, f or
$100, 000. The pr i ce was equal t o t he book val ue of t he equi t y acqui r ed.
The r epor t ed i ncome ( l oss) and di vi dends pai d by t he Company S ar e as
f ol l ows:

I ncome Di vi dends
Year ( l oss) Pai d
20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5, 000 $5, 000
20X2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 270, 000) 0
20X3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 100, 000) 0
20X4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000 5, 000

I nvest ment i ncome r epor t ed i n 20X4 under t he sophi st i cat ed equi t y met hod
woul d be __________.
a. $15, 000
b. $13, 500
c. $5, 500
d. $0


Chapt er 6
6- 10
34. Company P uses t he sophi st i cat ed equi t y met hod of account i ng f or i t s 30%
i nvest ment i n Company S' s common st ock. Dur i ng 20X9, Company S r epor t ed
ear ni ngs of $650, 000 and pai d di vi dends of $150, 000. Assume t hat al l t he
undi st r i but ed ear ni ngs of Company S wi l l be di st r i but ed as di vi dends i n
f ut ur e per i ods. The di vi dends r ecei ved f r omFl ax ar e el i gi bl e f or t he
80%di vi dends r ecei ved deduct i on. Company P' s 20X9, t ax r at e i s 30%. Tax
r at es af t er 20X9 ar e 25%. I n i t s December 31, 20X9, bal ance sheet , t he
i ncr ease i n t he def er r ed t ax l i abi l i t y f r omt hese t r ansact i ons woul d
be __________.
a. $7, 500
b. $9, 000
c. $150, 000
d. $30, 000


35. Assume t hat Company P pur chases a 10%common st ock i nt er est i n Company S
f or $12, 000 on J anuar y 1, 20X2, and an addi t i onal 20%i nt er est on
J anuar y 1, 20X3, f or $26, 000. Ther e was no excess of cost or book val ue
on ei t her i nvest ment . The bal ance sheet s of Company, S whi ch pays no
di vi dends, f ol l ow:

12/ 31/ X3 12/ 31/ X2 01/ 01/ X2
Tot al asset s. . . . . . . . . . . $160, 000 $130, 000 $120, 000

Common st ock. . . . . . . . . . . $100, 000 $100, 000 $100, 000
Ret ai ned ear ni ngs. . . . . . 60, 000 30, 000 20, 000
Tot al equi t y. . . . . . . . . . . $160, 000 $130, 000 $120, 000
======== ======== ========

For 20X3, Company P r epor t s i nvest ment i ncome of __________.
a. $18, 000
b. $12, 000
c. $9, 000
d. $6, 000


36. Company P acqui r ed 30%of Company S' s common st ock on J anuar y 1, 20X8,
f or $100, 000. Company P' s 30%i nt er est const i t ut es si gni f i cant
i nf l uence. Ther e i s no excess of cost over book val ue. Dur i ng 20X8,
Company S ear ned $40, 000 and pai d di vi dends of $25, 000. Dur i ng 20X9,
Company S ear ned $50, 000 and pai d di vi dends of $15, 000 on Apr i l 1 and
$15, 000 on Oct ober 1. On J ul y 1, 20X9, Company P sol d hal f of i t s
i nt er est i n Company S f or $66, 000 cash. The gai n on t he sal e of t he
i nvest ment i n Company P' s 20X9 i ncome st at ement shoul d be __________.
a. $16, 000
b. $13, 700
c. $12, 250
d. $10, 000


Chapt er 6
6- 11
PROBLEM

1. The separ at e condensed bal ance sheet s and i ncome st at ement s of Par Cor p.
and i t s whol l y owned subsi di ar y, Sub Cor p. , ar e as f ol l ows:

Bal ance Sheet s
December 31, 20X8

Asset s Par Sub
Cur r ent
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 149, 000 $ 50, 000
Account s r ecei vabl e ( net ) . . . . . . . . . . . . . . . 190, 000 60, 000
I nvent or i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 000 40, 000
Tot al cur r ent asset s. . . . . . . . . . . . . . . . . . . $ 429, 000 $150, 000

Pr oper t y, pl ant , and equi pment ( net ) . . . . . . . $ 361, 000 $200, 000
I nvest ment i n Sub ( equi t y met hod) . . . . . . . . . . 320, 000 - -
Tot al asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 110, 000 $350, 000
========== ========

Cur r ent l i abi l i t i es
Account s payabl e. . . . . . . . . . . . . . . . . . . . . . . . . $ 100, 000 $ 70, 000
Accr ued l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . 30, 000 20, 000
Tot al cur r ent l i abi l i t i es. . . . . . . . . . . . . . $ 130, 000 $ 90, 000
========== ========

St ockhol der s' equi t y
Common st ock ( $10 par ) . . . . . . . . . . . . . . . . . . . $ 220, 000 $ 30, 000
Addi t i onal pai d- i n capi t al . . . . . . . . . . . . . . . 140, 000 100, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . 620, 000 130, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . . . . $ 980, 000 $260, 000
Tot al l i abi l i t i es and st ockhol der s'
equi t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 100, 000 $350, 000
========== ========

I ncome St at ement

Par Sub
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 000, 000 $300, 000
Cost of goods sol d. . . . . . . . . . . . . . . . . . . . . . . . . 770, 000 200, 000
Gr oss mar gi n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 230, 000 $100, 000
Ot her oper at i ng expenses. . . . . . . . . . . . . . . . . . . 130, 000 50, 000
Oper at i ng i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100, 000 $ 50, 000
Equi t y i n ear ni ngs of Sub. . . . . . . . . . . . . . . . . . 30, 000 - -
I ncome bef or e t axes. . . . . . . . . . . . . . . . . . . . . . . . $ 130, 000 $ 50, 000
Pr ovi si on f or i ncome t axes. . . . . . . . . . . . . . . . . 40, 000 20, 000
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90, 000 $ 30, 000
========== ========

Chapt er 6
6- 12
On J anuar y 1, 20X8, Par pur chased al l of Sub $10 par , vot i ng common
st ock f or $300, 000. On J anuar y 1, 20X8, t he f ai r val ue of Sub asset s and
l i abi l i t i es equal ed t he car r yi ng amount s of $330, 000 and $90, 000,
r espect i vel y. The excess pur chase pr i ce i s at t r i but abl e t o goodwi l l .

Dur i ng 20X8, Par and Sub pai d cash di vi dends of $50, 000 and $10, 000,
r espect i vel y. For t ax pur poses, Par r ecei ves t he 100%excl usi on f or
di vi dends r ecei ved f r omSub.

Ther e wer e no i nt er company t r ansact i ons ot her t han Par ' s r ecei pt of
di vi dends f r omSub and Par ' s r ecor di ng of i t s shar e of Sub' s ear ni ngs.

On J une 30, 20X8, Par i ssued 2, 000 shar es of common st ock f or $17 per
shar e. Ther e wer e no ot her changes i n ei t her Par ' s or Sub' s common st ock
dur i ng 19X8.

Bot h Par and Sub pai d i ncome t axes at t he r at e of 40%.

Requi r ed:

( 1) I n t he 20X8 consol i dat ed i ncome st at ement of Par and i t s
subsi di ar y, what amount shoul d be r epor t ed as consol i dat ed
net i ncome?
a. $60, 000 b. $87, 600 c. $90, 000 d. $117, 600

( 2) The consol i dat ed bal ance sheet of Par and i t s subsi di ar y
shoul d r epor t t ot al consol i dat ed asset s of :
a. $1, 110, 000 b. $1, 144, 000 c. $1, 200, 000 d. $1, 460, 000

( 3) The consol i dat ed bal ance sheet of Par and i t s subsi di ar y
shoul d r epor t t ot al r et ai ned ear ni ngs of :
a. $620, 000 b. $640, 000 c. $650, 000 d. $750, 000

( 4) I n t he consol i dat ed i ncome st at ement of Par and i t s
subsi di ar y, how much expense shoul d be r epor t ed f or
amor t i zat i on?
a. $0 b. $3, 000 c. $4, 000 d. $10, 000

( 5) I n comput i ng t he consol i dat ed ear ni ngs per shar e f or Par and
Sub, t he number of shar es used shoul d be:
a. 25, 000 b. 24, 000 c. 22, 000 d. 21, 000

( 6) I n t he December 31, 20X8, consol i dat ed bal ance sheet of Par
and i t s subsi di ar y, how much shoul d be r epor t ed as t ot al
cur r ent asset s?
a. $150, 000 b. $280, 000 c. $429, 000 d. $579, 000

( 7) Par ' s J anuar y 1, 20X8, i nvent or y was $110, 000. Par ' s ( par ent
onl y) 20X6 i nvent or y t ur nover r at i o was:
a. 11. 1 b. 10. 0 c. 7. 7 d. 7. 0

( 8) I n Par ' s 20X8 i ncome st at ement , what amount of def er r ed
i ncome t axes on Par ' s equi t y i n Sub' s ear ni ngs shoul d be
i ncl uded i n Par ' s pr ovi si on f or i ncome t axes?
a. $0 b. $2, 000 c. $10, 000 d. $12, 000

Chapt er 6
6- 13
ANS:

( 1) c ( 5) d
( 2) c ( 6) d
( 3) a ( 7) b
( 4) a ( 8) a

DI F: M OBJ : 3

2. Company S has been an 80%- owned subsi di ar y of Company P si nce J anuar y 1,
20X7. The det er mi nat i on and di st r i but i on of excess schedul e pr epar ed at
t he t i me of pur chase was as f ol l ows:

Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $570, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . . . . . . $600, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . . . . . . 80% 480, 000
Excess of cost over book val ue. . . . . . . . . . . . . $ 90, 000
Under val uat i on of equi pment ,
$62, 500 x . 8 x ( 10- year l i f e) . . . . . . . . . . . . 50, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40, 000
========

On J anuar y 2, 20X9, Company P i ssued $120, 000 of 8%bonds at f ace val ue
t o hel p f i nance t he pur chase of 25%of t he out st andi ng common st ock of
Al pha Company f or $200, 000. No excess r esul t ed f r omt hi s t r ansact i on.
Al pha ear ned $100, 000 net i ncome dur i ng 20X7 and pai d $20, 000 i n
di vi dends.

The onl y change i n pl ant asset s dur i ng 20X9 was t hat Company S sol d a
machi ne f or $10, 000. The machi ne had a cost of $60, 000 and accumul at ed
depr eci at i on of $40, 000. Depr eci at i on expense r ecor ded dur i ng 20X7 was
as f ol l ows:

Company P Company S Al pha Company
Bui l di ngs. . . . . . . . . . . . . . . . . $15, 000 $ 8, 000 $12, 000
Machi ner y. . . . . . . . . . . . . . . . . 35, 000 20, 000 4, 000

The 20X9 consol i dat ed i ncome was $180, 000, of whi ch t he NCI was $10, 000.
Company P pai d di vi dends of $12, 000, and Company S pai d di vi dends of
$10, 000.

Consol i dat ed i nvent or y was $287, 000 i n 20X8 and $223, 000 i n 20X9;
consol i dat ed cur r ent l i abi l i t i es wer e $246, 000 i n 20X8 and $216, 700 i n
20X9. Cash i ncr eased by $205, 700.

Requi r ed:

Pr epar e t he 20X9 consol i dat ed st at ement of cash f l ows f or Company P. and
i t s subsi di ar y, Company S.

Chapt er 6
6- 14
ANS:

Company P and Subsi di ar y Company S
Consol i dat ed St at ement of Cash Fl ows

Cash f l ows f r omoper at i ng act i vi t i es:
Consol i dat ed net i ncome. . . . . . . . . . . . . . . . . $ 170, 000
Adj ust ment t o r econci l e net i ncome t o net
cash:
NCI i n i ncome. . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000
Bui l di ng depr eci at i on. . . . . . . . . . . . . . . . . 23, 000
Machi ne depr eci at i on ( i ncl udes $5, 000
f r omdet er mi nat i on and di st r i but i on
of excess) . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Undi st r i but ed equi t y i ncome f r om
Al pha i nvest ment . . . . . . . . . . . . . . . . . . . . ( 20, 000)
Loss on machi ner y. . . . . . . . . . . . . . . . . . . . . 10, 000
Decr ease i n i nvent or y. . . . . . . . . . . . . . . . . 64, 000
Decr ease i n cur r ent l i abi l i t i es. . . . . . . ( 29, 300)
Tot al adj ust ment s. . . . . . . . . . . . . . . . . . . . . 117, 700
Net cash f l ows pr ovi ded by oper at i ng
act i vi t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 287, 700

Payment f or pur chase of Al pha Cor p. . . . . . . . $( 200, 000)
Sal e of machi ne. . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Net cash f l ows pr ovi ded by i nvest i ng
act i vi t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 190, 000)

Cash f l ows f r omf i nanci ng act i vi t i es:
8%bond i ssuance. . . . . . . . . . . . . . . . . . . . . . . . $ 120, 000
Di vi dends pai d
By Company P. . . . . . . . . . . . . . . . . ( 12, 000)
By Company S. . . . . . . . . . . . . . . . . ( 2, 000) ( 14, 000)
Net cash f l ows pr ovi ded by
f i nanci ng act i vi t i es. . . . . . . . . . . . . . . . . . . . 106, 000
Net i ncr ease i n cash. . . . . . . . . . . . . . . . . . . . . . $ 203, 700
=========

DI F: M OBJ : 1

Chapt er 6
6- 15
$246, 000 cash. The appr ai sal showed t hat some of Company S' s equi pment ,
wi t h a 5- year est i mat ed r emai ni ng l i f e, was under val ued $25, 000. The
excess pur chase pr i ce i s at t r i but ed t o goodwi l l . The f ol l owi ng i s t he
Company S bal ance sheet on December 31, 20X2:

Asset s

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
Pr oper t y, pl ant , and equi pment . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Accumul at ed depr eci at i on. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 90, 000)
Tot al asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $270, 000
========


Cur r ent l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30, 000
Long- t er ml i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000
Common st ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Tot al l i abi l i t i es and equi t y. . . . . . . . . . . . . . . . . . . . . . . . . $270, 000
========

Compar at i ve bal ance sheet dat a ar e as f ol l ows:

December 31, 20X2 December 31, 20X3
( Par ent onl y) ( Consol i dat ed)
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 100, 000 $ 87, 100
I nvent or y. . . . . . . . . . . . . . . . . . . . . 60, 000 84, 200
Pr oper t y, pl ant , and equi pment 950, 000 1, 346, 000
Accumul at ed depr eci at i on. . . . . . ( 360, 000) ( 574, 000)
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . 0 66, 000
Cur r ent l i abi l i t i es. . . . . . . . . . . ( 80, 000) ( 115, 000)
Long- t er ml i abi l i t i es. . . . . . . . . ( 100, 000) ( 130, 000)
NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 ( 43, 000)
Cont r ol l i ng i nt er est :
Common st ock ( $10 par ) . . . . . . ( 350, 000) ( 400, 000)
Addi t i onal pai d- i n capi t al . . ( 50, 000) ( 90, 000)
Ret ai ned ear ni ngs. . . . . . . . . . . ( 170, 000) ( 231, 300)
$ 0 $ 0
========= =========

The f ol l owi ng i nf or mat i on r el at es t o t he act i vi t i es of t he t wo f i r ms f or
20X3:

( 1) Company S i ssued 5, 000 shar es of common st ock f or $18 a
shar e.

( 2) Company S pai d of f $10, 000 of i t s l ong- t er mdebt .

( 3) Company P pur chased pr oduct i on equi pment f or $76, 000.

( 4) Consol i dat ed net i ncome was $103, 900; t he NCI ' s shar e was
$6, 000. Depr eci at i on expense t aken by Company P and Company S
on t hei r separ at e books was $92, 000 and $28, 000,
r espect i vel y.

( 5) Company P pai d $30, 000 i n di vi dends; Company S pai d $15, 000.

Chapt er 6
6- 16

Chapt er 6
6- 17
Requi r ed:

Pr epar e t he consol i dat ed st at ement of cash f l ows f or t he year ended
December 31, 20X3, f or Company P and i t s subsi di ar y, Company S.

ANS:

Det er mi nat i on and Di st r i but i on of Excess Schedul e:

Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $246, 000
Less i nt er est acqui r ed, 80%x $200, 000. . . . . . . . . . . . . . . . . 160, 000
Excess of cost over book val ue. . . . . . . . . . . . . . . . . . . . . . . . . $ 86, 000
Under val uat i on of equi pment , 80%x $20, 000
( 5- year l i f e, $4, 000 per year ) . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66, 000
========

Company P and Subsi di ar y Company S
Consol i dat ed St at ement of Cash Fl ows

Cash f l ows f r omoper at i ng act i vi t i es:
Consol i dat ed net i ncome. . . . . . . . . . . . . . . . . . . . $ 97, 900
Adj ust ment t o r econci l e net i ncome t o
net cash
NCI i n net i ncome. . . . . . . . . . . . . . . . . . . . . . . . $ 6, 000
Depr eci at i on ( $92, 000 + $28, 000 + $4, 000) 124, 000
Decr ease i n i nvent or y. . . . . . . . . . . . . . . . . . . . 5, 800
I ncr ease i n cur r ent l i abi l i t i es. . . . . . . . . . 5, 000
Tot al adj ust ment s. . . . . . . . . . . . . . . . . . . . . . 140, 800
Net cash pr ovi ded by oper at i ng act i vi t i es. . . . $ 238, 700

Cash f l ows f r omi nvest i ng act i vi t i es:
Payment f or pur chase of Company S,
net of cash acqui r ed. . . . . . . . . . . . . . . . . . . . . $( 216, 000)
Pur chase of pr oduct i on equi pment . . . . . . . . . . . . . ( 76, 000)
Net cash pr ovi ded by i nvest i ng act i vi t i es. . . . ( 292, 000)

Common st ock i ssuance ( 5, 000 shar es x $18
per shar e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90, 000
Decr ease i n l ong- t er mdebt . . . . . . . . . . . . . . . . . ( 10, 000)
Di vi dends pai d:
By Company P. . . . . . . . . . . . . . . . . . . $( 30, 000)
By Company S, t o noncont r ol l i ng
i nt er est . . . . . . . . . . . . . . . . . . . . . ( 3, 000) ( 33, 000)
Net cash pr ovi ded by f i nanci ng act i vi t i es. . . 47, 000
Net decr ease i n cash. . . . . . . . . . . . . . . . . . . . . . . . $ ( 6, 300)
Cash at begi nni ng of year . . . . . . . . . . . . . . . . . . . 100, 000
Cash at year end. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93, 700
=========

Chapt er 6
6- 18
Schedul e of noncash i nvest i ng act i vi t y:

Company P pur chased 80%of t he capi t al st ock of Company S f or $246, 000.
I n conj unct i on wi t h t he acqui si t i on, l i abi l i t i es wer e assumed and a
noncont r ol l i ng i nt er est was cr eat ed as f ol l ows:

Adj ust ed val ue of asset s acqui r ed
( $270, 000 book val ue pl us $86, 000 excess) . $356, 000
Cash pai d f or capi t al st ock. . . . . . . . . . . . . . . . . 246, 000 $110, 000
Li abi l i t i es assumed. . . . . . . . . . . . . . . . . . . . . . . . . 70, 000
NCI , $200, 000 x 20%. . . . . . . . . . . . . . . . . . . . . . . . . $ 40, 000
========

DI F: M OBJ : 1

4. On J anuar y 1, 20X1, Pr i ce Company pur chased 80%of t he common st ock of
Si dex Company f or $228, 000.

Pr esent ed bel ow ar e col umns f or t he J anuar y 1, 20X1 condensed bal ance
sheet s of Si dex and Pr i ce, as wel l as t he December 31, 20X1 consol i dat ed
bal ance sheet .

12- 31- 20X1
Bal ances, 1- 1- 20X1 Consol i dat ed
Si dex Pr i ce Bal ances
Cash. . . . . . . . . . . . . . . . . . . . . . $ 20, 000 $ 210, 000 $ 90, 000
Ot her Cur r ent Asset s. . . . . . 80, 000 100, 000 250, 000
Land. . . . . . . . . . . . . . . . . . . . . . 50, 000 60, 000 110, 000
Bui l di ng. . . . . . . . . . . . . . . . . . 200, 000 350, 000 550, 000
Accumul at ed Depr eci at i on. . ( 40, 000) ( 100, 000) ( 159, 200)
Pat ent . . . . . . . . . . . . . . . . . . . . 18, 000
$310, 000 $ 620, 000 $ 858, 800
======== ========= =========

Cur r ent Li abi l i t i es. . . . . . . $ 25, 000 $120, 000 $185, 000
Long- t er mLi abi l i t i es. . . . . 50, 000 100, 000 150, 000
Common St ock. . . . . . . . . . . . . . 20, 000 50, 000 50, 000
Ot her Pai d- i n Capi t al . . . . . 80, 000 150, 000 150, 000
Ret ai ned Ear ni ngs. . . . . . . . . 135, 000 200, 000 270, 800
NCI . . . . . . . . . . . . . . . . . . . . . . . 53, 000
$310, 000 $620, 000 $858, 800
======== ======== ========

On J anuar y 1, 20X1, t he onl y t angi bl e net asset s of Si dex whi ch wer e
used, was under val ued $10, 000. The bui l di ng was wor t h $15, 000 mor e t han
book val ue. I t had a r emai ni ng usef ul l i f e of 10 year s on J anuar y 1,
20X1 and st r ai ght - l i ne depr eci at i on was used. The excess pur chase pr i ce
was at t r i but ed t o a pat ent wi t h a r emai ni ng l i f e of 10 year s. The Pr i ce
company concept ( pr o r at a mar ket val ue appr oach) was used i n r eval uat i on
of asset s.

Chapt er 6
6- 19
The 20X1 Consol i dat ed I ncome St at ement showed:

Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 800, 000
Cost of Goods Sol d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 488, 000)
Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 203, 200)
Consol i dat ed Net I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108, 800
To NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
To Cont r ol l i ng I nt er est . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100, 800
=========

Oper at i ng expenses i ncl ude depr eci at i on of $31, 200 and pat ent
amor t i zat i on of $2, 000. I n December 19X1, Pr i ce decl ar ed and pai d
di vi dends of $30, 000; Si dex decl ar ed and pai d di vi dends of $10, 000.

Requi r ed:

a. Compl et e t he Fi gur e 6- 1 wor ksheet f or a consol i dat ed st at ement
of cash f l ows f or 20X1.

b. Pr epar e t he suppl ement ar y di scl osur e of noncash i nvest i ng and
f i nanci ng act i vi t i es f or t he st at ement of cash f l ows f or 20X1.

ANS:

a. For t he wor ksheet sol ut i on, pl ease r ef er t o Answer 6- 1.

b. Suppl ement al schedul e of noncash i nvest i ng and f i nanci ng
act i vi t y:
Pr i ce Company pur chased 80%of t he common st ock of Si dex
Company f or $228, 000. I n conj unct i on wi t h t he acqui si t i on,
l i abi l i t i es wer e assumed and a noncont r ol l i ng i nt er est was
cr eat ed as f ol l ows:

Adj ust ed val ue of asset s acqui r ed:
( $310, 000 book val ue pl us $40, 000 excess) . . . . . . . . . $350, 000
Cash pai d f or common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . 228, 000
Bal ance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122, 000
========
Li abi l i t i es assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75, 000
========
NCI cr eat ed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47, 000
========

DI F: D OBJ : 1

Chapt er 6
6- 20
Subsi di ar y Company at a cost of $252, 000. Par ent pai d $152, 000 i n cash
and i ssued 1, 000 shar es of 8%pr ef er r ed st ock wi t h par and mar ket val ue
of $100, 000 f or 80%of Subsi di ar y' s common st ock.

Pr esent ed bel ow ar e col umns f or t he J anuar y 1, 20X1 condensed bal ance
sheet s of Subsi di ar y and Par ent , as wel l as t he December 31, 20X1
consol i dat ed bal ance sheet .

12- 31- 20X1
Bal ances, 1- 1- 20X1 Consol i dat ed
Subsi di ar y Par ent Bal ances
Cash. . . . . . . . . . . . . . . . . . . . . . . $ 25, 000 $ 160, 000 $ 177, 000
Ot her Cur r ent Asset s. . . . . . . 90, 000 100, 000 266, 000
Land. . . . . . . . . . . . . . . . . . . . . . . 40, 000 110, 000 150, 000
Bui l di ng. . . . . . . . . . . . . . . . . . . 200, 000 350, 000 650, 000
Accumul at ed Depr eci at i on. . . ( 40, 000) ( 100, 000) ( 180, 000)
Pat ent . . . . . . . . . . . . . . . . . . . . . 56, 000
$315, 000 $ 620, 000 $1, 119, 000
======== ========= ==========

Cur r ent Li abi l i t i es. . . . . . . . $ 25, 000 $120, 000 $ 185, 000
Long- t er mLi abi l i t i es. . . . . . 50, 000 100, 000 300, 000
Pr ef er r ed St ock. . . . . . . . . . . . 100, 000
Common St ock. . . . . . . . . . . . . . . 20, 000 50, 000 50, 000
Ot her Pai d- i n Capi t al . . . . . . 80, 000 150, 000 150, 000
Ret ai ned Ear ni ngs. . . . . . . . . . 140, 000 200, 000 280, 000
NCI . . . . . . . . . . . . . . . . . . . . . . . . 54, 000
$315, 000 $620, 000 $1, 119, 000
======== ======== ==========

On J anuar y 1, 20X1, al l of t he i dent i f i abl e net asset s of Subsi di ar y had
mar ket val ues equal t o book val ues, except f or an i nt er nal l y- devel oped
pat ent . I n t he consol i dat ed st at ement s, t he pat ent was amor t i zed over 15
year s.

The 20X1 Consol i dat ed I ncome St at ement showed:

Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 800, 000
Cost of Goods Sol d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 480, 000)
Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 204, 000)
Consol i dat ed Net I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16, 000
To NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
To Cont r ol l i ng I nt er est . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108, 000
=========

Oper at i ng expenses i ncl ude depr eci at i on of $40, 000, as wel l as
amor t i zat i on of t he pat ent . I n December 20X1, Par ent decl ar ed and pai d
di vi dends of $28, 000; Subsi di ar y decl ar ed and pai d di vi dends of $10, 000.

On J ul y 1, 20X1, Par ent sol d l and t o Subsi di ar y f or cash equal t o t he
cost of t he l and, $50, 000. Subsi di ar y t hen pai d cash of $100, 000 t o have
a bui l di ng const r uct ed by an i ndependent cont r act or . To f i nance t he
pr oper t y acqui si t i on, Subsi di ar y bor r owed $150, 000 f r omt he bank on a
l ong- t er mnot e, guar ant eed by Par ent Company.

Chapt er 6
6- 21
Requi r ed:

a. Compl et e t he Fi gur e 6- 2 wor ksheet f or a consol i dat ed st at ement
of cash f l ows f or 20X1.

b. Pr epar e t he suppl ement ar y di scl osur e of noncash i nvest i ng and
f i nanci ng act i vi t i es f or t he st at ement of cash f l ows f or 20X1.

ANS:


b. Suppl ement al schedul e of noncash i nvest i ng and f i nanci ng
act i vi t y:

Dur i ng 20x1, Par ent Company pur chased 80%of t he common st ock
of Subsi di ar y Company f or cash of $152, 000 and pr ef er r ed st ock
wi t h mar ket val ue of $100, 000. I n conj unct i on wi t h t he
acqui si t i on, l i abi l i t i es wer e assumed, pr ef er r ed st ock was
i ssued, and a noncont r ol l i ng i nt er est was cr eat ed as f ol l ows:

Adj ust ed val ue of asset s acqui r ed:
( $315, 000 book val ue pl us $60, 000 excess) . . . . . . . . . $375, 000
Cash pai d f or common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . 152, 000
Bal ance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $223, 000
========

Li abi l i t i es assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75, 000
Pr ef er r ed st ock i ssued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
NCI cr eat ed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48, 000
$223, 000
========

DI F: D OBJ : 1

Chapt er 6
6- 22
6. Di l l s Company pur chased an 80%i nt er est i n t he common st ock of Sar ada
Company f or $860, 000 on J anuar y 1, 20X7. The pr i ce was $90, 000 i n excess
of t he book val ue of t he under l yi ng equi t y, and t he excess was
at t r i but ed t o a pat ent wi t h a 10- year l i f e.

Dur i ng 20X9, Di l l s Company and Sar ada Company r epor t ed t he f ol l owi ng
i nt er nal l y gener at ed i ncome bef or e t axes:

Di l l s Co. Sar ada Co.
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300, 000 $120, 000
Cost of goods sol d. . . . . . . . . . . . . . . . . . . . . . . . . ( 200, 000) ( 90, 000)
Gai n on machi ne. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 - -
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 40, 000) ( 20, 000)
I ncome bef or e t axes. . . . . . . . . . . . . . . . . . . . . . . . $ 70, 000 $ 10, 000
========= ========

Sar ada Company sol d goods t o Di l l s Company f or $60, 000. Di l l s Company
had $30, 000 of Sar ada Company' s goods i n i t s begi nni ng i nvent or y and
$12, 000 of Sar ada Company' s goods i n i t s endi ng i nvent or y. Sar ada
Company sel l s goods t o Di l l s Company at cost pl us 20%.

Di l l s Company sol d a new machi ne t o Sar ada Company on J anuar y 1, 20X9,
f or $40, 000. The cost of t he machi ne was $30, 000. I t has a 5- year l i f e.

The af f i l i at ed gr oup f i l es a consol i dat ed t ax r et ur n and i s t axed at
30%.

Requi r ed:

Pr epar e a consol i dat ed i ncome st at ement f or 20X9. I ncl ude i ncome
di st r i but i on f or bot h f i r ms.

Chapt er 6
6- 23
ANS:

Di l l s Company and Sar ada Company

Sal es ( l ess $60, 000 i nt er company sal es) . . . . . . . . . . . . . . . . $ 360, 000
Cost of goods sol d ( $290, 000 - $60, 000 i nt er company
sal es - $5, 000 begi nni ng i nvent or y pr of i t + $2, 000
endi ng i nvent or y pr of i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 227, 000)
Expenses ( $60, 000 + $9, 000 pat ent amor t i zat i on
- $2, 000 depr eci at i on adj ust ment ) . . . . . . . . . . . . . . . . . . . . ( 67, 000)
I ncome bef or e t axes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66, 000
Pr ovi si on f or i ncome t ax, 30%x $66, 000. . . . . . . . . . . . . . . . ( 19, 800)
Consol i dat ed net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46, 200
Less NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1, 820)
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44, 380
=========

Sar ada Company' s I ncome Di st r i but i on
____________________________________________________________________
Endi ng i nvent or y | I nt er nal l y gener at ed
pr of i t . . . . . . . . . . . . . $2, 000 | i ncome. . . . . . . . . . . . . . . . . . . . $10, 000
| Begi nni ng i nvent or y pr of i t . . 5, 000
____________________________________________________________________
| Adj ust ed i ncome. . . . . . . . . . . . . $13, 000
| Tax, 30%. . . . . . . . . . . . . . . . . . . . 3, 900
| Net i ncome. . . . . . . . . . . . . . . . . . $ 9, 100
| NCI shar e. . . . . . . . . . . . . . . . . . . 20%
| NCI . . . . . . . . . . . . . . . . . . . . . . . . . $ 1, 820
| =======

Di l l s Company' s I ncome Di st r i but i on
____________________________________________________________________
Gai n on machi ne. . . . $10, 000 | I nt er nal l y gener at ed
Pat ent amor t i zat i on 9, 000 | i ncome. . . . . . . . . . . . . . . . . . . . $ 70, 000
| Real i zed gai n on machi ne. . . . 2, 000
____________________________________________________________________
| Adj ust ed bef or e t ax. . . . . . . . . $ 53, 000
| Di l l s Company' s t ax,
| . 3 x 53, 000 . . . . . . . . . . . . . . ( 15, 900)
| Adj ust ed net i ncome. . . . . . . . . $ 37, 100
| . 8 x Sar ada Company' s
| net i ncome. . . . . . . . . . . . . . . . 7, 280
| Cont r ol l i ng i nt er est . . . . . . . . $ 44, 380
| ========

DI F: M OBJ : 3

Chapt er 6
6- 24
7. Di l l s Company pur chased an 80%i nt er est i n t he common st ock of Sar ah
Company f or $860, 000 on J anuar y 1, 20X7. The pr i ce was $90, 000 i n excess
of t he book val ue of t he under l yi ng equi t y, and t he excess was
at t r i but ed t o a pat ent wi t h a 10- year l i f e.

Dur i ng 20X9, Di l l s Company and Sar ah Company r epor t ed t he f ol l owi ng
i nt er nal l y gener at ed i ncome bef or e t ax:

Di l l s Co. Sar ah Co.
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300, 000 $120, 000
Cost of goods sol d. . . . . . . . . . . . . . . . . . . . . . ( 200, 000) ( 90, 000)
Gai n on machi ne. . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 - -
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 40, 000) ( 20, 000)
I ncome bef or e t ax. . . . . . . . . . . . . . . . . . . . . . . $ 70, 000 $ 10, 000
========= ========

Sar ah Company sol d goods t o Di l l s Company f or $60, 000. Di l l s Company had
$30, 000 of Sar ah Company goods i n i t s begi nni ng i nvent or y and $12, 000 of
Sar ah Company' s goods i n i t s endi ng i nvent or y. Sar ah Company sel l s goods
t o Di l l s Company at cost pl us 20%.

Di l l s Company sol d a new machi ne t o Sar ah Company on J anuar y 1, 20X9,
f or $40, 000. The cost of t he machi ne was $30, 000. I t has a 5- year l i f e.

The f i r ms f i l e separ at e t ax r et ur ns. Bot h ar e subj ect t o a 30%t ax r at e.
Di l l s Company r ecei ves an 80%di vi dend deduct i on.

Requi r ed:

Pr epar e a consol i dat ed i ncome st at ement f or 20X9. I ncl ude i ncome
di st r i but i on f or bot h f i r ms.

Chapt er 6
6- 25
ANS:

Di l l s Company and Sar ah Company

Sal es ( l ess $60, 000 i nt er company sal es) . . . . . . . . . . . . . . . . . . $ 360, 000
Cost of goods sol d ( $290, 000 - $60, 000 i nt er company
sal es - $5, 000 begi nni ng i nvent or y pr of i t + $2, 000
endi ng i nvent or y pr of i t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 227, 000)
Expenses ( $60, 000 + $9, 000 pat ent amor t i zat i on
- $2, 000 depr eci at i on adj ust ment ) . . . . . . . . . . . . . . . . . . . . . . ( 67, 000)
I ncome bef or e t axes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66, 000
Pr ovi si on f or i ncome t ax, ( 3, 900 + 15, 900 + 437) . . . . . . . . . ( 20, 237)
Consol i dat ed net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45, 763
Less noncont r ol l i ng i nt er est . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 1, 820)
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43, 943
=========

Sar ah Company' s I ncome Di st r i but i on
____________________________________________________________________
Endi ng i nvent or y | I nt er nal l y gener at ed
pr of i t . . . . . . . . . . $2, 000 | i ncome. . . . . . . . . . . . . . . . . . . . $10, 000
| Begi nni ng i nvent or y pr of i t . . 5, 000
____________________________________________________________________
| Adj ust ed i ncome. . . . . . . . . . . . . $13, 000
| Tax, 30%. . . . . . . . . . . . . . . . . . . . 3, 900
| Net i ncome. . . . . . . . . . . . . . . . . . $ 9, 100
| NCI shar e. . . . . . . . . . . . . . . . . . . 20%
| Noncont r ol l i ng i nt er est . . . . . $ 1, 820
| =======

Di l l s Company' s I ncome Di st r i but i on
____________________________________________________________________
Gai n on machi ne sal e $10, 000 | I nt er nal l y gener at ed
Pat ent amor t i zat i on 9, 000 | i ncome. . . . . . . . . . . . . . . . . . . . $ 70, 000
| Real i zed gai n on
| machi ne. . . . . . . . . . . . . . . . . . . 2, 000
| ( 80%x 9, 100) Sar ah Company' s
net i ncome. . . . . . . . . . . . . . . . 7, 280
____________________________________________________________________
| Adj ust ed bef or e t ax. . . . . . . . . $ 60, 280
| Dol l s Company t ax, . 3 x
| ( 70, 000 + 2, 000 - 10, 000
| - 9, 000) . . . . . . . . . . . . . . . . . ( 15, 900)
| . 3 x . 2 x 7, 280. . . . . . . . . . . . . ( 437)
| Adj ust ed net i ncome. . . . . . . . . $ 43, 943
| ========

DI F: M OBJ : 4

Chapt er 6
6- 26
8. On J anuar y 1, 20X8, Paul Company pur chased 80%of t he common st ock of
Smi t h Company f or $300, 000. On t hi s dat e Smi t h had t ot al owner s' equi t y
of $350, 000. Any excess of cost over book val ue i s at t r i but ed t o a
pat ent , t o be amor t i zed over 10 year s.

Dur i ng 20X8, Paul has appr opr i at el y account ed f or i t s i nvest ment i n
Smi t h usi ng t he si mpl e equi t y met hod.

Dur i ng 20X8, Paul sol d mer chandi se t o Smi t h f or $50, 000, of whi ch
$10, 000 i s hel d by Smi t h on December 31, 20X8. Paul ' s gr oss pr of i t on
sal es i s 40%.

Dur i ng 20X8, Smi t h sol d some l and t o Paul at a gai n of $10, 000. Paul
st i l l hol ds t he l and at year end.

Paul and Smi t h qual i f y as an af f i l i at ed gr oup f or t ax pur poses and t hus
wi l l f i l e a consol i dat ed t ax r et ur n. Assume a 30%cor por at e i ncome t ax
r at e.

Requi r ed:


ANS:



CY El i mi nat e t he cur r ent - year ent r i es made i n t he i nvest ment
account and i n t he Smi t h i ncome account .

EL El i mi nat e 80%of Smi t h Company equi t y bal ances at t he

D Di st r i but e t he $20, 000 excess of cost over book val ue t o t he
pat ent .

A Amor t i ze t he pat ent over 10 year s.

I S El i mi nat e t he ent i r e i nt er company sal es of $50, 000.

EI El i mi nat e t he $4, 000 of gr oss pr of i t i n t he endi ng
i nvent or y.

LA El i mi nat e t he $10, 000 gai n on sal e of l and agai nst t he l and
account .

T Recor d pr ovi si on f or i ncome t ax, cal cul at ed as f ol l ows:

Consol i dat ed i ncome bef or e t ax. . . . . . . . . . . . . . . . . . . . . $154, 000
Mul t i pl y by cor por at e t ax r at e. . . . . . . . . . . . . . . . . . . . . 30%
Tax l i abi l i t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46, 200
========

Chapt er 6
6- 27

To Noncont r ol l i ng I nt er est : 70, 000 - 10, 000 = 60, 000 - ( . 3 x
60, 000) = 42, 000 x . 2 = $8, 400

To Cont r ol l i ng I nt er est : 100, 000 - 4, 000 - 28, 200 + ( . 8 x
42, 000) - 2, 000 = $99, 400

Taxes on Smi t h ar e 30%x $60, 000 = $18, 000.

$46, 200 - 18, 000 = $28, 200 t axes on consol i dat ed i ncome.

DI F: D OBJ : 3

owner s' equi t y of $300, 000. Any excess of cost over book val ue i s
at t r i but ed t o a pat ent , t o be amor t i zed over 15 year s.

Dur i ng 20X1, Par ent has appr opr i at el y account ed f or i t s i nvest ment i n

Dur i ng 20X1, Par ent sol d mer chandi se t o Subsi di ar y f or $50, 000, of whi ch
$10, 000 i s hel d by Subsi di ar y on December 31, 20X1. Par ent ' s gr oss
pr of i t on sal es i s 40%.

Dur i ng 20X1, Subsi di ar y sol d some l and t o Par ent at a gai n of $10, 000.
Par ent st i l l hol ds t he l and at year end.

Par ent and Subsi di ar y do not qual i f y as an af f i l i at ed gr oup f or t ax
pur poses and t hus wi l l f i l e separ at e t ax r et ur ns. Assume a 30%cor por at e
i ncome t ax r at e and an 80%di vi dends- r ecei ved deduct i on.

Requi r ed:


Chapt er 6
6- 28
ANS:




EL El i mi nat e 75%of Subsi di ar y Company equi t y bal ances at t he

D Al l ocat e t he $27, 000 excess t o t he pat ent .

A Amor t i ze t he pat ent over 15 year s, $1, 800 per year .


i nvent or y.

LA El i mi nat e t he $10, 000 gai n on sal e of l and agai nst t he l and
account .

T Adj ust f or t he t ax ef f ect s of t he pat ent amor t i zat i on and
i nt er company pr of i t el i mi nat i ons as f ol l ows:

Dr . / ( Cr . ) Pr ovi si on f or I ncome Taxes Def er r ed Tax
See Not e 75%Cont . I nt . 25%Mi n. I nt . Asset / Li abi l i t y
( a) $ ( 540) $ 540
( b) ( 1, 200) 1, 200
( c) ( 2, 250) $( 750) 3, 000
( d) ( 315) 315
$( 4, 305) $( 750) $5, 055

( a) Adj ust ment ( A) f or amor t i zat i on of t he pat ent was not
r ecogni zed i n Par ent ' s r ecor ds.

Par ent ' s Pr ovi si on f or I ncome Taxes, t her ef or e, must be
decr eased by . 3 x $1, 800 or $540.

( b) Adj ust ment ( EI ) f or i nt er company gr oss pr of i t i n endi ng
i nvent or y debi t s cost of goods sol d and, t hus, decr eases
20X1 i ncome by $4, 000. Par ent ' s Pr ovi si on f or I ncome Taxes
t hen must be decr eased by . 3 x ( 4, 000) or $1, 200.

( c) Adj ust ment ( LA) el i mi nat es Subsi di ar y' s i nt er company pr of i t
on sal e of l and of $10, 000 and, t hus, decr eases 20X1 i ncome
by $10, 000.

Subsi di ar y' s Pr ovi si on f or I ncome Taxes t hen must be
decr eased by 30%x ( $10, 000) or $3, 000, spl i t 75%and 25%
bet ween cont r ol l i ng and NCI .

( d) Par ent ' s shar e of Subsi di ar y' s 20X1 i ncome i s decr eased by
75%x ( $10, 000 - 3, 000) or 5, 250.

Par ent ' s t ax pr ovi si on on i t s equi t y i nt er est must t hus be
decr eased by 20%x 30%x $5, 250 or $315.

Chapt er 6
6- 29

To NCI : $50, 000 - 10, 000 = 40, 000 - . 3 x
( 40, 000) = 28, 000 x . 25 = $7, 000

To Cont r ol l i ng I nt er est : ( 100, 000 - [ 32, 250 - 315] ) - ( 4, 000 - 1, 200) +
( . 75 x 28, 000) - ( 1, 800 - 540) = $85, 005

DI F: D OBJ : 4

Subsi di ar y Company i n a st ock exchange. On t hi s dat e Subsi di ar y had
t ot al owner s' equi t y of $550, 000 and book val ue appr oxi mat ed f ai r val ue.



On December 31, 20X1, Par ent sol d t o Subsi di ar y some equi pment wi t h a
cost of $75, 000 and a book val ue of $30, 000. The sal es pr i ce was
$32, 000. Subsi di ar y i s depr eci at i ng t he equi pment over a 5- year l i f e,
assumi ng no sal vage val ue and usi ng t he st r ai ght - l i ne met hod.

Par ent and Subsi di ar y qual i f y as an af f i l i at ed gr oup f or t ax pur poses
and t hus wi l l f i l e a consol i dat ed t ax r et ur n. Assume a 30%cor por at e
i ncome t ax r at e.

Requi r ed:


Chapt er 6
6- 30
ANS:





BI El i mi nat e t he $37, 500 of gr oss pr of i t i n t he begi nni ng
i nvent or y.


i nvent or y.

F1 El i mi nat e t he $10, 000 gai n on sal e of equi pment agai nst
r et ai ned ear ni ngs of Par ent , r est or e t he asset t o i t s
or i gi nal cost , and r est or e t he $45, 000 of accumul at ed
depr eci at i on wr i t t en of f upon t r ansf er .

F2 El i mi nat e t he $2, 000 of excess depr eci at i on f or 20X2 on t he

T Recor d pr ovi si on f or i ncome t ax, cal cul at ed as f ol l ows:

Consol i dat ed i ncome bef or e t ax. . . . . . . . . . . . . . . . $297, 000
Mul t i pl y by cor por at e t ax r at e. . . . . . . . . . . . . . . . 30%
Tax l i abi l i t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89, 100
========



To Cont r ol l i ng I nt er est : 120, 000 + 2, 000 + ( 100%x
[ 150, 000 + 37, 500 - 12, 500] ) =
297, 000 - ( . 3 x 297, 000) = $207, 900

DI F: M OBJ : 3

Chapt er 6
6- 31
11. On J anuar y 1, 20X1, Pr oud Company pur chased 90%of t he common st ock of
Sl at t er y Company f or $573, 000, i n a t axabl e combi nat i on. On t hi s dat e
Sl at t er y had t ot al owner s' equi t y of $550, 000, i ncl udi ng r et ai ned
ear ni ngs of $300, 000.

On J anuar y 1, 20X1, t he onl y t angi bl e asset of Sl at t er y whi ch was
under val ued was equi pment , whi ch was wor t h $20, 000 mor e t han book val ue.
The equi pment has a r emai ni ng l i f e of 6 year s and i s depr eci at ed usi ng
t he st r ai ght - l i ne met hod. The excess pur chase pr i ce, i f any, i s
at t r i but ed t o a pat ent t o be amor t i zed over 15 year s.

Dur i ng 20X1 and 20X2, Pr oud has appr opr i at el y account ed f or i t s
i nvest ment i n Sl at t er y usi ng t he cost met hod.

On J anuar y 1, 20X2, Sl at t er y hel d mer chandi se acqui r ed f r omPr oud f or
$20, 000. Dur i ng 20X2, Pr oud sol d mer chandi se t o Sl at t er y f or $75, 000, of
whi ch $15, 000 i s hel d by Sl at t er y on December 31, 20X2. Pr oud' s usual

On December 31, 20X1, Sl at t er y sol d t o Pr oud some equi pment wi t h a cost
Pr oud i s depr eci at i ng t he equi pment over a 4- year l i f e, assumi ng no
sal vage val ue and usi ng t he st r ai ght - l i ne met hod.

Pr oud and Sl at t er y qual i f y as an af f i l i at ed gr oup f or t ax pur poses and
t hus wi l l f i l e a consol i dat ed t ax r et ur n. Assume a 30%cor por at e i ncome
t ax r at e.

Requi r ed:

Compl et e t he Fi gur e 6- 6 ver t i cal wor ksheet f or consol i dat ed f i nanci al

Chapt er 6
6- 32
ANS:



CV Conver t t o t he si mpl e equi t y met hod as of J anuar y 1, 20X1
1, 20X1 t o J anuar y 1, 20X2) .

CY El i mi nat e t he cur r ent - year di vi dend i ncome of Pr oud
agai nst di vi dends decl ar ed by Sl at t er y.

EL El i mi nat e 90%of Sl at t er y Company equi t y bal ances at t he

D Al l ocat e t he $78, 000 excess of cost over book val ue as
f ol l ows: $18, 000 t o equi pment ( 90%of $20, 000
under val uat i on) and $60, 000 t o t he pat ent .

A1 Depr eci at e t he i ncr ease t o equi pment over 6 year s, wi t h
$3, 000 f or 20X1 char ged t o r et ai ned ear ni ngs, and $3, 000

A2 Amor t i ze t he pat ent over 15 year s, wi t h $4, 000 f or 20X1
char ged t o r et ai ned ear ni ngs, and $4, 000 f or 20X2 char ged

i nvent or y.


i nvent or y.

r et ai ned ear ni ngs of Pr oud and Sl at t er y, r est or e t he asset
t o i t s or i gi nal cost , and r est or e t he $20, 000 of

F2 El i mi nat e t he $3, 000 of excess depr eci at i on f or 20X2 on

T Recor d t he pr ovi si on f or i ncome t ax, cal cul at ed as
f ol l ows:

Consol i dat ed i ncome bef or e t ax. . . . . . . . . . . . . . . . $198, 000
Mul t i pl y by cor por at e t ax r at e. . . . . . . . . . . . . . . . 30%
Tax l i abi l i t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59, 400
========

Chapt er 6
6- 33

To Noncont r ol l i ng I nt er est : 80, 000 + 3, 000 = 83, 000 - . 3 x
( 83, 000) = 58, 100 x . 1 = $5, 810

To Cont r ol l i ng I nt er est : 120, 000 + 8, 000 - 6, 000 - 34, 500 +
( . 9 x 58, 100) - 3, 000 - 4, 000 = $132, 790

Taxes on Sl at t er y ar e ( . 3 x 83, 000) or $24, 900.
$59, 400 - $24, 900 = $34, 500 t axes on consol i dat ed i ncome.

DI F: D OBJ : 3

Sl at t er y had t ot al owner s' equi t y of $550, 000.


i nvest ment i n Sl at t er y usi ng t he si mpl e equi t y met hod.



t ax r at e.

Requi r ed:


Chapt er 6
6- 34
ANS:



account and i n t he Sl at t er y i ncome account .


D Di st r i but e t he $78, 000 excess of cost over book val ue as
f ol l ows: $18, 000 t o accumul at ed depr eci at i on on equi pment
( 90%of $20, 000 under val uat i on) and $60, 000 t o t he pat ent .



i nvent or y.


i nvent or y.



T Recor d t he pr ovi si on f or i ncome t ax, cal cul at ed as f ol l ows:

Consol i dat ed i ncome bef or e t ax . . . . . . . . . . . . . . . . $198, 000
Mul t i pl y by cor por at e t ax r at e. . . . . . . . . . . . . . . . . 30%
Tax l i abi l i t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59, 400
========


To Noncont r ol l i ng I nt er est : 80, 000 + 3, 000 = 83, 000 - ( . 3 x
83, 000) = 58, 100 x . 1 = $5, 810

To Cont r ol l i ng I nt er est : 120, 000 + 8, 000 - 6, 000 - 34, 500 + ( . 9 x
58, 100) - 3, 000 - 4, 000 = $132, 790

Taxes on Sl at t er y ar e . 3 x 83, 000 or $24, 900.


Chapt er 6
6- 35
DI F: D OBJ : 3

Sl at t er y had t ot al owner s' equi t y of $550, 000.


i nvest ment i n Sl at t er y usi ng t he cost met hod.



t ax r at e.

Requi r ed:


Chapt er 6
6- 36
ANS:



CV Conver t t o t he si mpl e equi t y met hod as of J anuar y 1, 20X1
1, 20X1 t o J anuar y 1, 20X2) .

CY El i mi nat e t he cur r ent - year di vi dend i ncome of Pr oud agai nst
di vi dends decl ar ed by Sl at t er y.


f ol l ows: $18, 000 t o accumul at ed depr eci at i on on equi pment
( 90%of $20, 000 under val uat i on) and $60, 000 t o t he pat ent .



i nvent or y.


i nvent or y.




Consol i dat ed i ncome bef or e t ax. . . . . . . . . . . . . . . . . . $198, 000
Mul t i pl y by cor por at e t ax r at e. . . . . . . . . . . . . . . . . . 30%
Tax l i abi l i t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59, 400
========

Chapt er 6
6- 37

To Noncont r ol l i ng I nt er est : 80, 000 + 3, 000 = 83, 000 - ( . 3 x
83, 000) = 58, 100 x . 1 = $5, 810

To Cont r ol l i ng I nt er est : 120, 000 + 8, 000 - 6, 000 - 34, 500 + ( . 9 x
58, 100) - 3, 000 - 4, 000 = $132, 790

Taxes on Sl at t er y ar e . 3 x 83, 000 or $24, 900.

DI F: D OBJ : 3

owner ' s equi t y of $550, 000, i ncl udi ng r et ai ned ear ni ng of $250, 000.

On J anuar y 1, 20X1, t he onl y t angi bl e asset of Subsi di ar y t hat was
under val ued was bui l di ng, whi ch was wor t h $30, 00 mor e t han book val ue.
The bui l di ng has a r emai ni ng l i f e of 9 year s and i s depr eci at ed usi ng
t he st r ai ght - l i ne met hod. Any excess f r omt he pur chase i s at t r i but ed t o
goodwi l l .


$15, 000. Dur i ng 20X2, Subsi di ar y sol d mer chandi se t o Par ent f or $80, 000,

On December 31, 20X1, Par ent sol d some equi pment t o Subsi di ar y wi t h a
cost of $50, 000, and a book val ue of $25, 000. The sal es pr i ce was
$40, 000. Subsi di ar y i s depr eci at i ng t he equi pment over 3- year l i f e,

Par ent and Subsi di ar y qual i f y as an af f i l i at ed gr oup f or t ax pur poses
and t hus wi l l f i l e a consol i dat ed t ax r et ur n. Assume a 30%cor por at e
i ncome t ax r at e.

Requi r ed:

Compl et e t he Fi gur e 6- 9 ver t i cal wor ksheet f or consol i dat ed f i nanci al

Chapt er 6
6- 38
ANS:



CV Conver t t o si mpl e equi t y met hod as of J anuar y 1, 20X2.

CY El i mi nat e t he cur r ent - year di vi dend i ncome of Par ent

EL El i mi nat e 90%of t he Subsi di ar y Company equi t y bal ances at

f ol l ows: $27, 000 t o bui l di ng ( 90%of $30, 000
under val uat i on) and $40, 000 t o goodwi l l .

A Depr eci at e t he i ncr ease t o bui l di ng over 9 year s, wi t h

i nvent or y.


i nvent or y.




Consol i dat ed t axabl e i ncome. . . . . . . . . . . . . . . . . . . . . $200, 000
Mul t i pl e by cor por at e t ax r at e. . . . . . . . . . . . . . . . . . 30%
Tax l i abi l i t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60, 000
========


To Noncont r ol l i ng I nt er est : 80, 000 + 6, 000 - 8, 000 = 78, 000 - ( 30%
x 78, 000) = 54, 600 x 10%= $5, 460

To Cont r ol l i ng I nt er est : 120, 000 + 5, 000 - 36, 600 + ( 90%x 54, 600)
- 3, 000 = $134, 540

Taxes on Subsi di ar y ar e 30%x 78, 000 or $23, 400; $600, 000 - $23, 400 =
$36, 600 t axes on consol i dat ed i ncome.

DI F: D OBJ : 3

Chapt er 6
6- 39
Subsi di ar y Company f or $340, 400, i n a t axabl e combi nat i on. On t hi s dat e,
Subsi di ar y had t ot al owner s' equi t y of $422, 000, i ncl udi ng r et ai ned
ear ni ngs of $222, 000. Any excess of cost over book val ue i s at t r i but abl e

Dur i ng 20X1 and 20X2, Subsi di ar y Company r epor t ed t he f ol l owi ng
i nf or mat i on:

20X1 20X2
Net i ncome bef or e t axes. . . . . . . . . . . . . . . . . . . . $40, 000 $80, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 30, 000

i nvest ment i n Subsi di ar y usi ng t he si mpl e equi t y met hod, i ncl udi ng
i ncome t ax ef f ect s.


t ax r at e and an 80%di vi dends- r ecei ved deduct i on.

Requi r ed:

Compl et e Fi gur e 6- 10 t he wor ksheet f or consol i dat ed f i nanci al st at ement s
near est dol l ar .

Chapt er 6
6- 40
ANS:





D Al l ocat e t he $45, 000 excess of cost over book val ue t o t he
pat ent .

A Amor t i ze t he pat ent over 15 year s, wi t h $3, 000 f or 20X1

i nvent or y.


i nvent or y.


Chapt er 6
6- 41
Dr .
( Cr . ) Ret ai ned Ear ni ngs Pr ovi si on f or I ncome Taxes Def er r ed Tax
See Not e Par ent Subsi di ar y 70%Cont . I nt . 30%Mi n. I nt . Asset / Li abi l i t y
( a) $ ( 900) $ ( 900) $1, 800
( b) ( 840) $( 360) 840 $ 360
( c) ( 118) 118
( d) ( 1, 680) ( 720) 2, 400
( e) ( 235) 235
$( 1, 858) $( 360) $( 1, 857) $( 360) $4, 435
======= ===== ======= ===== ======

NOTE:

( a) Adj ust ment ( A) , f or amor t i zat i on of t he pat ent , was not
r ecogni zed i n Par ent ' s r ecor ds. Par ent ' s begi nni ng r et ai ned
ear ni ngs and Pr ovi si on f or I ncome Taxes bot h must be
decr eased by . 3 x $3, 000 or $900.

( b) Adj ust ment ( BI ) , f or i nt er company gr oss pr of i t i n begi nni ng
i nvent or y, cr edi t s cost of goods sol d, and t hus i ncr eases
19X2 i ncome by $4, 000. Subsi di ar y' s Pr ovi si on f or I ncome
Taxes t hus must be i ncr eased by . 3 x 4, 000, or $1, 200, spl i t
70%and 30%bet ween cont r ol l i ng and NCI .

( c) Par ent ' s shar e of Subsi di ar y' s 19X2 i ncome i s i ncr eased by
. 7 x ( 4, 000 - 1, 200) or $1, 960. Par ent ' s t ax pr ovi si on on
i t s equi t y i nt er est must t hus be i ncr eased by 20%x 30%x
$1, 960 or $118.

( d) Adj ust ment ( EI ) , f or i nt er company gr oss pr of i t i n endi ng
i nvent or y, debi t s cost of goods sol d, and t hus decr eases
Taxes t hus must be decr eased by . 3 x 8, 000, or $2, 400, spl i t

( e) Par ent ' s shar e of Subsi di ar y' s 19X2 i ncome i s decr eased by
i t s equi t y i nt er est must t hus be decr eased by 20%x 30%x
$3, 920 or $235.


To Noncont r ol l i ng I nt er est : 80, 000 + 4, 000 - 8, 000 = 76, 000 - . ( 3 x
76, 000) = 53, 200 x . 3 = $15, 960

To Cont r ol l i ng I nt er est : ( 100, 000 - [ 32, 352 + 118 - 235] ) + ( . 7 x
53, 200) - ( 3, 000 - 900) = $102, 905

DI F: D OBJ : 4

Chapt er 6
6- 42

i nf or mat i on:

20X1 20X2
Net i ncome bef or e t axes. . . . . . . . . . . . . . . . . . . . $40, 000 $80, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 30, 000

i nvest ment i n Subsi di ar y usi ng t he si mpl e equi t y met hod, i ncl udi ng
i ncome t ax ef f ect s.




Requi r ed:

near est dol l ar .

Chapt er 6
6- 43
ANS:





pat ent .


i nvent or y.


i nvent or y.




Chapt er 6
6- 44
Dr .
( a) $ ( 900) $ ( 900) $1, 800
( b) ( 840) $( 360) 840 $ 360
( c) ( 118) 118
( d) ( 1, 680) ( 720) 2, 400
( e) ( 235) 235
( f ) ( 3, 600) 1, 200 2, 400
$( 5, 458) $( 360) $ ( 657) $( 360) $6, 835
======= ===== ======= ===== ======

NOTE:

( a) Adj ust ment ( A) , f or amor t i zat i on of pat ent , was not
ear ni ngs i s i ncr eased and Pr ovi si on f or I ncome Taxes must be
decr eased by . 3 x $3, 000 or $900.

Taxes t hus must be i ncr eased by . 3 x 4, 000 or $1, 200, spl i t

$1, 960 or $118.

( d) Adj ust ment ( EI ) , f or i nt er company gr oss pr of i t i n endi ng
i nvent or y, debi t s cost of goods sol d, and t hus decr eases
Taxes t hus must be decr eased by . 3 x ( 8, 000) or $2, 400,
spl i t 70%and 30%bet ween cont r ol l i ng and NCI .

i t s equi t y i nt er est must t hus be decr eased by 20%x 30%x
$3, 920 or $235.

( f ) Adj ust ment s ( F1) and ( F2) , f or Par ent ' s i nt er company gai n on
sal e of equi pment , r ecogni zes $4, 000 of t he gai n and t hus
i ncr eases Par ent ' s pr ovi si on f or t ax by $1, 200. The
r emai ni ng $8, 000 of unr eal i zed gai n r equi r es a def er r ed t ax
asset of $2, 400.


To Noncont r ol l i ng I nt er est : 80, 000 + 4, 000 - 8, 000 = 76, 000 - . ( 3 x
76, 000) = 53, 200 x . 3 = $15, 960

To Cont r ol l i ng I nt er est : ( 100, 000 - [ 32, 352 + 118 - 235] ) + ( 4, 000
- 1, 200) + ( . 7 x 53, 200) - ( 3, 000 - 900)
= $105, 705

DI F: D OBJ : 4
Chapt er 6
6- 45

i nf or mat i on:

20X1 20X2
Net i ncome bef or e t axes. . . . . . . . . . . . . . . . . . . . . . $40, 000 $80, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 30, 000

i nvest ment i n Subsi di ar y usi ng t he cost met hod, i ncl udi ng i ncome t ax
ef f ect s.




Requi r ed:

near est dol l ar .

Chapt er 6
6- 46
ANS:



CV Conver t t o t he si mpl e equi t y met hod as of J anuar y 1, 20X2:
70%of $28, 000 i ncr ease i n r et ai ned ear ni ngs f r omJ anuar y 1,
19X1 t o J anuar y 1, 20X2) .

DTL Adj ust f or t he secondar y i ncome t ax on t he undi st r i but ed
ear ni ngs of subsi di ar y not r ecogni zed under t he cost met hod.
Debi t r et ai ned ear ni ngs of Par ent f or 20%x 30%x $19, 600
equi t y conver si on or $1, 176. Subsi di ar y' s undi st r i but ed
ear ni ngs f or 20X2 ar e $26, 000 ( $56, 000 af t er t ax i ncome l ess
$30, 000 di vi dends) . Of t hi s, 70%or $18, 200 woul d accr ue t o
Par ent and t hus 20%x 30%x $18, 200 or $1, 092 shoul d be
debi t ed t o pr ovi si on f or i ncome t axes. The t ot al $2, 268
shoul d be cr edi t ed t o Def er r ed Tax Asset / Li abi l i t y.

CY El i mi nat e t he cur r ent - year di vi dend i ncome of Par ent agai nst


D Di st r i but e t he $45, 000 excess of cost over book val ue t o a
pat ent .


i nvent or y.


i nvent or y.




Chapt er 6
6- 47
Dr .
( a) $ ( 900) $ ( 900) $1, 800
( b) ( 840) $( 360) 840 $ 360
( c) ( 118) 118
( d) ( 1, 680) ( 720) 2, 400
( e) ( 235) 235
( f ) ( 3, 600) 1, 200 2, 400
$( 5, 458) $( 360) $ ( 657) $( 360) $6, 835
======= ===== ======= ===== ======

NOTE:

( a) Adj ust ment ( A) f or amor t i zat i on of t he pat ent was not
ear ni ngs and Pr ovi si on f or I ncome Taxes bot h must be
decr eased by . 3 x $3, 000 or $900.

Taxes t hus must be i ncr eased by . 3 x 4, 000 or $1, 200, spl i t

$1, 960 or $118.

( d) Adj ust ment ( EI ) f or i nt er company gr oss pr of i t i n endi ng
i nvent or y debi t s cost of goods sol d, and t hus decr eases 20X2
i ncome by $8, 000. Subsi di ar y' s Pr ovi si on f or I ncome Taxes
t hus must be decr eased by . 3 x ( 8, 000) or $2, 400, spl i t 70%
and 30%bet ween cont r ol l i ng and NCI .

. 7 x ( 8, 000 - 2, 400) or $3, 920. Par ent ' s on i t s equi t y
i nt er est must t hus be decr eased by 20%x 30%x $3, 920 or
$235.

( f ) Adj ust ment s ( F1) and ( F2) f or Par ent ' s i nt er company gai n on
sal e of equi pment r ecogni zes $4, 000 of t he gai n and t hus
i ncr eases Par ent ' s pr ovi si on f or t ax by $1, 200. The
r emai ni ng $8, 000 of unr eal i zed gai n r equi r es a def er r ed t ax
asset of $2, 400.


To Noncont r ol l i ng I nt er est : 80, 000 + 4, 000 - 8, 000 = 76, 000 - ( . 3 x
76, 000) = 53, 200 x . 3 = $15, 960

To Cont r ol l i ng I nt er est : ( 100, 000 - [ 32, 352 + 118 - 235] ) + ( 4, 000 -
1, 200) + ( . 7 x 53, 200) - ( 3, 000 - 900) =
$105, 705

DI F: D OBJ : 4

Chapt er 6
6- 48
18. On J anuar y 1, 20X6, Company P pur chased a 15%i nt er est i n Company S. On
J ul y 1, 20X9, Company P pur chased an addi t i onal 20%i nt er est i n Company
S. Bot h pur chases wer e at a cost i n excess of under l yi ng book val ue.
Company S pai d di vi dends each December f r om20X6 t o 20X9.

Requi r ed:

a. How woul d Company P r ecor d i t s i nvest ment i n Company S i n i t s
f i nanci al st at ement s or i gi nal l y i ssued f or 20X6 t o 20X8?

b. Does a 35%owner shi p i nt er est absol ut el y r equi r e t he use of
t he equi t y met hod?

c. How wi l l Company P account f or i t s i nvest ment i n Company S i n
i t s 20X9 f i nanci al st at ement s?

d. How wi l l Company P account f or i t s i nvest ment i n Company S i n
t he 20X6 t o 20X9 compar at i ve st at ement s publ i shed i n Mar ch
20X0?

ANS:

a. The i nvest ment woul d be account ed f or under t he cost met hod.
Onl y t he di vi dends r ecei ved woul d be r ecor ded as i ncome.

b. Owner shi p of 20%or mor e of t he vot i ng common shar es of
anot her f i r mpr esumes t hat t he sophi st i cat ed equi t y met hod
shoul d be used. The i nvest or may, however , assume t he bur den
of showi ng t hat t her e i s not ef f ect i ve i nf l uence. Thi s coul d
be t he case i f t he i nvest or i s i n a r egul at ed i ndust r y or
t her e i s a power f ul NCI .

c. The 20%i nvest ment wi l l be account ed f or under t he
sophi st i cat ed equi t y met hod f or t he l ast 6 mont hs of t he year .
The sophi st i cat ed equi t y met hod wi l l al so be used f or t he 15%
i nt er est f or t he ent i r e year . The pr i or owner shi p i nt er est i s
br ought t o i t s sophi st i cat ed equi t y bal ance r et r oact i vel y.

d. The ol d 15%owner shi p i nt er est wi l l be account ed f or
r et r oact i vel y under t he sophi st i cat ed equi t y met hod. Thus, t he
15%i nt er est wi l l be account ed f or under t he sophi st i cat ed
equi t y met hod f or al l per i ods, 20X1 t o 20X4.

DI F: E OBJ : 5

Chapt er 6
6- 49
19. Company P pur chased a 30%i nt er est i n Company S f or $120, 000 on J anuar y
1, 20X7, when Company S had t he f ol l owi ng st ockhol der s' equi t y:

Common st ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
Ret ai ned ear ni ngs ( def i ci t ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 20, 000)
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $280, 000
========

Any excess cost was due t o equi pment t hat i s bei ng depr eci at ed over 5
year s usi ng st r ai ght - l i ne depr eci at i on.

Si nce t he i nvest ment , Company P has consi st ent l y sol d goods t o Company S
t o r eal i ze a 30%gr oss pr of i t . Such sal es t ot al ed $50, 000 dur i ng 20X9.
Company S had $10, 000 of such goods i n i t s begi nni ng i nvent or y and
$40, 000 i n i t s endi ng i nvent or y.

On J anuar y 1, 20X9, Company S sol d a machi ne wi t h a book val ue of
$15, 000 t o Company P f or $30, 000. The machi ne has a 5- year l i f e and i s
bei ng depr eci at ed on a st r ai ght - l i ne basi s.

Company S r epor t ed a net i ncome of $75, 000 bef or e t axes f or 20X9. Bot h
f i r ms ar e subj ect t o a 30%cor por at e t ax r at e. Company S pai d no
di vi dends i n 20X9. An 80%di vi dend ear ned excl usi on r at e appl i es.

Requi r ed:

Pr epar e al l ent r i es caused by Company P' s i nvest ment i n Company S f or
20X3 ( i ncl udi ng t ax r ami f i cat i ons) . Assume t hat Company P has r ecor ded
t he t ax on i t s i nt er nal l y gener at ed i ncome. Company P has pr oper l y
r ecor ded t he i nvest ment i n pr evi ous per i ods. Assume t hat suf f i ci ent
pr evi ousl y r ecor ded t ax l i abi l i t y exi st s t o of f set any def er r ed t ax
expense.

ANS:


Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120, 000
Less i nt er est acqui r ed, $280, 000 x . 3. . . . . . . . . . . . . . . . . . 84, 000
Excess cost at t r i but abl e t o equi pment
( 5- year l i f e, $7, 200 per year ) . . . . . . . . . . . . . . . . . . . . . . . $ 36, 000
========

Company S Company I ncome Di st r i but i on
____________________________________________________________________
Def er r ed gai n | I nt er nal l y gener at ed
on machi ne. . . . . . . $15, 000 | net i ncome. . . . . . . . . . . . . . . . $75, 000
| Real i zed gai n on machi ne. . . . 3, 000
____________________________________________________________________
| Adj ust ed i ncome. . . . . . . . . . . . . $63, 000
| Tax, 30%. . . . . . . . . . . . . . . . . . . . 18, 900
| Af t er - t ax i ncome. . . . . . . . . . . . $44, 100
| Company' s owner shi p i nt er est 30%
| Shar e of i ncome. . . . . . . . . . . . . $13, 230
| Less depr eci at i on of
| equi pment . . . . . . . . . . . . . . . . . ( 7, 200)
| Company P' s shar e of i ncome. $ 6, 030
Chapt er 6
6- 50
| =======

I nvest ment i n Company S. . . . . . . . . . . . . . . . . . . . . . 6, 030
I nvest ment I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . 6, 030

Pr ovi si on f or Tax
( 20%x 30%x $13, 230 -
i ncl udes depr eci at i on) . . . . . . . . . . . . . . . . . . 794
Def er r ed Tax Li abi l i t y. . . . . . . . . . . . . . . . . . . . . 794

Sal es Revenue, $30, 000 net i ncr ease x . 3 x . 3 2, 700
Def er r ed Gr oss Pr of i t . . . . . . . . . . . . . . . . . . . . . . 2, 700

Pr ovi si on f or Tax ( Def er r ed) , $2, 700 x 30%. . . 810
Pr ovi si on f or Tax. . . . . . . . . . . . . . . . . . . . . . . . . . 810

DI F: M OBJ : 5

20. Pat r o Company pur chased a 80%i nt er est i n t he Sel ma Company on J anuar y
1, 20X5 f or $630, 000. Any excess cost was at t r i but ed t o goodwi l l .

Equi t y bal ances f or t he Sel ma Company on J anuar y 1, 20X5 wer e as
f ol l ows:

Common st ock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000
Tot al equi t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700, 000

Sel ma sol d a machi ne t o Pat r o f or $30, 000 on J anuar y 1, 20X5. The cost
of t he machi ne t o Sar a was $20, 000. The machi ne has a 5 year l i f e and i s
bei ng depr eci at ed on a st r ai ght - l i ne basi s.

Dur i ng 20X6, Pat r o sol d mer chandi se t o Sel ma f or $50, 000. Thi s was t he
f i r st year of i nt er company mer chandi se sal es. Pat r o r ecor ds a 25%gr oss
pr of i t on t he sal es pr i ce. $20, 000 of t he goods hel d by Sel ma, pur chased
f r omPat r o, ar e st i l l i n t he i nvent or y at year end.

The f i r ms do not meet t he cr i t er i a t o be t axed as a consol i dat ed gr oup,
and t hus ar e subj ect t o separ at e ( doubl e) t axat i on. The par ent company
r ecei ves an 80%di vi dend excl usi on. The t ax r at e appl i cabl e t o bot h
compani es i s 30%.

The t r i al bal ances of Pat r o and Sel ma ar e i nser t ed on t he f ol l owi ng
wor ksheet whi ch i s dat ed December 31, 20X6.

Compl et e t he Fi gur e 6- 13 wor ksheet . I ncl ude:

1. A det er mi nat i on and di st r i but i on of excess schedul e

2. Keyed el i mi nat i on ent r i es wi t h shor t expl anat i ons

3. I ncome di st r i but i on schedul es t o suppor t t he al l ocat i on of
consol i dat ed net i ncome

Chapt er 6
6- 51
ANS:



Pr i ce pai d f or I nvest ment $630, 000
I nt er est Acqui r ed:
Common st ock $300, 000
Tot al $700, 000
I nt er est Acqui r ed: 0. 80 560, 000
========

I ncome Di st r i but i on Schedul es:

_____________________________Sel ma_____________________________
| Repor t ed I nc. $42, 000
| Real i zed gai n ( net ) 1, 400
| Adj ust ed I ncome 43, 400
| NCI shar e. . . . . . . . . . 0. 20
| NCI . . . . . . . . . . . . . . . . $ 8, 680
=======

____________________________Pat r o_____________________________
End I nv. Pr of i t ( net ) $3, 500 | I nt . Gener at ed N. I . $70, 000
| Adj ust ed i ncome $66, 500
| 80%Sub i ncome 34, 720
| Tax on Sub I ncome ( 2, 083)
| Cont r ol l i ng Shar e $99, 137
=======

Chapt er 6
6- 52
El i mi nat i ons:

CY El i mi nat e subsi di ar y i ncome and 80%of subsi di ar y di vi dends
decl ar ed

EL El i mi nat e 80%of subsi di ar y equi t y as of J an. 1

D Di st r i but e excess t o goodwi l l

F1 El i mi nat e $10, 000 gai n l ess $2, 000 r eal i zed i n 19X5

F2 Adj ust cur r ent year depr eci at i on f or r eal i zed gai n

I S El i mi nat e i nt er company sal es

EI Def er endi ng i nvent or y pr of i t , 25%x 20, 000

T1 Adj ust f or def er r ed t ax asset on J anuar y 1:

Adj ust ment i t em Pat r o Sel ma Tot al
Gai n on asset $1, 920 $480 $2, 400
Second t ax 269 269
Tot al $2, 189 $480 $2, 669

T2 Adj ust f or i ncr ease ( decr ease) i n def er r ed t ax asset :

Adj ust ment i t em Pat r o Sel ma Tot al
Gai n on asset $ ( 480) $( 120) $ ( 600)
Second t ax ( 67) ( 67)
End. I nvent or y 1, 500 1, 500
Tot al $ 953 $( 120) $ 833

DI F: D OBJ : 4

Chapt er 6
6- 53
21. Par ent Company pur chased a 60%i nt er est i n t he Subsi di ar y Company on
J anuar y 1, 20X5 f or $481, 000. Any excess cost was at t r i but ed t o pat ent ,
whi ch has a 20- year l i f e.

Equi t y bal ances f or t he Subsi di ar y Company on J anuar y 1, 20X5 wer e as
f ol l ows:

Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400, 000
Tot al equi t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $635, 000

The Par ent Company l eased equi pment t o t he Subsi di ar y Company on J anuar y
1, 20X6 under t he f ol l owi ng t er ms:

Payment f or 5 year s of $20, 000, payabl e each J anuar y 1,
st ar t i ng J anuar y 1, 20X6.
Guar ant eed r esi dual val ue of $10, 000 at t he end of t he l ease
t er m, December 31, 20Y0.
Annual i mpl i ci t i nt er est r at e i s 12%.
The sal es pr of i t i s $10, 000.

The equi pment has a 5- year l i f e and i s depr eci at ed on a st r ai ght - l i ne
basi s.

The Subsi di ar y Company sel l s mer chandi se t o t he Par ent Company at a
gr oss pr of i t r at e of 40%. I nt er company sal es dur i ng 20X7 wer e $80, 000.
The Par ent Company had $10, 000 of Subsi di ar y Company goods i n i t s
begi nni ng i nvent or y and $20, 000 of Subsi di ar y goods i n i t s endi ng
i nvent or y. The i nvent or y val ues r ef l ect t he i nt er company sal es pr i ce

The f i r ms do not meet t he cr i t er i a t o be t axed as a consol i dat ed gr oup,
and t hus ar e subj ect t o separ at e ( doubl e) t axat i on. The par ent company
r ecei ves and 80%di vi dend excl usi on. The t ax r at e appl i cabl e t o bot h
compani es i s 30%.

The t r i al bal ances of Par ent Company and Subsi di ar y Company ar e i nser t ed
on t he f ol l owi ng wor ksheet whi ch i s dat ed December 31, 20X7.

Compl et e t he Fi gur e 6- 14 wor ksheet . I ncl ude:

a. A det er mi nat i on and di st r i but i on of excess schedul e

b. Keyed el i mi nat i on ent r i es wi t h shor t expl anat i ons

c. I ncome di st r i but i on schedul es t o suppor t t he al l ocat i on of
consol i dat ed net i ncome

Chapt er 6
6- 54
ANS:



Pr i ce pai d f or i nvest ment $481, 000
I nt er est Acqui r ed:
Common st ock $400, 000
Tot al $635, 000
I nt er est Acqui r ed: 0. 60 381, 000
Pat ent , 20 year l i f e $100, 000
========

I ncome Di st r i but i on Schedul es:

_______________________________Sub. _____________________________
End I nv. Pr of i t ( net ) $5, 600 | Repor t ed I nc. $21, 000
| Beg. I nv. Pr of i t ( net ) 2, 800
| Adj ust ed I ncome. . . . 18, 200
| NCI shar e. . . . . . . . . . 0. 40
| NCI . . . . . . . . . . . . . . . . $ 7, 280
=======

______________________________Par ent ____________________________
| I nt . gener at ed i ncome $49, 000
| Real i zed gai n ( net ) 1, 400
| Adj ust ed i ncome. . . . . . . 50, 400
| 60%Sub i ncome. . . . . . . . 10, 920
| Tax on Sub I ncome. . . . . ( 655)
| Cont r ol l i ng Shar e $60, 665
=======

Chapt er 6
6- 55
El i mi nat i ons:

CY El i mi nat e subsi di ar y i ncome and 60%of subsi di ar y di vi dends
decl ar ed

EL El i mi nat e 60%of subsi di ar y equi t y as of J an. 1

D Di st r i but e excess t o goodwi l l

CL1 El i mi nat e I nt er company l ease based on t he f ol l owi ng
amor t i zat i on schedul e at 12%i nt er est

Dat e Payment I nt er est Pr i nci pal Bal ance
1/ 1/ X6 $20, 000 $( 20, 000) $66, 421
1/ 1/ X7 20, 000 $7, 971 ( 12, 029) 54, 392
1/ 1/ X8 20, 000 6, 527 ( 13, 473) 40, 919
1/ 1/ X9 20, 000 4, 910 ( 15, 090) 25, 829
1/ 1/ Y0 20, 000 3, 099 ( 16, 901) 8, 929
12/ 31/ Y0 10, 000 1, 071 ( 8, 929) 0

CL2 El i mi nat e i nt er company i nt er est on l ease

F1 El i mi nat e gai n on l eased asset and adj ust r et ai ned ear ni ngs
as of J an. 1

F2 Adj ust cur r ent year depr eci at i on f or r eal i zed gai n

I S El i mi nat e i nt er company sal es

BI Def er begi nni ng i nvent or y gai n, 40%x 10, 000, adj ust
r et ai ned ear ni ngs

EI Def er endi ng i nvent or y pr of i t , 40%x 20, 000

T1 Adj ust f or def er r ed t ax asset on J anuar y 1:

Adj ust ment i t em Par ent Sub. Tot al
Gai n on asset $2, 400 $2, 400
Beg. i nvent or y 720 $480 1, 200
Second t ax 101 101
Tot al $3, 221 $480 $3, 701

T2 Adj ust f or i ncr ease ( decr ease) i n def er r ed t ax asset :

Adj ust ment i t em Par ent Sub. Tot al
Gai n on asset $ ( 600) ( 600)
Beg. i nvent or y ( 720) $( 480) $( 1, 200)
Second t ax ( 101) ( 101)
End. I nvent or y 1, 440 960 2, 400
Second t ax 202 202
Tot al $ 221 $ 480 $ 701

DI F: D OBJ : 4
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Chapter 7 Special Issues In Accounting for an Investment in a
Subsidiary

MULTIPLE CHOICE

1. A new subsi di ar y i s bei ng f or med. The par ent company pur chased 70%of
t he shar es f or $20 per shar e. The r emai ni ng shar es wer e sol d t o a
var i et y of out si de i nt er est s f or an aver age of $22 per shar e. The
consol i dat ed st at ement s wi l l show
a. an ext r aor di nar y gai n.
b. an ext r aor di nar y l oss.
c. onl y cash and r el at ed equi t y.
d. goodwi l l .


2. A new subsi di ar y i s bei ng f or med. The par ent company pur chased 70%of
t he shar es f or $20 per shar e. The r emai ni ng shar es wer e sol d t o a
var i et y of out si de i nt er est s f or an aver age of $18 per shar e. The
consol i dat ed st at ement s wi l l show
a. an ext r aor di nar y gai n.
b. an ext r aor di nar y l oss.
c. onl y cash and r el at ed equi t y.
d. goodwi l l .


3. When a par ent acqui r es a cont r ol l i ng i nt er est i n a subsi di ar y as a
r esul t of a ser i es of pur chases of subsi di ar y st ock, cur r ent pr act i ce i n
pr epar i ng st at ement s f ol l ows t he
a. economi c ent i t y concept .
b. par ent company concept .
c. pi ecemeal acqui si t i on concept .
d. pr opor t i onat e consol i dat i on concept .


4. When cont r ol of a subsi di ar y i s achi eved wi t h t he i ni t i al i nvest ment i n
subsi di ar y st ock, when subsequent bl ock of subsi di ar y' s st ock i s
pur chased
a. t he par ent must change f r omt he cost met hod t o t he equi t y met hod.
b. t he par ent must change f r omt he equi t y met hod t o t he cost met hod.
c. no change i n account i ng met hods i s r equi r ed.


Chapt er 7
7- 2
5. Pi ne Company pur chased a 55%i nt er est i n t he Sent Company on J anuar y 1,
20X1 f or $350, 000. On t hat dat e, t he st ockhol der s' equi t y of Sent
Company was $450, 000. Any excess cost was at t r i but abl e t o goodwi l l . Pi ne
pur chased anot her 20%i nt er est on J anuar y 1, 20X4 f or $200, 000. On
J anuar y 1, 20X4, Sent Company' s st ockhol der s' equi t y was $700, 000, t he
ent i r e i ncr ease due t o r et ai ned ear ni ngs. Any excess cost was agai n
at t r i but ed t o goodwi l l . The goodwi l l bal ance on t he December 31, 20X4,
bal ance sheet i s __________.
a. $102, 500
b. $60, 000
c. $0
d. $162, 500


6. Pi ne Company pur chased a 55%i nt er est i n t he Sent Company on J anuar y 1,
20X1 f or $350, 000. On t hat dat e, t he st ockhol der s' equi t y of Sent
Company was $450, 000. Any excess cost was at t r i but abl e t o t he f ai r val ue
i ncr ease of equi pment wi t h a 10- year l i f e. Pi ne pur chased anot her 20%
i nt er est on J anuar y 1, 20X5 f or $200, 000. On J anuar y 1, 20X5, Sent
Company' s st ockhol der s' equi t y was $700, 000, t he ent i r e i ncr ease due t o
r et ai ned ear ni ngs. Any excess cost was agai n at t r i but ed t o t he f ai r
val ue i ncr ease of equi pment wi t h a 6- year l i f e. The addi t i onal expense
on t he December 31, 20X5, i ncome st at ement i s __________.
a. $10, 250
b. $20, 250
c. $10, 000
d. $16, 250


7. Pr i or t o J anuar y 1, 20X4, Par t s I nc. owned a 60%cont r ol l i ng i nt er est i n
Sor t er Company. On J ul y 1, 20X4, Par t s I nc. pur chased an addi t i onal 20%
i nt er est i n Sor t er f or $150, 000. Sor t er ' s st ockhol der s' equi t y was
$600, 000 on J anuar y 1, 20X4. Any excess was at t r i but ed t o goodwi l l . On
J ul y 1, 20X4, t her e was i nt er company i nvent or y owned by Par t s I nc. t hat
had been pur chased f r omSor t er . Sor t er ' s pr of i t on t he i nvent or y was
$5, 000. Par t s I nc. sol d t he i nvent or y dur i ng t he l at t er hal f of 20X4.
Sor t er ' s net i ncome f or 20X4 was $60, 000, ear ned evenl y dur i ng t he year .
Goodwi l l ar i si ng f r omt he second acqui si t i on i s __________.
a. $30, 000
b. $29, 500
c. $25, 000
d. $23, 500


Chapt er 7
7- 3
8. Pr i or t o J anuar y 1, 20X4, Par t s I nc. owned a 60%cont r ol l i ng i nt er est i n
Sor t er Company. On J ul y 1, 20X4, Par t s I nc. pur chased an addi t i onal 20%
i nt er est i n Sor t er f or $150, 000. Sor t er ' s st ockhol der s' equi t y was
$600, 000 on J anuar y 1, 20X4. Any excess was at t r i but ed t o t o t he f ai r
val ue i ncr ease of a bui l di ng wi t h a 20- year l i f e. On J ul y 1, 20X4, t her e
was i nt er company i nvent or y owned by Par t s I nc. t hat had been pur chased
f r omSor t er . Sor t er ' s pr of i t on t he i nvent or y was $5, 000. Par t s I nc.
sol d t he i nvent or y dur i ng t he l at t er hal f of 20X4. Sor t er ' s net i ncome
f or 20X4 was $60, 000, ear ned evenl y dur i ng t he year . The noncont r ol l i ng
i nt er est shar e of i ncome f or 20X4 i s __________.
a. $18, 000
b. $17, 000
c. $12, 000
d. $11, 000


9. When a subsequent bl ock of an exi st i ng subsi di ar y' s st ock i s pur chased,
t he det er mi nat i on and di st r i but i on of excess schedul e
a. i s not i ndependent of t he appr ai sal s made dur i ng pr evi ous
acqui si t i ons.
b. i s compl et el y i ndependent of t he appr ai sal s made dur i ng pr evi ous
acqui si t i ons.
c. must t ake i nt o account al l pr evi ous appr ai sal s.


10. When i nvest ment bl ocks ar e car r i ed at cost , t he conver si on ent r y i s
based upon
a. t he di f f er ence i n r et ai ned ear ni ngs at t he begi nni ng of t he
cur r ent f i scal year and t he r et ai ned ear ni ngs when t he f i r st bl ock
was acqui r ed.
b. t he di f f er ence i n r et ai ned ear ni ngs at t he begi nni ng of t he
cur r ent f i scal year and t he r et ai ned ear ni ngs when t he bl ock
gi vi ng a cont r ol l i ng i nt er est was acqui r ed.
c. t he di f f er ence i n r et ai ned ear ni ngs at t he begi nni ng of t he
cur r ent f i scal year and t he r et ai ned ear ni ngs of each bl ock at i t s
acqui si t i on.
d. t he di f f er ence i n r et ai ned ear ni ngs at t he begi nni ng of t he
cur r ent f i scal year and t he r et ai ned ear ni ngs when t he l ast bl ock
was acqui r ed.


Chapt er 7
7- 4
11. Pal t o I nc. pur chased a 10%i nt er est i n t he Sauer Company f or $50, 000 on
J anuar y 1, 20X1. On t hat dat e, Sauer ' s st ockhol der s' equi t y was
$400, 000. Any excess woul d have been consi der ed goodwi l l . On J anuar y 1,
20X4, Pal t o pur chased anot her 60%i nt er est f or $500, 000 when Sauer ' s
st ockhol der s' equi t y was $700, 000. Agai n, any excess was vi ewed as
goodwi l l . The Sauer Company ear ned $50, 000 dur i ng 20X4. The bal ance i n
t he I nvest ment i n Sauer account j ust pr i or t o t he 60%pur chase shoul d
have been __________.
a. $47, 000
b. $50, 000
c. $77, 000
d. $80, 000


12. Pal t o I nc. pur chased a 10%i nt er est i n t he Sauer Company f or $50, 000 on
J anuar y 1, 20X1. On t hat dat e, Sauer ' s st ockhol der s' equi t y was
$400, 000. Any excess woul d have been at t r i but ed t o a pat ent wi t h a 10-
year l i f e. On J anuar y 1, 20X3, Pal t o pur chased anot her 60%i nt er est f or
$500, 000 when Sauer ' s st ockhol der s' equi t y was $700, 000. Agai n, any
excess was at t r i but ed t o t he pat ent wi t h an 8- year l i f e. The Sauer
Company ear ned $50, 000 dur i ng 20X3. The pat ent on t he December 31, 20X3,
consol i dat ed bal ance sheet wi l l be __________.
a. $90, 000
b. $77, 000
c. $80, 000
d. $10, 000


13. Company P pur chased t he out st andi ng common st ock of Company S as
f ol l ows:

15%, J anuar y 1, 20X1
20%, J une 1, 20X1
30%, August 1, 20X1
35%, Sept ember 30, 20X1

The f i scal year of bot h f i r ms ends on Sept ember 30. S' s st ock was
acqui r ed by P at book val ue. The cont r ol l i ng i nt er est i n consol i dat ed
net ear ni ngs f or t he f i scal year ended Sept ember 30, 20X1, woul d i ncl ude
whi ch of t he f ol l owi ng ear ni ngs of t he subsi di ar y?
a. 100%, J anuar y- Sept ember 20X1
b. 15%, J anuar y- May 20X1; 35%, J une- J ul y 20X1; and 65%, August -
Sept ember 20X1
c. 15%, J anuar y- May 20X1; 20%, J une- J ul y 20X1; and 30%, August -
Sept ember 20X1
d. 65%, J anuar y- Sept ember 20X1


Chapt er 7
7- 5
14. Company P pur chased t he out st andi ng common st ock of Company S as
f ol l ows:

15%, J anuar y 1, 20X1
20%, J une 1, 20X1
30%, August 1, 20X1
35%, Sept ember 30, 20X1

The f i scal year of bot h f i r ms ends on December 31. S' s st ock was
acqui r ed by P at book val ue. The cont r ol l i ng i nt er est i n consol i dat ed
net ear ni ngs f or t he f i scal year ended December 31, 20X1, woul d i ncl ude
whi ch of t he f ol l owi ng ear ni ngs of t he subsi di ar y?
a. 100%, J anuar y- December 20X1
b. 15%, J anuar y- May 20X1; 20%, J une- J ul y 20X1; and 30%, August -
Sept ember 20X1
c. 15%, J anuar y- May 20X1; 35%, J une- J ul y 20X1; 65%, August - Oct ober
20X1; and 100%, Sept ember - December
d. 15%, J anuar y- May 20X1; 35%, J une- J ul y 20X1; 65%, August - Sept ember
20X1; and 100%, November - December


15. When a par ent sel l s par t of i t s subsi di ar y i nt er est , a gai n or l oss i s
r ecogni zed i f t he par ent
a. sel l s i t s ent i r e i nvest ment .
b. l oses cont r ol and si gni f i cant i nf l uence.
c. l oses cont r ol onl y.
d. sel l s any por t i on on i t s i nvest ment .


$200, 000. At t he t i me of t he pur chase, Company S had t he f ol l owi ng
st ockhol der s' equi t y:

Common st ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . . . . . . . . . . . . $200, 000
========

Any excess i s at t r i but abl e t o equi pment wi t h a 10- year l i f e. On J anuar y
1, 20X6, t he r et ai ned ear ni ngs of Company S was $175, 000. Dur i ng t he
f i r st 6 mont hs of 20X6, $25, 000 was ear ned by Company S. The ent i r e
i nvest ment was sol d f or $300, 000 on J ul y 1, 20X6. The gai n was
__________.
a. $( 35, 000)
b. $90, 000
c. $105, 500
d. $100, 000


Chapt er 7
7- 6
$200, 000. At t he t i me of t he pur chase, Company S had t he f ol l owi ng
st ockhol der s' equi t y:

Common st ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . . . . . . . . . . . . $200, 000
========

Any excess i s at t r i but abl e t o equi pment wi t h a 10- year l i f e. On J anuar y
1, 20X6, t he r et ai ned ear ni ngs of Company S was $175, 000. The ent i r e
i nvest ment was sol d f or $300, 000 on J anuar y 1, 20X6. The gai n was
__________.
a. $( 20, 250)
b. $90, 000
c. $114, 750
d. $100, 000


18. A par ent company owns a 90%i nt er est i n a subsi di ar y at t he st ar t of t he
year and dur i ng t he year sel l s a 10%i nt er est t o r educe i t s owner shi p
per cent age t o 80%. The most popul ar vi ew of t he t r ansact i on under
cur r ent consol i dat i ons t heor y i s t hat
a. i t i s a sal e of an i nvest ment at a gai n or a l oss.
b. i t i s l i kened t o a t r easur y st ock t r ansact i on whi ch may not r esul t
i n a gai n or a l oss.
c. i t i s a t r ansact i on bet ween t he cont r ol l i ng and noncont r ol l i ng
owner shi p i nt er est s and has no ef f ect on consol i dat ed i ncome. The
t r ansact i on woul d i mpact onl y pai d- i n capi t al .
d. t he i ncr ease or decr ease i n equi t y as a r esul t of t he sal e i s an
adj ust ment t o donat ed capi t al .


19. I n t he year a par ent sel l s i t s subsi di ar y i nvest ment , t he r esul t s of
subsi di ar y oper at i ons pr i or t o t he sal e dat e ar e
a. t ypi cal l y consol i dat ed t o t he poi nt of sal e.
b. t ypi cal l y shown on t he bal ance sheet i n t he st ockhol der s' equi t y
sect i on as an adj ust ment t o r et ai ned ear ni ngs.
c. not t ypi cal l y r ef l ect ed on any of t he par ent ' s st at ement s.
d. not t ypi cal l y consol i dat ed.


Chapt er 7
7- 7
20. Pat t en Company pur chased an 80%i nt er est i n Sal t y I nc. on J anuar y 1,
20X1, f or $500, 000 when t he st ockhol der s' equi t y of Sal t y was $500, 000.
Any excess of cost was at t r i but ed t o a bui l di ng wi t h a 20- year l i f e. On
J ul y 1, 20X4, Pat t en sol d par t of i t s i nvest ment and r educed i t s
owner shi p i nt er est t o 60%. Sal t y ear ned $62, 000, evenl y, dur i ng 20X4.
The shar e of i ncome ear ned by t he NCI dur i ng 20X4 i s __________.
a. $10, 000
b. $12, 400
c. $18, 600
d. $43, 400


21. Page Company pur chased an 80%i nt er est i n t he common st ock of t he Seed
Company f or $600, 000 on J anuar y 1, 20X4, when Seed Company had t he
f ol l owi ng st ockhol der s' equi t y:

Common st ock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300, 000
Pr ef er r ed st ock, 10%, $10 par . . . . . . . . . . . . . . . . . . . . 100, 000
Pai d- i n excess of par , common. . . . . . . . . . . . . . . . . . . . 50, 000

The pr ef er r ed st ock i s cumul at i ve and was 1 year i n ar r ear s on J anuar y
1, 20X4. Any excess of cost over book val ue on t he common st ock pur chase
was at t r i but ed t o goodwi l l . The goodwi l l t hat wi l l appear on t he
consol i dat ed bal ance sheet pr epar ed on J anuar y 1, 20X4, i s __________.
a. $80, 000
b. $88, 000
c. $160, 000
d. $168, 000


22. Page Company pur chased an 80%i nt er est i n t he common st ock of t he Seed

Common st ock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300, 000

The pr ef er r ed st ock i s cumul at i ve and was 2 year s i n ar r ear s on J anuar y
was at t r i but ed t o goodwi l l . Seed had net i ncome of $40, 000 dur i ng 20X4
and pai d no di vi dends. The noncont r ol l i ng i nt er est shar e of net i ncome
was __________.
a. $3, 200
b. $6, 400
c. $8, 000
d. $16, 000


Chapt er 7
7- 8
23. Page Company pur chased an 80%i nt er est i n t he common st ock of t he Sel dom

Common st ock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300, 000

The pr ef er r ed st ock i s cumul at i ve and was 2 year s i n ar r ear s on J anuar y
was at t r i but ed t o goodwi l l . Seed had net i ncome of $40, 000 dur i ng 20X4
and pai d no di vi dends. The cont r ol l i ng i nt er est ' s shar e of Seed' s i ncome
was __________.
a. $24, 000
b. $23, 360
c. $25, 600
d. $32, 000


24. Pl ant company owns 80%of t he common st ock of Sur f Company. Sur f Company
al so has out st andi ng pr ef er r ed st ock. Pl ant Company owned none of t he
pr ef er r ed st ock pr i or t o J anuar y 1, 20X5. Pl ant Company pur chased 100%
of t he out st andi ng pr ef er r ed st ock on J anuar y 1, 20X5, at a pr i ce i n
excess of book val ue. The r esul t of t hi s t r ansact i on wi t h r egar d t o t he
consol i dat ed st at ement s i s t hat
a. t her e wi l l be added goodwi l l .
b. t her e wi l l be a l oss r ecor ded i n t he year of t he pur chase.
c. t he pr ef er r ed st ock wi l l not appear on t he bal ance sheet and t her e
wi l l be a decr ease i n r et ai ned ear ni ngs as a r esul t of t he
pur chase.
d. t he i nvest ment i n pr ef er r ed st ock wi l l appear on t he bal ance
sheet .


25. Pi ckl e Company owns 80%of t he common st ock of Souer Company and none of
t he pr ef er r ed st ock. Souer Company has t he f ol l owi ng st ockhol der s'
equi t y:

Pr ef er r ed st ock, cumul at i ve, 10%, $100 par . . . . . . . $100, 000
Common st ock ( $5 par ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Pai d- i n capi t al i n excess of par . . . . . . . . . . . . . . . . . 300, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $750, 000
========

The pr ef er r ed st ock di vi dends ar e 2 year s i n ar r ear s. What i s t he NCI i n
r et ai ned ear ni ngs?
a. $20, 400
b. $24, 000
c. $30, 000
d. $46, 000
e. None of t he above

Chapt er 7
7- 9

26. Company P has consi st ent l y sol d mer chandi se f or r esal e t o i t s subsi di ar y
at cost pl us 25%. Ther e wer e i nt er company goods i n bot h t he subsi di ar y' s
begi nni ng and endi ng i nvent or y. As a r esul t of t hese sal es, whi ch of t he
f ol l owi ng amount s must be adj ust ed f or when pr epar i ng onl y a
consol i dat ed bal ance sheet ?

Sal es Pr of i t Begi nni ng Endi ng
by Co. P Dur i ng I nvent or y I nvent or y
t he Year Pr of i t Pr of i t
a. Yes Yes Yes
b. Yes No Yes
c. No No Yes
d. No No No

ANS: C DI F: E REF: App OBJ : A1

27. Company P owns an 90%i nt er est i n Company S. Company S has out st andi ng
$100, 000 of 10%bonds t hat wer e sol d at f ace val ue and have 6 year s t o
mat ur i t y as of t he bal ance sheet dat e. Company P owns $70, 000 of t he
bonds and has a r emai ni ng unamor t i zed book val ue of $66, 000. Company S
bonds wi l l be pr esent ed on t he consol i dat ed bal ance sheet as
a. bonds payabl e, $30, 000.
b. bonds payabl e, $34, 000.
c. bonds payabl e, $100, 000.
d. bonds payabl e wi l l not appear .

ANS: A DI F: E REF: App OBJ : A1

28. Saddl e Cor por at i on i s an 80%- owned subsi di ar y of Paso Company. On
J anuar y 1, 20X1, Saddl e sol d Paso a machi ne f or $50, 000. Saddl e' s cost
was $60, 000 and t he book val ue was $40, 000. The machi ne had a 5- year
r emai ni ng l i f e at t he t i me of t he sal e. A consol i dat ed bal ance sheet
onl y i s bei ng pr epar ed on December 31, 20X3. The r et ai ned ear ni ngs of
t he cont r ol l i ng i nt er est r equi r es whi ch of t he f ol l owi ng adj ust ment s?
a. $( 10, 000)
b. $( 4, 000)
c. $( 2, 000)
d. No adj ust ment needed

ANS: B DI F: M REF: App OBJ : A1

Chapt er 7
7- 10
PROBLEM

1. I t i s common f or a par ent f i r mt o r ecor d i t s i nvest ment i n a subsi di ar y
under ei t her t he cost or si mpl e equi t y met hod t o expedi t e t he
el i mi nat i on pr ocess. Thi s does cr eat e some compl i cat i ons, however , when
al l or a por t i on of t he i nvest ment i s sol d. Assume t hat i n each of t he
f ol l owi ng cases, t he par ent sel l s i t s i nvest ment mi dway t hr ough i t s
f i scal year .

( 1) The par ent owned an 80%i nt er est and sol d al l of i t s
hol di ngs.

( 2) The par ent owned an 80%i nt er est and sol d a 20%i nt er est t o
r educe i t s owner shi p per cent age t o 60%.

( 3) The par ent owned an 80%i nt er est and sol d a 60%i nt er est t o
r educe i t s owner shi p per cent age t o 20%.

Requi r ed:

a. For each of t he above cases, comment on t he pr ocedur es
necessar y t o r ecor d t he sal e, wher e t he i nvest ment i s car r i ed
under si mpl e equi t y, and t he i mpact on consol i dat ed i ncome of
t he sal e.

b. For each of t he above cases, st at e t he added pr ocedur es t hat
woul d be necessar y i f t he i nvest ment was r ecor ded under t he
cost met hod.

Chapt er 7
7- 11
ANS:

( a) Si mpl e equi t y- - A si mpl e equi t y adj ust ment i s made t o r ecor d
cur r ent year i ncome t o t he dat e of sal e. Amor t i zat i on of
excess must be made f or al l pr i or per i ods and t he cur r ent
par t i al per i od. Thi s wi l l br i ng t he ent i r e i nvest ment t o i t s
sophi st i cat ed equi t y bal ance and wi l l adj ust r et ai ned
ear ni ngs f or pr i or year s' amor t i zat i on, whi ch, i n t he past ,
wer e made on t he consol i dat ed wor ksheet . The gai n or l oss on
t he sal e may qual i f y as a di scont i nued oper at i on.

Cost - - Thi s i s t he same as equi t y except t hat an addi t i onal
adj ust ment i s needed t o conver t f r omcost t o si mpl e equi t y
f or pr i or per i ods. An equi t y adj ust ment i s al so needed f or
t he cur r ent par t i al per i od. Once t he equi t y adj ust ment i s
made, amor t i zat i on woul d be adj ust ed f or as i t woul d under

( b) Si mpl e equi t y- - Amor t i zat i on of excess adj ust ment s f or t he
pr i or and cur r ent per i ods ar e made onl y on t he 20%i nvest ment
sol d. Amor t i zat i on appl i cabl e t o t he 60%cont r ol l i ng i nt er est
wi l l st i l l be made on t he consol i dat ed wor ksheet . A gai n or
l oss on t he sal e of t he i nvest ment wi l l appear i n t he pai d- i n
capi t al sect i on of t he consol i dat ed bal ance sheet . The
mi nor i t y shar e of i ncome wi l l be 20%f or t he f i r st hal f year
and 40%f or t he second hal f year . The cont r ol l i ng i nt er est
wi l l r ecei ve 80%and 60%, r espect i vel y.

Cost - - Thi s i s t he same as si mpl e equi t y except t hat an
addi t i onal adj ust ment i s needed t o conver t onl y t he 20%
i nt er est sol d f r omcost t o t he si mpl e equi t y met hod f or bot h
t he pr i or per i ods and t he cur r ent par t i al per i od.

( c) Si mpl e equi t y- - The r ecor di ng adj ust ment s ar e t he same as
t hose f or t he sal e of t he ent i r e i nt er est . The 20%i nvest ment
t hat r emai ns wi l l now be account ed f or under t he
sophi st i cat ed equi t y met hod and t hus needs t o be br ought t o
t hi s amount . The gai n or l oss on t he sal e wi l l be shown i n
t he " ot her gai ns and l osses" sect i on of t he i ncome st at ement .
Ther e wi l l no l onger be a consol i dat i on, and t he 20%i nt er est
wi l l be l i st ed on t he bal ance sheet as a l ong- t er m
i nvest ment .

Cost - - Agai n, al l r ecor di ng adj ust ment s ar e t he same as t hose
f or t he sal e of t he ent i r e i nt er est .

DI F: M OBJ : 3

Chapt er 7
7- 12
2. A subsi di ar y company may have pr ef er r ed st ock as par t of i t s equi t y
st r uct ur e. Fur t her , suppose t hat t he pr ef er r ed st ock i s cumul at i ve and
i n ar r ear s on di vi dends.

Requi r ed:

a. What i s t he i mpact of t he pr ef er r ed st ock on t he excess of
cost over book val ue on t he or i gi nal cont r ol l i ng i nvest ment i n
common st ock?

b. What i s t he i mpact of t he pr ef er r ed st ock on t he annual
di st r i but i on of i ncome?

c. What i s t he t heor y f ol l owed i n consol i dat ed r epor t i ng when t he
par ent pur chases a por t i on of t he subsi di ar y' s pr ef er r ed
st ock?

ANS:

a. That por t i on of r et ai ned ear ni ngs appl i cabl e t o t he pr ef er r ed
st ock equal t o t he ar r ear age i s subt r act ed f r omr et ai ned
ear ni ngs i n t he det er mi nat i on and di st r i but i on of excess
schedul e t o ar r i ve at r et ai ned ear ni ngs appl i cabl e t o t he
common st ock.

b. The NCI woul d be awar ded t he pr ef er r ed shar e of cur r ent i ncome
equal t o t he annual di vi dend r equi r ement . The bal ance of
i ncome avai l abl e t o common shar ehol der s woul d be al l ocat ed
bet ween t he cont r ol l i ng and noncont r ol l i ng i nt er est s.

c. Fr oma consol i dat ed vi ewpoi nt , t he shar es of pr ef er r ed st ock
pur chased by t he par ent ar e t r eat ed as r et i r ed. The di f f er ence
bet ween t he book val ue ( adj ust ed f or di vi dend ar r ear age) and
t he pr i ce pai d i s t r eat ed as an i ncr ement t o pai d- i n excess i f
t he shar es ar e pur chased bel ow book val ue or as a r educt i on of
pr evi ous pai d- i n f r omr et i r ement or r et ai ned ear ni ngs i f t he
pr i ce pai d exceeds book val ue.

DI F: M OBJ : 4

3. Company P pur chased 10%of t he out st andi ng st ock of Company S. on
J anuar y 1, 20X3, f or $75, 000. Any excess of cost i s at t r i but abl e t o
goodwi l l . On J anuar y 1, 20X5, Company P acqui r ed an addi t i onal 60%
i nt er est i n Company S. f or $500, 000. At t he t i me of t he second pur chase,
equi pment wi t h a 5- year r emai ni ng l i f e was under val ued by $50, 000. Any
r emai ni ng excess was at t r i but abl e t o goodwi l l . The f ol l owi ng
st ockhol der s' equi t i es exi st ed f or Company S:

J anuar y 1, J anuar y 1, J anuar y 1,
20X3 20X5 20X6
Common st ock. . . . . . . . . . . . . . . . . . . . $ 80, 000 $ 80, 000 $ 80, 000
Pai d- i n capi t al i n excess of par 120, 000 120, 000 120, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . 300, 000 500, 000 700, 000

Chapt er 7
7- 13
Requi r ed:

Pr epar e al l necessar y el i mi nat i ng and adj ust i ng ent r i es t o t hese
i nvest ment s on t he Fi gur e 7- 1 par t i al wor ksheet dat ed December 31, 20X6.
I ncl ude al l necessar y suppor t i ng schedul es.

ANS:


El i mi nat i ons and Adj ust ment s

CV Conver t i nvest ment t o equi t y met hod. ( See cost - t o- equi t y
conver si on schedul e. )

CY El i mi nat e 70%of Company S st ockhol der ' s equi t y agai nst t he

D Di st r i but e excess accor di ng t o t he det er mi nat i on and
di st r i but i on of excess schedul es.

A Depr eci at e t he i ncr ease i n equi pment f or t he past and t he
cur r ent year s, $6, 000 per year .

Cost - t o- equi t y conver si on:
10%( J anuar y 1, 20X6, r et ai ned ear ni ngs of
$700, 000- - J anuar y 1, 20X3, r et ai ned ear ni ngs
of $300, 000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40, 000
60%( J anuar y 1, 20X6, r et ai ned ear ni ngs of
$700, 000- - J anuar y 1, 20X5, r et ai ned ear ni ngs
of $500, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160, 000
========

10%I nvest ment :
Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25, 000
=======

60%I nvest ment :
Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500, 000
Excess of cost over book val ue. . . . . . . . . . . . . . . . . . . . . . . . . $ 80, 000
I ncr ease equi pment , 5 year s, 60%x $50, 000. . . . . . . . . . . . . 30, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
========

DI F: E OBJ : 2

Chapt er 7
7- 14
4. Pi l at t e Company acqui r ed a 90%i nt er est i n t he common st ock of Sweet
Company f or $575, 000 on J anuar y 1, 20X3, when Sweet Company had t he

Pr ef er r ed st ock ( 5%cumul at i ve, $100 par ) . . . . . . . . . . . . . . $ 80, 000
Common st ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350, 000
Pai d- i n capi t al i n excess of par ,
common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $655, 000
========

The pr ef er r ed st ock di vi dends ar e 2 year s i n ar r ear s. Any excess i s
at t r i but abl e t o equi pment wi t h a 6- year l i f e, whi ch i s under val ued by

Requi r ed:

Pr epar e a det er mi nat i on and di st r i but i on of excess schedul e f or t he
i nvest ment i n Sweet Company.

ANS:


Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . $575, 000
Less i nt er est acqui r ed
Common st ock. . . . . . . . . . . . . . . . . . . . . $350, 000
Pai d- i n capi t al i n excess of par . 75, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . $150, 000
Less di vi dends i n ar r ear s. . . . . . . . ( 8, 000) 142, 000
Tot al common st ockhol der s' equi t y $567, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . 90 510, 300
Excess of cost over book val ue. . . . . $ 64, 700
I ncr ease equi pment , 90%x $40, 000. . 36, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28, 700
========

DI F: M OBJ : 4

5. On J anuar y 1, 20X1, Company P pur chased a 90%i nt er est i n Company S f or
$320, 000. Company P pr epar ed t he f ol l owi ng det er mi nat i on and
di st r i but i on of excess schedul e at t hat t i me:

Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $320, 000
Less: I nt er est acqui r ed
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . $200, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . . . . $300, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . . . . . 90 270, 000
Excess of cost over book val ue at t r i but ed
t o a bui l di ng ( 20- year l i f e) . . . . . . . . . . . $ 50, 000
========

Company S had i ncome of $30, 000 f or 20X1 and $40, 000 f or 20X2. No
di vi dends wer e pai d. Company P sol d i t s ent i r e i nvest ment i n Company S
on J anuar y 1, 19X3, f or $340, 000.

Chapt er 7
7- 15

Chapt er 7
7- 16
Requi r ed:

a. Assumi ng t hat Company P used t he si mpl e equi t y met hod t o
r ef l ect i t s i nvest ment i n Company S, pr epar e Company P' s
ent r i es t o r ecor d t he sal e.
b. Assumi ng t hat Company P used t he cost met hod t o r ef l ect i t s
i nvest ment i n Company S, pr epar e t he ent r i es t o r ecor d t he
sal e on Company P' s books.

ANS:

a. Ret ai ned Ear ni ngs- - Company P. . . . . . . . . . . . . . . $ 5, 000
I nvest ment i n Company S. . . . . . . . . . . . . . . . . . . . $ 5, 000
To adj ust i nvest ment account and Company
P Ret ai ned Ear ni ngs f or t he addi t i onal
Depr eci at i on made on consol i dat ed
st at ement f or 20X1 and 20X2 ( $2, 500 per
year ) .

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340, 000
Loss on Di sposal . . . . . . . . . . . . . . . . . . . . . . . . . . . 38, 000
I nvest ment i n Company S. . . . . . . . . . . . . . . . . . 378, 000

Cal cul at i on of I nvest ment i n Company S
Or i gi nal Cost . . . . . . . . . . . . . . . . . . . . . . . . . . $320, 000
Cont r ol l i ng Shar e of Subsi di ar y I ncome
( 90%x $70, 000) . . . . . . . . . . . . . . . . . . . . . . . . 63, 000
Less: Addi t i onal bui l di ng depr eci at i on . . ( 5, 000)
I nvest ment i n Company S. . . . . . . . . . . . . . . . . . . . $378, 000
========

b. I nvest ment i n Company S. . . . . . . . . . . . . . . . . . . . $ 58, 000
Ret ai ned Ear ni ngs- - Company P. . . . . . . . . . . . . . $ 58, 000
To r ecor d par ent shar e of subsi di ar y
i ncome as shown on pr i or year s'
consol i dat ed st at ement s, l ess addi t i onal
bui l di ng depr eci at i on ( $63, 000 - $5, 000) .

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340, 000
Loss on Di sposal . . . . . . . . . . . . . . . . . . . . . . . . . . . 38, 000
To r ecor d t he sal e of t he 80%i nt er est
i n Company S.

DI F: M OBJ : 3

Chapt er 7
7- 17
6. Company P I ndust r i es pur chased a 70%i nt er est i n Company S on J anuar y 1,
20X1, at a pr i ce $20, 000 i n excess of book val ue. The excess was
at t r i but ed t o a pat ent wi t h a l i f e of 20 year s. Si nce t he pur chase,
t her e have been t he f ol l owi ng i nt er company t r ansact i ons:

( 1) On J anuar y 1, 20X2, Company P sol d a pi ece of equi pment wi t h
a net book val ue of $40, 000 t o Company S f or $50, 000. The
equi pment had a f i ve- year r emai ni ng l i f e.

( 2) Each year , st ar t i ng i n 20X3, Company S has sol d mer chandi se
f or r esal e t o Company P at cost pl us 25%. A summar y of
t r ansact i ons shows t he f ol l owi ng:

Endi ng
Dol l ar Sal es I nvent or y
Year wi t h Mar k- up wi t h Mar k- up
20X3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $110, 000 $30, 000
20X4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120, 000 $40, 000
20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140, 000 $60, 000

( 3) On J anuar y 1, 20X5, Company P pur chased Company S' s 8%,
$100, 000 f ace val ue bonds f or $98, 000, whi ch wer e i ssued at
par val ue. The bonds have f i ve year s t o mat ur i t y.

Requi r ed:

Compl et e t he f ol l owi ng schedul e t o adj ust t he r et ai ned ear ni ngs of t he
noncont r ol l i ng and cont r ol l i ng i nt er est on t he December 31, 20X5,
wor ksheet f or a consol i dat ed bal ance sheet onl y.

Adj ust ment t o RE of :
I t em Cal cul at i on Mi nor i t y Cont r ol l i ng
Pat ent
Equi pment
Mer chandi se
Bonds
Tot al

ANS:

Adj ust ment t o RE of :
I t em Cal cul at i on NCI Cont r ol l i ng
Pat ent $1, 000 x 5 year s $ 5, 000
Equi pment $2, 000 x 1 year ( unear ned) 2, 000
Mer chandi se $60, 000 x 20%, Spl i t 30%/ 70% $3, 600 8, 400
Bonds $2, 000 gai n - $400,
amor t i zat i on f or 19X5,
Spl i t 30%/ 70% 480 1, 120
Tot al $4, 080 $16, 520
====== =======

DI F: E REF: Appendi x OBJ : A1

Chapt er 7
7- 18
7. On J anuar y 1, 20X1, Pat r i ck Company pur chased 60%of t he common st ock of
Sol omon Company f or $200, 000. On t hi s dat e, Sol omon had common st ock,
ot her pai d- i n capi t al , and r et ai ned ear ni ngs of $20, 000, $60, 000, and
$120, 000 r espect i vel y.

On J anuar y 1, 20X1, t he onl y t angi bl e asset of Sol omon whi ch was
under val ued was a l ong- t er mi nvest ment , whi ch was wor t h $15, 000 mor e
t han book val ue.

On J ul y 1, 20X2, Pat r i ck Company pur chased an addi t i onal 30%of t he
common st ock of Sol omon Company f or $140, 000.

On J ul y 1, 20X2, t he l ong- t er mi nvest ment was under val ued by $20, 000 and
any r emai ni ng excess of cost over book val ue was due t o goodwi l l .

Net i ncome and di vi dends f or 2 year s f or Sol omon Company wer e:

20X1 20X2
Net i ncome f or year . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $80, 000
Di vi dends, pai d- i n December . . . . . . . . . . . . . . . . 0 50, 000

I n 20X2, t he net i ncome of Sol omon f or t he f i r st hal f of t he year was
$30, 000.

I n bot h 20X1 and 20X1, Pat r i ck has account ed f or i t s i nvest ment i n
Sol omon usi ng t he cost met hod.

I n t he l ast quar t er of 20X2, Sol omon sol d $80, 000 of goods t o Pat r i ck,
at a gr oss pr of i t r at e of 30%. On December 31, 20X2, $20, 000 of t hese
goods ar e i n Pat r i ck' s endi ng i nvent or y.

Requi r ed:

pr epar e det er mi nat i on and di st r i but i on of excess schedul es f or
t he t wo pur chases. Use t he Pat r i ck company concept ( pr or at a
mar ket val ue appr oach) i n any wr i t e- up of asset s.


Chapt er 7
7- 19
ANS:


60%on J an. 1, 20X1 30%on J ul y 1, 20X2
Pr i ce pai d $200, 000 $140, 000
Common st ock $ 20, 000 $ 20, 000
Ot her pai d- i n capi t al 60, 000 60, 000
Ret . ear n. , J an. 1 120, 000 170, 000
I ncome, 1- 1 t o 7- 1 30, 000
Tot al equi t y $200, 000 $280, 000
I nt er est acqui r ed 60% 120, 000 30% 84, 000
Excess of cost over
book val ue $ 80, 000 $ 56, 000
Al l ocabl e t o:
Long- t er mi nvest ment . 6( 15, 000) 9, 000 . 3( 20, 000) 6, 000
Goodwi l l $ 71, 000 $ 50, 000
======== ========



CV Conver t t o si mpl e equi t y met hod as of J anuar y 1, 20X2 ( 60%
20X1 t o J anuar y 1, 20X2) .

CY El i mi nat e t he cur r ent - year di vi dend i ncome of Pat r i ck
agai nst di vi dends decl ar ed by Sol omon.

EL El i mi nat e 90%of Sol omon Company equi t y bal ances at t he
begi nni ng of t he year agai nst t he i nvest ment account . Al so
el i mi nat e 30%of t he J anuar y t hr ough J une 30, 20X2 i ncome
( $30, 000) wi t h a debi t of $9, 000 t o Pur chased I ncome.

D Di st r i but e t he $136, 000 excess cost as r equi r ed by t he
det er mi nat i on and di st r i but i on of excess schedul e.

I S El i mi nat e t he i nt er company sal e and pur chase.

i nvent or y.


To Noncont r ol l i ng I nt er est : . 1 x ( 80, 000 - 6, 000) = $7, 400

To Cont r ol l i ng I nt er est : 100, 000 + [ . 6 x ( 30, 000) ] + [ . 9 x ( 50, 000
- 6, 000) ] = $157, 600

DI F: D OBJ : 2

Chapt er 7
7- 20
8. On J anuar y 1, 20X1, Pat r i ck Company pur chased 60%of t he common st ock of
Sol omon Company f or $200, 000. On t hi s dat e, Sol omon had common st ock,

On J anuar y 1, 20X1, t he onl y t angi bl e asset of Sol omon whi ch was
t han book val ue.

On J ul y 1, 20X2, Pat r i ck Company pur chased an addi t i onal 30%of t he
common st ock of Sol omon Company f or $140, 000.


Net i ncome and di vi dends f or 2 year s f or Sol omon Company wer e:

20X1 20X2
Net i ncome f or year . . . . . . . . . . . . . . . . . . $60, 000 $96, 000
Di vi dends, pai d- i n December . . . . . . . . . . 0 50, 000

I n 20X2, t he net i ncome of Sol omon f or t he f i r st hal f of t he year was
$50, 000.

I n bot h 20X1 and 20X2, Pat r i ck has account ed f or i t s i nvest ment i n
Sol omon usi ng t he si mpl e equi t y met hod.

I n t he l ast quar t er of 20X2, Sol omon sol d $80, 000 of goods t o Pat r i ck,
at a gr oss pr of i t r at e of 30%. On December 31, 20X2, $20, 000 of t hese
goods ar e i n Pat r i ck' s endi ng i nvent or y.

Requi r ed:

t he t wo pur chases. Use t he Pat r i ck company concept ( pr or at a
mar ket val ue appr oach) i n any wr i t e- up of asset s.


Chapt er 7
7- 21
ANS:


60%on J an. 1, 20X1 30%on J ul y 1, 20X2
Pr i ce pai d $200, 000 $140, 000
Common st ock $ 20, 000 $ 20, 000
Ret . ear n. , J an. 1 120, 000 170, 000
I ncome, 1- 1 t o 7- 1 30, 000
Tot al equi t y $200, 000 $280, 000
Excess of cost over
book val ue $ 80, 000 $ 56, 000
Al l ocabl e t o:
Goodwi l l $ 71, 000 $ 50, 000
======== ========



account and i n t he Sol omon i ncome account .

EL El i mi nat e 90%of Sol omon Company equi t y bal ances at t he



i nvent or y.



To Cont r ol l i ng I nt er est : 100, 000 + [ . 6 x ( 50, 000) ] + [ . 9 x ( 46, 000
- 6, 000) ] = $166, 000

DI F: D OBJ : 2

Chapt er 7
7- 22
st ock, ot her pai d- i n capi t al , and r et ai ned ear ni ngs of $20, 000, $80, 000,
and $150, 000 r espect i vel y.

On J anuar y 1, 20X1, t he onl y t angi bl e asset of Subsi di ar y whi ch was
t han book val ue.

On J ul y 1, 20X2, Par ent Company pur chased an addi t i onal 30%of t he
common st ock of Subsi di ar y Company f or $117, 000.


On December 31, 20X2, Par ent Company pur chased t he l ast 10%of t he
common st ock of Subsi di ar y Company f or $35, 600, a pr i ce equal t o book
val ue.

Net i ncome and di vi dends f or t wo year s f or Subsi di ar y Company wer e:

20X1 20X2
Net i ncome f or year . . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $96, 000
Di vi dends, pai d- i n December . . . . . . . . . . . . . . . . . 0 40, 000

I n 20X2, t he net i ncome of Subsi di ar y f or t he f i r st hal f of t he year was
$40, 000.

I n bot h 20X1 and 20X1, Par ent has account ed f or i t s i nvest ment i n

Requi r ed:

t he f i r st t wo pur chases. Use t he par ent company concept
( pr or at e mar ket val ue appr oach) i n any wr i t e- up of asset s.


Chapt er 7
7- 23
ANS:


60%on J an. 1, 20X1 30%on J ul y 1, 20X2
Pr i ce pai d $177, 000 $117, 000
Common st ock $ 20, 000 $ 20, 000
Ret . ear n. , J an. 1 150, 000 200, 000
I ncome, 1- 1 t o 7- 1 40, 000
Tot al equi t y $250, 000 $340, 000
Excess of cost over
book val ue $ 27, 000 $ 15, 000
Al l ocabl e t o:
Goodwi l l $ 18, 000 $ 9, 000
======== ========




EL1 El i mi nat e 60%of Subsi di ar y Company equi t y bal ances at t he


el i mi nat e 10%of t he J anuar y t hr ough December 31, 20X2
i ncome ( $96, 000) wi t h a debi t of $9, 600 t o Pur chased I ncome.
Al so el i mi nat e t he $4, 000 of di vi dends decl ar ed by
Subsi di ar y whi ch wer e pai d t o t he 10%i nt er est .




To Cont r ol l i ng I nt er est : 100, 000 + ( . 6 x 40, 000) + ( . 9 x 56, 000)
= $174, 400 or
100, 000 + ( 100%x 96, 000) - 12, 000 - 9, 600
= $174, 400

DI F: D OBJ : 2

Chapt er 7
7- 24
$160, 000, and $150, 000 r espect i vel y. Any excess of cost over book val ue
was at t r i but ed t o a pat ent , t o be amor t i zed over 10 year s.

On J ul y 1, 20X2, Par ent Company pur chased an addi t i onal 80%of t he
common st ock of Subsi di ar y Company f or $350, 000. On t hi s dat e, any
excess of cost over book val ue was agai n at t r i but ed t o a pat ent , t o be

Net i ncome and di vi dends f or t wo year s f or Subsi di ar y Company wer e:

20X1 20X2

I n 20X2, t he net i ncome of Subsi di ar y f or t he f i r st hal f of t he year was
$45, 000.

For 20X1, Par ent account ed f or i t s i nvest ment usi ng t he cost met hod. On
J ul y 1, 20X2, an ent r y was NOT made t o conver t t he f i r st 10%t o t he
equi t y met hod. For t he l ast hal f of 20X2, Par ent account ed f or al l of
i t s i nvest ment usi ng t he si mpl e equi t y met hod.

I n t he l ast quar t er of 20X2, Subsi di ar y sol d l and wi t h a cost of $20, 000
t o Par ent f or $30, 000. On December 31, 20X2, Par ent st i l l hol ds t he
l and.

Requi r ed:

t he t wo pur chases.


ANS:


10%on J an. 1, 20X1 80%on J ul y 1, 20X2
Pr i ce pai d $60, 000 $350, 000
Common st ock $ 20, 000 $ 20, 000
Ret . ear n. , J an. 1 150, 000 200, 000
I ncome, 1- 1 t o 7- 1 45, 000
Tot al equi t y $330, 000 $425, 000
Excess of cost over
book val ue al l ocabl e
t o t he pat ent $27, 000 $ 10, 000
======= ========

Chapt er 7
7- 25



CV Conver t t he f i r st 10%t o t he si mpl e equi t y met hod as of J ul y
1, 20X2. The conver si on shoul d al so be r ecor ded by Par ent i n
i t s account i ng r ecor ds.




A1 Amor t i ze t he pat ent on t he 10%pur chase over 10 year s.
Char ge t he 20X1 amor t i zat i on agai nst J anuar y 1, 20X1
r et ai ned ear ni ngs of Par ent Company and t he 20X2 agai nst

Char ge t he 20X2 amor t i zat i on f or one- hal f of a year agai nst

LA El i mi nat e t he i nt er company gai n on sal e of l and.



To Cont r ol l i ng I nt er est : 100, 000 + ( . 1 x 45, 000) + [ . 9 x ( 55, 000
- 10, 000) ] - 500 - 2, 700 = $141, 800 or
100, 000 + [ . 9 x ( 100, 000 - 10, 000) ]
- 36, 000 - 2, 700 - 500 = $141, 800

DI F: D OBJ : 2

Chapt er 7
7- 26
st ock, ot her pai d- i n capi t al , and r et ai ned ear ni ngs of $20, 000, $80, 000,
and $150, 000 r espect i vel y. Any excess of cost over book val ue was
at t r i but ed t o a pat ent , t o be amor t i zed over 10 year s.

On Apr i l 1, 20X2, Par ent Company pur chased an addi t i onal 50%of t he
common st ock of Subsi di ar y Company f or $190, 000. On t hi s dat e, any
excess of cost over book val ue was agai n at t r i but ed t o a pat ent , t o be

Net i ncome and di vi dends f or 2 year s f or Subsi di ar y Company wer e:

20X1 20X2

I n 20X2, t he net i ncome of Subsi di ar y f or t he f i r st quar t er of t he year
was $30, 000.

For 20X1, Par ent account ed f or i t s i nvest ment i n Subsi di ar y usi ng t he
sophi st i cat ed equi t y met hod. For al l of 20X2, Par ent account ed f or al l
of i t s i nvest ment usi ng t he si mpl e equi t y met hod.

I n t he l ast quar t er of 20X2, Subsi di ar y sol d l and wi t h a cost of $20, 000
t o Par ent f or $30, 000. On December 31, 20X2, Par ent st i l l hol ds t he
l and.

Requi r ed:

t he t wo pur chases.


ANS:


40%on J an. 1, 20X1 50%on J ul y 1, 20X2
Pr i ce pai d $120, 000 $190, 000
Common st ock $ 20, 000 $ 20, 000
Ret . ear n. , J an. 1 150, 000 200, 000
I ncome, 1- 1 t o 4- 1 30, 000
Tot al Equi t y $250, 000 $330, 000
Excess of cost over
book val ue al l ocabl e
t o t he pat ent $ 20, 000 $ 25, 000
======== ========

Chapt er 7
7- 27




el i mi nat e 50%of t he J anuar y t hr ough Mar ch 20X2 i ncome

D Di st r i but e t he $43, 000 r emai ni ng excess cost of cost over
book val ue as r equi r ed by t he det er mi nat i on and di st r i but i on
of excess schedul e. Si nce t he sophi st i cat ed equi t y met hod
was used dur i ng 20X1 on t he f i r st 40%, t he pr oper
el i mi nat i ons wi l l yi el d an $18, 000 ( not $20, 000) excess on
t hi s par t of t he i nvest ment .

Char ge t he 20X2 amor t i zat i on agai nst oper at i ng expenses.

Char ge t he 20X2 amor t i zat i on f or t hr ee- f our t hs of a year

LA El i mi nat e t he i nt er company gai n on sal e of l and.



To Cont r ol l i ng I nt er est : 100, 000 + ( . 4 x 30, 000) + [ . 9 x ( 70, 000
- 10, 000) ] - 2, 000 - 1, 875 = $162, 125 or
100, 000 + [ . 9 x ( 100, 000 - 10, 000) ]
- 15, 000 - 2, 000 - 1, 875 = $162, 125

DI F: D OBJ : 2

Chapt er 7
7- 28
owner s' equi t y of $400, 000. Any excess of cost over book val ue was due
t o goodwi l l .


Dur i ng 20X2, Subsi di ar y had net i ncome of $90, 000, of whi ch one- hal f was
ear ned dur i ng t he f i r st si x mont hs. Di vi dends of $30, 000 wer e decl ar ed
and pai d- i n December 20X2.

For t he f i r st hal f of 20X2, Par ent r ecor ded i t s 80%shar e of
Subsi di ar y' s net i ncome. The bal ance i n t he i nvest ment on J ul y 1, 20X2
was $476, 000.

On J ul y 1, 20X2, Par ent Company sol d 10%of t he t ot al st ock of
Subsi di ar y, r educi ng i t s i nvest ment per cent age t o 70%. The f ol l owi ng
ent r y was made on t hat dat e, f or t he 10%sol d onl y, t o r ecor d t he sal e
of t he 10%i nvest ment .

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63, 125
Gai n on Sal e of Subsi di ar y St ock . . . . . . . 4, 000
I nvest ment I n Sub. Company . . . . . . . . . . . . . 59, 125
( 476, 000 x 1/ 8) - 375

On J anuar y 1, 20X2, Subsi di ar y hel d mer chandi se acqui r ed f r omPar ent f or
$10, 000. Dur i ng 20X2, Par ent sol d mer chandi se t o Subsi di ar y f or $70, 000,
of whi ch $15, 000 i s hel d by Subsi di ar y on December 31, 20X2. Par ent ' s

Requi r ed:


Chapt er 7
7- 29
ANS:



NCI Tr ansf er t o NCI t he shar e of i ncome sol d on J ul y 1, 20X2
( 10%of $45, 000) wi t h a cr edi t . Debi t Subsi di ar y I ncome f or
$4, 375 and oper at i ng expenses f or $125.

CY El i mi nat e t he par ent ' s ent r y r ecor di ng i t s r emai ni ng 70%
shar e of i ncome f or al l of 20X2 agai nst di vi dends decl ar ed
by Subsi di ar y.


D Al l ocat e t he r emai ni ng $70, 000 excess of cost over book
val ue t o goodwi l l .

i nvent or y.


i nvent or y.


To Noncont r ol l i ng I nt er est : ( . 3 x 90, 000) - 4, 500 = $22, 500

To Cont r ol l i ng I nt er est : 100, 000 + 4, 000 - 6, 000 + ( . 7 x 90, 000)
+ 4, 375 + 4, 000 = $169, 375

DI F: D OBJ : 3

Chapt er 7
7- 30
Sal t Company f or $330, 000. Any excess of cost over book val ue on t hi s
dat e i s at t r i but ed t o a pat ent , t o be amor t i zed over 10 year s.

On t hi s dat e, Sal t had t ot al shar ehol der s' equi t y as f ol l ows:

8%Pr ef er r ed St ock, $100 par . . . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
Common St ock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Ot her Pai d- i n Capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $450, 000
========

The 8%pr ef er r ed st ock i s cumul at i ve, nonpar t i ci pat i ng, and has a
l i qui dat i ng val ue of par pl us di vi dends i n ar r ear s. Ther e wer e no
pr ef er r ed di vi dends i n ar r ear s on J anuar y 1, 20X1.

Dur i ng 20X1, Sal t had a net l oss of $10, 000 and pai d no di vi dends. I n
20X2, Sal t had net i ncome of $100, 000 and pai d di vi dends, on pr ef er r ed
and common, t ot al i ng $36, 000.

I n 20X1 and 20X2, Pepper has account ed f or i t s i nvest ment i n Sal t usi ng

Dur i ng 20X2, Sal t sol d mer chandi se t o Pepper f or $40, 000, of whi ch
$20, 000 i s st i l l hel d by Pepper on December 31, 20X2. Sal t ' s usual gr oss
pr of i t i s 40%.

Requi r ed:


ANS:



PS Al l ocat e t he 8, 000 of pr ef er r ed di vi dends i n ar r ear s on
J anuar y 1, 20X2 t o t he pr ef er r ed equi t y.

account and i n t he Sal t i ncome account .

EL El i mi nat e 90%of Sal t ' s common equi t y bal ances at t he

pat ent .



Chapt er 7
7- 31
i nvent or y.


To Noncont r ol l i ng I nt er est - Pr ef er r ed: $8, 000 f or 20X2 di vi dends

To Noncont r ol l i ng I nt er est - Common: . 1 x ( 100, 000 - 8, 000 - 8, 000)
= $8, 400

To Cont r ol l i ng I nt er est : 80, 000 + [ . 9 x ( 100, 000 - 8, 000 - 8, 000) ]
- 1, 500 = $154, 100

DI F: D OBJ : 4

Sal t Company f or $330, 000. Any excess of cost over book val ue on t hi s
dat e i s at t r i but ed t o a pat ent , t o be amor t i zed over 10 year s.

On t hi s dat e, Sal t had t ot al shar ehol der s' equi t y as f ol l ows:

Common St ock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $450, 000
========


Dur i ng 20X1, Sal t had a net l oss of $10, 000 and pai d no di vi dends. I n
20X2, Sal t had net i ncome of $100, 000 and pai d di vi dends, on pr ef er r ed
and common, t ot al i ng $36, 000.

I n 20X1 and 20X2, Pepper has account ed f or i t s i nvest ment i n Sal t usi ng
t he cost met hod.

Dur i ng 20X2, Sal t sol d mer chandi se t o Pepper f or $40, 000, of whi ch
$20, 000 i s st i l l hel d by Pepper on December 31, 20X2. Sal t ' s usual gr oss
pr of i t i s 40%.

Requi r ed:


Chapt er 7
7- 32
ANS:



CV Conver t t o t he si mpl e equi t y met hod as of J anuar y 1, 20X1.
Due t o t he combi ned ef f ect of Sal t ' s l oss of $10, 000 i n 20X1
and t he $8, 000 ar r ear age of pr ef er r ed di vi dends, t he
decr ease i n r et ai ned ear ni ngs t o t he common equi t y i s
$18, 000. Of t hi s $18, 000, 90%or $16, 200 i s al l ocabl e t o t he
cont r ol l i ng i nt er est .

PS Al l ocat e t he $8, 000 of pr ef er r ed di vi dends i n ar r ear s on

CY El i mi nat e t he cur r ent - year di vi dend i ncome agai nst di vi dends
decl ar ed t o common st ock by Sal t .

EL El i mi nat e 90%of Sal t ' s common equi t y bal ances at t he

pat ent .



i nvent or y.



= $8, 400

To Cont r ol l i ng I nt er est : 80, 000 + [ . 9 x ( 100, 000 - 8, 000 - 8, 000) ]
- 1, 500 = $154, 100

DI F: D OBJ : 4

Chapt er 7
7- 33
Subsi di ar y Company f or $300, 000. Any excess of cost over book val ue on
t hi s dat e i s at t r i but ed t o a pat ent , t o be amor t i zed over 10 year s.

On t hi s dat e, Subsi di ar y had t ot al shar ehol der s' equi t y as f ol l ows:

Common St ock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $450, 000
========


Dur i ng 20X1, Subsi di ar y had a net l oss of $10, 000 and pai d no di vi dends.
I n 20X2, Subsi di ar y had net i ncome of $100, 000 and pai d di vi dends, on
pr ef er r ed and common, t ot al i ng $40, 000.

On J anuar y 1, 20X2, Par ent pur chased $50, 000 par val ue of Subsi di ar y' s
pr ef er r ed st ock f or $52, 000. At year end, t he pr ef er r ed i s st i l l hel d as
an i nvest ment .

I n 20X1 and 20X2, Par ent has account ed f or i t s i nvest ment s i n
Subsi di ar y' s pr ef er r ed and common usi ng t he si mpl e equi t y met hod.

Dur i ng 20X2, Subsi di ar y sol d mer chandi se t o Par ent f or $40, 000, of whi ch
$15, 000 i s st i l l hel d by Par ent on December 31, 20X2. Subsi di ar y' s usual
gr oss pr of i t i s 40%.

Requi r ed:


Chapt er 7
7- 34
ANS:




CY El i mi nat e t he cur r ent - year ent r i es made i n t he i nvest ment i n
common and t he subsi di ar y i ncome account s.

EL El i mi nat e 80%of Subsi di ar y' s common equi t y bal ances at t he
begi nni ng of t he year agai nst t he i nvest ment i n common.

pat ent .



i nvent or y.

CYP El i mi nat e t he cur r ent - year ent r i es made i n t he i nvest ment i n
pr ef er r ed and t he subsi di ar y i ncome account s.

ELP El i mi nat e 50%of Subsi di ar y' s pr ef er r ed equi t y bal ances at
t he begi nni ng of t he year agai nst t he i nvest ment i n
pr ef er r ed. The di f f er ence i s cr edi t ed t o cont r ol l i ng pai d- i n
capi t al si nce i t r esul t s f r oma t r ansact i on wi t h t he
consol i dat ed f i r m' s shar ehol der s.


To Noncont r ol l i ng I nt er est - Pr ef er r ed: $8, 000 f or 20X2 di vi dends x
50%= $4, 000

= $17, 200

80, 000 + 4, 000 + [ . 8 x ( 100, 000 - 8, 000 - 6, 000) ] - 2, 000 = $150, 800

DI F: D OBJ : 4

Chapt er 7
7- 35
t hi s dat e i s due t o goodwi l l .

On t hi s dat e, Subsi di ar y had common shar ehol der s' equi t y as f ol l ows:

Common st ock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Ot her pai d- i n capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170, 000

Al so on t he dat e of pur chase, Subsi di ar y had out st andi ng $200, 000 par
val ue of 10%pr ef er r ed st ock t hat i s cumul at i ve and nonpar t i ci pat i ng.
The pr ef er r ed st ock has a l i qui dat i ng val ue of par , pl us di vi dends i n
ar r ear s. Ther e wer e no pr ef er r ed di vi dends i n ar r ear s on J anuar y 1,
20X1.

Dur i ng 20X1, Subsi di ar y had a net i ncome of $30, 000 and pai d no
di vi dends. I n 20X2, Subsi di ar y had net i ncome of $120, 000 and pai d
di vi dends, on pr ef er r ed and common, t ot al i ng $60, 000.

I n 20X1 and 20X2, Par ent has account ed f or i t s i nvest ment i n Subsi di ar y
usi ng t he cost met hod.

On J ul y 1, 20X2, Par ent pur chased equi pment f or $70, 000 and i mmedi at el y
sol d i t t o Subsi di ar y f or $100, 000. Subsi di ar y wi l l use and depr eci at e
t he equi pment over 5 year s, assumi ng st r ai ght - l i ne depr eci at i on wi t h no
sal vage val ue.

Requi r ed:


Chapt er 7
7- 36
ANS:



Subsi di ar y' s i ncr ease i n r et ai ned ear ni ngs dur i ng 20X1 was
$30, 000, of whi ch $20, 000 bel ongs t o t he pr ef er r ed equi t y
f or di vi dends i n ar r ear s. The r emai ni ng $10, 000 i ncr ease
bel ongs t o t he common equi t y, wi t h 80%of t hi s t o Par ent .



EL El i mi nat e 80%of Subsi di ar y' s common equi t y bal ances at t he
begi nni ng of t he year agai nst t he i nvest ment i n common.

D Di st r i but e t he $60, 000 excess of cost over book val ue t o
goodwi l l .

bui l di ng and equi pment .

F2 El i mi nat e t he $3, 000 of excess depr eci at i on f or t he l ast
hal f of 20X2 on t he t r ansf er r ed equi pment .



To Noncont r ol l i ng I nt er est - Common: . 2 x ( 120, 000 - 20, 000) =
$20, 000

To Cont r ol l i ng I nt er est : 114, 000 - 30, 000 + [ . 8 x ( 120, 000 -
20, 000) ] + 3, 000 = $167, 000

DI F: D OBJ : 4

Chapt er 7
7- 37
t hi s dat e i s due t o goodwi l l .

On t hi s dat e, Subsi di ar y had common shar ehol der s' equi t y as f ol l ows:

Common st ock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Ot her pai d- i n capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170, 000

Al so on t he dat e of pur chase, Subsi di ar y had out st andi ng $200, 000 par
val ue of 10%pr ef er r ed st ock t hat i s cumul at i ve and nonpar t i ci pat i ng.
The pr ef er r ed st ock has a l i qui dat i ng val ue of par , pl us di vi dends i n
ar r ear s. Ther e wer e no pr ef er r ed di vi dends i n ar r ear s on J anuar y 1,
20X1.

Dur i ng 20X1, Subsi di ar y had a net i ncome of $30, 000 and pai d no
di vi dends. I n 20X2, Subsi di ar y had net i ncome of $120, 000 and pai d
di vi dends, on pr ef er r ed and common, t ot al i ng $60, 000.

On J anuar y 1, 20X2, Par ent pur chased al l of Subsi di ar y' s pr ef er r ed st ock
f or $210, 000. At year - end, t he pr ef er r ed i s st i l l hel d as an i nvest ment .

I n 20X1 and 20X2, Par ent has account ed f or i t s i nvest ment i n Subsi di ar y
usi ng t he cost met hod.

On J ul y 1, 20X2, Par ent pur chased equi pment f or $70, 000 and i mmedi at el y
sol d i t t o Subsi di ar y f or $100, 000. Subsi di ar y wi l l use and depr eci at e
t he equi pment over 5 year s, assumi ng st r ai ght - l i ne depr eci at i on wi t h no
sal vage val ue.

Requi r ed:


Chapt er 7
7- 38
ANS:



Subsi di ar y' s i ncr ease i n r et ai ned ear ni ngs dur i ng 20X1 was
$30, 000, of whi ch $20, 000 bel ongs t o t he pr ef er r ed equi t y f or
$30, 000, of whi ch $20, 000 bel ongs t o t he pr ef er r ed equi t y f or
di vi dends i n ar r ear s. The r emai ni ng $10, 000 i ncr ease bel ongs
t o t he common equi t y, wi t h 80%of t hi s t o Par ent .




D Al l ocat e t he $60, 000 excess of cost over book val ue t o
goodwi l l .

bui l di ng and equi pment .

F2 El i mi nat e t he $3, 000 of excess depr eci at i on f or t he l ast
hal f of 20X2 on t he t r ansf er r ed equi pment .

CYP El i mi nat e t he $40, 000 of di vi dend i ncome f r omSubsi di ar y' s
pr ef er r ed agai nst t he di vi dends decl ar ed account of
Subsi di ar y.

ELP El i mi nat e t he J anuar y 1 pr ef er r ed equi t y bal ances agai nst
t he i nvest ment i n pr ef er r ed. The di f f er ence i s cr edi t ed t o
cont r ol l i ng pai d- i n capi t al si nce i t r esul t s f r oma
t r ansact i on wi t h t he consol i dat ed f i r m' s shar ehol der s.



114, 000 - 30, 000 + 3, 000 + ( 100%x 20, 000) +
[ 80%x ( 120, 000 - 20, 000) ] = $187, 000

DI F: D OBJ : 4

Chapt er 7
7- 39

On J anuar y 1, 20X1, any excess of cost over book val ue i s at t r i but abl e
t o t he under val uat i on of l and, bui l di ng, and goodwi l l . Land i s wor t h
$20, 000 mor e t han cost . Bui l di ng i s wor t h $60, 000 mor e t han book val ue.
I t has a r emai ni ng usef ul l i f e of 9 year s and i s depr eci at ed usi ng t he
st r ai ght - l i ne met hod.

Dur i ng 20X1, Par ent has appr opr i at el y account ed f or i t s i nvest ment i n
Subsi di ar y usi ng t he cost met hod.

$20, 000 i s hel d by Par ent on December 31, 20X1. Subsi di ar y' s usual gr oss
pr of i t on af f i l i at ed sal es i s 50%.


On J ul y 1, 20X1, Par ent sol d t o Subsi di ar y some equi pment wi t h a cost of
$40, 000 and a book val ue of $18, 000. The sal es pr i ce was $30, 000.
Subsi di ar y i s depr eci at i ng t he equi pment over a 4- year l i f e, assumi ng no

Requi r ed:

Pr epar e a det er mi nat i on and di st r i but i on of excess schedul e. Next ,
compl et e t he Fi gur e 7- 13 wor ksheet f or a consol i dat ed bal ance sheet as
of December 31, 20X1.

Chapt er 7
7- 40
ANS:



CV Conver t t o t he si mpl e equi t y met hod as of December 31, 20X1,
1, 20X1, t o December 31, 20X1) .

EL El i mi nat e 90%of t he subsi di ar y equi t y account s agai nst t he

D Di st r i but e t he excess of cost over book val ue t o net asset s
schedul e.

A Amor t i ze t he excess wr i t e- up t o bui l di ng over 9 year s.

EI El i mi nat e t he i nt er company gr oss pr of i t i n t he endi ng
i nvent or y.

I A El i mi nat e t he i nt er company r ecei vabl e and payabl e.

F1 El i mi nat e t he gai n on sal e of equi pment f r omt he Ret ai ned
Ear ni ngs of Par ent .

F2 El i mi nat e t he excess depr eci at i on on t he equi pment sol d f r om
Par ent t o Subsi di ar y. $12, 000 4 year s = $3, 000 x 1/ 2 year
= $1, 500


Cost of I nvest ment . . . . . . . . . . . . . . . . . . . . . . . $343, 000
Book val ue of i nvest ment
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Ot her pai d- i n capi t al . . . . . . . . . . . . . . . . . . . 120, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . 100, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $270, 000
Per cent age acqui r ed. . . . . . . . . . . . . . . . . . . . . . . 90% 243, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000

Al l ocabl e t o:
Land 90%x 20, 000. . . . . . . . . . . . . . . . . . . . . . $18, 000 Dr .
Bui l di ng 90%x 60, 000 . . . . . . . . . . . . . . . . . 54, 000 Dr .
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28, 000 Dr .
=======

DI F: D REF: App OBJ : A1

Chapt er 7
7- 41

On J anuar y 1, 20X1, any excess of cost over book val ue i s due t o t he
under val uat i on of l and, bui l di ng, and goodwi l l . Land i s wor t h $10, 000
mor e t han cost . Bui l di ng i s wor t h $50, 000 mor e t han book val ue, has a
r emai ni ng l i f e of 9 year s, and i s depr eci at ed usi ng t he st r ai ght - l i ne
met hod.


$10, 000 i s hel d by Par ent on December 31, 20X1. Subsi di ar y' s gr oss
pr of i t on sal es i s 40%. On December 31, 20X1, Par ent st i l l owes
Subsi di ar y $7, 000 f or mer chandi se acqui r ed i n December .

On J ul y 1, 20X0, Subsi di ar y sol d $100, 000 par val ue of 10%, 10- year
bonds f or $104, 000. The bonds pay i nt er est semi annual l y on J anuar y 1 and
J ul y 1. St r ai ght - l i ne amor t i zat i on of pr emi umi s used. On J anuar y 1,
20X2, Par ent r epur chased one- hal f of t he bonds at par .

r at e i s 10%. The usef ul l i f e of t he equi pment i s 4 year s. The l ease has
been capi t al i zed by bot h compani es. Subsi di ar y i s depr eci at i ng t he
equi pment usi ng t he st r ai ght - l i ne met hod and assumi ng a sal vage val ue of
$4, 610.

A par t i al l ease amor t i zat i on schedul e, appl i cabl e t o ei t her company, i s
pr esent ed bel ow:

1- 1- 20X2 $104, 610
- 30, 000
1- 1- 20X2 $ 74, 610 10% $7, 461 $30, 000 $22, 539
- 22, 539
1- 1- 20X3 $ 52, 071

Requi r ed:

Pr epar e a det er mi nat i on and di st r i but i on of excess schedul e. Next ,
compl et e t he Fi gur e 7- 14 wor ksheet f or a consol i dat ed bal ance sheet as
of December 31, 20X2. Round al l comput at i ons t o t he near est dol l ar .

Chapt er 7
7- 42
ANS:

Cost of I nvest ment . . . . . . . . . . . . . . . . . . . . $337, 000
Book val ue of i nvest ment
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Ot her pai d- i n capi t al . . . . . . . . . . . . . . . . 120, 000

Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $270, 000
Per cent age acqui r ed. . . . . . . . . . . . . . . . . . . . 90% 243, 000
( debi t bal ance) . . . . . . . . . . . . . . . . . . . . . . . $ 94, 000
========
Al l ocabl e t o:
Land 90%x ( 10, 000) . . . . . . . . . . . . . . . $ 9, 000 Dr .
Bui l di ng 90%x ( 50, 000) . . . . . . . . . . . 45, 000 Dr .
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . $40, 000 Dr .
=======



EL El i mi nat e 90%of t he subsi di ar y equi t y account s agai nst t he

D Di st r i but e t he excess of cost over book val ue t o net asset s
schedul e.

A Amor t i ze t he excess wr i t e- up t o bui l di ng over 9 year s,
char gi ng $5, 000 x 2 or $10, 000 t o Ret ai ned Ear ni ngs of
Par ent .

i nvent or y.

I A El i mi nat e t he i nt er company r ecei vabl e and payabl e.

B1 El i mi nat e bond i nt er est r ecei vabl e agai nst 50%of bond
i nt er est payabl e.

B2 El i mi nat e t he bond i nvest ment agai nst 50%of bonds payabl e
and pr emi umon bonds.
The r esul t i ng gai n of $1, 500 i s al l ocat ed 90%and 10%t o
r et ai ned ear ni ngs of Par ent and Subsi di ar y.

CL1 El i mi nat e t he l ease payabl e ( l ease obl i gat i on payabl e pl us
l ease i nt er est payabl e) agai nst t he l ease r ecei vabl e ( mi ni mum
l ease payment s r ecei vabl e l ess unear ned i nt er est i ncome) .

CL2 Recl assi f y t he l eased equi pment .

CL3 Recl assi f y t he accumul at ed depr eci at i on on t he l eased
equi pment .

DI F: D REF: App OBJ : A1
Chapt er 7
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7- 70
Chapter 8 Subsidiary Equity Transactions; Indirect and Mutual
Holdings

MULTIPLE CHOICE

1. A par ent company owns a 100%i nt er est i n a subsi di ar y. Recent l y, t he
subsi di ar y pai d a 10%st ock di vi dend. The di vi dend shoul d be r ecor ded on
t he books of t he par ent
a. at t he par val ue or st at ed val ue of t he shar es r ecei ved.
b. at t he mar ket val ue of t he shar es on t he dat e of decl ar at i on.
c. at t he mar ket val ue of t he shar es on t he dat e of di st r i but i on.
d. mer el y as a memo ent r y i ndi cat i ng t hat t he cost of t he or i gi nal
i nvest ment now i s al l ocat ed t o a gr eat er number of shar es.


2. Company P pur chased a 80%i nt er est i n t he Company S on J anuar y 1, 20X1,
f or $600, 000. Any excess of cost i s at t r i but ed t o t he Company' s bui l di ng
wi t h a 20- year l i f e. The equi t y bal ances of Company S ar e as f ol l ows:

J anuar y 1, 20X1 December 31, 20X4
Common st ock, $10 par . . $100, 000 $140, 000
Ot her pai d- i n capi t al . . 200, 000 280, 000
Ret ai ned ear ni ngs. . . . . . 250, 000 450, 000

The onl y change i n pai d- i n capi t al i s a r esul t of a 40%st ock di vi dend
pai d i n 20X3. The cost t o si mpl e equi t y conver si on t o br i ng t he
i nvest ment account t o i t s December 31, 20X4, bal ance i s __________.
a. $30, 000
b. $136, 000
c. $160, 000
d. $256, 000


3. When t he par ent pur chases some newl y i ssued shar es of a subsi di ar y, any
adj ust ment s r esul t i ng f r omt he subsi di ar y st ock sal es shoul d be made
a. at t he end of t he cur r ent f i scal year when t he wor ksheet i s
pr epar ed.
b. at t he t i me of t he sal e when t he equi t y met hod i s used.
c. at t he t i me of t he sal e i f t he cost met hod i s used.
d. r et r oact i vel y t o t he st ar t of t he cur r ent f i scal year .


4. A subsi di ar y st ock sal e of new shar es t o a noncont r ol l i ng i nt er est may
be vi ewed so t hat any i ncr ease i n par ent ' s i nt er est i s vi ewed as
gener at i ng addi t i onal pai d- i n capi t al and any decr ease i s vi ewed as a
r educt i on f i r st i n pai d- i n capi t al i n excess of par i f i t exi st s;
ot her wi se, par ent r et ai ned ear ni ngs i s r educed. Thi s i s a( n)
a. par ent company concept .
b. pr opor t i onat e consol i dat i on concept .
c. economi c uni t concept .
d. equi t y met hod.

Chapt er 8
8- 2

5. Par i s LTD. owned a 75%i nt er est i n Scot t Company pr i or t o J anuar y 1,
20X3. On J anuar y 1, 20X1, Par i s LTD. pai d $600, 000 f or i t s i nt er est when
Scot t Company had t ot al equi t y of $550, 000. On J anuar y 1, 20X3, Scot t
Company had t he f ol l owi ng st ockhol der s' equi t y:

Common st ock, $10 par . . . . . . . . . . . . . . . $100, 000
Ot her pai d- i n capi t al . . . . . . . . . . . . . . . 200, 000

On J anuar y 2, 20X3, Scot t Company sol d 2, 500 addi t i onal shar es of st ock
f or $80 each i n a pr i vat e of f er i ng t o noncont r ol l i ng shar ehol der s. As a
r esul t of t hi s sal e, whi ch of t he f ol l owi ng changes woul d appear i n t he
20X3 consol i dat ed st at ement s?
a. $50, 000 gai n
b. $22, 500 gai n
c. $50, 000 i ncr ease i n cont r ol l i ng pai d- i n capi t al
d. $22, 500 i ncr ease i n cont r ol l i ng pai d- i n capi t al



Common st ock, $10 par . . . . . . . . . . . . . . . $100, 000

f or $35 each i n a pr i vat e of f er i ng t o noncont r ol l i ng shar ehol der s. As a
a. $45, 000 l oss
b. $21, 875 l oss
c. $45, 000 decr ease i n cont r ol l i ng pai d- i n capi t al
d. $21, 875 decr ease i n cont r ol l i ng pai d- i n capi t al


Chapt er 8
8- 3

Common st ock, $10 par . . . . . . . . . . . . . . . $100, 000

f or $80 each i n a publ i c of f er i ng t o noncont r ol l i ng shar ehol der s. As a
a. $50, 000 gai n
b. $22, 500 gai n
c. $50, 000 i ncr ease i n cont r ol l i ng pai d- i n capi t al
d. $22, 500 i ncr ease i n cont r ol l i ng pai d- i n capi t al



Common st ock, $10 par . . . . . . . . . . . . . . . $100, 000

f or $35 each i n a publ i c of f er i ng t o noncont r ol l i ng shar ehol der s. As a
a. $45, 000 l oss
b. $21, 875 l oss
c. $45, 000 decr ease i n cont r ol l i ng pai d- i n capi t al
d. $21, 875 decr ease i n cont r ol l i ng pai d- i n capi t al


Chapt er 8
8- 4
Scot t Company had t ot al equi t y of $550, 000. Scot t Company had t he
f ol l owi ng st ockhol der s' equi t y on t he dat es shown:

1/ 1/ X1 1/ 1/ X3 12/ 31/ X4
Common st ock, $10 par . . . . . . $100, 000 $100, 000 $125, 000
Ot her pai d- i n capi t al . . . . . . 200, 000 200, 000 375, 000
Ret ai ned ear ni ngs. . . . . . . . . . 250, 000 350, 000 400, 000

f or $80 each i n a pr i vat e of f er i ng t o noncont r ol l i ng shar ehol der s.
Assume t hat t he i nvest ment i n Scot t Company i s car r i ed under t he cost
met hod. The cost - t o- equi t y adj ust ment t o t he i nvest ment account t o br i ng
i t t o i t s si mpl e equi t y adj ust ed cost on December 31, 20X4, woul d be an
i ncr ease of __________.
a. $96, 000
b. $112, 500
c. $127, 500
d. $224, 000


Scot t Company had t ot al equi t y of $550, 000. Scot t Company had t he
f ol l owi ng st ockhol der s' equi t y on t he dat es shown:

1/ 1/ X1 1/ 1/ X3 12/ 31/ X4
Common st ock, $10 par . . . . . . $100, 000 $100, 000 $125, 000
Ot her pai d- i n capi t al . . . . . . 200, 000 200, 000 250, 000
Ret ai ned ear ni ngs. . . . . . . . . . 250, 000 350, 000 400, 000

f or $30 each i n a pr i vat e of f er i ng t o noncont r ol l i ng shar ehol der s.
Assume t hat t he i nvest ment i n Scot t Company i s car r i ed under t he cost
met hod. The cost - t o- equi t y adj ust ment t o t he i nvest ment account t o br i ng
i t t o i t s si mpl e equi t y adj ust ed cost on December 31, 20X4, woul d be an
i ncr ease of __________.
a. $52, 500
b. $112, 500
c. $120, 000
d. $135, 000


Chapt er 8
8- 5
11. Company P owns 80%of t he out st andi ng common st ock of t he Company S and
has 10, 000 out st andi ng shar es of common st ock. I f Company S i ssues 2, 500
added shar es of common st ock, and Company P pur chases some of t he newl y
i ssued shar es, whi ch of t he f ol l owi ng st at ement s i s t r ue?
a. Ot her t han r ecor di ng t he pur chase, t her e i s no adj ust ment t o t he
cont r ol l i ng i nt er est i f t he par ent pur chases al l t he shar es
i ssued.
b. Ot her t han r ecor di ng t he pur chase, t her e i s no adj ust ment t o t he
cont r ol l i ng i nt er est i f t he par ent does not pur chase any of t he
shar es i ssued.
c. Ot her t han r ecor di ng t he pur chase, t her e i s no adj ust ment t o t he
cont r ol l i ng i nt er est i f t he par ent pur chases 80%of t he shar es
i ssued.
d. Ther e i s a new excess of cost over book val ue or excess of book
val ue over cost i f t he par ent pur chases 80%of t he newl y i ssued
shar es.


12. Pr i or t o J anuar y 1, 20X3, Company P owned a 90%i nt er est Company S. On
J anuar y 1, 20X3, Company S had t he f ol l owi ng st ockhol der s' equi t y:

Common st ock, $10 par . . . . . . . . . . . . . . . $100, 000

On J anuar y 2, 20X9, Company S sol d 2, 000 added shar es i n a pr i vat e
of f er i ng f or $80 per shar e. Company P pur chased al l t he shar es. As a
r esul t of t hi s sal e,
a. t he i nvest ment account i ncr eases $160, 000 and cont r ol l i ng i nt er est
i n pai d- i n capi t al decr eases.
b. t he i nvest ment account i ncr eases $160, 000, and t her e i s addi t i onal
c. t he i nvest ment account i ncr eases $160, 000, and a gai n i s r ecor ded.
d. t he i nvest ment account i ncr eases $160, 000, and a l oss i s r ecor ded.


13. Pr i or t o J anuar y 1, 20X3, Company P owned a 90%i nt er est Company S. On
J anuar y 1, 20X3, Company S had t he f ol l owi ng st ockhol der s' equi t y:

Common st ock, $10 par . . . . . . . . . . . . . . . $100, 000

On J anuar y 2, 20X3, Company S sol d 2, 000 added shar es i n a pr i vat e
of f er i ng f or $70 per shar e. Company P pur chased 600 of t he shar es. As a
r esul t of t hi s sal e, t her e i s a( n)
a. gai n on t he consol i dat ed i ncome st at ement of $15, 000.
b. i ncr ease i n t he cont r ol l i ng i nt er est , pai d- i n excess of $15, 000.
c. i ncr ease i n t he i nvest ment account and a new excess of cost over
book val ue.
d. i ncr ease i n t he cont r ol l i ng i nt er est , pai d- i n capi t al of $57, 000.


Chapt er 8
8- 6
14. When a par ent pur chases a por t i on of t he newl y i ssued st ock of i t s
subsi di ar y and t he owner shi p i nt er est r emai ns t he same,
a. any di f f er ence bet ween t he change i n equi t y and t he pr i ce pai d i s
t he excess of cost or book val ue at t r i but abl e t o t he new bl ock.
b. any di f f er ence bet ween t he change i n equi t y and t he pr i ce pai d i s
vi ewed as a gai n or l oss on t he sal e of an i nt er est .
c. any di f f er ence bet ween t he change i n equi t y and t he pr i ce pai d i s
vi ewed as a change i n pai d- i n capi t al or r et ai ned ear ni ngs.
d. t her e wi l l be no adj ust ment .


subsi di ar y i n a pr i vat e of f er i ng and t he owner shi p i nt er est decr eases,


subsi di ar y and t he owner shi p i nt er est i ncr eases,


17. Appl e I nc. pur chased a 70%i nt er est i n t he Banana Company f or $450, 000
on J anuar y 1, 20X3, when Banana Company had t he f ol l owi ng st ockhol der s'
equi t y:

Common st ock, $10 par . . . . . . . . . . . . . . . . . $100, 000
Ot her pai d- i n capi t al . . . . . . . . . . . . . . . . . 250, 000

At t he t i me of t he pur chase, Banana Company was an 80%owner of t he
Car r ot Company. The i nvest ment i n Car r ot Company i s account ed f or under
t he sophi st i cat ed equi t y met hod. On t he dat e of t he pur chase, Car r ot
Company has a machi ne t hat has a mar ket val ue i n excess of book val ue of
$20, 000. Ther e i s no di f f er ence bet ween book and mar ket val ue f or any
Banana Company asset s. The goodwi l l t hat woul d r esul t f r omt hi s pur chase
i s __________.
a. $100, 000
b. $86, 000
c. $84, 000
d. $88, 800

Chapt er 8
8- 7

18. Appl e I nc. owns a 90%i nt er est i n Banana Company. Banana Company, i n
t ur n, owns a 80%i nt er est i n Car r ot Company. Dur i ng 20X4, Car r ot Company
sol d $50, 000 of mer chandi se t o Appl e I nc. at cost pl us 25%. Of t hi s
mer chandi se, $10, 000 was st i l l unsol d by Appl e I nc. at year end. The
adj ust ment t o t he cont r ol l i ng i nt er est i n consol i dat ed net i ncome f or
20X4 i s __________.
a. $560
b. $1, 440
c. $1, 600
d. $1, 800


19. Abl e Company owns an 80%i nt er est i n Bar ns Company and a 20%i nt er est i n
Car ns Company. Bar ns owns a 40%i nt er est i n Car ns Company.
a. Abl e does not cont r ol Car ns; t hus, Car ns' i ncome i s not i ncl uded
i n t he consol i dat ed st at ement s.
b. Abl e cont r ol s Car ns; t he noncont r ol l i ng i nt er est of Car ns Company
i s 48%.
c. Abl e cont r ol s Car ns; t he noncont r ol l i ng i nt er est of Car ns Company
i s 40%.
d. Bar ns account s f or Car ns under t he sophi st i cat ed cost met hod;
Bar ns i s t hen consol i dat ed wi t h Abl e.


20. Abl e Company owns an 80%i nt er est i n Bar ns Company and a 20%i nt er est i n
Car ns Company. Bar ns owns a 40%i nt er est i n Car ns Company. The r epor t ed
i ncome of Car ns i s $20, 000 f or 20X4. Whi ch of t he f ol l owi ng shows how i t
wi l l be di st r i but ed?

Bar ns
Non- Car ns
Cont r ol l i ng Cont r ol l i ng Non-
I nt er est I nt er est Cont r ol l i ng
a. $10, 400 $1, 600 $8, 000
b. $ 2, 000 $8, 000 $8, 000
c. $12, 000 $ 0 $8, 000
d. $10, 400 $9, 600 $ 0


21. Consol i dat ed st at ement s f or X, Y, and Z ar e pr oper i f
a. X owns 100%of t he out st andi ng common st ock of Y and 49%of Z; M
owns 51%of Z.
b. X owns 100%of t he out st andi ng common st ock of Y and 75%of Z; X
bought t he st ock of Z one mont h bef or e t he st at ement dat e and sol d
i t 6 weeks l at er .
c. X owns 100%of t he out st andi ng st ock of Y; Y owns 75%of Z.
d. Ther e i s no i nt er r el at i on of f i nanci al cont r ol among X, Y, and Z;
however , t hey ar e cont empl at i ng t he j oi nt pur chase of 100%of t he
out st andi ng st ock of D.
e. X owns 100%of t he out st andi ng common st ock of Y and Z; Z i s i n
bankr upt cy.

Chapt er 8
8- 8


22. Whi ch of t he f ol l owi ng si t uat i ons i s a mut ual hol di ng?
a. A owns 80%of B, and B owns 70%of C.
b. A owns 80%of B and 20%of C; B owns 70%of C.
c. A owns 80%of B, and B owns 20%of A.
d. None of t he above


23. Company P had 300, 000 shar es of common st ock out st andi ng. I t owned 80%
of t he out st andi ng common st ock of S. S owned 20, 000 shar es of P common
st ock. I n t he consol i dat ed bal ance sheet , Company P' s out st andi ng common
st ock may be shown as
a. 285, 000 shar es.
b. 300, 000 shar es.
c. 300, 000 shar es, l ess 20, 000 shar es of t r easur y st ock.
d. 300, 000 shar es, f oot not ed t o i ndi cat e t hat S hol ds 20, 000 shar es.


24. A owns 80%of B and 20%of C. B owns 32%of C, and C owns 10%of A.
Whi ch i nt er est wi l l not be i ncl uded i n t he consol i dat ed bal ance sheet ?
a. 10%of A
b. 100%of C
c. 10%of A and 48%of C
d. 20%of B and 48%of C


25. Manke Company owns a 90%i nt er est i n Neske Company. Neske, i n t ur n, owns
a 10%i nt er est i n Manke. Neske has 10, 000 common st ock shar es
out st andi ng, and Manke has 20, 000 common st ock shar es out st andi ng. How
many shar es woul d each f i r mshow as out st andi ng i n t he consol i dat ed
bal ance sheet , under t he t r easur y st ock met hod?
a. Manke, 20, 000
b. Manke, 20, 000; Neske, 1, 000
c. Manke, 18, 000; Neske, 1, 000
d. Manke, 18, 000


Chapt er 8
8- 9
26. Al st on I nc. owns 90%of t he capi t al st ock of Bal ance Co. Bal ance owns
15%of t he capi t al st ock of Al st on. Net i ncome, bef or e adj ust i ng f or
i nt er est i n i nt er company net i ncome f or each f i r m, was $50, 000 f or
Al st on and $19, 000 f or Bal ance.

The f ol l owi ng not at i ons ar e used. I gnor e al l i ncome t ax consi der at i ons.

Ai = Al st on' s consol i dat ed net i ncome, i . e. , i t s net i ncome pl us i t s
shar e of t he consol i dat ed net i ncome of Bal ance

Bi = Bal ance' s consol i dat ed net i ncome, i . e. , i t s net i ncome pl us i t s
shar e of t he consol i dat ed net i ncome of Al st on

The equat i on, i n a set of si mul t aneous equat i ons, t hat comput es Bi i s
a. Bi = . 10 x ( 19, 000 + . 15Ai ) .
b. Bi = 19, 000 + . 15Ai .
c. Bi = ( . 10 x 10, 000) + . 15Ai .
d. Bi = ( . 10 x 19, 000) + ( . 15 x 50, 000) .


27. Al st on I nc. owns 90%of t he capi t al st ock of Bal ance Co. Bal ance owns
15%of t he capi t al st ock of Al st on. Net i ncome, bef or e adj ust i ng f or
i nt er est i n i nt er company net i ncome f or each f i r m, was $50, 000 f or
Al st on and $19, 000 f or Bal ance.

The f ol l owi ng not at i ons ar e used. I gnor e al l i ncome t ax consi der at i ons.

Ai = Al st on' s consol i dat ed net i ncome, i . e. , i t s net i ncome pl us i t s
shar e of t he consol i dat ed net i ncome of Bal ance

Bi = Bal ance' s consol i dat ed net i ncome, i . e. , i t s net i ncome pl us i t s
shar e of t he consol i dat ed net i ncome of Al st on

Bal ance' s noncont r ol l i ng i nt er est i n consol i dat ed net i ncome i s
a. ( . 10 x 19, 000) .
b. 19, 000 + . 15Ai .
c. 10 x ( 19, 000 + . 15Ai ) .
d. ( 10 x 19, 000) + ( . 15 x 50, 000) .


Chapt er 8
8- 10
PROBLEM

1. Two t ypes of i nt er company st ock pur chases si gni f i cant l y compl i cat e t he
consol i dat i on pr ocess. The f i r st occur s when t he subsi di ar y i ssues added
shar es of st ock i n a publ i c i ssue and t he par ent buys a por t i on of t he
shar es. The second occur s when t he subsi di ar y pur chases out st andi ng
shar es of t he par ent company.

Requi r ed:

a. Di scuss t he cur r ent t heor et i cal consol i dat i on pr ocedur e f or
si t uat i ons i n whi ch t he par ent buys a por t i on of t he newl y
i ssued subsi di ar y shar es t hat i s ( 1) equal t o i t s exi st i ng
owner shi p per cent age, ( 2) gr eat er t han i t s exi st i ng owner shi p
per cent age, and ( 3) l ess t han i t s exi st i ng owner shi p
per cent age.

b. Di scuss t he most wi del y suppor t ed, cur r ent t heor et i cal
consol i dat i on pr ocedur es used when t he subsi di ar y pur chases
out st andi ng common st ock shar es of t he par ent .

ANS:

a. ( 1) The par ent ' s i nvest ment account i ncr eases, but t he i ncr ease
i s equal t o t he change i n t he par ent ' s equi t y i n t he
subsi di ar y. Thus, t her e i s no added excess of cost or book
val ue, and t her e i s no equi t y adj ust ment .

( 2) That por t i on of t he pur chase t hat exceeds t he shar es needed
t o mai nt ai n t he exi st i ng owner shi p per cent age const i t ut es a
new bl ock of st ock t hat r equi r es a new det er mi nat i on and
di st r i but i on of excess schedul e f or t he added i nt er est . Ther e
wi l l be separ at e amor t i zat i on of excess on t he new bl ock.

( 3) I n ef f ect , t he par ent ' s i nvest ment mi t i gat es t he i mpact on
i t s por t i on of subsi di ar y equi t y. The equi t y i nt er est pr i or
t o t he i ssuance pl us t he pr i ce pai d f or t he added i nt er est i s
compar ed t o t he equi t y i nt er est af t er t he i ssuance. I f t her e
i s an i ncr ease, pai d- i n capi t al i n excess of par i ncr eases.
I f t her e i s a decr ease, pai d- i n capi t al i n excess of par
decr eases.

b. The most popul ar vi ew of a mut ual hol di ng i s t hat t he subsi di ar y
i s pur chasi ng t he shar es of t he par ent as an agent of t he par ent .
Thi s i s a r easonabl e vi ew si nce t he subsi di ar y i s cont r ol l ed by
t he par ent . The shar es pur chased ar e t r eat ed as t r easur y shar es.
As such, t hese shar es do not r ecei ve any shar e of consol i dat ed
i ncome.

DI F: M OBJ : 2, 5

Chapt er 8
8- 11
2. Company P owned an 80%i nt er est i n Company S on J anuar y 1, 20X6, when
Company S had t he f ol l owi ng st ockhol der s' equi t y:

Common st ock ( $20 par ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180, 000
Pai d- i n capi t al i n excess of par . . . . . . . . . . . . . . . . . . . . . . 350, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . . . . . . . . . . . . . . . . . $750, 000
========

On J ul y 1, 20X6, Company S sol d 1, 000 addi t i onal shar es t o mi nor i t y
shar ehol der s i n a publ i c of f er i ng f or $50 per shar e. Company S' s net
i ncome f or 20X6 was $80, 000, and t he i ncome was ear ned evenl y dur i ng t he
year .

Company P uses t he si mpl e equi t y met hod t o r ecor d t he i nvest ment i n
Company S. Summar y ent r i es ar e made each December 31 t o r ecor d t he
year ' s act i vi t y.

Requi r ed:

Pr epar e Company P' s equi t y adj ust ment s f or 20X6 t hat r esul t f r omchanges
i n t he i nvest ment i n Company S account . Assume Company P has $500, 000 of
pai d- i n capi t al i n excess of par .

ANS:

I nvest ment i n Company S. . . . . . . . . . . . . . . . . . . . 60, 800
Subsi di ar y I ncome. . . . . . . . . . . . . . . . . . . . . . . . 60, 800

Cal cul at i on:
80%x f i r st 6 mont hs i ncome of 40, 000. . . . $ 32, 000
72%x second 6 mont hs i ncome of 40, 000. . . 28, 800
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60, 800
========

Cal cul at i on:
I nt er est af t er sal e
Company S, J anuar y 1, equi t y. . . . . . . . . . . $750, 000
I ncome, f i r st 6 mont hs. . . . . . . . . . . . . . . . . 40, 000
Sal e of shar es, 1, 000 x $50. . . . . . . . . . . . 50, 000
Tot al st ockhol der s' equi t y. . . . . . . . . . . . . $840, 000
I nt er est . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 $604, 800
I nt er est pr i or t o sal e
( 750, 000 + 40, 000) x 80%. . . . . . . . . . . . . . . . 632, 000
Decr ease i n owner shi p i nt er est . . . . . . . . . . . $ 27, 200
========

DI F: D OBJ : 2

Chapt er 8
8- 12
$300, 000. Any excess of cost was at t r i but abl e t o goodwi l l .

On J anuar y 1, 20X4, Company S pur chased 2, 400 shar es hel d by
noncont r ol l i ng st ockhol der s f or $50 per shar e. Any excess of cost over
book val ue i s at t r i but abl e t o goodwi l l . No ot her changes t o t he pai d- i n
capi t al account have occur r ed.

Company S equi t y bal ances on var i ous dat es wer e as f ol l ows:

J anuar y 1, December 31, December 31,
20X1 20X3 20X5
Capi t al st ock ( $10 par ) . . . $120, 000 $120, 000 $120, 000
Pai d- i n capi t al i n excess
of par . . . . . . . . . . . . . . . . . . 60, 000 60, 000 60, 000
Ret ai ned ear ni ngs. . . . . . . . . 160, 000 240, 000 340, 000
Tr easur y st ock ( at cost ) . . ( 120, 000)

Company P mai nt ai ns i t s i nvest ment at cost . Company S r ecor ded t he
pur chase of i t s shar es as t r easur y st ock at cost .

Requi r ed:

Pr epar e t he necessar y det er mi nat i on and di st r i but i on of excess schedul es
and al l Fi gur e 8- 1 wor ksheet el i mi nat i ons and adj ust ment s on t he
f ol l owi ng par t i al wor ksheet pr epar ed on December 31, 20X6:

ANS:


80%I nt er est
Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300, 000
I nt er est acqui r ed, 80%x $340, 000. . . . . . . . . . . . . . . . . . . . . . 272, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28, 000
========

20%Tr easur y St ock
Pr i ce pai d, 2, 400 shar es x $50. . . . . . . . . . . . . . . . . . . . . . . . . $120, 000
I nt er est acqui r ed, 20%x $420, 000. . . . . . . . . . . . . . . . . . . . . . 84, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36, 000
========

Chapt er 8
8- 13


CV Conver t t he 80%i nt er est t o t he equi t y met hod, 80%x
( $340, 000 - $160, 000) .

CVT Conver t t he 20%t r easur y st ock t o t he equi t y met hod, 20%of
( $340, 000 - $240, 000) .

EL El i mi nat e t he 80%i nvest ment agai nst Company S equi t y.

D Di st r i but e t he excess on t he 80%i nt er est .

ELT El i mi nat e t he t r easur y st ock i nvest ment agai nst Company S
equi t y.

DT Di st r i but e t he excess of t he 20%t r easur y st ock.

DI F: D OBJ : 3

4. Company B pur chased an 80%i nt er est i n t he common st ock of Company C f or
$600, 000 on J anuar y 1, 20X1. Any excess of cost i s at t r i but abl e t o a
pat ent wi t h a 20- year l i f e. Company B mai nt ai ns i t s i nvest ment i n
Company C under t he cost met hod.

Company A pur chased a 60%i nt er est i n t he common st ock of Company B on
J anuar y 1, 20X5, f or $2, 500, 000. Any excess of cost i s at t r i but abl e t o
Company C equi pment , whi ch i s under st at ed by $100, 000, and a Company B
bui l di ng, whi ch i s under st at ed by $200, 000. Any r emai ni ng excess i s
consi der ed at t r i but abl e t o t he pat ent . Rel evant st ockhol der s' equi t i es
ar e as f ol l ows:

Company B Company C
J anuar y 1, J anuar y 1, J anuar y 1,
20X5 20X1 20X5
Common st ock. . . . . . . . . . . . $ 400, 000 $100, 000 $100, 000
Pai d- i n capi t al i n
excess of par . . . . . . . . . 1, 100, 000 150, 000 150, 000
Ret ai ned ear ni ngs. . . . . . . 2, 000, 000 300, 000 450, 000

Requi r ed:

a. Pr epar e a det er mi nat i on and di st r i but i on of excess schedul e
f or t he i nvest ment i n Company B.

b. On J anuar y 1, 20X6, Company C sol d a machi ne wi t h a net book
val ue of $40, 000 t o Company A f or $50, 000. The machi ne has a
5- year l i f e. Pr epar e t he el i mi nat i ons and adj ust ment s needed
on t he December 31, 20X7, t r i al bal ance wor ksheet t hat r el at e
t o t hi s i nt er company sal e.

Chapt er 8
8- 14
ANS:

a. Pr i ce pai d, J anuar y 1, 20X5. . . . . . . . . . . . . $2, 500, 000
Company B equi t y. . . . . . . . . . . . . . . . . . . . $3, 500, 000
Company B cont r ol l i ng i nt er est i n
Company C undi st r i but ed i ncome,
80%x $150, 000. . . . . . . . . . . . . . . . . . 120, 000
Pat ent amor t i zat i on,
4 year s x $8, 000*. . . . . . . . . . . . . . . . . ( 32, 000)
Tot al st ockhol der s' equi t y. . . . . . . . . . . . $3, 588, 000
I nt er est acqui r ed. . . . . . . . . . . . . . . . . . . . . 60% 2, 152, 800
Excess of cost over book val ue. . . . . . . . $ 347, 200
At t r i but abl e t o Company C
equi pment , 60%x 80%x 100, 000. . . . 48, 000
At t r i but abl e t o Company B
bui l di ng, 60%x 200, 000. . . . . . . . . . . 120, 000 168, 000
At t r i but abl e t o t he pat ent . . . . . . . . . . $ 179, 200
==========

*Det er mi nat i on and Di st r i but i on of Excess Schedul e:

Pr i ce pai d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $600, 000
I nt er est acqui r ed, 80%x $550, 000,
Company C equi t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440, 000
At t r i but abl e t o t he pat ent 20- year l i f e. . . . . . . . . . . $160, 000
========

b. El i mi nat i ons and Adj ust ment s:

Ret ai ned Ear ni ngs, A, 8, 000 x 80%x 60%. . . . 3, 840
Ret ai ned Ear ni ngs, B, 8, 000 x 80%x 40%. . . . 2, 560
Ret ai ned Ear ni ngs, C, 8, 000 x 20%. . . . . . . . . . 1, 600
Accumul at ed Depr eci at i on. . . . . . . . . . . . . . . . . . . 2, 000
Machi ne. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
To el i mi nat e t he r emai ni ng gai n and
r est or e machi ne val ue.

Accumul at ed Depr eci at i on. . . . . . . . . . . . . . . . . . . 2, 000
Depr eci at i on Expense. . . . . . . . . . . . . . . . . . . . . 2, 000
To r ecogni ze gai n f or t he cur r ent year .

DI F: D OBJ : 4

5. Company P pur chased an 80%i nt er est i n t he Company S f or $480, 000 on
J anuar y 1, 20X1, when Company S had t he f ol l owi ng st ockhol der s' equi t y:

Common st ock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200, 000
Tot al equi t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500, 000
========

Any excess i s at t r i but abl e t o goodwi l l .

On J anuar y 1, 20X3, Company S pur chased a 10%i nt er est i n t he Company P
at a pr i ce equal t o book val ue. Bot h f i r ms mai nt ai n i nvest ment s under
t he cost met hod.

Chapt er 8
8- 15
Requi r ed:

a. Compl et e t he Fi gur e 8- 2 par t i al wor ksheet f or December 31,
20X3, assumi ng t he use of t he t r easur y st ock met hod.

b. Cal cul at e t he di st r i but i on of i ncome f or 20X3, assumi ng t hat
i nt er nal l y gener at ed net i ncome i s $50, 000 f or Ci r cus and
$20, 000 f or Squar e.

ANS:



CV Conver t i nvest ment i n Company S t o t he equi t y met hod, 80%of
( $400, 000 - $300, 000) .

ELS El i mi nat e t he i nvest ment i n Company S agai nst Company S
equi t y.

D Di st r i but e t he excess accor di ng t o t he schedul e.

ELP El i mi nat e t he i nvest ment i n Company P agai nst Company P
equi t y.

b. Cont r ol l i ng i nt er est :
$50, 000 + ( 80%x $20, 000) . . . . . . . . . . . . . . . . . . . . $66, 000
Noncont r ol l i ng i nt er est : 20%x $20, 000. . . . . . . . 4, 000
Consol i dat ed net i ncome: . . . . . . . . . . . . . . . . . . . . . $70, 000
=======

DI F: D OBJ : 5

6. On J anuar y 1, 20X1, Pr i smCompany pur chased 7, 500 shar es of t he common
st ock of Si ght Company f or $495, 000. On t hi s dat e, Si ght had 20, 000
shar es of $10 par common st ock aut hor i zed, 10, 000 shar es i ssued and
out st andi ng. Ot her pai d- i n capi t al and r et ai ned ear ni ngs wer e $200, 000
and $300, 000 r espect i vel y. On J anuar y 1, 20X1, any excess of cost over
book val ue i s due t o a pat ent , t o be amor t i zed over 15 year s.

Si ght ' s net i ncome and di vi dends f or t wo year s wer e:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $80, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 20, 000

I n November , 20X1, Si ght Company al so decl ar ed a 10%st ock di vi dend at a
t i me when t he mar ket pr i ce of i t s common st ock was $50 per shar e. The
st ock di vi dend was di st r i but ed on December 31, 20X1.

For bot h 20X1 and 20X2, Pr i smCompany has account ed f or i t s i nvest ment
i n Si ght Company usi ng t he si mpl e equi t y met hod.

Dur i ng 20X1, Si ght Company sol d goods t o Pr i smCompany f or $40, 000, of
whi ch $10, 000 was on hand on December 31, 20X1. Dur i ng 20X2, Si ght sol d
goods t o Pr i smf or $60, 000 of whi ch $15, 000 was on hand on December 31,
20X2. Si ght ' s gr oss pr of i t on i nt er company sal es i s 40%.
Chapt er 8
8- 16

Requi r ed:

f or 20X2.

ANS:



account and i n t he Si ght i ncome account .

EL El i mi nat e 75%of Si ght Company equi t y bal ances at t he

pat ent .

A Amor t i ze t he pat ent over 15 year s. Char ge t he 20X1
amor t i zat i on t o r et ai ned ear ni ngs of Pr i smand t he 20X2
amor t i zat i on t o oper at i ng expenses.

B1 El i mi nat e t he i nt er company gr oss pr of i t i n t he begi nni ng
i nvent or y of Pr i sm.

I S El i mi nat e t he i nt er company sal e and pur chase of mer chandi se.




To Cont r ol l i ng I nt er est : 100, 000 + [ . 75 x ( 80, 000 + 4, 000 - 6, 000) ]
- 3, 000 = $155, 500

DI F: D OBJ : 1

Chapt er 8
8- 17
7. On J anuar y 1, 20X1, Pr i smCompany pur chased 7, 500 shar es of t he common
st ock of Si ght Company f or $495, 000. On t hi s dat e, Si ght had 20, 000
shar es of $10 par common st ock aut hor i zed, 10, 000 shar es i ssued and
out st andi ng. Ot her pai d- i n capi t al and r et ai ned ear ni ngs wer e $200, 000
and $300, 000 r espect i vel y. On J anuar y 1, 20X1, any excess of cost over
book val ue i s due t o a pat ent , t o be amor t i zed over 15 year s.

Si ght ' s net i ncome and di vi dends f or t wo year s wer e:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $80, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 20, 000

I n November , 20X1, Si ght Company al so decl ar ed a 10%st ock di vi dend at a
t i me when t he mar ket pr i ce of i t s common st ock was $50 per shar e. The
st ock di vi dend was di st r i but ed on December 31, 20X1.

For bot h 20X1 and 20X2, Pr i smCompany has account ed f or i t s i nvest ment
i n Si ght usi ng t he cost met hod.

Dur i ng 20X1, Si ght Company sol d goods t o Pr i smCompany f or $40, 000, of
whi ch $10, 000 was on hand on December 31, 20X1. Dur i ng 20X2, Si ght sol d
goods t o Pr i smf or $60, 000 of whi ch $15, 000 was on hand on December 31,
20X2. Si ght ' s gr oss pr of i t on i nt er company sal es i s 40%.

Requi r ed:

f or 20X2.

Chapt er 8
8- 18
ANS:



Comput at i on of conver si on:

Ret ai ned ear ni ngs, J anuar y 1, 20X2 ( af t er st ock di vi dend) $290, 000
Ret ai ned ear ni ngs, J anuar y 1, 20X1 . . . . . . . . . . . . . . . . . . . . 300, 000
Change i n r et ai ned ear ni ngs bal ance ( decr ease) . . . . . . . . . ( 10, 000)
Add back r et ai ned ear ni ngs t r ansf er r ed t o
ot her pai d- i n capi t al ( $50 x 1, 000 shar es)
as a r esul t of st ock di vi dend. . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
$ 40, 000
Owner shi p i nt er est . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75%
Si mpl e equi t y conver si on. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30, 000
========

or

20X1 net i ncome - di vi dends decl ar ed ( $50, 000 - $10, 000) x 75%= $30, 000

CY El i mi nat e t he cur r ent - year di vi dend i ncome of Pr i smagai nst
di vi dends decl ar ed by Si ght .

EL El i mi nat e 75%of Si ght Company equi t y bal ances at t he
begi nni ng of t he year agai nst t he i nvest ment account

pat ent .

amor t i zat i on t o r et ai ned ear ni ngs of Pr i smand t he 20X2

BI El i mi nat e t he i nt er company gr oss pr of i t i n t he begi nni ng





To Cont r ol l i ng I nt er est : 100, 000 + [ . 75 x ( 80, 000 + 4, 000 - 6, 000) ]
- 2, 000 = $156, 500

DI F: D OBJ : 1

Chapt er 8
8- 19
8. On J anuar y 1, 20X1, Par ent Company pur chased 8, 000 shar es of t he common
st ock of Subsi di ar y Company f or $350, 000. On t hi s dat e, Subsi di ar y had
20, 000 shar es of $5 par common st ock aut hor i zed, 10, 000 shar es i ssued
and out st andi ng. Ot her pai d- i n capi t al and r et ai ned ear ni ngs wer e
$150, 000 and $200, 000 r espect i vel y. On J anuar y 1, 20X1, any excess of
cost over book val ue i s due t o a pat ent , t o be amor t i zed over 15 year s.

Subsi di ar y' s net i ncome and di vi dends f or t wo year s wer e:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $90, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 30, 000

On J anuar y 1, 20X2, Subsi di ar y Company sol d an addi t i onal 2, 000 shar es
of common st ock t o one i ndi vi dual f or $50 per shar e. The shar es wer e not
i ssued i n a publ i c of f er i ng.

On t hi s dat e, Par ent Company r ecor ded t he f ol l owi ng ent r y on i t s books
as a r esul t of i t s change i n per cent age owner shi p of Subsi di ar y Company.

J an. 1 I nvest ment i n Subsi di ar y Company. . . 8, 000
Ot her Pai d- i n Capi t al . . . . . . . . . . . . 8, 000
To r ecor d i ncr ease i n owner shi p
i nt er est

For bot h 20X1 and 20X2, Par ent Company has cor r ect l y appl i ed t he si mpl e
equi t y met hod.

I n t he l ast quar t er of 20X2, Subsi di ar y Company sol d goods t o Par ent
Company f or $40, 000. Subsi di ar y' s usual gr oss pr of i t on i nt er company
sal es i s 40%. On December 31, $7, 500 of t hese goods ar e st i l l i n
Par ent ' s endi ng i nvent or y.

Requi r ed:

f or 20X2.

Chapt er 8
8- 20
ANS:


The or i gi nal pat ent i s as f ol l ows:
$350, 000 - 80%x ( 50, 000 + 150, 000 + 200, 000) = $30, 000.

Par ent ' s per cent age owner shi p - bef or e: 8, 000 10, 000 = 80%
Par ent ' s per cent age owner shi p - af t er : 8, 000 12, 000 = 66 2/ 3%

Adj ust ment f or change i n owner shi p per cent age:
Subsi di ar y Company shar ehol der s' equi t y pr i or
t o sal e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $440, 000
Add t o common st ock, $5 par x 2, 000 shar es. . . . . . . . . . . 10, 000
Add t o ot her pai d- i n capi t al , $45 x 2, 000 shar es. . . . . $ 90, 000
Subsi di ar y Company shar ehol der s' equi t y subsequent
t o sal e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $540, 000
========

Cont r ol l i ng i nt er est subsequent t o sal e
( 66 2/ 3%of $540, 000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $360, 000
Cont r ol l i ng i nt er est pr i or t o sal e ( 80%of $440, 000) . 352, 000
Net i ncr ease i n cont r ol l i ng i nt er est . . . . . . . . . . . . . . . . . $ 8, 000
========



EL El i mi nat e 66 2/ 3%of Subsi di ar y Company equi t y bal ances at

pat ent .

amor t i zat i on t o r et ai ned ear ni ngs of Par ent and t he 20X2


i nvent or y of Par ent .


To Noncont r ol l i ng I nt er est : . 33 1/ 3 x ( 90, 000 - 3, 000) = $29, 000

To Cont r ol l i ng I nt er est : 100, 000 + [ . 66 2/ 3 x ( 90, 000 - 3, 000) ] -
2, 000 = $156, 000

DI F: D OBJ : 2

Chapt er 8
8- 21

Subsi di ar y' s net i ncome and di vi dends f or 2 year s wer e:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $90, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 30, 000

of common st ock t o one i ndi vi dual f or $50 per shar e. The shar es wer e not
i ssued i n a publ i c of f er i ng.

For bot h 20X1 and 20X2, Par ent Company has cor r ect l y appl i ed t he cost
met hod.


Requi r ed:

f or 20X2.

ANS:


The or i gi nal pat ent i s as f ol l ows
$405, 000 - 90%x ( 50, 000 + 150, 000 + 200, 000) = $45, 000.

Par ent ' s per cent age owner shi p - af t er : 8, 000 12, 000 = 66 2/ 3%

Cost - t o- equi t y conver si on
Adj ust ment t o Par ent Company r et ai ned ear ni ngs:
80%of change i n r et ai ned ear ni ngs of
Subsi di ar y
Company f r omJ anuar y 1, 20X1 t o J anuar y 1, 20X2:
80%x $40, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32, 000

Adj ust ment t o Par ent Company ot her pai d- i n
capi t al :
Cont r ol l i ng i nt er est af t er sal e
( 66 2/ 3%of $540, 000) . . . . . . . . . . . . . . . . . . . . $360, 000
Cont r ol l i ng i nt er est bef or e sal e
( 80%of $440, 000) . . . . . . . . . . . . . . . . . . . . . . . . . 352, 000 8, 000
Adj ust ment t o i nvest ment account : . . . . . . . . . . . . $40, 000
=======

Chapt er 8
8- 22



EL El i mi nat e 66 2/ 3%of Subsi di ar y Company equi t y bal ances at

pat ent .





To Noncont r ol l i ng I nt er est : . 33 1/ 3 x ( 90, 000 - 3, 000) = $29, 000

To Cont r ol l i ng I nt er est : 100, 000 + [ . 66 2/ 3 x ( 90, 000 - 3, 000) ] -
2, 000 = $156, 000

DI F: D OBJ : 2

Chapt er 8
8- 23

Subsi di ar y' s net i ncome and di vi dends f or t wo year s wer e:

20X1 20X2
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $80, 000
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 20, 000

of common st ock f or $50 per shar e. The shar es wer e not i ssued i n a
publ i c of f er i ng. Par ent pur chased 1, 200 shar es of t he new i ssue, and one
i ndi vi dual pur chased t he ot her 800.

On t hi s dat e, Par ent Company r ecor ded t he f ol l owi ng ent r i es on i t s books
f or t he pur chase and as a r esul t of i t s change i n per cent age owner shi p
of Subsi di ar y Company.

J an. 1 I nvest ment i n Subsi di ar y Company. . . . . . . 60, 000
To r ecor d pur chase of 1, 200 shar es

J an. 1 I nvest ment i n Subsi di ar y Company. . . . . . . 3, 000
To r ecor d i ncr ease i n owner shi p
i nt er est

For bot h 20X1 and 20X2, Par ent Company has cor r ect l y appl i ed t he si mpl e
equi t y met hod.


Requi r ed:

f or 20X2.

Chapt er 8
8- 24
ANS:

The or i gi nal pat ent i s as f ol l ows:

$405, 000 - 90%x ( 50, 000 + 150, 000 + 200, 000) = $45, 000

Par ent ' s per cent age owner shi p - af t er : 10, 200 12, 000 = 85%

Adj ust ment f or change i n owner shi p per cent age:

Subsi di ar y Company shar ehol der s' equi t y pr i or t o sal e . . . $440, 000
Add t o common st ock, $5 par x 2, 000 shar es. . . . . . . . . . . . . . . 10, 000
Add t o ot her pai d- i n capi t al , $45 x 2, 000 shar es. . . . . . . . . 90, 000

Subsi di ar y Company shar ehol der s' equi t y subsequent t o sal e $540, 000
========
Cont r ol l i ng i nt er est subsequent t o sal e ( 85%of $540, 000) $459, 000
Cont r ol l i ng i nt er est pr i or t o sal e ( 90%of $440, 000) . . . . . 396, 000

Net i ncr ease i n cont r ol l i ng i nt er est . . . . . . . . . . . . . . . . . . . . . $ 63, 000
Pr i ce pai d f or shar es: 1, 200 x $50. . . . . . . . . . . . . . . . . . . . . . 60, 000

I ncr ease i n cont r ol l i ng i nt er est over pr i ce pai d. . . . . . . . . $ 3, 000
========




pat ent .






To Cont r ol l i ng I nt er est : 100, 000 + [ . 85 x ( 80, 000 - 4, 000) ] - 3, 000
= $161, 600

DI F: D OBJ : 2

Chapt er 8
8- 25
Sub- One Company f or $87, 000. On t hi s dat e, Sub- One had common st ock,

On J anuar y 1, 20X2, Par ent Company pur chased 90%of t he common st ock of
Sub- Two Company f or $73, 500. On t hi s dat e, Sub- Two had common st ock,

Any excess of cost over book val ue on ei t her pur chase i s due t o t he
pat ent , t o be amor t i zed over 15 year s.

For bot h 20X1 and 20X2, Par ent has account ed f or bot h subsi di ar i es usi ng

On J ul y 1, 20X2, Sub- One sol d used equi pment t o Sub- Two. The equi pment
had a cost of $50, 000 and accumul at ed depr eci at i on of $20, 000. The sal e
pr i ce was $36, 000. Dur i ng t he l ast hal f of 20X2, Sub- Two used t he
equi pment , depr eci at i ng i t over f i ve year s usi ng t he st r ai ght - l i ne
met hod.

Dur i ng 20X2, Sub- Two sol d mer chandi se t o Sub- One f or $10, 000, of whi ch
$5, 000 i s st i l l hel d by Sub- One on December 31, 20X2. Sub- Two' s gr oss
pr of i t was 40%.

Requi r ed:

f or 20X2.

Chapt er 8
8- 26
ANS:



CY1 El i mi nat e t he cur r ent - year ent r i es made i n t he i nvest ment
account f or Sub- One and i n t he subsi di ar y i ncome account .

EL1 El i mi nat e 80%of t he Sub- One Company equi t y bal ances at t he

D1 Di st r i but e t he $15, 000 excess of cost over book val ue t o
pat ent .


account f or Sub- Two and i n t he subsi di ar y i ncome account .

EL2 El i mi nat e 90%of t he Sub- Two Company equi t y bal ances at t he

D2 Di st r i but e t he $6, 000 excess of cost over book val ue t o t he
pat ent .

A2 Amor t i ze t he pat ent over 15 year s, wi t h $400 f or 20X2
char ged t o oper at i ng expenses.

F1 El i mi nat e t he i nt er company gai n on sal e of equi pment ,
r est or e t he asset t o cost and r est or e t he ol d accumul at ed
depr eci at i on.

F2 El i mi nat e t he excess depr eci at i on of $600 on t he equi pment
f or t he l ast hal f of 20X2.

I S El i mi nat e t he i nt er company sal es and pur chases.

i nvent or y.


To Noncont r ol l i ng I nt er est Sub- One: . 2 x ( 20, 000 - 6, 000 + 600) =
$2, 920

To Noncont r ol l i ng I nt er est Sub- Two: . 1 x ( 10, 000 - 2, 000) = $800

To Cont r ol l i ng I nt er est : 25, 000 + [ . 8 x ( 20, 000 - 6, 000 + 600) ] +
[ . 9 x ( 10, 000 - 2, 000) ] - 1, 000 - 400 = $42, 480

DI F: D OBJ : 4

Chapt er 8
8- 27
Sub- A Company f or $90, 000. On t hi s dat e, Sub- A had common st ock, ot her
pai d- i n capi t al , and r et ai ned ear ni ngs of $10, 000, $20, 000, and $60, 000
r espect i vel y.

On J anuar y 1, 20X2, Sub- A Company pur chased 80%of t he common st ock of
Sub- B Company f or $68, 000. On t hi s dat e, Sub- B Company had common st ock,

Any excess of cost over book val ue on ei t her pur chase i s due t o a
pat ent , t o be amor t i zed over t en year s.

Bot h Par ent and Sub- A have account ed f or t hei r i nvest ment s usi ng t he
si mpl e equi t y met hod.

Dur i ng 20X2, Sub- B sol d mer chandi se t o Sub- A f or $20, 000, of whi ch one-
f our t h i s st i l l hel d by Sub- B on December 31, 20X2. Sub- B' s usual gr oss
pr of i t i s 40%. Dur i ng 20X3, Sub- B sol d mor e goods t o Sub- A f or $30, 000,
of whi ch $10, 000 i s st i l l on hand on December 31, 20X3.

Requi r ed:

f or 20X3.

Chapt er 8
8- 28
ANS:



account f or Sub- A and i n t he Sub- B i ncome account .

EL1 El i mi nat e 90%of Sub- A Company equi t y bal ances at t he

pat ent .

A1 Amor t i ze t he pat ent over 10 year s, wi t h $1, 800 f or 20X1 and
20X2 char ged t o r et ai ned ear ni ngs of Par ent and $900 f or
20X3 t o oper at i ng expenses.

account f or Sub- B and i n t he Sub- B i ncome account .

EL2 El i mi nat e 80%of Sub- B Company equi t y bal ances at t he

pat ent .

char ged 10%t o r et ai ned of Sub- A and 90%t o Par ent , and $800
f or 20X3 t o oper at i ng expenses.


i nvent or y.

i nvent or y ( $2, 000) wi t h debi t s t o r et ai ned ear ni ngs of Sub- B
f or 20%x ( 2, 000) or $400, t o r et ai ned ear ni ngs of Sub- A f or
10%x ( 80%x [ 2, 000] ) or $160, and t o r et ai ned ear ni ngs of
Par ent f or 90%x ( 80%[ 2, 000] ) or $1, 440.


To Noncont r ol l i ng I nt er est Sub- B: 20%x ( 12, 500 + 2, 000 - 4, 000) =
$2, 100

To Noncont r ol l i ng I nt er est Sub- A: 10%x [ 20, 000 + 80%x ( 12, 500 +
2, 000 - 4, 000) - 800] = $2, 760

To Cont r ol l i ng I nt er est : 30, 000 + 90%x [ 20, 000 + 80%x ( 12, 500 +
2, 000 - 4, 000) - 800] - 900 = $53, 940

DI F: D OBJ : 4

Chapt er 8
8- 29
r espect i vel y.

On J anuar y 1, 20X2, Sub- A Company pur chased 80%of t he common st ock of
Sub- B Company f or $68, 000. On t hi s dat e, Sub- B Company had common st ock,

Any excess of cost over book val ue on ei t her pur chase i s due t o a
pat ent , t o be amor t i zed over t en year s.

cost met hod.

On December 31, 20X1, Par ent sol d used equi pment t o Sub- A Company. The
equi pment had a cost of $45, 000 and accumul at ed depr eci at i on of $20, 000.
The sal e pr i ce was $30, 000. Dur i ng 20X2 and 20X3, Sub- A used t he
equi pment , depr eci at i ng i t over f i ve year s usi ng t he st r ai ght - l i ne
met hod.


Requi r ed:

f or 20X3.

Chapt er 8
8- 30
ANS:



CV Conver t bot h i nvest ment s t o t he si mpl e equi t y met hod as of
J anuar y 1, 20X3. The conver si on f or Sub- B i s $6, 400: 80%of
t he $8, 000 net i ncr ease i n r et ai ned ear ni ngs i n 20X2. The
conver si on f or Sub- A i s $35, 100: 90%of t he $39, 000 net
i ncr ease i n r et ai ned ear ni ngs i n 20X1 and 20X2. The net
i ncr ease f or Sub- A i s $92, 600 - 60, 000 pl us t he equi t y
conver si on f or Sub- B.

CY1 El i mi nat e t he cur r ent - year di vi dend i ncome of Par ent agai nst
di vi dends decl ar ed by Sub- A.


pat ent .

A1 Amor t i ze t he pat ent over 10 year s, wi t h $1, 800 f or 20X1 and
20X2 char ged t o r et ai ned ear ni ngs of Par ent and $900 f or
20X3 t o oper at i ng expenses.

CY2 El i mi nat e t he cur r ent - year di vi dend i ncome of Sub- A agai nst
di vi dends decl ar ed by Sub- B.


pat ent .

char ged 10%t o r et ai ned of Sub- A and 90%t o Par ent , and $800
f or 20X3 t o oper at i ng expenses.


i nvent or y.

10%x ( 80%x [ 2, 000] ) or $160 and t o r et ai ned ear ni ngs of
Par ent f or 90%x ( 80%x [ 2, 000] ) or $1, 440.

F1 Debi t Ret ai ned Ear ni ngs of Par ent t o el i mi nat e t he r emai ni ng
unr eal i zed gai n on sal e of equi pment f r omPar ent t o Sub- A:
$5, 000 l ess 1, 000 r eal i zed i n 20X2. Rest or e t he equi pment t o
cost . I n a si ngl e cr edi t of $19, 000, r est or e t he ol d
accumul at ed depr eci at i on of $20, 000 and el i mi nat e t he excess
depr eci at i on of $1, 000 f or 20X2.

F2 El i mi nat e t he excess depr eci at i on on t he equi pment f or 20X3.

Chapt er 8
8- 31


$2, 100

2, 000- 4, 000) - 800] = $2, 760

To Cont r ol l i ng I nt er est : 30, 000 + 1, 000 + 90%x [ 20, 000 + 80%
( 12, 500 + 2, 000 - 4, 000) - 800] - 900 =
$54, 940

DI F: D OBJ : 4

14. On J anuar y 1, 20X1, Sub- A Company pur chased 80%of t he common st ock of
Sub- B Company f or $56, 000, a pr i ce equal t o book val ue. On t hi s dat e,
Sub- B Company had common st ock, ot her pai d- i n capi t al , and r et ai ned
ear ni ngs of $5, 000, $30, 000, and $35, 000 r espect i vel y.

On J anuar y 1, 20X2, Par ent Company pur chased 90%of t he common st ock of
r espect i vel y. Any excess of cost over book val ue i s due t o a pat ent , t o
be amor t i zed over 10 year s.

si mpl e equi t y met hod.


Requi r ed:

f or 20X3.

Chapt er 8
8- 32
ANS:



account f or Sub- A and i n t he Sub- B i ncome account .


pat ent .

A Amor t i ze t he pat ent over 10 year s, wi t h $900 f or 20X2 char ged
t o r et ai ned ear ni ngs of Par ent and $900 f or 20X3 t o oper at i ng
expenses.

account f or Sub- B and i n t he Sub- B i ncome account .



i nvent or y.

10%x ( 80%x 2, 000) or $160, and t o r et ai ned ear ni ngs of
Par ent f or 90%x ( 80%x 2, 000) or $1, 440.


$2, 100

2, 000 - 4, 000) ] = $2, 840

To Cont r ol l i ng I nt er est : 30, 000 + 90%x [ 20, 000 + 80%x ( 12, 500 +
2, 000 - 4, 000) ] - 900 = $54, 660

DI F: D OBJ : 4

Chapt er 8
8- 33
15. On J anuar y 1, 20X1, Par ent Company pur chased 85%of t he common st ock,
8, 500 shar es, of Subsi di ar y Company f or $317, 500. On t hi s dat e,
Subsi di ar y had common st ock, ot her pai d- i n capi t al , and r et ai ned
ear ni ngs of $50, 000, $100, 000, and $200, 000 r espect i vel y.

On J anuar y 1, 20X2, Subsi di ar y pur chased, f r omi t s r emai ni ng
shar ehol der s, 1, 000 shar es of i t s common st ock, 10%of t he st ock
out st andi ng on t hat dat e. The pr i ce pai d was $44, 000.



Dur i ng t he l ast quar t er of 20X2, Subsi di ar y sol d mer chandi se t o Par ent
f or $40, 000, $10, 000 of whi ch i s st i l l hel d by Par ent on December 31,
20X2. Subsi di ar y' s usual gr oss pr of i t on i nt er company sal es i s 40%.

Requi r ed:

f or t he year ended December 31, 20X2. Consol i dat i on pr ocedur es shoul d
t r eat t he pur chase of t he t r easur y st ock as an addi t i onal i nt er est
pur chased by t he par ent .

ANS:


Goodwi l l on each bl ock pur chased:
85%bl ock: 317, 500 - . 85 x ( 50, 000 + 100, 000 + 200, 000) = $20, 000
10%bl ock: 44, 000 - . 10 x ( 50, 000 + 100, 000 + 250, 000) = $ 4, 000




D1 Di st r i but e t he $20, 000 excess of cost over book val ue t o
goodwi l l .

ELT El i mi nat e 10%of t he Subsi di ar y Company equi t y bal ances at
t he begi nni ng of t he year agai nst t he t r easur y st ock
account .

D2 Al l ocat e t he $4, 000 excess of cost over book val ue t o
goodwi l l .



Chapt er 8
8- 34


To Cont r ol l i ng I nt er est : 110, 000 + . 95 x ( 60, 000 - 4, 000) = $163, 200

DI F: D OBJ : 3




On J anuar y 1, 20X2, Subsi di ar y pur chased f r omout si de i nvest or s 800
shar es of t he common st ock of Par ent Company, 8%of Par ent ' s out st andi ng
st ock, f or $60, 000. I t i s expect ed t hat t he shar es may be r esol d at a
l at er dat e. Subsi di ar y uses t he cost met hod i n account i ng f or t he
i nvest ment .

Dur i ng t he l ast quar t er of 20X2, Subsi di ar y sol d mer chandi se t o Par ent
f or $40, 000, $10, 000 of whi ch i s st i l l hel d by Par ent on December 31,
20X2. Subsi di ar y' s usual gr oss pr of i t on i nt er company sal es i s 40%.

Requi r ed:

f or t he year ended December 31, 20X2. Use t he t r easur y st ock met hod f or
t he I nvest ment i n Par ent Company.

Chapt er 8
8- 35
ANS:




E1 El i mi nat e 85%of t he Subsi di ar y Company equi t y bal ances at

goodwi l l .



CY2 El i mi nat e t he cur r ent - year di vi dend i ncome of Subsi di ar y
agai nst di vi dends decl ar ed by Par ent .

TS Recl assi f y t he I nvest ment i n Par ent Company as t r easur y
st ock.



To Cont r ol l i ng I nt er est : 110, 000 + . 85 x ( 60, 000 - 4, 000)
= $157, 600

DI F: D OBJ : 5
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Chapter 9 The International Accounting Environment Module:
Derivatives and Related

MULTIPLE CHOICE

1. The I nt er nal Revenue Code r egul at es t r ansf er pr i ci ng i n t he Uni t ed
St at es by encour agi ng t he use of a t r ansf er pr i ce t hat
a. r ef l ect s what t he pr i ce woul d have been i f t he under l yi ng
t r ansact i on was bet ween unr el at ed par t i es.
b. shi f t s al l i ncome t o t he Uni t ed St at es based company.
c. maxi mi zes par ent t axabl e i ncome r egar dl ess of wher e t he par ent
cor por at i on i s i ncor por at ed.
d. shi f t s al l i ncome t o t he hi ghest i ncome t ax j ur i sdi ct i on.


2. A manuf act ur er pr oduced a good wi t h a val ue of 250, t he r et ai l er added
125 t o t he val ue of t he good. Assumi ng t he val ue added t ax r at e i s 15%
t he net val ue added t ax due t o t he gover nment by t he r et ai l er i s
a. 37. 50
b. 18. 75
c. 56. 25
d. 0


3. A manuf act ur er pr oduced a good wi t h a val ue of 300, t he r et ai l er added
140 t o t he val ue of t he good. Assumi ng t he val ue added t ax r at e i s 10%
t he f i nal pr i ce t o t he consumer woul d be
a. 470
b. 484
c. 517
d. 454


4. Par ent Cor por at i on i s l ocat ed i n a count r y wi t h an i ncome t ax r at e of
40%. Subsi di ar y Company i s l ocat ed i n a count r y wi t h an i ncome t ax r at e
of 25%. The best t ax st r at egy f or t he ent er pr i se woul d be t o set t he
t r ansf er pr i ces on sal es of goods f r omt he subsi di ar y t o t he par ent at a
pr i ce t hat i s
a. hi gher t han t he pr i ce t hat woul d be i n ef f ect f or unr el at ed
par t i es i n an ar ms l engt h t r ansact i on.
b. l ower t han t he pr i ce t hat woul d be i n ef f ect f or unr el at ed par t i es
i n an ar ms l engt h t r ansact i on.
c. equal t o t he pr i ce t hat woul d be i n ef f ect f or unr el at ed par t i es
i n an ar ms l engt h t r ansact i on.
d. t r ansf er pr i ces do not af f ect over al l t ax pai d.


Chapt er 9
9- 2
5. The I nt er nat i onal Account i ng St andar ds Boar d ( I ASB) wor ks t o f or mul at e
i nt er nat i onal account i ng st andar ds t hat ar e adopt ed by each count r y
a. when appr oved by t he I ASB.
b. when accept ed by t he maj or i t y of I ASB member count r i es.
c. on a vol unt ar y basi s.
d. onl y af t er accept ance by 2/ 3 of I ASB member count r i es.


6. Lat i n account i ng pr i nci pl es t end t o r esul t i n
a. ver y conser vat i ve account i ng measur ement s.
b. l ess descr i pt i ve and mor e secr et i ve account i ng di scl osur e.
c. hi gh r el i ance on hi st or i cal cost measur es.
d. a l ow l evel of const ancy wi t h t ax r egul at i ons.


7. When account i ng f or i nvest ment s usi ng t he equi t y met hod, whi ch count r y' s
account i ng syst emdet er mi nes si gni f i cant i nf l uence when an i nvest or has
acqui r ed mor e t han 10%of t he vot i ng st ock?
a. Uni t ed St at es
b. Mexi co
c. J apan
d. Ger many


8. The mai n di f f er ence bet ween U. S. account i ng st andar ds and i nt er nat i onal
account i ng st andar ds when account i ng f or pl ant , pr oper t y and equi pment
i s
a. i nt er nat i onal account i ng st andar ds r equi r e t he use of cur r ent f ai r
val ue wi t h changes r ecogni zed i n equi t y onl y.
b. U. S. account i ng st andar ds do not al l ow t he wr i t e- down of asset s
due t o i mpai r ment .
c. i nt er nat i onal account i ng st andar ds al l ow pl ant , pr oper t y and
equi pment t o be st at ed at cur r ent f ai r val ue wi t h changes
r ecogni zed i n i ncome or equi t y.
d. U. S. account i ng st andar ds al l ow pl ant , pr oper t y and equi pment t o
be st at ed at cur r ent f ai r val ue wi t h changes r ecogni zed i n i ncome
or equi t y.


9. Whi ch of t he f ol l owi ng st at ement s best di f f er ent i at es mul t i nat i onal
f i r ms f r omdomest i c f i r ms?
a. Mul t i nat i onal f i r ms have over seas sal es of f i ces.
b. Mul t i nat i onal s engage i n bot h i mpor t i ng and expor t i ng.
c. Mul t i nat i onal f i r ms have one or mor e pl ant ( s) i n a f or ei gn
count r y.
d. Mul t i nat i onal busi ness peopl e make use of wor l dwi de sal es,
capi t al , and l abor mar ket s.


Chapt er 9
9-3
10. Whi ch of t he f ol l owi ng f act or s has NOT i nf l uenced t he devel opment of
account i ng pr act i ces i n var i ous nat i ons?
a. t he pol i t i cal envi r onment
b. economi c devel opment
c. cul t ur al backgr ound
d. al l of t hese f act or s have i nf l uenced t he devel opment of account i ng
pr act i ces


11. Whi ch of t he f ol l owi ng account i ng ar eas i s NOT si gni f i cant l y af f ect ed by
i nt er nat i onal act i vi t y?
a. over head al l ocat i on
b. r ecogni t i on pr i nci pl es
c. audi t i ng st andar ds
d. al l ar e si gni f i cant l y af f ect ed


12. Why woul d a U. S. manuf act ur i ng f i r msel ect a f or ei gn si t e f or one of i t s
pl ant s?
a. The si t e i s cl oser t o t he pr oduct mar ket ar ea
b. Labor cost s ar e mor e f avor abl e
c. The f or ei gn count r y' s t ax envi r onment i s mor e at t r act i ve
d. Al l of t hese f act or s coul d i nf l uence a f i r m' s deci si on t o
manuf act ur e over seas.

ANS: D DI F: E OBJ : I nt r oduct i on & 1

13. Whi ch of t he f ol l owi ng count r i es has account i ng st andar ds t hat most
r esul t i n consi st ency wi t h t he count r y' s t ax account i ng pol i ci es?
a. Mexi co
b. Uni t ed Ki ngdom
c. Uni t ed St at es
d. I sr ael


14. Whi ch of t he f ol l owi ng count r i es has t he st r ongest r equi r ement s
concer ni ng i nf l at i on- adj ust ed f i nanci al st at ement s?
a. Fr ance
b. Br azi l
c. Canada
d. Uni t ed St at es


15. Whi ch of t he f ol l owi ng account i ng si t uat i ons i s t r eat ed vi r t ual l y
i dent i cal l y under bot h U. S. and I nt er nat i onal account i ng st andar ds?
a. ear ni ngs per shar e
b. i nvent or y
c. pl ant , pr oper t y and equi pment
d. busi ness combi nat i ons

Chapt er 9
9- 4

16. A val ue added t ax gener al l y r esul t s i n
a. t axes appl i ed onl y at t he whol esal e l evel .
b. t axes appl i ed at each st age of pr oduct i on.
c. t axes appl i ed onl y at t he r et ai l l evel .
d. doubl e t axat i on of di st r i but i ons t o owner s.


17. The most si gni f i cant di f f er ence bet ween account i ng pr i nci pl es used i n
Br azi l and t hose empl oyed i n t he Uni t ed St at es i s
a. account i ng f or i nf l at i on.
b. depr eci at i on account i ng.
c. t he f act t hat consol i dat ed f i nanci al st at ement s ar e not i ssued i n
Br azi l .
d. t he f act t hat Br azi l i an cor por at i ons do not pay i ncome t ax.


18. Whi ch of t he f ol l owi ng does not descr i be a cul t ur al cl assi f i cat i on used
t o descr i be account i ng syst ems?
a. Nor di c account i ng
b. Lat i n account i ng
c. Nor t h Amer i can account i ng
d. Asi an account i ng


19. Whi ch of t he f ol l owi ng count r i es has t ax r egul at i ons t hat do not per mi t
LI FO i nvent or y val uat i on?
a. Ger many
b. Uni t ed St at es
c. Uni t ed Ki ngdom
d. LI FO i s not per mi t t ed f or t ax pur poses i n any of t hese count r i es.


20. Whi ch of t he f ol l owi ng count r i es uses t ax r ul es t o det er mi ne i f l eases
shoul d be capi t al i zed f or account i ng pur poses?
a. Ger many
b. J apan
c. Uni t ed Ki ngdom
d. Al l of t hese count r i es uses t ax r ul es t o det er mi ne capi t al i zat i on.


21. I n whi ch count r y i s t he capi t al i zat i on of r esear ch and devel opment cost s
per mi t t ed, under cer t ai n condi t i ons?
a. Ger many
b. Uni t ed St at es
c. Mexi co
d. Under cer t ai n ci r cumst ances, capi t al i zat i on i s per mi t t ed i n al l
t hr ee count r i es.

Chapt er 9
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22. I n whi ch of t he f ol l owi ng count r i es ar e bot h i ncr eases and decr eases i n
t he f ai r val ue of pl ant , pr oper t y and equi pment r ecogni zed?
a. Uni t ed St at es
b. Ger many
c. J apan
d. Uni t ed Ki ngdom


23. Whi ch of t he f ol l owi ng has not l ed t o an i ncr ease i n t he demand f or
audi t ed f i nanci al st at ement s?
a. gr owt h i n t he cor por at e f or mof busi ness
b. an i ncr ease i n gl obal capi t al needs
c. an i ncr ease i n i nvest or bases
d. an i ncr ease i n gl obal t ax r at es


24. Whi ch of t he f ol l owi ng i s not an obj ect i ve of t he I nt er nat i onal
Account i ng St andar ds Boar d ( I ASB) ?
a. t o est abl i sh l egal l y enf or ceabl e account i ng st andar ds t o gover n
i nt er nat i onal busi ness
b. t o f or mul at e and publ i sh account i ng st andar ds t o be obser ved i n
t he pr esent at i on of f i nanci al st at ement s
c. t o wor k f or t he har moni zat i on of account i ng st andar ds
d. al l ar e obj ect i ves of t he I ASB


25. The Secur i t i es and Exchange Commi ssi on r equi r es f or ei gn compani es
seeki ng t o sel l secur i t i es on U. S. st ock mar ket s t o
a. r econci l e i t s f i nanci al st at ement s t o U. S. GAAP.
b. r econci l e i t s f i nanci al st at ement s t o U. S. t ax r egul at i ons.
c. pr ovi de f i nanci al st at ement s pr epar ed accor di ng t o U. S. GAAP.
d. pr ovi de i nvest or s det ai l s of di f f er ences bet ween U. S. account i ng
st andar ds and I nt er nat i onal account i ng st andar ds.


26. The I ASB has est abl i shed " benchmar k" account i ng met hods. Compani es
adopt i ng met hods ot her t han benchmar k met hods wi l l
a. r ecei ve an adver se audi t opi ni on.
b. be banned f r omt r ansact i ng busi ness wi t h i nt er nat i onal banks.
c. be encour aged t o pr ovi de a r econci l i at i on of r esul t s r est at i ng
t hemunder t he benchmar k met hod.
d. be f i ned by an amount based on t he magni t ude of t he depar t ur e f r om
t he benchmar k met hod.


Chapt er 9
9- 6
27. Whi ch of t he f ol l owi ng account i ng met hods, commonl y empl oyed i n t he
Uni t ed St at es, i s di scour aged by t he I ASB?
a. t he gener al expensi ng of r esear ch and devel opment cost s
b. LI FO i nvent or y val uat i on
c. capi t al i zat i on of cer t ai n l eases
d. di scl osur e of r el at ed- par t y t r ansact i on


28. How does t he I nt er nat i onal Feder at i on of Account ant s ( I FAC) di f f er f r om
t he I nt er nat i onal Account i ng St andar ds Boar d ( I ASB) ?
a. Adher ence t o I FAC st andar ds i s not vol unt ar y.
b. The I FAC i s concer ned wi t h f i nanci al r epor t i ng st andar ds onl y.
c. The I FAC i s domi nat ed by t he Eur opean Communi t y ( EC) .
d. The I FAC i s mor e concer ned wi t h encour agi ng t he har moni zat i on of
account i ng pr i nci pl es t han wi t h st andar d set t i ng.


29. The Eur opean Communi t y ( EC) has est abl i shed account i ng di r ect i ves.
Unl i ke st andar ds of ot her i nt er nat i onal bodi es i nvol ved i n st andar d
set t i ng, EC di r ect i ves
a. ar e not vol unt ar y.
b. do not al l ow consol i dat ed f i nanci al st at ement s.
c. do not appl y t o any U. S. f i r ms.
d. ar e pr i mar i l y audi t i ng r at her t han account i ng st andar ds.


30. Whi ch of t he f ol l owi ng woul d not be an advant age t o Amer i can i nvest or s
t hat woul d r esul t f r omt he har moni zat i on of account i ng st andar ds?
a. Fi nanci al i nf or mat i on wi l l be mor e compar abl e.
b. Account i ng pr i nci pl es wi l l be mor e r esponsi ve t o economi c r eal i t y.
c. Account i ng pr i nci pl es wi l l be mor e r esponsi ve t o nat i onal
pol i t i cs.
d. Fi r ms wi l l not be at an account i ng advant age or di sadvant age when
seeki ng capi t al .


Chapt er 9
9-7
ESSAY

1. How does a mul t i nat i onal cor por at i on di f f er f r oma domest i c f i r m
i nvol ved i n i nt er nat i onal busi ness?

ANS:

A mul t i nat i onal f i r mhas oper at i ons i n sever al count r i es. These f i r ms
ar e i nvol ved r egul ar l y i n manuf act ur i ng and/ or di st r i but i on i n a var i et y
of nat i ons. Mul t i nat i onal f i r ms par t i ci pat e i n i nt er nat i onal sal es,
l abor , and capi t al mar ket s.

Domest i c f i r ms i nvol ved i n i nt er nat i onal busi ness par t i ci pat e i n f or ei gn
mar ket s t o a l esser degr ee. For exampl e, a f i r mmay be i nvol ved i n sal es
onl y on an i nt er nat i onal l evel . Anot her f i r mmay be i nvol ved i n sal es,
l abor , and capi t al mar ket i ng, but onl y occasi onal l y.

DI F: E OBJ : 1

2. Expl ai n t he goal of har moni zat i on of account i ng syst ems.

ANS:

Compar abi l i t y i s t he over al l goal . Var i ous par t i es want compar abi l i t y
f or i ndi vi dual r easons. For exampl e i nt er nat i onal l abor uni ons may want
t o have compar abl e i nf or mat i on f or col l ect i ve bar gai ni ng and pol i cy
deci si ons. Gover nment al bodi es want t o assess mul t i nat i onal ent er pr i ses'
oper at i ons f or t axi ng pur poses. I nvest or s ar e i nt er est ed i n as much
di scl osur e of f i nanci al i nf or mat i on t o achi eve t he most ef f ect i ve
al l ocat i on of capi t al among compet i ng par t i es. And t he I nt er nat i onal
Or gani zat i on of Secur i t i es Commi ssi ons i s commi t t ed t o encour agi ng
i nt er nat i onal secur i t i es t r adi ng dependent of pr ovi di ng i nvest or s wi t h
compar abl e i nf or mat i on.

DI F: E OBJ : 6

3. Why i s t he avai l abi l i t y of compar abl e account i ng st at ement s i mpor t ant t o
mul t i nat i onal f i r ms?

ANS:

Mul t i nat i onal f i r ms need t o measur e t he ef f i ci ency and ef f ect i veness of
t hei r i nt er nat i onal subsi di ar i es, br anches, and i nvest ment . Li kewi se,
compar abl e f i nanci al i nf or mat i on i s needed t o eval uat e compet i ng
i nvest ment oppor t uni t i es.

DI F: E OBJ : 2

Chapt er 9
9- 8
4. Why wi l l t he f or mat i on of t he Eur opean Uni on ( EU) pr ovi de U. S.
busi nesses wi t h oppor t uni t i es f or gr owt h?

ANS:

The EU wi l l pot ent i al l y be t he l ar gest si ngl e mar ket i n t he wor l d. Wi t h
t he l i ber al i zat i on of bor der s and t ar i f f l aws, goods wi l l f l ow mor e
f r eel y. These f act or s coul d gener at e i ncr eased demand f or U. S. goods and
ser vi ces.

DI F: M OBJ : 8

5. An i ssue t hat af f ect s compar abi l i t y bet ween mul t i nat i onal cor por at i ons
i s t he t r eat ment of t r ansf er pr i ci ng. Pr ovi de a descr i pt i on of t r ansf er
pr i ci ng and di scuss t he pr obl ems i t cr eat es.

ANS:

Tr ansf er pr i ci ng descr i bes t he pr i ce at whi ch goods or ser vi ces ar e
t r ansf er r ed or conveyed bet ween uni t s of a mul t i nat i onal ent er pr i se.
Pr obl ems ar e cr eat ed when t r ansf er pr i ces ar e mani pul at ed so t hat pr of i t
and ot her measur es ar e not r epr esent at i ve of an ar ms- l engt h basi s
bet ween unr el at ed par t i es.

DI F: E OBJ : 10

6. A Br azi l i an company has pr esent ed a set of f i nanci al st at ement s t o your
cl i ent , a U. S. bank. The Br azi l i an f i r mi s seeki ng hel p i n f i nanci ng a
l ong- t er ml ease. St at e t hr ee ways i n whi ch t hei r st at ement s wi l l di f f er
f r omt he U. S. st at ement s of whi ch your cl i ent i s f ami l i ar .

ANS:

The most si gni f i cant di f f er ence i s t he i nf l at i on adj ust ment s made t o t he
Br azi l i an st at ement . Most nonmonet ar y asset s, owner ' s equi t y, and
depr eci at i on ar e maj or i t ems t hat ar e not val ued f ol l owi ng hi st or i cal
cost pr i nci pl es. LI FO i nvent or y i s not per mi t t ed, and al l l eases ar e
account ed f or as oper at i ng l eases.

DI F: M OBJ : 5

Chapt er 9
9-9
7. Descr i be some dr i vi ng f or ces f or t he i nt er nat i onal devel opment of
account i ng.

ANS:

Gr owt h of mul t i nat i onal compani es whi ch need compar abl e account i ng
st andar ds t o measur e t he ef f ect i veness and ef f i ci ency of t hei r var i ous
i nt er nat i onal subsi di ar i es, br anches and/ or ot her equi t y i nvest ment s.
The gr owt h of i nt er nat i onal i nvest i ng by i nst i t ut i ons and i ndi vi dual s
who need compar abl e f i nanci al i nf or mat i on upon whi ch t o base t hei r
deci si ons.

DI F: E OBJ : 2

8. What ar e t he t wo pr i mar y appr oaches t o t he har moni zat i on of account i ng
st andar ds? Whi ch met hod woul d be mor e benef i ci al , and why?

ANS:

One appr oach t o t he har moni zat i on of account i ng st andar ds i s t o l et
account i ng evol ve nat ur al l y as i nt er nat i onal busi ness devel ops. As mor e
busi ness i s conduct ed bet ween nat i ons, t he par t i es needi ng compar abl e
f i nanci al i nf or mat i on wi l l ser ve as an evol ut i onar y f or ce behi nd t he
har moni zat i on of account i ng st andar ds. An al t er nat i ve appr oach i s not t o
wai t f or t he evol ut i onar y f or ces, but r at her t o pr omul gat e and pr oscr i be
speci f i c st andar ds t hr ough a due pr ocess syst em. Thi s l at t er appr oach i s
becomi ng domi nant . I t of f er s t he benef i t s of bei ng mor e t i mel y and
devel opi ng st andar ds by desi gn.

DI F: E OBJ : 8

9. A common met hod of t axat i on i s t he val ue added t ax ( VAT) . Pr ovi de a
descr i pt i on of how t hi s t ax i s appl i ed.

ANS:

The val ue added t ax ( VAT) i s appl i ed t o t he amount of val ue added at
each st age or l evel f r omi ni t i al pr oduct i on t o f i nal sal e t o t he
i ndi vi dual consumer . The VAT i ncur r ed by a pr evi ous l evel r educes t he
cost of sal es of t he cur r ent l evel i n or der t o det er mi ne t he val ue
added.

DI F: M OBJ : 10

Chapt er 9
9- 10
10. Gi ven t he pol i t i cal nat ur e of account i ng st andar ds set t i ng i n t he U. S. ,
what appr oach woul d you suggest t o convi nce a U. S. pol i cy maker of t he
need f or i nt er nat i onal st andar ds?

ANS:

Appr opr i at e r esponses woul d i ncl ude t he f ol l owi ng:

I nf or mat i on about f or ei gn st ock exchanges, such as t he vol ume of
t r ansact i ons and t hei r gr owt h i n t he l ast 20 year s.

Number of f or ei gn f i r ms t r aded i n t he U. S. exchanges.

Amount of i nt er nat i onal t r ade.

DI F: D OBJ : 2, 3, 4

11. U. S. account i ng st andar ds al l ow f or sever al met hods of account i ng f or
si mi l ar t r ansact i ons. I n many ot her count r i es, onl y one met hod i s
al l owed. Havi ng di scussed t he var i ous i nf l uences on account i ng st andar ds
ar ound t he wor l d, why do you t hi nk t he U. S. st andar ds ar e mor e l i kel y t o
al l ow di ver si t y?

ANS:

Si nce t he U. S. account i ng st andar ds ar e not as cl osel y l i nked t o t he
f eder al t ax code, gr eat er f l exi bi l i t y i s al l owed. Ot her count r i es have
one st andar d f or r epor t i ng and f or t ax pur poses.

DI F: D OBJ : 4

Chapter 10 Foreign Currency Transactions

MULTIPLE CHOICE

1. The best def i ni t i on f or di r ect quot es woul d be " di r ect quot es measur e
a. how much f or ei gn cur r ency must be exchanged t o r ecei ve 1 domest i c
cur r ency. "
b. cur r ent or spot r at es. "
c. how much domest i c cur r ency must be exchanged t o r ecei ve 1 f or ei gn
cur r ency. "
d. exchange r at es at a f ut ur e poi nt i n t i me. "


2. A U. S. company pur chases medi cal l ab equi pment f r oma J apanese company.
The J apanese company r equi r es payment i n J apanese yen. I n t hi s
t r ansact i on, t he yen woul d be r ef er r ed t o as t he
a. domest i c cur r ency f or t he U. S. company.
b. denomi nat ed cur r ency.
c. pur chasi ng cur r ency.
d. sel l i ng cur r ency.


3. A U. S. company t hat has pur chased i nvent or y f r oma Ger man vendor woul d
be exposed t o a net exchange gai n on t he unpai d bal ance i f t he
a. amount t o be pai d was denomi nat ed i n dol l ar s.
b. dol l ar weakened r el at i ve t o t he Eur o and t he Eur o was t he
denomi nat ed cur r ency.
c. dol l ar st r engt hened r el at i ve t o t he Eur o and t he Eur o was t he
d. U. S. company pur chased a f or war d cont r act t o buy Eur os.


4. A U. S. company t hat has sol d i t s pr oduct t o a Ger man f i r mwoul d be
exposed t o a net exchange gai n on t he unpai d r ecei vabl e i f t he
a. amount t o be pai d was denomi nat ed i n dol l ar s.
b. dol l ar weakened r el at i ve t o t he Eur o and t he Eur o was t he
c. dol l ar st r engt hened r el at i ve t o t he Eur o and t he Eur o was t he
d. U. S. company pur chased a f or war d cont r act t o buy Eur os.


5. A bank deal i ng i n f or ei gn cur r ency t el l s you t hat t he f or ei gn cur r ency
wi l l buy you $. 80 US dol l ar s. The bank has gi ven you
a. a di r ect quot e.
b. an i ndi r ect quot e.
c. t he of f i ci al ( f i xed) r at e.
d. a f or war d r at e.

Chapt er 10
10- 2

6. When an economi c t r ansact i on i s denomi nat ed i n a cur r ency ot her t han t he
ent i t y' s domest i c cur r ency, t he ent i t y must est abl i sh a
a. domest i c r at e.
b. hedge r at e.
c. r at e of cur r ency change.
d. r at e of exchange.


7. A f or war d exchange cont r act i s bei ng t r ansact ed at a pr emi umi f t he
cur r ent f or war d r at e i s
a. l ess t han t he expect ed spot r at e.
b. gr eat er t han t he expect ed spot r at e.
c. l ess t han t he cur r ent spot r at e.
d. gr eat er t han t he cur r ent spot r at e.


8. Whi ch of t he f ol l owi ng f act or s i nf l uences t he spr ead bet ween f or war d and
spot r at es?
a. whi ch cur r ency i s denomi nat ed as t he domest i c cur r ency
b. t he l engt h of t he f or war d exchange cont r act
c. t he cur r ent cr oss r at e bet ween t he t wo cur r enci es
d. al l ar e f act or s t hat may i nf l uence t he spr ead


9. For ei gn cur r ency t r ansact i ons not i nvol vi ng a hedge shoul d be account ed
f or usi ng
a. t he one- t r ansact i on met hod.
b. t he t wo- t r ansact i on met hod.
c. a hybr i d of t he one- and t wo- t r ansact i on met hods.
d. ei t her t he one- or t he t wo- t r ansact i on met hod ( al l owed by t he
FASB) .


10. A t r ansact i on denomi nat ed i n a f or ei gn cur r ency wi l l most l i kel y r esul t
i n gai ns and l osses t o t he r epor t i ng ent i t y i f t he
a. f or war d exchange cont r act i s sel l i ng at a pr emi um.
b. t r ansact i on i s denomi nat ed and measur ed i n t he r epor t i ng ent i t y' s
cur r ency.
c. t r ansact i on t akes pl ace i n a count r y wi t h a t i er ed monet ar y
syst em.
d. t r ansact i on i s denomi nat ed i n a f or ei gn cur r ency and measur ed i n
t he r epor t i ng ent i t y' s cur r ency.


Chapt er 10
10- 3
11. Gi ven t he f ol l owi ng i nf or mat i on f or a 90 day cont r act :

US Dol l ar s FC
Val ue Today 3, 750 5, 000
I nt er est Rat e 4% 7%
3 mont hs i nt er est 37. 50 87. 50
Val ue i n 3 mont hs ?? ??
The spot r at e t oday i s 1FC = . 75

What wi l l be t he f or war d r at e?
a. 1FC = . 75 US Dol l ar s
b. 1FC = . 57 US Dol l ar s
c. 1FC = . 745 US Dol l ar s
d. 1FC = . 70 US Dol l ar s

ANS: C
US Val ue i n 3 mont hs = 3, 750 + 37. 50 = 3, 787. 50
FC Val ue i n 3 mont hs = 5, 000 + 87. 50 = 5, 087. 50
Fwd r at e = 3, 787. 50 / 5, 087. 50 = . 745

DI F: D OBJ : 2

12. A U. S. f i r mhas pur chased, f or 50, 000 FCs, an el ect r i c gener at or f r oma
f or ei gn f i r m. The exchange r at es wer e 1 FC = $0. 80 on t he del i ver y dat e
and 1 FC = $0. 76 when t he payabl e was pai d. What i s t he f i nal r ecor ded
val ue i f t he t wo- t r ansact i on met hod i s used?
a. $40, 000
b. $38, 000
c. $42, 000
d. $50, 000


13. A U. S. manuf act ur er has sol d comput er ser vi ces t o a f or ei gn f i r mand
r ecei ved 200, 000 f or ei gn cur r ency uni t s ( FCs) . The exchange r at es wer e 1
FC = $. 75 on t he dat e of t he sal e and 1 FC = $. 80 when t he r ecei vabl e
was set t l ed. On t he t r ansact i on dat e, t he set t l ement exchange r at e i s
est i mat ed t o be 1FC = $. 72. By t he set t l ement dat e, what i s t he t ot al
exchange gai n or l oss r ecor ded f or t he t r ansact i on i f t he t wo-
t r ansact i on met hod i s used?
a. $10, 000 exchange gai n
b. $6, 000 exchange l oss
c. $10, 000 exchange l oss
d. no gai n or l oss


Chapt er 10
10- 4
14. A U. S. manuf act ur er has sol d goods t o a f or ei gn f i r mf or a sal e pr i ce of
80, 000FC on 12/ 15/ X1. The i nvoi ce i s due 1/ 15/ X2. The U. S. Fi r mf i scal
year i s 12/ 31/ X1. Gi ven t he f ol l owi ng exchange r at es, what gai n or l oss
woul d t he US f i r mr ecor d on 12/ 31?

12/ 15 1FC = $0. 60 US Dol l ar s
12/ 31 1FC = $0. 65 US Dol l ar s
1/ 15 1FC = $0. 63 US Dol l ar s

a. l oss of $4, 000
b. l oss of $1, 600
c. gai n of $2, 400
d. gai n of $4, 000


15. Whi ch of t he f ol l owi ng does not r epr esent an exchange r i sk on an exposed
posi t i on t o a company t r ansact i ng busi ness wi t h a f or ei gn vendor ?
a. t r ansact i on i s denomi nat ed i n f or ei gn cur r ency, set t l ed at a
f ut ur e dat e
b. f i r mcommi t ment t o pur chase i nvent or y t o be pai d f or i n f or ei gn
cur r ency
c. For ecast ed f or ei gn cur r ency t r ansact i on wi t h a hi gh pr obabi l i t y of
occur r ence
d. f i r mcommi t ment t o pur chase i nvent or y denomi nat ed i n U. S. dol l ar s


16. Exchange gai ns and l osses on a f or war d exchange cont r act t hat cover s t he
same t i me per i od as t he t r ansact i on whi ch i t pr ovi des a hedge f or shoul d
be r ecogni zed as
a. an ext r aor di nar y i t em.
b. par t of t he or i gi nal sal es t r ansact i on.
c. i ncome f r omcont i nui ng oper at i ons.
d. i ncome f r omcont i nui ng oper at i ons, but onl y i f mat er i al .


Chapt er 10
10- 5
17. On August 1, 20X1, an Amer i can f i r mpur chased a machi ne cost i ng
200, 000, 000 yen f r oma J apanese f i r mt o be pai d f or on Oct ober 1, 20X1.
Al so on August 1, 20X1, t he Amer i can f i r ment er ed i nt o a cont r act t o
pur chase 200, 000, 000 yen t o be del i ver ed on Oct ober 1, 20X1, at a
f or war d r at e of 1 Yen = $0. 00783. The exchange r at es wer e as f ol l ows:

Spot
August 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . 1 Yen = $0. 00781
August 31, 20X1. . . . . . . . . . . . . . . . . . . . . . . . 1 Yen = $0. 00777
Oct ober 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . 1 Yen = $0. 00779

Whi ch of t he f ol l owi ng st at ement s i s i ncor r ect concer ni ng t he account i ng
t r eat ment of t hese t r ansact i ons?
a. The machi ne' s f i nal r ecor ded val ue was $1, 558, 000.
b. The begi nni ng bal ance i n t he account s payabl e was $1, 562, 000.
c. An exchange gai n on t he account s payabl e of $4, 000 was r ecogni zed
on Oct ober 1, 20X1.
d. The val ue of t he account s payabl e j ust bef or e payment , on Oct ober
1, 20X1, was $1, 558, 000.


18. Quest i ons 18 and 19 ut i l i ze t he f ol l owi ng i nf or mat i on.

On 6/ 1/ X2, an Amer i can f i r mpur chased a i nvent or y cost i ng 100, 000
Canadi an Dol l ar s f r oma Canadi an f i r mt o be pai d f or on 8/ 1/ X2. Al so on
6/ 1/ X2, t he Amer i can f i r ment er ed i nt o a f or war d cont r act t o pur chase
100, 000 Canadi an dol l ar s f or del i ver y on 8/ 1/ X2. The exchange r at es wer e
as f ol l ows:

Spot For war d
6/ 1/ X2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 CD = $0. 73 1 CD = $0. 74
6/ 30/ X2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 CD = $0. 70 1 CD = $0. 75
8/ 1/ X2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 CD = $0. 68 1 CD = $0. 68

The Amer i can f i r ms f i scal year end i s 6/ 30/ X2. The changes i n t he val ue
of t he f or war d cont r act shoul d be di scount ed at 8%.

What i s t he val ue of t he For war d Cont r act Recei vabl e- FC on 6/ 1/ X2?
a. $73, 000
b. $74, 000
c. $68, 000
d. $70, 000


Chapt er 10
10- 6
19. What i s t he val ue of t he For war d Cont r act Recei vabl e- FC on 6/ 30/ X2?
a. $75, 000
b. $75, 693
c. $74, 693
d. $74, 993

ANS: B
Or i gi nal val ue of For war d Cont r act Recei vabl e- FC =
100, 000 x . 74 = 74, 000
Cur r ent ( 6/ 30) val ue of t he For war d Cont r act Recei vabl e- FC =
100, 000 x . 75 = 75, 000
I ncr ease i n val ue of For war d Cont r act Recei vabl e =
1, 000
Val ue of Recei vabl e, di scount ed at 8%, n = 1
1, 000 - ( 1, 000 x . 08/ 12) = 993
Val ue of r ecei vabl e = 74, 000 + 993 = 74, 993

DI F: D OBJ : 5

20. The pur pose of a hedge on an i dent i f i abl e commi t ment wher e t he US
company i s sel l i ng goods i s t o:
a. f i x t he basi s of sal es r evenue t o t he dat e of t he commi t ment
b. el i mi nat e al l exchange gai ns/ l osses f r omt he dat e of commi t ment t o
t he dat e of set t l ement
c. f i x t he basi s of cost of goods sol d t o t he dat e of commi t ment
d. el i mi nat e any exchange gai ns/ l osses f r omt he t r ansact i on dat e t o
t he set t l ement dat e


21. Whi ch of t he f ol l owi ng st at ement s i s not t r ue r egar di ng f or war d
cont r act s t hat cover per i ods of t i me di f f er ent f r omt he set t l ement
per i od ( t r ansact i on dat e t o t he set t l ement dat e) ?
a. I f t he f or war d cont r act expi r es bef or e t he set t l ement dat e, t he
gai n or l oss wi l l par t i al l y of f set t he gai n or l oss on t he f or ei gn
cur r ency t r ansact i on.
b. I f t he f or war d cont r act expi r es af t er t he set t l ement dat e, post -
set t l ement dat e gai ns and l osses ar e not r ecogni zed as component s
of cur r ent oper at i ng i ncome.
c. Pr emi umand di scount ar e amor t i zed over t he l i f e of t he cont r act .
d. Al l of t hese st at ement s ar e t r ue.


Chapt er 10
10- 7
22. Quest i ons 22 & 23 use t he f ol l owi ng i nf or mat i on:

On 4/ 1/ X3, a US Company commi t s t o sel l a pi ece of equi pment t o a Fr ench
cust omer . At t hat t i me, t he US company ent er s i nt o a f or war d cont r act t o
sel l f or ei gn cur r ency on 8/ 1/ X3( 120 days) . Del i ver y wi l l t ake pl ace
7/ 1/ X3 wi t h payment due on 8/ 1/ X3. The f i scal year end f or t he company
i s 6/ 30/ X3. The sal es pr i ce of t he equi pment i s 200, 000 Eur os. Var i ous
exchange r at es ar e as f ol l ows:

Spot For war d
4/ 1/ X3 1FC = $0. 60 1FC = $0. 58
6/ 30/ X3 1FC = $0. 58 1FC = $0. 56
( al so 7/ 1/ X3)
8/ 1/ X3 1FC = $0. 55 1FC = $0. 55
Di scount r at e i s 12%.

What i s t he amount i n t he Fi r mCommi t ment account on 6/ 30/ X3?
a. 4, 000 debi t
b. 8, 000 debi t
c. 4, 000 cr edi t
d. 10, 000 cr edi t

ANS: C
On 4/ 1:
For war d Cont r act Recei vabl e - Dol l ar s 116, 000
For war d Cont r act Payabl e- FC 116, 000

On 6/ 30, f i scal year end, t he val ue of t he commi t ment has changed.

4/ 1 200, 000 x . 60 = 120, 000 val ue of t he sal es r evenue
6/ 30 200, 000 x . 58 = 116, 000 val ue of t he sal e r evenue
Loss on commi t ment ( debi t ) r esul t s i n a cr edi t t o Fi r mCommi t ment

DI F: D OBJ : 5

23. What i s t he val ue of For war d Cont r act Payabl e- FC on 6/ 30?
a. 112, 000
b. 112, 040
c. 116, 000

ANS: B
Fwd val ue 4/ 1 200, 000 x 0. 58 116, 000
Fwd val ue 6/ 30 200, 000 x 0. 56 112, 000
Decr ease i n Fai r Val ue 4, 000
of Payabl e
PV of change: 3, 960
N = 1, i = . 12/ 12
Di scount = 4, 000 x . 12/ 12 = 40

Cur r ent val ue of f wd cont r act = 116, 000 - 3, 960 = 112, 040

DI F: D OBJ : 5

Chapt er 10
10- 8
24. Whi ch of t he f ol l owi ng st at ement s i s t r ue concer ni ng f or war d cont r act s
cl assi f i ed as hedges of an i dent i f i abl e f or ei gn cur r ency commi t ment ?
a. For war d cont r act s used as hedges cannot exceed t he f or ei gn
cur r ency commi t ment .
b. For war d cont r act s cannot ext end f or a t i me per i od af t er t he
t r ansact i on dat e of t he commi t ment .
c. The gai n or l oss t r aceabl e t o t he t i me per i od af t er t he
t r ansact i on dat e of t he commi t ment shoul d not be def er r ed.
d. None of t hese st at ement s i s t r ue.


25. Whi ch of t he f ol l owi ng i s not t r ue concer ni ng t he account i ng f or hedges
of f or ecast ed t r ansact i ons usi ng an opt i on?
a. An i nt r i nsi c val ue must be cal cul at e t hr oughout t he hedge per i od
b. The account i ng r equi r es r eval ui ng t he mar ket val ue of t he opt i on
c. The opt i on f i xes t he val ue of t he t r ansact i on t o t he dat e of t he
commi t ment .


26. The account i ng t r eat ment gi ven a cash f l ow hedge of a f or ecast ed
t r ansact i on cont i nues unl ess:
a. The hedgi ng r el at i onshi p i s no l onger hi ghl y ef f ect i ve based on
management pol i ci es.
b. The der i vat i ve i nst r ument i s sol d, t er mi nat ed, or exer ci sed.
c. The der i vat i ve i nst r ument i s no l onger desi gnat ed as a hedge on a
f or ecast ed t r ansact i on.
d. al l of t hese st at ement s ar e t r ue.


27. A Uni t ed St at es based company t hat has not hedged an exposed asset
posi t i on woul d exper i ence an exchange gai n i f
a. f or war d r at es i ncr eased.
b. f or war d r at es decr eased.
c. spot r at es i ncr eased.
d. spot r at es decr eased.


28. I n t he account i ng f or f or war d exchange cont r act s, gai ns and l osses ar e
measur ed usi ng ei t her spot or f or war d r at es. Whi ch of t he f ol l owi ng
st at ement s concer ni ng measur ement of gai ns and l osses i s t r ue?
a. The gai ns or l osses i n a hedge on an exposed asset wi l l use t he
spot r at e f or t he asset and t he f or war d r at e f or t he f or war d
cont r act .
b. The gai ns or l osses i n a specul at i ve hedge wi l l use t he f or war d
r at e t hr oughout t he cont r act .
c. The gai ns or l osses i n a hedge on an i dent i f i abl e commi t ment wi l l
use t he spot r at e f or t he commi t ment and t he f or war d r at e f or t he
f or war d cont r act .

Chapt er 10
10- 9

29. The t i me val ue of an opt i on i s t he di f f er ence bet ween t he
a. pr emi umpai d and i t s cur r ent r at e.
b. pr emi umpai d and i t s i nt r i nsi c val ue.
c. exer ci se pr i ce and i t s cur r ent r at e.
d. cal l opt i on pr i ce and t he put opt i on pr i ce.


30. The t wo di st i ngui shi ng char act er i st i cs of a f i nanci al i nst r ument ar e
a. one or mor e opt i ons and one or mor e exchange r at es.
b. one or mor e under l yi ngs and one or mor e not i onal amount s.
c. cash f l ows and economi c exchange.
d. a per shar e pr i ce and a quant i t y.


31. Hugh, I nc. pur chased mer chandi se f or 300, 000 FC f r oma Br i t i sh vendor on
November 30, 20X3. Payment i n Br i t i sh pounds i s due J anuar y 31, 20X4.
Exchange r at es t o pur chase 1 FC i s as f ol l ows:

Nov. 30, 20X3 Dec. 31, 20X3
Spot . . . . . . . . . . . . . . . . . $1. 65 $1. 62
30 day. . . . . . . . . . . . . . . $1. 64 $1. 59
60 day. . . . . . . . . . . . . . . $1. 63 $1. 56

I n t he December 31, 20X3 i ncome st at ement , what amount shoul d Hugh
r epor t as f or ei gn exchange gai n f r omt hi s t r ansact i on?
a. $12, 000
b. $9, 000
c. $6, 000
d. $0


32. Wi l d, I nc. sol d mer chandi se f or 500, 000 FC t o a f or ei gn vendor on
November 30, 20X5. Payment i n f or ei gn cur r ency i s due J anuar y 31, 20X6.
Exchange r at es t o pur chase 1 f or ei gn cur r ency uni t ar e as f ol l ows:

Nov. 30, 20X5 Dec. 31, 20X5 J an. 31, 20X6
Spot . . . . . . . . . . . . . $1. 49 $1. 45 $1. 44
30 day. . . . . . . . . . . $1. 48 $1. 43 $1. 43
60 day. . . . . . . . . . . $1. 46 $1. 41 $1. 42

I n t he year i n whi ch t he sal e was made, 20X5, what amount shoul d Wi l d
r epor t as f or ei gn exchange gai n/ l oss f r omt hi s t r ansact i on?
a. $25, 000
b. $20, 000
c. $5, 000
d. $0


Chapt er 10
10- 10
33. Pi l e, I nc. pur chased mer chandi se f or 500, 000 FC f r oma f or ei gn vendor on
On t he same day, Pi l e si gned an agr eement wi t h a f or ei gn exchange br oker
t o buy 500, 000 FC on J anuar y 31, 20X4. Exchange r at es t o pur chase 1 FC
ar e as f ol l ows:

Nov. 30, 20X5 Dec. 31, 20X5 J an. 31, 20X6
Spot . . . . . . . . . . . . . $1. 49 $1. 45 $1. 44
30 day. . . . . . . . . . . $1. 48 $1. 43 $1. 43
60 day. . . . . . . . . . . $1. 46 $1. 41 $1. 42

What wi l l be t he adj ust ment t o t he account payabl e i ncl uded i n t he
j our nal ent r y r ecor d on November 30, 20X5?
a. $20, 000 debi t
b. $20, 000 cr edi t
c. $30, 000 debi t
d. $0


34. Lar son, I nc. sol d mer chandi se f or 600, 000 FC t o a f or ei gn vendor on
On t he same day, Lar son si gned an agr eement wi t h a f or ei gn exchange
br oker t o sel l 600, 000 FC on J anuar y 31, 20X6. Exchange r at es t o
pur chase 1 FC ar e as f ol l ows:

Nov. 30, 20X5 Dec. 31, 20X5 J an. 31, 20X6
Spot . . . . . . . . . . . . . $1. 49 $1. 46 $1. 43
30 day. . . . . . . . . . . $1. 48 $1. 43 $1. 44
60 day. . . . . . . . . . . $1. 47 $1. 40 $1. 42

What wi l l be t he amount of t he For war d Cont r act Recei vabl e- Dol l ar s on
November 30, 20X5?
a. $894, 000
b. $888, 000
c. $882, 000
d. $858, 000


Chapt er 10
10- 11
35. Happ, I nc. agr eed t o pur chase mer chandi se f r oma Br i t i sh vendor on
November 30, 20X3. The goods wi l l ar r i ve on J anuar y 31, 20X4 and payment
of 100, 000 Br i t i sh pounds i s due Febr uar y 28, 20X4. On November 30,
20X3, Happ si gned an agr eement wi t h a f or ei gn exchange br oker t o buy
100, 000 Br i t i sh pounds on Febr uar y 28, 20X4. Exchange r at es t o pur chase
1 Br i t i sh pound ar e as f ol l ows:

Nov. 30, 20X3 Dec. 31, 20X3 J an. 31, 20X4 Feb. 28, 20X4
Spot . . . $1. 65 $1. 62 $1. 59 $1. 57
30 day. $1. 64 $1. 59 $1. 60 $1. 59
60 day. $1. 63 $1. 56 $1. 58 $1. 58

Because of t hi s commi t ment hedge, Happ, I nc. wi l l r ecor d t he mer chandi se
at what val ue when i t ar r i ves i n J anuar y?
a. $165, 000
b. $164, 000
c. $160, 000
d. $159, 000


36. I n a hedge of a f or ecast ed t r ansact i on, gai ns or l osses on der i vat i ve
i nst r ument s pr i or t o t he occur r ence of t he act ual t r ansact i on shoul d be
r epor t ed as
a. a component of st ockhol der s' equi t y.
b. a component of ot her compr ehensi ve i ncome.
c. an ext r aor di nar y i t em.
d. i ncome f r omcont i nui ng oper at i ons.


37. Cur r ent di scl osur e r equi r es user s of hedgi ng i nst r ument s t o pr ovi de
i nf or mat i on about al l of t he f ol l owi ng except
a. obj ect i ves of usi ng hedgi ng i nst r ument s.
b. descr i pt i ons of var i ous t ypes of hedges ent er ed i nt o.
c. t he or i gi nal cost of ent er i ng i nt o t he der i vat i ve i nst r ument
hedge.
d. how gai ns and l osses ar e r ecogni zed i n ear ni ngs or ot her
compr ehensi ve i ncome.


Chapt er 10
10- 12
PROBLEM

1. Descr i be t he r i sks and uncer t ai nt y a U. S. company f aces when pur chasi ng
goods f r oma f or ei gn cor por at i on and set t l i ng t he t r ansact i on i n t he
f or ei gn cur r ency.

ANS:

Gi ven t hat r at es of exchange var y over t i me, t her e i s uncer t ai nt y about
how many U. S. dol l ar s wi l l be needed at set t l ement . Addi t i onal l y,
because exchange r at es change over t i me, t he U. S. company may need mor e
dol l ar s t o set t l e t he pur chase, exposi ng t he company t o busi ness r i sk.

DI F: E OBJ : 4

2. On Sept ember 15, 20X2, Wal l Company, a U. S. f i r m, pur chased a pi ece of
equi pment f r oma f or ei gn f i r mf or 500, 000 FCs. Payment f or t he equi pment
was t o be made i n FCs on J anuar y 15, 20X3. The spot r at es on sel ect ed
dat es wer e as f ol l ows:

Dat e Spot Rat e
9/ 15/ X2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 30
12/ 31/ X2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 33
1/ 15/ X3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 315

Requi r ed:

a. Assumi ng t hat t he US Cor p. has a December 31 year end, pr epar e
t he necessar y j our nal ent r i es t o account f or t he ser i es of
t r ansact i ons i nvol vi ng t he pur chase.

b. Pr epar e al l t he necessar y j our nal ent r i es assumi ng t hat t he US
Cor p. wi l l be payi ng f or t he equi pment i n U. S. dol l ar s.

ANS:

a. Nov. 1
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Account s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000

Dec. 31
Exchange Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000

J an. 15
Account s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165, 000
Exchange Gai n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 500
I nvest ment i n FC. . . . . . . . . . . . . . . . . . . . . . . . . . . . 157, 500

Chapt er 10
10- 13
b. Nov. 1
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000

Dec. 31
No ent r y

J an. 15
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000

DI F: M OBJ : 3

3. On November 1, 20X1, DEMO Cor p. , a U. S. f i r m, sol d mer chandi se t o a
f or ei gn f i r mf or 60, 000 FCs. DEMO wi l l be pai d on J anuar y 31, 20X2, i n
FCs. The spot r at es on sel ect ed dat es wer e as f ol l ows:

Dat e Spot Rat e
November 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 50
December 31, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 55
J anuar y 31, 20X2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 53

Requi r ed:

Assumi ng t hat DEMO has a December 31 year end, pr epar e t he necessar y
j our nal ent r i es t o account f or t he ser i es of t r ansact i ons i nvol vi ng t he
sal e.

ANS:

Nov. 1
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000

Dec. 31
Exchange Gai n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 000

J an. 31
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 800
Exchange Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 200
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 000

DI F: M OBJ : 3

4. A U. S. Cor p. pur chased a comput er f r oma Fr ench f i r mon J ul y 1, 20X5,
when a Eur o cost $0. 25. The U. S. f i r mwi l l be r equi r ed t o pay t he Fr ench
manuf act ur er 75, 000 Eur os on August 1, 20X5, when t he Eur o cost s $0. 23.

Requi r ed:

Make t he necessar y j our nal ent r i es f or t he U. S. f i r mon J ul y 1 and
August 1.

Chapt er 10
10- 14
ANS:

J ul y 1
Comput er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 750

Aug. 1
Account s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 750
Exchange Gai n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 500
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 250

DI F: E OBJ : 3

5. On J anuar y 1, 20X1, a U. S. f i r mbought a t r uck f r oma f or ei gn f i r mf or
10, 000 FCs, t o be pai d on Mar ch 1 i n FCs. The spot r at e was 1 FC = $1. 25
on J anuar y 1 and 1 FC = $1. 265 on Mar ch 1. To pr ot ect t hemsel ves f r om
exchange r at e changes, t he U. S. f i r ment er ed i nt o a f or war d exchange
cont r act on J anuar y 1 t o buy FCs on Mar ch 1 f or $1. 28.

Requi r ed:

Make al l t he necessar y j our nal ent r i es t o r ecor d t he t r ansact i ons f or
t he U. S. f i r mon J anuar y 1 and Mar ch 1.

ANS:

J an. 1
Tr uck. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 500

Fwd Cont r act Recei vabl e- FC. . . . . . . . . . . . . . . . . . . . . . 12, 800
Fwd Cont r act Payabl e- $. . . . . . . . . . . . . . . . . . . . . . . . 12, 800

Mar . 1
Fwd Cont r act Payabl e- $. . . . . . . . . . . . . . . . . . . . . . . . . . 12, 800
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 800

I nvest ment i n FCs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 650
Exchange Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Fwd Cont r act Recei vabl e- FC. . . . . . . . . . . . . . . . . . . . 12, 800

Exchange Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
I nvest ment i n FCs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 650

DI F: E OBJ : 3, 5

Chapt er 10
10- 15
6. Expl ai n how t he r i sks di f f er f or hol der s and wr i t er s of f or ei gn exchange
opt i ons. Addi t i onal l y, descr i be t he di f f er ence bet ween Amer i can and
Eur opean opt i ons. Fi nal l y, how i s t he i nt r i nsi c val ue of an opt i on
cal cul at ed?

ANS:

For a hol der of an opt i on, t he t ot al r i sk i s l i mi t ed t o t he pr emi umpai d
and appl i cabl e br oker age f ees, whi l e t he opt i on has unl i mi t ed r i sk
associ at ed wi t h exchange r at e f l uct uat i ons whi ch ar e not of f set by t he
pr emi umchar ged. " Amer i can" opt i ons can be exer ci sed any t i me dur i ng t he
opt i on per i od, wher eas " Eur opean" opt i ons can onl y be exer ci sed at
mat ur i t y. The i nt r i nsi c val ue of an opt i on r epr esent s t he di f f er ence
bet ween t he exer ci se pr i ce and t he cur r ent r at e.

DI F: E OBJ : 4

7. For a hedge on an exposed posi t i on, descr i be t he pr ocess of val ui ng t he
f or war d cont r act as t he f i scal per i od end dat e.

ANS:

a. Cal cul at e t he f ai r val ue of t he f or war d cont r act :
Or i gi nal Fwd Val ue of Cont r act
Cur r ent Fwd Val ue of Cont r act
Change gai n ( l oss) i n f or war d val ue
b. Cal cul at e t he pr esent val ue of t he change:
Change i n f or war d val ue di scount ed at a r at e of
i nt er est / 12 per i ods, f or n = number of mont hs unt i l
set t l ement
c. Cal cul at e t he change i n pr esent val ue:
Cur r ent Pr esent val ue of cont r act
Pr i or Pr esent val ue of cont r act
Change i n Pr esent Val ue
d. Spl i t t he change i n pr esent val ue bet ween t he gai n/ ( l oss) on spot
val ues and t he changes i n t i me val ue

DI F: M OBJ : 5

8. Wol t er s Cor por at i on i s a U. S. cor por at i on t hat pur chased 50, 000
chocol at e bar s f r oma f or ei gn manuf act ur er on Mar ch 1, 20X9 f or 80, 000
f or ei gn cur r ency uni t s, t o be pai d on Apr i l 30, 20X9. On Mar ch 1, 20X9
Wol t er s al so ent er ed i nt o a f or war d cont r act t o pur chase 80, 000 f or ei gn
cur r ency uni t s on Apr i l 30, 20X9. Wol t er s has a December 31 year end.

Exchange r at es ar e as f ol l ows:

Dat e _ Spot Rat e For war d Rat e
3/ 1/ X9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 69 $0. 65
3/ 31/ X9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 61 $0. 65
4/ 30/ X9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 66 $0. 66

Chapt er 10
10- 16
Requi r ed:

Pr epar e t he j our nal ent r i es t o r ecor d t he t r ansact i ons t hr ough Apr i l 30,
20X9. Mar ch 31 i s NOT a f i scal per i od end. I gnor e t he spl i t bet ween spot
gai n/ l oss and t i me val ue.

ANS:

Mar . 1
I nvent or y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55, 200
Account s Payabl e . . . . . . . . . . . . . . . . . . . . . . 55, 200

Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . 52, 000
Fwd Cont r act Payabl e- $. . . . . . . . . . . . . . . . . . 52, 000

Apr . 30
Account s Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . 55, 200
I nvest ment i n FC . . . . . . . . . . . . . . . . . . . . . . . 52, 800
Exchange Gai n . . . . . . . . . . . . . . . . . . . . . . . 2, 400

I nvest ment i n FC . . . . . . . . . . . . . . . . . . . . . . . . . 52, 800
Fwd Cont r act Recei vabl e . . . . . . . . . . . . . . . . 52, 000
Exchange Gai n . . . . . . . . . . . . . . . . . . . . . . . . . . 800

DI F: M OBJ : 3, 5

9. Descr i be t he di scl osur es r equi r ed by t he FASB of f i r ms usi ng der i vat i ves
as f or ei gn cur r ency hedges.

ANS:

The FASB r equi r es f our basi c di scl osur es:

( 1) The obj ect i ves of usi ng hedgi ng i nst r ument s and t he
st r at egi es f or achi evi ng t he obj ect i ve.

( 2) A descr i pt i on of t he var i ous t ypes of hedges such as f ai r
val ue hedges and cash f l ow hedges.

( 3) A descr i pt i on of t he ent i t y' s r i sk management pol i cy f or
hedgi ng t ypes al ong wi t h a descr i pt i on of t he t ypes of
t r ansact i ons whi ch ar e hedged.

( 4) Det ai l ed i nf or mat i on r egar di ng: t he amount of gai ns/ l osses on
hedges, wher e gai ns/ l osses ar e r ecogni zed- ear ni ngs or ot her
compr ehensi ve i ncome, when gai ns/ l osses appear i ng i n ot her
compr ehensi ve i ncome wi l l be r ecogni zed i n ear ni ngs, wher e
gai ns/ l osses r ecogni zed i n ear ni ngs appear i n t he i ncome
st at ement , and gai ns/ l osses r ecogni zed due t o a hedge no
l onger qual i f yi ng f or hedge account i ng.

DI F: M OBJ : 5

Chapt er 10
10- 17
10. Rex Cor por at i on, a U. S. f i r mwi t h a cal endar account i ng year , agr eed t o
buy a speci al l y made t r uck f r oma J apanese f i r mf or del i ver y on J anuar y
31, 20X2 wi t h payment due on 2/ 28/ X2. On t he same dat e t he agr eement was
si gned, November 1, 20X1, a f or war d cont r act due on Febr uar y 28, 20X2,
was al so si gned t o pur chase 1, 000, 000 yen, t he cont r act pr i ce of t he
t r uck. Exchange r at es wer e as f ol l ows:

Dat e Spot Rat e For war d Rat e
11/ 1/ X1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 0076 $0. 0078
12/ 31/ X1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 0081 $0. 0080
1/ 31/ X2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 0084 $0. 0083
2/ 28/ X2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 0085 $0. 0085

Di scount r at e = 8%

Requi r ed:

Pr epar e t he j our nal ent r i es needed t o pr oper l y r ef l ect t he pur chase and
f or war d cont r act t hr ough t he end of t he f i scal year .

ANS:

Nov. 1
Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . . . . . . . 7, 800
Fwd Cont r act Payabl e- $ . . . . . . . . . . . . . . . . . . . . . . . . 7, 800

Dec. 31
Loss on Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . 500
Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500

Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . . . . . 500
Unr eal i zed Gai n on Cont r act . . . . . . . . . . . . . . . . . . 500

Unr eal i zed Loss on Cont r act . . . . . . . . . . . . . . . . . . . . 302. 67
Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . . . 302. 67

Chapt er 10
10- 18
11/ 1 12/ 31
# of FC 1, 000, 000 1, 000, 000
Spot Rat e . 0076 . 0081
Fwd Rat e- Remai n . 0078 . 0080
Fwd Rat e- Or i gi nal . 0078

Fai r Val ue of Fwd Cont r act

Or i gi nal Val ue 7, 800
Cur r ent Val ue 8, 000
Change; gai n ( l oss) i n val ue 200
of Fwd Cont r act Rec
PV of change:
n = 1, . 08/ 12 197. 33
n = 0, . 08/ 12
Change i n PV:
Cur r ent PV 197. 33
Pr i or PV 0
Change i n PV 197. 33
Change gai n ( l oss)
i n spot r at es 500. 00
Change i n t i me 302. 67

DI F: M OBJ : 3, 5

11. On J anuar y 1, 20X1, a domest i c f i r magr ees t o sel l goods t o a f or ei gn
cust omer , wi t h del i ver y t o be made on Mar ch 1, 20X1. The goods, val ued
at 50, 000 FCs, ar e t o be pai d f or 30 days af t er del i ver y. On J anuar y 1,
20X1, t he domest i c f i r mpur chased a 90- day f or war d cont r act t o sel l
50, 000 FCs. Exchange r at es on sel ect ed dat es ar e as f ol l ows:

Dat e Spot Rat e Fwd Rat e
1/ 1/ X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $1. 00 1FC = $0. 99
3/ 1/ X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 98 1FC = $0. 97
4/ 1/ X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 96 1FC = $0. 96


Requi r ed:

Pr epar e t he j our nal ent r i es needed t o pr oper l y r ef l ect t he sal es
t r ansact i on and t he f or war d exchange cont r act . The f or war d cont r act
meet s t he condi t i ons necessar y t o be cl assi f i ed as a hedge on an
i dent i f i abl e f or ei gn cur r ency commi t ment . I ncl ude t he t abl e t o cal cul at e
t he spl i t bet ween exchange gai ns or l osses on t he cont r act due t o
changes i n spot r at es and t he changes i n t i me val ue.

Chapt er 10
10- 19
ANS:

J an. 1
Fwd Cont r act Recei vabl e- $. . . . . . . . . . . . . . . . . . . . . . . 49, 500
Fwd Cont r act Payabl e- FC. . . . . . . . . . . . . . . . . . . . . . . 49, 500

Mar . 1
Loss on Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000
Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000

Fwd Cont r act Payabl e- FC. . . . . . . . . . . . . . . . . . . . . . . . . 1, 000
Unr eal i zed Gai n on Cont r act . . . . . . . . . . . . . . . . . . . 1, 000

Unr eal i zed Loss on Cont r act . . . . . . . . . . . . . . . . . . . . . 8. 33
Fwd Cont r act Payabl e- FC. . . . . . . . . . . . . . . . . . . . . . . 8. 33

Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000

Apr . 1
I nv i n For ei gn Cur r ency. . . . . . . . . . . . . . . . . . . . . . . . . 48, 000
Exchange Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000

Fwd Cont r act Payabl e- FC . . . . . . . . . . . . . . . . . . . . . . . . 1, 000

Unr eal i zed Exchange Loss. . . . . . . . . . . . . . . . . . . . . . . . 491. 67
Fwd Cont r act Payabl e- FC . . . . . . . . . . . . . . . . . . . . . . 491. 67

I nv i n For ei gn Cur r ency . . . . . . . . . . . . . . . . . . . . . . 48, 000

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49, 500
Fwd Cont r act Rec- $. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49, 500

1/ 1 3/ 1 4/ 1
# of FC 50, 000 50, 000 50, 000
Spot Rat e 1. 00 . 98 . 96
Fwd Rat e- Remai n . 99 . 97 . 96
Fwd Rat e- Or i gi nal . 99 . 99

Fai r Val ue of Fwd Cont r act :
Or i gi nal 49, 500 49, 500
Cur r ent 48, 500 48, 000
Change- Gai n( l oss) i n Fwd Val ue 1, 000 1, 500

Pr esent Val ue of Change:
n = 1, i = . 10/ 12 991. 67
n = 2, i = . 10/ 12 1, 500
Change i n Val ue:
Cur r ent Pr esent Val ue 991. 67 1, 500. 00
Pr i or Pr esent Val ue 0 991. 67
Change i n Pr esent Val ue 991. 67 508. 33
Change due t o spot r at e- Gai n( l oss) 1, 000. 00 1, 000. 00
Change i n t i me- Gai n( l oss) ( 8. 33) ( 491. 67)

DI F: D OBJ : 3, 5
Chapt er 10
10- 20

12. Wol t er s Cor por at i on i s a U. S. cor por at i on t hat pur chased 50, 000
chocol at e bar s f r oma f or ei gn manuf act ur er on 6/ 1/ X9 f or 80, 000 f or ei gn
cur r ency uni t s, t o be pai d on 9/ 1/ X9. On 6/ 1/ X9 Wol t er s al so ent er ed
i nt o a f or war d cont r act t o pur chase 80, 000 f or ei gn cur r ency uni t s on
9/ 1/ X9. Wol t er s has a J ul y 31 year end.

Exchange r at es ar e as f ol l ows:

Dat e _ Spot Rat e Fwd Rat e
6/ 1/ X9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 64 $0. 645
7/ 31/ X9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 66 $0. 68
9/ 1/ X9. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 69 $0. 69


Requi r ed:

Make t he necessar y j our nal ent r i es f or Wol t er s f or t he per i od J une 1
t hr ough Sept ember 1, 20X9.

ANS:

J une 1
I nvent or y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 200
Account s Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 200


J ul y 31
Exchange Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 600



Sept . 1
Exchange Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 400
I nv i n FC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55, 200

Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . . . . . . 2, 400

Unr eal i zed Exchange Loss. . . . . . . . . . . . . . . . . . . . . . . . 1, 572
Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . . . . 1, 572

I nv i n FC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55, 200

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 600

Chapt er 10
10- 21
6/ 1 7/ 31 9/ 1
# of FC 80, 000 80, 000 80, 000
Spot Rat e . 64 . 66 . 69
Fwd Rat e- Remai n . 645 . 68 . 69

Or i gi nal 51, 600 51, 600
Cur r ent 54, 400 55, 200

n = 1, i = . 12/ 12 2, 772
n = 2, i = 12/ 12 3, 600
Change i n Val ue:
Cur r ent Pr esent Val ue 2, 772 3, 600
Pr i or Pr esent Val ue 0 2, 772
Change i n Pr esent Val ue 2, 772 828
Change due t o spot r at e- Gai n( l oss) 1, 600 2, 400
Change i n t i me- Gai n( l oss) 1, 172 ( 1, 572)

DI F: D OBJ : 3, 5

13. Li on Cor por at i on, a U. S. f i r m, ent er ed i nt o sever al f or ei gn cur r ency
t r ansact i ons dur i ng t he year . Det er mi ne t he ef f ect of each t r ansact i on
on net i ncome f or t hat cur r ent account i ng year onl y. Bear has a J une 30
year end.

Requi r ed:

a. On J anuar y 15, Li on sol d $30, 000 ( Canadi an) i n mer chandi se t o
a Canadi an f i r m, t o be pai d f or on Febr uar y 15 i n Canadi an
dol l ar s. Canadi an dol l ar s wer e wor t h $0. 85 ( U. S. ) on J anuar y
15 and $0. 82 ( U. S. ) on Febr uar y 15.

b. On J une 1, Li on pur chased and r ecei ved a comput er cost i ng
100, 000 eur os f r oma Ger man f i r m. Bear pai d f or t he comput er
on August 1. On J une 1, t o r educe exchange r i sks, Li on
pur chased a cont r act t o buy 100, 000 mar ks i n 60 days. Exchange
r at es ar e as f ol l ows:
Spot Fwd
6/ 1 $0. 53 $0. 60
6/ 30 $0. 54 $0. 58


c. On J une 1, Li on pur chased an opt i on t o sel l 100, 000 FC i n 60
days t o hedge a f or ecast ed sal e t o a cust omer . The opt i on sol d
f or a pr emi umof $6, 500 and a st r i ke pr i ce of $1. 20. The val ue
of t he opt i on 6/ 30 was $12, 500. The spot r at e on 6/ 1 was $1. 19
and at 6/ 30 $1. 25.

Chapt er 10
10- 22
ANS:

a. Exchange l oss on sal e: $900

b. Exchange l oss on exposed payabl e. . . . . . . . . . . . . . . . . . $( 1, 000)
Unr eal i zed gai n on f or war d cont r act . . . . . . . . . . . . . . . 1, 000
Loss on t i me val ue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2, 990)
Net l oss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $( 2, 990)
=======

The val ue of t he For war d Cont r act Recei vabl e- FC on 6/ 30 i s
58, 000 compar ed t o 60, 000 on 6/ 1, a l oss i n val ue of 2, 000.
The pr esent val ue of t hat change i s 1, 990( n = 1, I = . 06/ 12)
The di f f er ence bet ween t he pr esent val ue of t he l oss and t he
gai n on t he spot s r esul t s i n a l oss f r omt i me val ue of 2, 990
( 1, 990 l oss - 1, 000 gai n)

c. 6/ 30
I nt r i nsi c Val ue: 100, 000 FC x ( 1. 25 - 1. 20) = 5, 000 r epor t ed
i n Ot her Compr ehensi ve i ncome, The r emai ni ng i ncr ease i n val ue
of t he opt i on of 1, 000 ( 12, 500 - 6, 500 = 6, 000 t ot al i ncr ease
i n val ue) i s a gai n.

DI F: M OBJ : 5

14. Di f f er ent i at e bet ween t he f ol l owi ng monet ar y syst ems: f l oat i ng syst em,
cont r ol l ed f l oat syst emand t i er ed syst em.

ANS:

I n a f l oat i ng r at e syst em, suppl y and demand pr i mar i l y def i ne cur r ency
exchange r at e. I n a cont r ol l ed f l oat syst em, t he exchange r at e i s
est abl i shed and mai nt ai ned by a nat i on' s cent r al bank. I n a t i er ed
syst em, a count r y est abl i shes speci al exchange r at es f or cer t ai n
t r ansact i ons.

DI F: E OBJ : 1

15. On November 1, 20X1, a U. S. company pur chased i nvent or y f r oma f or ei gn
suppl i er f or 100, 000 FCs, wi t h payment t o be made on J anuar y 31, 20X2,
i n FCs. To hedge agai nst f l uct uat i ons i n exchange r at es, t he f i r m
ent er ed i nt o a f or war d exchange cont r act on November 1 t o pur chase
100, 000 FCs on J anuar y 31, 20X2. The U. S. f i r mhas a December 31 year
end f or account i ng pur poses. The f ol l owi ng exchange r at es may appl y:

11/ 1/ X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 15 $0. 13
12/ 31/ X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 16 $0. 14
1/ 31/ X2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 165 $0. 165


Requi r ed:

Chapt er 10
10- 23
Make al l t he necessar y j our nal ent r i es f or t he U. S. f i r mr el at i ve t o
t hese event s occur r i ng bet ween November 1, 20X1, and J anuar y 31, 20X2.

ANS:

Nov. 1
I nvent or y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000
Account s Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000


Dec. 31
Exchange Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000


Unr eal i zed Loss on Cont r act . . . . . . . . . . . . . . . . . . . . . 10
Fwd Cont r act Recei vabl e- FC. . . . . . . . . . . . . . . . . . . . 10

J an. 31
Exchange Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
I nv i n FC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 500

Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . . . . . . 500
Unr eal i zed Gai n on Cont r act . . . . . . . . . . . . . . . . . . . 500


I nv i n FC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 500
Fwd Cont r act Recei vabl e- FC. . . . . . . . . . . . . . . . . . . . 16, 500

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 000

11/ 1 12/ 31 1/ 31
# of FC 100, 000 100, 000 100, 000
Spot Rat e . 15 . 16 . 165
Fwd Rat e- Remai n . 13 . 14 . 165

Or i gi nal 13, 000 13, 000
Cur r ent 14, 000 16, 500

n = 1, i = . 12/ 12 990
n = 2, i = . 12/ 12 3, 500
Change i n Val ue:
Cur r ent Pr esent Val ue 990 3, 500
Pr i or Pr esent Val ue 0 990
Change i n Pr esent Val ue 990 2, 510
Change due t o spot r at e- Gai n( l oss) 1, 000 500
Change i n t i me- Gai n( l oss) ( 10) 2, 010
Chapt er 10
10- 24

DI F: M OBJ : 3, 5

16. On November 1, 20X1, a U. S. company sol d mer chandi se t o a f or ei gn f i r m
f or 100, 000 FCs wi t h payment t o be made on J anuar y 31, 20X2, i n FCs. To
hedge agai nst f l uct uat i ons i n exchange r at es, t he f i r ment er ed i nt o a
f or war d exchange cont r act on December 1, 20X1 t o sel l 100, 000 FCs on
J anuar y 31, 20X2. The U. S. f i r mhas a December 31 year end f or
account i ng pur poses. The f ol l owi ng exchange r at es may appl y:

11/ 1/ X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 15
12/ 1/ X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 155 $0. 17
12/ 31/ X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 16 $0. 175
1/ 31/ X2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 165 $0. 165


Requi r ed:

Make al l t he necessar y j our nal ent r i es f or t he U. S. f i r mr el at i ve t o
t hese event s occur r i ng bet ween November 1, 20X1, and J anuar y 31, 20X2.

ANS:

Nov. 1
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000

Dec. 1
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Exchange Gai n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500

Fwd Cont r act Recei vabl e- $. . . . . . . . . . . . . . . . . . . . . . 17, 000
Fwd Cont r act Payabl e- FC. . . . . . . . . . . . . . . . . . . . . . 17, 000

Dec. 31
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Exchange Gai n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500

Fwd Cont r act Payabl e- FC. . . . . . . . . . . . . . . . . . . . . . . 500

Fwd Cont r act Payabl e- FC. . . . . . . . . . . . . . . . . . . . . . . . . 4

J an. 31
I nv i n FC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 500
Account s Recei vabl e . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 000
Exchange Gai n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500


Unr eal i zed Exchange Gai n. . . . . . . . . . . . . . . . . . . . . . 1, 496

Chapt er 10
10- 25

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 000
Fwd Cont r act Recei vabl e- $. . . . . . . . . . . . . . . . . . . . . 17, 000

12/ 1 12/ 31 1/ 31
# of FC 100, 000 100, 000 100, 000
Spot Rat e . 155 . 16 . 165
Fwd Rat e- Remai n . 17 . 175 . 165

Or i gi nal 17, 000 17, 000
Cur r ent 17, 500 16, 500
Change- Gai n( l oss) i n Fwd Val ue ( 500) 500

n = 1, i = . 10/ 12 ( 496)
n = 2, i = . 10/ 12 500
Change i n Val ue:
Cur r ent Pr esent Val ue ( 496) 500
Pr i or Pr esent Val ue 0 ( 496)
Change i n Pr esent Val ue ( 496) 996
Change due t o spot r at e- Gai n( l oss) ( 500) ( 500)
Change i n t i me- Gai n( l oss) 4 1, 496

DI F: M OBJ : 3, 5

17. Zer l i e s I mpor t s pur chased aut omot i ve par t s f r oma Ger man f i r mon J ul y
1, 20X1. The par t s cost 150, 000 Eur os t o be pai d f or on August 15. To
pay f or t he par t s, Zer l i e s I mpor t s bor r owed 150, 000 eur os f r oma Ger man
bank on J ul y 16. The l oan bear s an 11%i nt er est r at e t o be r epai d on
August 15 i n eur os.

Anot her opt i on woul d have been f or Zer l i e s t o have hedged t he pur chase
wi t h a f or war d exchange cont r act on J ul y 1 t o buy 150, 000 eur os at a
f or war d r at e of $0. 67. Exchange r at es wer e as f ol l ows:

Dat e Spot Rat e
J ul y 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 M = $0. 65
J ul y 16, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 M = $0. 60
August 15, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 M = $0. 62

Requi r ed:

a. Comput e t he ef f ect on net i ncome assumi ng t he f ol l owi ng:

( 1) Zer l i e di d not bor r ow t o pay f or t he t r ansact i on or hedge t he
t r ansact i on on J ul y 1.
( 2) Zer l i e bor r owed f r omt he Ger man bank on J ul y 16.
( 3) Zer l i e hedged t he f ul l pur chase on J ul y 1.
**i gnor e pr esent val ues and di scount r at es

b. Det er mi ne whi ch of t hese t hr ee al t er nat i ves woul d have been
t he best f or Zer l i e under t he si t uat i on descr i bed.

Chapt er 10
10- 26
ANS:

___1 2 3
a. No Loan
or Hedge Loan Hedge
Exchange gai n on account s payabl e. . $4, 500 $ 4, 500 $ 4, 500
Gai n on eur os. . . . . . . . . . . . . . . . . . . . . . 3, 000
I nt er est expense. . . . . . . . . . . . . . . . . . . ( 853)
Loss on l oan. . . . . . . . . . . . . . . . . . . . . . . ( 3, 000)
Loss on hedge. . . . . . . . . . . . . . . . . . . . . . ( 4, 500)
Pr emi umon hedge. . . . . . . . . . . . . . . . . . . ( 3, 000)
$4, 500 $ 3, 647 $( 3, 000)
====== ======= =======

b. Zer l i e woul d have been bet t er of f i f he had exposed hi s
l i abi l i t y t o t he mar ket r at her t han at t empt ed t o hedge or
bor r ow.

DI F: D OBJ : 3, 4, 5

18. Bul l dog Ent er pr i se, a U. S. f i r m, agr eed on Febr uar y 1, 20X1, t o buy
gear s f r oma Mexi can f i r mf or 75, 000 pesos. Del i ver y i s schedul ed f or
Apr i l 1, 20X1, wi t h payment due on May 1, 20X1. On Febr uar y 1, 20X1,
Bul l dog al so acqui r ed a f or war d cont r act t o buy 75, 000 pesos on May 1,
20X1. ( The gear s r epr esent i nvent or y t o t he U. S. f i r m. ) Ther e ar e no
f i scal per i od ends.

Requi r ed:

Pr epar e t he j our nal ent r i es necessar y f or Bul l dog Ent er pr i se t o r ecor d
t hi s act i vi t y. Assume t hat t he f ol l owi ng exchange r at es exi st ed:

Dat e Spot Rat e For war d Rat e
Febr uar y 1, 20X1. . . . . . . . 1 peso = $0. 223 1 peso = $0. 227
Apr i l 1, 20X1. . . . . . . . . . . 1 peso = $0. 228 1 peso = $0. 230
May 1, 20X1. . . . . . . . . . . . . 1 peso = $0. 226 1 peso = $0. 226


Chapt er 10
10- 27
ANS:

Feb. 1

Apr . 1
Loss on Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . 375
Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375

Fwd Cont r act Recei vabl e- FC. . . . . . . . . . . . . . . . . . . . . . 375


I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 725
Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375

May 1
Account s Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 100
I nv i n FC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 950
Exchange Gai n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

Unr eal i zed Loss on Cont r act . . . . . . . . . . . . . . . . . . . . 150
Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . . . 150

Unr eal i zed Loss on Cont r act . . . . . . . . . . . . . . . . . . . . 147
Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . . . 147

I nv i n FC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 950
Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . . . 16, 950

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 025

2/ 1 4/ 1 5/ 1
# of FC 75, 000 75, 000 75, 000
Spot Rat e . 223 . 228 . 226
Fwd Rat e- Remai n . 227 . 230 . 226

Or i gi nal 17, 025 17, 025
Cur r ent 17, 250 16, 950
Change- Gai n( l oss) i n Fwd Val ue 225 ( 75)

n = 1, i = . 15/ 12 222
n = 2, i = . 10/ 12 ( 75)
Change i n Val ue:
Cur r ent Pr esent Val ue 222 ( 75)
Change i n Pr esent Val ue 222 ( 297)
Change due t o spot r at e- Gai n( l oss) 375 ( 150)
Change i n t i me- Gai n( l oss) ( 153) ( 147)

DI F: D OBJ : 3, 5
Chapt er 10
10- 28

19. On November 1, 20X8 Desket , I nc. a U. S. company agr eed t o sel l goods t o
a f or ei gn buyer f or 200, 000 FC. The goods wer e t o be shi pped on December
1 wi t h payment t o be r ecei ved J anuar y 31, 20X9.

The hedgi ng cont r act , si gned on November 1, 20X8, cal l ed f or t he sal e of
200, 000 FC on J anuar y 31, 20X9. Assume t he December 31 i s f i scal year
end. Exchange r at es ar e as f ol l ows:

Spot Rat e Fwd Rat e
11/ 1/ X8 . . . . . . . . . . . . . . . . . . . . . . . $0. 66 $0. 69
12/ 1/ X8 . . . . . . . . . . . . . . . . . . . . . . . $0. 67 $0. 68
12/ 31/ X8 . . . . . . . . . . . . . . . . . . . . . . $0. 65 $0. 66


Requi r ed:

Pr epar e al l necessar y ent r i es t hr ough December 31, 20X8 f or t he
commi t ment hedge and sal e.

ANS:

Nov. 1

Dec. 1
Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000
Gai n on Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . 2, 000

Unr eal i zed Loss on Cont r act . . . . . . . . . . . . . . . . . . . . . 2, 000

Unr eal i zed Gai n on Cont r act . . . . . . . . . . . . . . . . . . 3, 980

Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132, 000

Dec. 31
Exchange Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000


Fwd Cont r act Payabl e- FC . . . . . . . . . . . . . . . . . . . . . . . . 20
Unr eal i zed Gai n on Cont r act . . . . . . . . . . . . . . . . . . 20

Chapt er 10
10- 29
11/ 1 12/ 1 12/ 31
# of FC 200, 000 200, 000 200, 000
Spot Rat e . 66 . 67 . 65
Fwd Rat e- Remai n . 69 . 68 . 66

Or i gi nal 138, 000 138, 000
Cur r ent 136, 000 132, 000

n = 1, i = . 12/ 12 1, 980
n = 2, i = . 12/ 12 6, 000
Change i n Val ue:
Cur r ent Pr esent Val ue 1, 980 6, 000
Pr i or Pr esent Val ue 0 1, 980
Change i n Pr esent Val ue 1, 980 4, 020
Change due t o spot r at e- Gai n( l oss) ( 2, 000) 4, 000
Change i n t i me- Gai n( l oss) 3, 980 20

DI F: D OBJ : 3, 5

20. Red & Bl ue Company, a U. S. cor por at i on, agr eed t o pur chase mer chandi se
f r oma Br i t i sh vendor on J anuar y 1, 20X4. The goods wi l l be shi pped on
J anuar y 31, 20X4 and payment of 200, 000 Br i t i sh pounds i s due Febr uar y
28, 20X4. On J anuar y 1, USA si gned an agr eement wi t h a f or ei gn exchange
br oker t o buy 200, 000 Br i t i sh pounds on Febr uar y 28, 20X4. Exchange
r at es t o pur chase 1 Br i t i sh pound ar e as f ol l ows:

1/ 1/ X4. . . . . . . . . . . . . . . . . . $1. 65 $1. 63
1/ 31/ X4. . . . . . . . . . . . . . . . . $1. 62 $1. 605
2/ 28/ X4. . . . . . . . . . . . . . . . . $1. 59 $1. 59

Di scount Rat e = 15%

Requi r ed:

J our nal i ze t hese t r ansact i ons.

Chapt er 10
10- 30
ANS:

J an. 1
Fwd Cont r act Recei vabl e- FC. . . . . . . . . . . . . . . . . 326, 000
Fwd Cont r act Payabl e- $. . . . . . . . . . . . . . . . . . . 326, 000

J an. 31
Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Gai n on Fi r mCommi t ment . . . . . . . . . . . . . . . . . . 6, 000

Unr eal i zed Loss on Cont r act . . . . . . . . . . . . . . . . 6, 000
Fwd Cont r act Recei vabl e- FC. . . . . . . . . . . . . . . 6, 000

Unr eal i zed Gai n on Cont r act . . . . . . . . . . . . . . 1, 062

I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330, 000
Fi r mCommi t ment . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Account s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . 324, 000

Feb. 28
Fwd Cont r act Payabl e- $. . . . . . . . . . . . . . . . . . . . . 324, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324, 000

Account s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . 324, 000
I nv i n FC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318, 000
Exchange Gai n. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000

Fwd Cont r act Recei vabl e- FC. . . . . . . . . . . . . . . 6, 000

Unr eal i zed Gai n . . . . . . . . . . . . . . . . . . . . . . . . 2, 937

1/ 1 1/ 31 2/ 28
# of FC 200, 000 200, 000 200, 000
Spot Rat e 1. 65 1. 62 1. 59
Fwd Rat e- Remai n 1. 63 1. 605 1. 59
Fwd Rat e- Or i gi nal 1. 63 1. 63

Or i gi nal 326, 000 326, 000
Cur r ent 321, 000 318, 000
Change- Gai n( l oss) i n Fwd Val ue ( 5, 000) ( 8, 000)

n = 1, i = . 15/ 12 4, 938
n = 2, i = . 15/ 12 8, 000
Change i n Val ue:
Cur r ent Pr esent Val ue ( 4, 938) ( 8, 000)
Pr i or Pr esent Val ue 0 ( 4, 938)
Change i n Pr esent Val ue ( 4, 938) ( 3, 062)
Change due t o spot r at e- Gai n( l oss) ( 6, 000) ( 6, 000)
Change i n t i me- Gai n( l oss) 1, 062 2, 937

DI F: D OBJ : 3, 5

Chapt er 10
10- 31
21. On J anuar y 1, 20X4, Br anson Company, a U. S. cor por at i on, pur chased l ab
equi pment f r oma J apanese vendor f or 1, 000, 000 FC. The 1, 000, 000 FC i s
t o be pai d on Mar ch 31, 20X4. On Febr uar y 1 t he company pur chased a
f or war d cont r act t o buy f or ei gn cur r ency whi ch woul d expi r e on Mar ch 31,
20X4. The cont r act was t o pur chase 1, 000, 000 FC.

Exchange Rat es ar e as f ol l ows:

1/ 1/ X4 . . . . . . . . . . . . . . . $0. 018 $0. 011
2/ 1/ X4 . . . . . . . . . . . . . . . $0. 014 $0. 011
3/ 31X4 . . . . . . . . . . . . . . . $0. 013 $0. 013


Requi r ed:

Pr epar e t he ent r i es t o r ecor d t he t r ansact i ons.

ANS:

J an. 1
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 000

Feb. 1
Account s Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000
Exchange Gai n . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000

Fwd Cont r act Payabl e- $. . . . . . . . . . . . . . . . . 11, 000

Mar . 31
Dol l ar s due t o Br oker . . . . . . . . . . . . . . . . . . . . . . 11, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 000

I nv i n FC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 000
Exchange Gai n. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000

Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . 1, 000

Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . 3, 000

I nv i n FC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 000

Chapt er 10
10- 32
1/ 1 2/ 1 3/ 31
# of FC 1, 000, 000 1, 000, 000 1, 000, 000
Spot Rat e 0. 018 0. 014 0. 013
Fwd Rat e- Remai n 0. 011 0. 011 0. 013

Or i gi nal 11, 000 11, 000
Cur r ent 11, 000 13, 000
Change- Gai n( l oss) i n Fwd Val ue 0 2, 000

n = 1, i = . 15/ 12 0
n = 2, i = . 15/ 12 2, 000
Change i n Val ue:
Cur r ent Pr esent Val ue 0 2, 000
Change i n Pr esent Val ue 0 2, 000
Change due t o spot r at e- Gai n( l oss) 0 ( 1, 000)
Change i n t i me- Gai n( l oss) 0 3, 000

DI F: M OBJ : 3, 5

22. Bl ue & Gr een, I nc. pur chased mer chandi se f or 100, 000 FC f r oma f or ei gn
vendor on December 1, 20X5. Payment i n FC i s due J anuar y 31, 20X6. On
December 1, 20X5, Bl ue & Gr een si gned an agr eement wi t h a f or ei gn
exchange br oker t o buy 100, 000 FC on J anuar y 30, 20X6. Exchange r at es t o
pur chase 1 FC ar e as f ol l ows:

12/ 1/ X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 45 $1. 40
12/ 31/ X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 43 $1. 35
1/ 31/ X6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 41 $1. 41

Fi scal Year End i s 12/ 31; Di scount r at e = 12%

Requi r ed:

Pr epar e t he j our nal ent r i es f or December 1 t hr ough J anuar y 31 r el at ed t o
t he event s descr i bed above.

Chapt er 10
10- 33
ANS:

20X5
Dec. 1
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145, 000

Fwd Cont r act Payabl e- $. . . . . . . . . . . . . . . . . . . 140, 000

Dec. 31
Exchange gai n. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000



J an. 31
Account s Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . . 143, 000
I nv I n FC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141, 000
Exchange Gai n . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000


Fwd Cont r act Recei vabl e- FC . . . . . . . . . . . . . . . . 7, 950

I nv i n FC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141, 000

12/ 1 12/ 31 1/ 31
# of FC 100, 000 100, 000 100, 000
Spot Rat e 1. 45 1. 43 1. 41
Fwd Rat e- Remai n 1. 4 1. 35 1. 41

Or i gi nal 140, 000 140, 000
Cur r ent 135, 000 141, 000
Change- Gai n( l oss) i n Fwd Val ue ( 5, 000) 1, 000

n = 1, i = . 12/ 12 4, 950
n = 2, i = . 12/ 12 1, 000
Change i n Val ue:
Cur r ent Pr esent Val ue ( 4, 950) 1, 000
Pr i or Pr esent Val ue 0 ( 4, 950)
Change i n Pr esent Val ue ( 4, 950) 5, 950
Change due t o spot r at e- Gai n( l oss) ( 2, 000) ( 2, 000)
Change i n t i me- Gai n( l oss) ( 2, 950) 7, 950

DI F: M OBJ : 3, 5

Chapt er 10
10- 34
23. On 7/ 1, a company f or ecast s t he pur chase of 10, 000 uni t s of i nvent or y
f r oma f or ei gn vendor . The f or ecast ed cost i s est i mat ed t o be 150, 000FC.
I t i s est i mat ed i nvent or y wi l l be del i ver ed 11/ 1. Al so, on 7/ 1, t he
company pur chased a cal l opt i on t o buy 150, 000 FC at a st r i ke pr i ce of
$0. 60 anyt i me dur i ng Oct ober . An opt i on pr emi umof $1, 000.

7/ 1 7/ 31 8/ 31 10/ 1
Spot . . . . . . . . . . . . . . . . . $0. 58 $0. 61 $0. 63 $0. 635
FV of Opt i on. . . . . . . . . $1, 000 $1, 400 $2, 400 $2, 600

Requi r ed:

Pr epar e t he j our nal ent r i es r equi r ed t hr ough 10/ 1:

ANS:

7/ 1
I nv i n Cal l Opt i on. . . . . . . . . . . . . . . . . . . . . . . . . 1, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000

7/ 31
I nv i n Cal l Opt i on. . . . . . . . . . . . . . . . . . . . . . . . . 400
Unr eal i zed Loss on Opt i on. . . . . . . . . . . . . . . . . . 1, 100
OCI ( . 61 - . 60) x 150, 000 . . . . . . . . . . . . . . . 1, 500

8/ 31
I nv i n Cal l Opt i on. . . . . . . . . . . . . . . . . . . . . . . . . 1, 000
Unr eal i zed Loss on Opt i on. . . . . . . . . . . . . . . . . . 2, 000
OCI ( . 63 - . 61) x 150, 000 . . . . . . . . . . . . . . . 3, 000

10/ 1
I nv i n Cal l Opt i on. . . . . . . . . . . . . . . . . . . . . . . . . 200
Unr eal i zed Loss on Opt i on. . . . . . . . . . . . . . . . . . 550
OCI ( . 635 - . 63) x 150, 000 . . . . . . . . . . . . . . 750

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 600
I nvest ment i n Cal l Opt i on . . . . . . . . . . . . . . 2, 600

I nvent or y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95, 250
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95, 250

DI F: M OBJ : 5

24. On November 1, 20X2, a cal endar - year i nvest or pur chased a 90- day f or war d
cont r act t o buy 1, 000 FCs at a f or war d r at e of 1 FC = $1. 01, when t he
spot r at e was 1 FC = $1. 00. On December 31, 20X2, t he f or war d r at e f or a
30- day f or war d cont r act was 1 FC = $1. 02. On Febr uar y 1, 20X3, when t he
spot r at e was 1 FC = $1. 03, t he i nvest or pai d t he br oker and r ecei ved
t he f or ei gn cur r ency.

Requi r ed:

Pr epar e t he ent r i es necessar y t o r ecor d t hi s i nf or mat i on. I gnor e t he
pr esent val ue cal cul at i ons.

Chapt er 10
10- 35
ANS:

20X2
Nov. 1
Fwd Cont r act Recei vabl e- FC. . . . . . . . . . . 1, 010
Fwd Cont r act Payabl e- $. . . . . . . . . . . . . 1, 010

Dec. 31
Fwd Cont r act Recei vabl e- FC. . . . . . . . . . . 10
Unr eal i zed Gai n on Cont r act . . . . . . . . 10

20X3
Feb. 1
Fwd Cont r act Payabl e- $. . . . . . . . . . . . . . . . 1, 010
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 010

For ei gn Cur r ency. . . . . . . . . . . . . . . . . . . . . . 1, 030
Fwd Cont r act Recei vabl e- FC. . . . . . . . . . 1, 020
Exchange Gai n. . . . . . . . . . . . . . . . . . . . . . . 10

DI F: M OBJ : 3, 5

Chapter 11 Translation of Foreign Financial Statements

MULTIPLE CHOICE

1. The f unct i onal cur r ency appr oach adopt ed by FASB 52 r equi r es:
a. separ at e st at ement s be mai nt ai ned by t he domest i c par ent company
and t he f or ei gn br anch bot h i n t hei r own cur r enci es
b. separ at e st at ement s be mai nt ai ned by t he domest i c par ent company
and t he f or ei gn br anch wi t h t he f or ei gn br anch t r ansl at ed i nt o t he
f unct i onal cur r ency
c. r esul t s f r omf or ei gn cur r ency changes t o be i gnor ed
d. a f ocus on whet her t he domest i c r epor t i ng ent i t y' s cash f l ows wi l l
be i ndi r ect l y or di r ect l y af f ect ed by changes i n t he exchange
r at es of t he f or ei gn ent i t y' s cur r ency


2. I n whi ch of t he f ol l owi ng ci r cumst ances sur r oundi ng a Mexi can subsi di ar y
of an US par ent i s t he peso most l i kel y t o be consi der ed t he f unct i onal
cur r ency?
a. Sal es ar e made gl obal l y and col l ect ed i n US dol l ar s. Pl ant uses
l ocal mat er i al s and l abor and pays i n pesos. I nt er company
t r ansact i on vol ume i s hi gh.
b. The Mexi can subsi di ar y sel l s pr oduct onl y i n Mexi co and r ecei ves
pesos. The mat er i al s and l abor ar e al so secur ed i n Mexi co and pai d
f or wi t h pesos.
c. The Mexi can subsi di ar y r ecei ves t hei r debt capi t al f r oma US bank
i n dol l ar s and pr oduct s pr oduced ar e sol d gl obal l y f or US dol l ar s.
d. Raw mat er i al s ar e acqui r ed f r omt he par ent and pai d f or i n US
dol l ar s. Labor i s acqui r ed l ocal l y and pai d i n pesos. Fi nanci ng i s
secur ed f r omt he par ent i n US dol l ar s.


3. A U. S. f i r mowns 100%of a J apanese aut omobi l e manuf act ur er . The cost of
aut omobi l e par t s i s t ypi cal l y 75%of t he f i r m' s t ot al pr oduct . I n whi ch
of t he f ol l owi ng ci r cumst ances woul d nei t her t he U. S. dol l ar nor t he
J apanese yen be consi der ed t he f unct i onal cur r ency?
a. The J apanese f i r mbuys Ger man aut omobi l e par t s wi t h mar ks t o
pr oduce car s sol d i n Lat i n Amer i ca f or dol l ar s.
b. The J apanese f i r mbuys Ger man aut omobi l e par t s wi t h dol l ar s t o
pr oduce car s sol d i n Lat i n Amer i ca f or dol l ar s.
c. The J apanese f i r mbuys Ger man aut omobi l e par t s wi t h mar ks t o
pr oduce car s sol d i n Lat i n Amer i ca f or mar ks.
d. The FASB r equi r es t hat ei t her t he par ent ' s or t he subsi di ar y' s
l ocal cur r ency be used as t he f unct i onal cur r ency.


Chapt er 11
11- 2
4. Whi ch of t he f ol l owi ng best descr i bes t he nor mal r equi r ed met hod of
account i ng f or st at ement s of f or ei gn ent i t i es i n whi ch a U. S. f i r mhas
an equi t y i nt er est ?
a. The f unct i onal met hod
b. The monet ar y- nonmonet ar y met hod
c. The cur r ent - noncur r ent met hod
d. The t empor al met hod


5. When t he f unct i onal cur r ency i s t he f or ei gn ent i t y' s cur r ency:
a. exchange r at e changes do not af f ect t he economi c wel l bei ng of t he
par ent
b. t he subsi di ar y oper at es as an ent i t y, i ndependent of t he par ent
c. Exchange r at e changes do not have i mmedi at e i mpact on t he cash
f l ows of t he par ent
d. Al l of t he above ar e cor r ect


6. The t r ansl at i on ( r emeasur ement ) adj ust ment r epor t ed i n a t r ansl at i on when
t he f unct i onal cur r ency i s not t he f or ei gn cur r ency i s i ncl uded
a. as a separ at e component of ot her compr ehensi ve i ncome
b. i n t he cur r ent l i abi l i t y sect i on of t he bal ance sheet as def er r ed
r evenue
c. i n t he cal cul at i on of net i ncome


7. Assumi ng t hat a f or ei gn ent i t y i s deemed t o be oper at i ng i n an
envi r onment domi nat ed by t he l ocal cur r ency, t he ent i t y' s asset s ar e
t r ansl at ed usi ng
a. t he cur r ent r at e.
b. a si mpl e aver age r at e.
c. a wei ght ed aver age r at e.
d. a hi st or i cal r at e.


8. Assumi ng t hat a f or ei gn ent i t y i s deemed t o be oper at i ng i n an
envi r onment domi nat ed by t he l ocal cur r ency, t he ent i t y' s capi t al st ock
i s t r ansl at ed usi ng
a. t he cur r ent r at e.
b. a si mpl e aver age r at e.
c. a wei ght ed aver age r at e.
d. a hi st or i cal r at e.

ANS: D DI F: M OBJ : 2, 3

Chapt er 11
11- 3
9. I f t he f unct i onal cur r ency i s det er mi ned t o not be t he f or ei gn ent i t y' s
l ocal cur r ency, t r ansl at i on i s done usi ng
a. t he cur r ent r at e met hod
b. t he f unct i onal met hod
c. t he r emeasur ement met hod
d. t he der i vat i ve met hod


10. I n most cases, whi ch of t he f ol l owi ng i s NOT a component of t r ansl at ed
r et ai ned ear ni ngs?
a. Tr ansl at ed r et ai ned ear ni ngs at t he end of t he pr i or per i od
b. I ncome f r omt he per i od t r ansl at ed at t he hi st or i cal r at e
c. The val ue of di vi dends t r ansl at ed at t he exchange r at e on t he dat e
of decl ar at i on
d. Al l ar e component s of t r ansl at ed r et ai ned ear ni ngs

ANS: B DI F: D OBJ : 3, 6

11. Whi ch of t he f ol l owi ng i s NOT t r ue r egar di ng f or ei gn st at ement
t r ansl at i on usi ng t he cur r ent or t empor al met hod?
a. al l asset s and l i abi l i t i es ar e t r ansl at ed at t he cur r ent exchange
r at e at t he dat e of t r ansl at i on.
b. onl y monet ar y asset s and l i abi l i t i es ar e t r ansl at ed at t he cur r ent
exchange r at e at t he dat e of t r ansl at i on.
c. Equi t y account s ot her t han r et ai ned ear ni ngs ar e t r ansl at ed at t he
hi st or i c r at e i n ef f ect on t he dat e of t he i nvest ment
d. el ement s of i ncome can be t r ansl at ed at a wei ght ed aver age r at e
f or t he per i od


12. Whi ch of t he f ol l owi ng i s NOT consi der ed when di r ect l y comput i ng t he
t r ansl at i on adj ust ment f or f or ei gn f i nanci al st at ement s?
a. Begi nni ng amount of net asset s hel d by t he domest i c i nvest or
b. I ncr ease or decr ease i n net asset s f or t he per i od excl udi ng
capi t al t r ansact i ons
c. I ncr ease or decr ease i n net asset as a r esul t of capi t al
t r ansact i ons
d. Al l ar e consi der ed when di r ect l y comput i ng t he t r ansl at i on
adj ust ment


13. Exchange r at es wi l l not usual l y di r ect l y af f ect t he cash f l ows of t he
par ent ent i t y i n whi ch of t he f ol l owi ng cases?
a. The f or ei gn ent i t y oper at es i n a cur r ency ot her t han i t s own.
b. The f or ei gn ent i t y oper at es i n i t s l ocal cur r ency.
c. The f or ei gn ent i t y f unct i ons i n a cur r ency ot her t han i t s l ocal
cur r ency.
d. The f or ei gn ent i t y f unct i ons i n t he par ent ' s cur r ency.


Chapt er 11
11- 4
14. Whi ch of t he f ol l owi ng suggest s t hat t he f or ei gn ent i t y' s f unct i onal
cur r ency i s t he par ent ' s cur r ency?
a. I nt er company t r ansact i on vol ume i s l ow.
b. Debt i s ser vi ced t hr ough l ocal oper at i ons.
c. Ther e i s an act i ve and pr i mar i l y l ocal mar ket .
d. Sal e pr i ces ar e i nf l uenced by i nt er nat i onal f act or s.


15. Whi ch of t he f ol l owi ng f or ei gn cur r ency t r ansact i ons woul d be i ncl uded
i n t he equi t y sect i on of a U. S. f i r mal ong wi t h t he cumul at i ve
t r ansl at i on adj ust ment s?
a. Those used t o hedge a net i nvest ment i n a f or ei gn ent i t y
b. Those used t o specul at e i n f or ei gn exchange r at es
c. Those used t o hedge an exposed asset or l i abi l i t y posi t i on
d. Those used t o hedge a f ut ur e f or ei gn cur r ency commi t ment


16. The el i mi nat i ons and adj ust ment ent r i es necessar y t o consol i dat e t he
par ent and subsi di ar y f i nanci al st at ement s ar e t r ansl at ed as f ol l ows:
a. al l bal ances, pr of i t s, and l osses at t he cur r ent exchange r at e on
t he consol i dat i on dat e
b. i nt er company bal ances t r ansl at e at t he r at es used f or ot her
account s, pr of i t s and l osses t r ansl at e at an aver age r at e
c. i nt er company bal ances t r ansl at e at t he cur r ent r at es, pr of i t s and
l osses t r ansl at e at an aver age r at e
d. none of t he above ar e cor r ect


17. A U. S. par ent pur chased a f or ei gn subsi di ar y l ast year at a pr i ce i n
excess of t he subsi di ar y' s book val ue. Thi s excess i s assumed t o be
t r aceabl e t o under val ued equi pment . When t he par ent company pr epar es i t s
el i mi nat i on ent r i es f or t he excess, whi ch of t he f ol l owi ng combi nat i ons
of exchange r at es shoul d be used?

Equi pment Depr eci at i on Expense
a. Hi st or i cal Cur r ent
b. Cur r ent Hi st or i cal
c. Hi st or i cal Aver age
d. Cur r ent Aver age


Chapt er 11
11- 5
18. Whi ch of t he f ol l owi ng i s t r ue concer ni ng t he account i ng f or a f or ei gn
i nvest ment under t he cost met hod?
a. I nvest ment i ncome i s r ecor ded usi ng t he exchange r at e on t he
di vi dend decl ar at i on dat e.
b. I nvest ment i ncome i s r ecor ded usi ng t he aver age exchange r at e f or
t he year .
c. I nvest ment i ncome i s based on t he i nvest ee' s net i ncome adj ust ed
f or t he excess of pur chase pr i ce over book val ue.
d. I nvest ment i ncome i s based on t he i nvest ee' s net i ncome wi t hout
adj ust i ng f or t he excess of pur chase pr i ce over book val ue.


19. Rhant e i s a Ger man company whol l y owned by a U. S. f i r m. I t s i nvent or y i s
val ued at t he l ower of cost or mar ket , wi t h cost bei ng measur ed by t he
aver age cost met hod. Pur chases of i nvent or y occur evenl y t hr oughout t he
per i od. I n 2005 Rhant e s endi ng i nvent or y was 50, 000 eur os at cost and
48, 000 eur os at mar ket . Assume t he f ol l owi ng exchange r at es:

J an. 1, 2005 1 eur o = $1. 40 U. S.
Dec. 31, 2005 1 eur o = $1. 53 U. S.
2005 aver age 1 eur o = $1. 45 U. S.

Det er mi ne t he t r ansl at ed val ue of Rhant e s i nvent or y t o be i ncl uded i n
t he consol i dat ed bal ance sheet f or t he U. S. par ent gi ven Rhant e s
f unct i onal cur r ency i s t he eur o.
a. $73, 440
b. $76, 500
c. $69, 600
d. $72, 500


20. Rhant e i s a Ger man company whol l y owned by a U. S. f i r m. I t s i nvent or y i s
val ued at t he l ower of cost or mar ket , wi t h cost bei ng measur ed by t he
aver age cost met hod. Pur chases of i nvent or y occur evenl y t hr oughout t he
per i od. I n 2005 Rhant e s endi ng i nvent or y was 50, 000 eur os at cost and
48, 000 eur os at mar ket . Assume t he f ol l owi ng exchange r at es:

J an. 1, 2005 1 eur o = $1. 40 U. S.
Dec. 31, 2005 1 eur o = $1. 53 U. S.
2005 aver age 1 eur o = $1. 45 U. S.

Det er mi ne t he r emeasur ed val ue of Rhant e s i nvent or y t o be i ncl uded i n
t he consol i dat ed bal ance sheet f or t he U. S. par ent gi ven Rhant e s
f unct i onal cur r ency i s t he U. S. dol l ar .
a. $72, 500
b. $73, 440
c. $69, 600
d. $76, 500


Chapt er 11
11- 6
21. A debi t bal ance i n a par ent ' s cumul at i ve t r ansl at i on adj ust ment af t er
t he f i r st year of owni ng a f or ei gn subsi di ar y suggest s whi ch of t he
f ol l owi ng i s t r ue?
a. The exchange r at e has st r engt hened r el at i ve t o t he U. S. dol l ar .
b. The exchange r at e has weak r el at i ve t o t he U. S. dol l ar .
c. The f or ei gn ent i t y had net i ncome but t her e was not a change i n
exchange r at es.
d. The f or ei gn ent i t y had a net l oss but t her e was not a change i n
exchange r at es.


22. Whi ch of t he f ol l owi ng pr ocedur es woul d be necessar y when a Swi ss
subsi di ar y mai nt ai ns i t s books i n eur os and i t s f unct i onal cur r ency i s
J apanese Yen and i t s par ent i s a US company?
a. Remeasur ement f r omeur os t o US Dol l ar s
b. Remeasur ement f r omeur os t o J apanese Yen; t r ansl at e f r omYen t o US
Dol l ar s
c. Remeasur ement f r omYen t o eur os; t r ansl at e f r omeur os t o US
Dol l ar s


23. Assumi ng t hat t he f unct i onal cur r ency of a f or ei gn subsi di ar y i s t he
l ocal cur r ency, whi ch of t he f ol l owi ng account s woul d be t r ansl at ed at
t he cur r ent r at e?
a. Addi t i onal Pai d- i n Capi t al
b. Pr epai d I nsur ance
c. Al l owance f or Doubt f ul Account s
d. Cost of Goods Sol d


24. Assumi ng t hat t he f unct i onal cur r ency of a f or ei gn subsi di ar y i s not t he
l ocal cur r ency, whi ch of t he f ol l owi ng account s woul d be r emeasur ed at
t he hi st or i cal r at e?
a. Long- t er mnot es payabl e
b. Account s Payabl e
c. Land
d. Sal es Revenue


Chapt er 11
11- 7
25. Whi ch of t he f ol l owi ng best descr i bes t he measur ement of a gai n or l oss
f r omt he sal e of a depr eci abl e asset by a f or ei gn subsi di ar y whose
f unct i onal cur r ency i s not t he l ocal cur r ency?
a. Reconst r uct t he j our nal ent r y on t he dat e of t he sal e usi ng t he
hi st or i cal r at e f or cash and t he depr eci abl e asset and i t s
accumul at ed depr eci at i on.
b. Reconst r uct t he j our nal ent r y on t he dat e of t he sal e usi ng t he
cur r ent r at e f or cash and t he hi st or i cal r at e f or t he depr eci abl e
asset and i t s accumul at ed depr eci at i on.
c. Tr ansl at e t he gai n or l oss usi ng t he hi st or i cal r at e.
d. Tr ansl at e gai ns at t he cur r ent r at e and l osses at t he hi st or i cal
r at e.


26. Whi ch of t he f ol l owi ng best descr i bes t he account i ng f or a f or ei gn
ent i t y r equi r i ng t r ansl at i on or r emeasur ement i f t he l ocal economy i s
cl assi f i ed as hi ghl y i nf l at i onar y?
a. The ent i t y' s f i nanci al st at ement s ar e f i r st adj ust ed f or i nf l at i on
and t hen t r ansl at ed i nt o t he domest i c cur r ency.
b. The ent i t y' s f i nanci al st at ement s ar e f i r st adj ust ed f or i nf l at i on
and t hen r emeasur ed i nt o t he domest i c cur r ency.
c. The unadj ust ed t r i al bal ance i s t r ansl at ed i f t he f unct i onal
cur r ency i s t he l ocal cur r ency.
d. The unadj ust ed t r i al bal ance i s r emeasur ed r egar dl ess of t he
f unct i onal cur r ency.


27. The adj ust ment r esul t i ng f r omt he r emeasur ement of an ent i t y oper at i ng
i n a hi ghl y i nf l at i onar y envi r onment woul d appear
a. i n t he st ockhol der s' equi t y sect i on of t he bal ance sheet .
b. as a component of ot her compr ehensi ve i ncome.
c. as an or di nar y i ncome st at ement i t em.
d. as an ext r aor di nar y i t emon t he i ncome st at ement .


28. FASB St at ement #52 r equi r es whi ch of t he f ol l owi ng di scl osur es f r om
f i r ms i nvol ved i n f or ei gn cur r ency t r ansact i ons?
a. Begi nni ng cumul at i ve t r ansl at i on adj ust ment s
b. Endi ng cumul at i ve t r ansl at i on adj ust ment s
c. The amount of i ncome t axes f or t he per i od al l ocat ed t o t r ansl at i on
adj ust ment s
d. Al l ar e r equi r ed di scl osur es


Chapt er 11
11- 8
29. I n a company' s di scl osur e of f or ei gn cur r ency t r ansact i ons and hedges
and t r ansl at i on adj ust ment s, al l of t he f ol l owi ng i t ems shoul d be
di scl osed except
a. begi nni ng and endi ng cumul at i ve t r ansl at i on adj ust ment s.
b. t he amount of i ncome t axes f or t he per i od al l ocat ed t o t r ansl at i on
adj ust ment s.
c. t he amount t r ansf er r ed f r omcumul at i ve t r ansl at i on adj ust ment due
t o changes i n f or ei gn exchange r at es.
d. t he aggr egat e adj ust ment f or t he per i od r esul t i ng f r omt r ansl at i on
adj ust ment .


30. Shar p Company owns a J apanese subsi di ar y. On Oct ober 15, 20X5, when t he
r at e of exchange was 121 yen t o $1, t he J apanese subsi di ar y decl ar ed and
pai d a di vi dend t o Shar p of 24, 000, 000 yen. The di vi dend r epr esent ed t he
net i ncome of t he f or ei gn subsi di ar y f or t he si x mont hs ended J une 30,
20X5, dur i ng whi ch t i me t he wei ght ed aver age of exchange r at es was 125
yen t o $1. The r at e of exchange i n ef f ect at December 31, 20X5, was 135
yen t o $1. What r at e of exchange shoul d be used t o t r ansl at e t he
di vi dend f or t he December 31, 20X5 f i nanci al st at ement s?
a. 121 yen t o $1
b. 125 yen t o $1
c. 135 yen t o $1
d. 128 yen t o $1


31. A f or ei gn subsi di ar y of Dal l as J eans Cor p. ( a U. S. f i r m) has cer t ai n
bal ance sheet account s on December 31, 20X9. The f unct i onal cur r ency i s
t he U. S. dol l ar and cur r ency of r ecor d i s t he peso and t he par ent ' s
books ar e kept i n U. S. dol l ar s. I nf or mat i on r el at i ng t o t hese account s
i n U. S. dol l ar s i s as f ol l ows:

Tr ansl at ed at
Cur r ent Hi st or i cal
Rat e Rat e
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . $175, 000 $190, 000
I nvent or i es . . . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000 450, 000
Pr epai d I nsur ance. . . . . . . . . . . . . . . . . . . . . . 40, 000 45, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000 100, 000

What amount shoul d be i ncl uded as t ot al asset s on Dal l as J ean' s bal ance
sheet on December 31, 20X9 as t he r esul t of t he above i nf or mat i on?
a. $645, 000
b. $765, 000
c. $770, 000
d. $785, 000
e. None of t he above


Chapt er 11
11- 9
32. A f or ei gn subsi di ar y of Gr i f f i n Cor p. ( a U. S. f i r m) has cer t ai n bal ance
sheet account s on December 31, 20X9. The f unct i onal cur r ency i s t he yen
and t he cur r ency of r ecor d i s t he dol l ar and t he par ent ' s books ar e kept
i n U. S. dol l ar s. I nf or mat i on r el at i ng t o t hese account s i n U. S. dol l ar s
i s as f ol l ows:

Tr ansl at ed at
Cur r ent Hi st or i cal
Rat e Rat e
Account s Recei vabl e . . . . . . . . . . . . . . . . . $200, 000 $220, 000
I nvent or y . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000 275, 000
Pr epai d Asset s . . . . . . . . . . . . . . . . . . . . . . 10, 000 15, 000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000 25, 000

What amount shoul d be i ncl uded i n t ot al asset s on Gr i f f i n' s bal ance
sheet on December 31, 20X9 as t he r esul t of t he above i nf or mat i on?
a. $610, 000
b. $535, 000
c. $715, 000
d. $540, 000


33. The r econci l i at i on of t he annual t r ansl at i on adj ust ment usual l y i ncl udes
al l of t he f ol l owi ng, EXCEPT
a. net asset s at t he begi nni ng of t he per i od mul t i pl i ed by t he change
i n exchange r at es dur i ng t he per i od.
b. change i n net asset s ( excl udi ng capi t al t r ansact i ons) mul t i pl i ed
by t he di f f er ence bet ween t he cur r ent r at e and t he aver age r at e
used t o t r ansl at e i ncome.
c. change i n net asset s ( excl udi ng capi t al t r ansact i ons) mul t i pl i ed
by t he di f f er ence bet ween t he hi st or i cal r at e and t he aver age r at e
used t o t r ansl at e i ncome.
d. change i n net asset s due t o capi t al t r ansact i ons mul t i pl i ed by t he
di f f er ence bet ween t he cur r ent r at e and t he r at e at t he t i me of
t he capi t al t r ansact i on.


34. Exchange gai ns and l osses r esul t i ng f r omt r ansl at i ng ( not r emeasur i ng)
f or ei gn cur r ency f i nanci al st at ement s i nt o U. S. dol l ar s shoul d be
i ncl uded as a( an)
a. a component of ot her compr ehensi ve i ncome.
b. ext r aor di nar y i t emi n t he i ncome st at ement f or t he per i od i n whi ch
t he r at e changes.
c. or di nar y gai n/ l oss i t emi n t he i ncome st at ement .
d. component of oper at i ng i ncome.


Chapt er 11
11- 10
35. Pat ent s ar e on t he books of a Br i t i sh subsi di ar y of a U. S. f i r mat a
val ue of 50, 000 pounds. The pat ent s wer e acqui r ed i n 20X3 when t he
exchange r at e was 1 pound = $1. 50. The Br i t i sh subsi di ar y was acqui r ed
by t he U. S. f i r mi n 20X0 when t he exchange r at e was 1 pound = $1. 40. The
exchange r at e on December 31, 20X4, t he dat e of t he most cur r ent bal ance
sheet , i s 1 pound = $1. 55. The aver age r at e of exchange f or 20X4 i s
$1. 53. What exchange r at e wi l l be used t o r emeasur e pat ent s f or t he
consol i dat ed st at ement s dat ed December 31, 20X4?
a. $1. 40
b. $1. 50
c. $1. 53
d. $1. 55


PROBLEM

1. Di scuss t he f act or s t hat may be consi der ed i n det er mi ni ng i f a Mexi can
subsi di ar y of a U. S. f i r mhas t he peso or t he dol l ar as i t s f unct i onal
cur r ency. The subsi di ar y onl y manuf act ur es component par t s t hat ar e
shi pped t o t he U. S. f i r m' s f i nal pr oduct i on pl ant i n Det r oi t .

ANS:

Fact or s t hat shoul d be consi der ed i ncl ude t he f ol l owi ng:

a. Cash f l ows - Ar e t he cash f l ows pr i mar i l y i n pesos, and do
t hey have a maj or i mpact on t he par ent ' s cash f l ows?

b. Expenses - Ar e goods and ser vi ces pur chased wi t h pesos or
dol l ar s?

c. Sal es Pr i ce - Pr i ces ar e i nf l uenced by l ocal f act or s r at her
t han i nt er nat i onal f act or s or exchange r at es

d. Fi nanci ng - I s debt secur ed l ocal l y and denomi nat ed i n pesos?

e. Mar ket s - I s t her e an act i ve, l ocal ( pr i mar y) mar ket r at her
t han t he mar ket bei ng pr i mar i l y t he par ent

DI F: E OBJ : 1

Chapt er 11
11- 11
2. Li st t he t wo pr i mar y obj ect i ves of t r ansl at i ng f or ei gn f i nanci al
st at ement s accor di ng t o t he FASB #52, whi ch emphasi zes t he concept of
t he f unct i onal cur r ency.

ANS:

a. Pr ovi de i nf or mat i on t hat i s gener al l y compat i bl e wi t h t he
expect ed economi c ef f ect s of a r at e change on an ent er pr i se' s
cash f l ows and equi t y.

b. Ref l ect , i n consol i dat ed st at ement s, t he f i nanci al r esul t s and
r el at i onshi ps of t he i ndi vi dual consol i dat ed ent i t i es as
measur ed i n t hei r f unct i onal cur r enci es i n conf or mi t y wi t h
U. S. gener al l y accept ed account i ng pr i nci pl es.

DI F: E OBJ : 2

3. Hyl i e, a U. S. cor por at i on, owns 100%of Fr osan, a Fr ench f i r m. Assume
t hat t he dol l ar i s t he f unct i onal cur r ency, al t hough t he books ar e kept
i n eur os.

Requi r ed:

What cur r ency exchange r at e woul d be used t o r emeasur e Fr osan s bal ance
sheet i nt o U. S. dol l ar s? Choose f r omcur r ent , si mpl e aver age, wei ght ed
aver age, or hi st or i cal .

a. Cash _____________________

b. Account s Recei vabl e _____________________

c. I nvent or y, car r i ed at cost _____________________

d. Equi pment _____________________

e. Accumul at ed Depr eci at i on _____________________

f . Bonds Payabl e _____________________

g. Common St ock _____________________

h. Sal es _____________________

Chapt er 11
11- 12
ANS:

a. Cash Cur r ent

b. Account s Recei vabl e Cur r ent

c. I nvent or y, car r i ed at cost Cur r ent

d. Equi pment Hi st or i cal

e. Accumul at ed Depr eci at i on Hi st or i cal

f . Bonds Payabl e Cur r ent

g. Common St ock Hi st or i cal

h. Sal es Wei ght ed Aver age

DI F: M OBJ : 6

4. Cabl eTech, a US cor por at i on, owns 100%of t he Canadi an company, Fi ber
Quebec. The Canadi an dol l ar i s t he cur r ency of r ecor d and t he f unct i onal
cur r ency.

Requi r ed:

What cur r ency exchange r at e woul d be used t o t r ansl at e Fi ber Quebec' s
account s i nt o US Dol l ar s? Choose f r omcur r ent , si mpl e aver age, wei ght ed
aver age, or hi st or i cal .

a. Pr epai d I nsur ance _______________________
b. Land _______________________
c. Common St ock _______________________
d. Bonds Payabl e _______________________
e. Sal es _______________________
f . Goodwi l l _______________________
g. Al l owance f or Doubt f ul Account s _______________________
h. Def er r ed I ncome Taxes _______________________

ANS:

a. Pr epai d I nsur ance Cur r ent
b. Land Cur r ent
c. Common St ock Hi st or i cal
d. Bonds Payabl e Cur r ent
e. Sal es Wei ght ed Aver age
f . Goodwi l l Cur r ent
g. Al l owance f or Doubt f ul Account s Cur r ent
h. Def er r ed I ncome Taxes Cur r ent

DI F: M OBJ : 3

Chapt er 11
11- 13
5. Compl et e t he f ol l owi ng wor ksheet , assumi ng t hat on J anuar y 1, 20X1,
Wei ss Cor por at i on pur chased Rock Cor por at i on. Rock' s f unct i onal cur r ency
i s t he FC.

Dat e Rel evant Exchange Rat es
J anuar y 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 25
J anuar y 1, 20X4. . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 30
Mar ch 31, 20X4. . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 40
December 31, 20X4. . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 50
Wei ght ed aver age 20X4. . . . . . . . . . . . . . . . . 1 FC = $0. 37

Rock Cor por at i on

FC Rat e Dol l ar s

I ncome St at ement
Net sal es. . . . . . . . . . . . . . . . . . . . . . FC 2, 000, 000 $
Cost s and expenses. . . . . . . . . . . . . 800, 000
Net i ncome. . . . . . . . . . . . . . . . . . . . . FC 1, 200, 000 $
============ ==========

St at ement of Ret ai ned Ear ni ngs
Ret ai ned ear ni ngs, begi nni ng
of year . . . . . . . . . . . . . . . . . . . . . . FC 6, 500, 000 $1, 300, 000
Net i ncome. . . . . . . . . . . . . . . . . . . . . 1, 200, 000
Subt ot al . . . . . . . . . . . . . . . . . . . . . . . FC 7, 700, 000 $
Di vi dends ( decl ar ed on Mar ch 31) 1, 000, 000 $
Ret ai ned ear ni ngs, end of year . FC 6, 700, 000 $
============ ==========
Bal ance Sheet
Asset s
Cur r ent asset s. . . . . . . . . . . . . . . . . FC 3, 000, 000 $
Pl ant asset s ( net )
( pur chased J anuar y 1, 20X1) . . 55, 000, 000
Tot al asset s. . . . . . . . . . . . . . . . . . . FC 58, 000, 000 $
============= ==========

Li abi l i t i es and St ockhol der s'
Equi t y
Cur r ent l i abi l i t i es. . . . . . . . . . . . FC 4, 000, 000 $
Long- t er mdebt . . . . . . . . . . . . . . . . . 25, 000, 000
Common st ock
( i ssued J anuar y 1, 20X1) 5, 000, 000
Pai d- i n capi t al i n excess of par 17, 300, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . 6, 700, 000
Cumul at i ve t r ansl at i on
adj ust ment s
Tot al l i abi l i t i es and
st ockhol der s' equi t y. . . . . . . . . . FC 58, 000, 000 $
============= ==========

Chapt er 11
11- 14
ANS:

Rock Cor por at i on

FC Rat e Dol l ar s
I ncome St at ement
Net sal es. . . . . . . . . . . . . . . . . . . . . . FC 2, 000, 000 . 37 $ 740, 000_
Cost s and expenses. . . . . . . . . . . . . 800, 000 . 37 296, 000_
Net i ncome. . . . . . . . . . . . . . . . . . . . . FC 1, 200, 000 . 37 $ 444, 000
============ ==========

St at ement of Ret ai ned Ear ni ngs
Ret ai ned ear ni ngs, begi nni ng
of year . . . . . . . . . . . . . . . . . . . . . . FC 6, 500, 000 $1, 300, 000
Net i ncome. . . . . . . . . . . . . . . . . . . . . 1, 200, 000 444, 000
Subt ot al . . . . . . . . . . . . . . . . . . . . . . . FC 7, 700, 000 $1, 744, 000
Di vi dends ( decl ar ed on Mar ch 31) 1, 000, 000 . 40 $ 400, 000
Ret ai ned ear ni ngs, end of year . FC 6, 700, 000 $1, 344, 000
============ ==========

Bal ance Sheet
Asset s
Cur r ent asset s. . . . . . . . . . . . . . . . . FC 3, 000, 000 . 50 $ 1, 500, 000
Pl ant asset s ( net )
( pur chased J anuar y 1, 20X1) . . 55, 000, 000 . 50 27, 500, 000
Tot al asset s. . . . . . . . . . . . . . . . . . . FC 58, 000, 000 $29, 000, 000
============= ===========

Li abi l i t i es and St ockhol der s'
Equi t y
Cur r ent l i abi l i t i es. . . . . . . . . . . . FC 4, 000, 000 . 50 $ 2, 000, 000
Long- t er mdebt . . . . . . . . . . . . . . . . . 25, 000, 000 . 50 12, 500, 000
Common st ock
( i ssued J anuar y 1, 20X1) 5, 000, 000 . 25 1, 250, 000
Pai d- i n capi t al i n excess of par 17, 300, 000 . 25 4, 325, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . 6, 700, 000 1, 344, 000
Cumul at i ve t r ansl at i on
adj ust ment s 7, 581, 000
Tot al l i abi l i t i es and
st ockhol der s' equi t y. . . . . . . . . . FC 58, 000, 000 $29, 000, 000
============= ===========

DI F: D OBJ : 3

Chapt er 11
11- 15
6. Aber cr ombe Co. , a U. S. f i r m, f or med a Ger man company i n 20X4 by
pur chasi ng t he common st ock of t he newl y f or med Dol ce I nc. The
f unct i onal cur r ency of Dol ce i s t he eur o. Dur i ng t hei r f i r st t hr ee
year s, Dol ce exper i enced t he f ol l owi ng act i vi t y i n r et ai ned ear ni ngs:

20X4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net l oss 100, 000 eur os
20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net i ncome 200, 000 eur os
J anuar y 1, 20X6. . . . . . . . . . . . . . . . . . . . . . Di vi dend 50, 000 eur os
20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net i ncome 75, 000 eur os

The f ol l owi ng exchange r at es coul d be r el evant :

Dat e Rat e
December 31, 20X3. . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = $0. 20
December 31, 20X4. . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = $0. 22
Aver age 20X4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = $0. 215
J anuar y 1, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = $0. 245
Aver age 20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = $0. 24
December 31, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = $0. 26
Aver age 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = $0. 25

Requi r ed:

What i s t he t r ansl at ed December 31, 20X6, bal ance of t he r et ai ned
ear ni ngs f or Dol ce?

ANS:

20X4 net l oss ( 100, 000 mar ks) x . 215. . . . . . . $( 21, 500)
20X5 net i ncome 200, 000 mar ks x . 24. . . . . . . . 48, 000
20X6 di vi dend ( 50, 000 mar ks) x . 245. . . . . . . . ( 12, 250)
20X6 net i ncome 75, 000 mar ks x . 25. . . . . . . . 18, 750
Tr ansl at ed bal ance on December 31, 20X6. . . . $ 33, 000
========

DI F: M OBJ : 3

7. Gr een Cor por at i on, a whol l y owned Br i t i sh subsi di ar y of a U. S. f i r m
began t he year wi t h 1, 300, 000 Br i t i sh pounds i n net asset s. The
subsi di ar y i ncur r ed a 65, 000 Br i t i sh Pound net l oss f or 20X1. The
subsi di ar y i ssued common st ock f or 100, 000 Br i t i sh pounds on November
15, 20X1. Assume t he f ol l owi ng exchange r at es f or 20X1:

Dat e Rat e
J anuar y 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Br i t i sh Pound = $1. 10
November 15, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . 1 Br i t i sh Pound = $1. 15
December 31, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . 1 Br i t i sh Pound = $1. 13
20X1 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Br i t i sh Pound = $1. 14

Requi r ed:

Comput e t he t r ansl at i on adj ust ment f or 20X1 usi ng t he di r ect met hod.

Chapt er 11
11- 16
ANS:

J anuar y 1, 20X1, net asset s x change i n cur r ent exchange r at e:
1, 300, 000 x ( 1. 13 - 1. 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39, 000
Net l oss x ( cur r ent - aver age exchange r at es) :
65, 000 x ( 1. 13 - 1. 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650
I ncr ease i n net asset s f r omst ock i ssue x ( change
i n r at es bet ween i ssue dat e and year end) :
100, 000 x ( 1. 13 - 1. 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2, 000)
$37, 650
=======

DI F: M OBJ : 4

8. A U. S. - owned f or ei gn subsi di ar y has t he f ol l owi ng begi nni ng and endi ng
st ockhol der s' equi t y f or 20X1:

J anuar y 1 December 31
Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000 FC 140, 000 FC
Pai d- i n capi t al i n excess of par . . . . . . . . . . . 30, 000 40, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000 100, 000
210, 000 FC 280, 000 FC
======= =======

The change i n common st ock r esul t ed f r oma sal e of st ock t o t he par ent
f i r mon May 15. The change i n r et ai ned ear ni ngs r esul t ed f r oma J ul y 1
di vi dend of 10, 000 FC and net i ncome f or 20X1. Var i ous exchange r at es
wer e as f ol l ows:

Dat e Rat e
J anuar y 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $1. 10
May 15, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $1. 12
J ul y 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $1. 13
December 31, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $1. 15
20X1 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $1. 125

Requi r ed:

Comput e t he 20X1 t r ansl at i on adj ust ment f or t he f or ei gn subsi di ar y.

ANS:

J anuar y 1, 20X1, net asset s x change i n cur r ent exchange r at e:
210, 000 x ( 1. 15 - 1. 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10, 500
Net i ncome f or 20X1 x ( cur r ent - aver age exchange r at es) :
50, 000 x ( 1. 15 - 1. 125) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 250
I ncr ease i n net asset s f r omst ock i ssue x ( change i n r at es
bet ween i ssue dat e and year end) :
30, 000 x ( 1. 15 - 1. 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Decr ease i n asset s f r omdi vi dends x ( cur r ent - di vi dend
dat e r at es) :
( 10, 000) x ( 1. 15 - 1. 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 200)
$12, 450
=======

DI F: D OBJ : 4
Chapt er 11
11- 17

9. For each of t he f ol l owi ng account bal ances, i dent i f y t he exchange r at e
used t o t r ansl at e or r emeasur e. The choi ces ar e cur r ent exchange r at e,
hi st or i cal r at e, wei ght ed aver age, ot her ( speci f y) .

Cur r ent Met hod Remeasur ement Met hod
Account s Recei vabl e |
Pr epai d Asset s |
Account s Payabl e |
Common St ock |
Land |
Goodwi l l |
Sal es Revenue |
Depr eci at i on |

ANS:

Cur r ent Met hod Remeasur ement Met hod
Account s Recei vabl e Cur r ent | Cur r ent
Pr epai d Asset s Cur r ent | Hi st or i cal
Account s Payabl e Cur r ent | Cur r ent
Common St ock Hi st or i cal | Hi st or i cal
Land Cur r ent | Hi st or i cal
Goodwi l l Cur r ent | Hi st or i cal
Sal es Revenue Wei ght Aver age | Wei ght Aver age
Depr eci at i on Wei ght Aver age | Hi st or i cal

DI F: M OBJ : 7

10. A U. S. f i r mpur chased 100%of a f or ei gn f i r mon J anuar y 1, 20X1, when
t he f or ei gn f i r mhad t he f ol l owi ng equi t y account s:

Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000 FC
Pai d- i n excess of par val ue. . . . . . . . . . . . . . . . . . . . . . 50, 000 FC
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000 FC
400, 000 FC
=======

The U. S. f i r mpai d 420, 000 FCs f or t he f or ei gn f i r m. The payment i n
excess of book val ue i s t r aceabl e t o under val ued l and owned by t he
f or ei gn f i r m. The f or ei gn f i r mhad a net i ncome of 25, 000 FCs dur i ng
20X1. Assume t hat t he f ol l owi ng exchange r at es ar e r el evant :

Dat e Rat e
J anuar y 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $2. 00
December 31, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $1. 80
20X1 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $1. 95

Requi r ed:

Pr epar e al l t he j our nal ent r i es t o r ecor d and updat e t he i nvest ment
account of t he U. S. f i r mand t he necessar y el i mi nat i ng and adj ust i ng
ent r i es f or t he 20X1 consol i dat ed st at ement . Assume t hat t he U. S. f i r m
used t he si mpl e equi t y met hod.

Chapt er 11
11- 18
ANS:

J an. 1
I nvest ment i n For ei gn Company. . . . . . . . . . . . . . . . . 840, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840, 000

Dec. 31
I nvest ment i n For ei gn Company. . . . . . . . . . . . . . . . . 48, 750
Subsi di ar y I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . 48, 750

El i mi nat i ng ent r i es:

Dec. 31
Subsi di ar y I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48, 750
I nvest ment i n For ei gn Company. . . . . . . . . . . . . . . 48, 750

Dec. 31
Begi nni ng Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . 400, 000
Common St ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Pai d- i n Excess of Par Val ue. . . . . . . . . . . . . . . . . . . 100, 000
Excess of Cost over Book Val ue. . . . . . . . . . . . . . . . 40, 000
I nvest ment i n For ei gn Company. . . . . . . . . . . . . . . 840, 000

Dec. 31
Land ( 20, 000 x 1. 80) . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 000
Cumul at i ve Tr ansl at i on Adj ust ment . . . . . . . . . . . . . 4, 000
Excess of Cost Over Book Val ue. . . . . . . . . . . . . . 40, 000

DI F: M OBJ : 5

11. On J anuar y 1, 20X1, Rapi d Cor por at i on pur chased 25%of a f or ei gn f i r m
when i t s st ockhol der s' equi t y sect i on t ot al ed 240, 000 FCs. Rapi d
Cor por at i on pai d 75, 000 FCs, wi t h t he excess over book val ue bei ng
at t r i but ed t o equi pment wi t h a 5- year usef ul l i f e. The f or ei gn f i r m
r epor t ed net i ncome of 80, 000 FCs f or 20X1. Rel evant exchange r at es wer e
as f ol l ows:

Dat e Rat e
J anuar y 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 30
December 31, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 35
Aver age 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 33

Requi r ed:

Pr epar e t he j our nal ent r i es necessar y t o r ecor d t he event s concer ni ng
Rapi d' s i nvest ment i n t he f or ei gn f i r m.

Chapt er 11
11- 19
ANS:

J an. 1
I nvest ment i n For ei gn Fi r m. . . . . . . . . . . . . . . . . . . . 22, 500
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 500

Dec. 31
I nvest ment i n For ei gn Fi r m. . . . . . . . . . . . . . . . . . . . 9, 010
Subsi di ar y I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 610
1
Cumul at i ve Tr ansl at i on Adj ust ment . . . . . . . . . . . 3, 400
2

1
[ 25%x ( 80, 000 x $0. 33) ] - [ 15, 000 x $0. 33 5]
2
25%x [ ( 240, 000 x ( $0. 35 - $0. 30) ) + ( 80, 000 x ( $0. 35 - $0. 33) ) ]

DI F: D OBJ : 5

12. Company A, an Amer i can company, owns Company B, a Canadi an subsi di ar y.
Company A bor r owed 1, 000, 000 Canadi an dol l ar s as a hedge on i t s net
i nvest ment i n Company B. For 20X3, Company A r ecor ded an exchange gai n
of $40, 000 due t o exchange r at e changes. The 20X3 t r ansl at i on adj ust ment
f or Company B was a debi t of $42, 000.

Requi r ed:

Descr i be t he account i ng t r eat ment r equi r ed f or t he hedge on Company A' s
books.

ANS:

The Canadi an bor r owi ng i s desi gnat ed and ef f ect i ve as a hedge of Company
A' s net i nvest ment i n Company B. To t he ext ent t hat t he exchange gai n or
l oss on such a hedge does not exceed t he cur r ent - per i od t r ansl at i on
adj ust ment , i t i s t o be i ncl uded i n t he cumul at i ve t r ansl at i on
adj ust ment component of st ockhol der s' equi t y. I n t hi s case, t he $40, 000
exchange gai n on t he hedge count er act s near l y al l of t he 20X3 debi t
t r ansl at i on adj ust ment , l eavi ng Company A wi t h a net debi t of $2, 000 t o
st ockhol der s' equi t y.

DI F: M OBJ : 4

13. I n t he t empor al or cur r ent met hod of t r ansl at i on f r omf unct i onal
cur r ency t o r epor t i ng cur r ency, what ar e t he st eps r equi r ed and r at es t o
be used.

Chapt er 11
11- 20
ANS:

The st eps f or t r ansl at i ng f i nanci al st at ement s ar e:

( 1) Adj ust t he f i nanci al st at ement s of t he f or ei gn ent i t y t o
conf or mwi t h Gener al l y Accept ed Account i ng Pr i nci pl es.

( 2) I dent i f y t he f unct i onal cur r ency,

( 3) Tr ansl at e t he f i nanci al st at ement s t o t he domest i c
ent i t y' s r epor t i ng cur r ency.
a. Al l Asset s and Li abi l i t i es ar e t r ansl at ed at
t he cur r ent r at e on t he t r ansl at i on dat e
b. El ement s of i ncome ar e t r ansl at ed at t he
cur r ent r at es at t he t i me of i ncome
r ecogni t i on or at a wei ght ed aver age
c. Equi t y account s ot her t han Ret ai ned Ear ni ngs
ar e t r ansl at ed at hi st or i cal r at es on dat e of
i nvest ment
d. Ret ai ned Ear ni ngs i s t r ansl at ed i n l ayer s

DI F: E OBJ : 3

14. An Amer i can f i r mowns 100%of a Ger man f i r mt hat had t he f ol l owi ng
t r ansact i ons occur r el at i ve t o t hei r equi pment account :

J anuar y 1, 20X5 Pur chased equi pment f or 50, 000 eur os

J ul y 1, 20X5 Pur chased equi pment f or 30, 000 eur os

J anuar y 1, 20X6 Pur chased equi pment f or 75, 000 eur os

J ul y 1, 20X6 Sol d equi pment pur chased on J anuar y 1, 20X5 f or
48, 000 eur os

The f ol l owi ng exchange r at es coul d be r el evant :

Dat e eur o/ $ Dat e eur o/ $
J anuar y 1, 20X5. . . . . . . . . . $0. 50 J anuar y 1, 20X6. . . . . . . $0. 53
J ul y 1, 20X5. . . . . . . . . . . . . $0. 52 J ul y 1, 20X6. . . . . . . . . . $0. 50
December 31, 20X5. . . . . . . . $0. 53 December 31, 20X6. . . . . $0. 49
Aver age 20X5. . . . . . . . . . . . . $0. 515 Aver age 20X6. . . . . . . . . . $0. 51

Requi r ed:

Assumi ng t hat t he U. S. dol l ar i s t he f unct i onal cur r ency and t hat t he
Ger man f i r muses st r ai ght - l i ne depr eci at i on over a 5- year per i od wi t h a
10%sal vage val ue, det er mi ne t he f ol l owi ng f or r emeasur ement pur poses:

a. The val ue of t he equi pment account on December 31, 20X6.

b. The val ue of t he depr eci at i on expense f or 20X6.

c. The amount of t he gai n or l oss r esul t i ng f r omt he J ul y 1,
20X6, sal e.

Chapt er 11
11- 21
ANS:

a. Equi pment :
J ul y 1, 20X5 ( 30, 000 x . 52) . . . . . . . . . . . . . . $15, 600
J anuar y 1, 20X6 ( 75, 000 x . 53) . . . . . . . . . . 39, 750
Tot al equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . $55, 350
=======

b. Depr eci at i on expense
( 50, 000 - 5, 000) x 1/ 2 year x . 50. . . . . . . . $ 2, 250
5

( 30, 000 - 3, 000) x . 52. . . . . . . . . . . . . . . . . . . 2, 808
5

( 75, 000 - 7, 500) x . 53. . . . . . . . . . . . . . . . . . . 7, 155
5
Tot al depr eci at i on. . . . . . . . . . . . . . . . . . . . . . . $12, 213
=======

c. Cash ( 48, 000 x . 50) . . . . . . . . . . . . . . . . . . . . . . 24, 000
Accumul at ed depr eci at i on. . . . . . . . . . . . . . . 6, 750
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 000
Gai n of sal e of equi pment . . . . . . . . . . . . . . 5, 750

DI F: M OBJ : 6

15. A Fr ench subsi di ar y of a U. S. f i r mkeeps account i ng r ecor ds i n eur os.
The U. S. dol l ar i s consi der ed t he subsi di ar y' s f unct i onal cur r ency.
Assume t he f ol l owi ng exchange r at es:

Dat e eur o = $
J anuar y 1, 20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 05
J ul y 1, 20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 07
Dec. 31, 20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 09
Aver age 20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 08
J anuar y 1, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 09
J ul y 1, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 07
Dec. 31, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 06
Aver age 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1. 08

Requi r ed:

Remeasur e t he f ol l owi ng i t ems f r omt he December 31, 20X6 t r i al bal ance
of t he subsi di ar y:

a. Sal es made evenl y t hr oughout 20X6 = 100, 000 eur os

b. Cost of goods sol d = 30, 000 eur os
5, 000 eur os pur chased J ul y 1, 20X5

c. Sal ar y expense f or 20X6 = 40, 000 eur os

d. Land = 1, 000, 000 eur os
200, 000 eur os pur chased J anuar y 1, 20X5

Chapt er 11
11- 22

ANS:

a. Sal es: ( 100, 000 x 1. 08) . . . . . . . . . . . . . . . . . . . . . . $108, 000

b. Cost of goods sol d:
( 5, 000 x 1. 07) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5, 350
( 25, 000 x 1. 07) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 750
$32, 100
=======

c. Sal ar y expense: ( 40, 000 x 1. 08) . . . . . . . . . . . . . . . . $43, 200

d. Land:
( 200, 000 x 1. 05) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 210, 000
( 800, 000 x 1. 07) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 856, 000
$1, 066, 000
==========

DI F: E OBJ : 5

16. For ei gn f i r ms oper at i ng i n hi ghl y i nf l at i onar y economi es r ecei ved
speci al t r eat ment under gener al l y accept ed account i ng pr i nci pl es ( GAAP)
r el at i ve t o t r ansl at i ng t hei r f i nanci al st at ement s.

Requi r ed:

a. How does t he FASB def i ne a hi ghl y i nf l at i onar y economy?

b. Why i s t he met hod t ypi cal l y used f or t r ansl at i ng f or ei gn
ent i t i es not per mi t t ed f or t hese f i r ms?

c. What met hod i s used f or r emeasur i ng or t r ansl at i ng t he
st at ement s of t hese f i r ms?

ANS:

a. The FASB def i nes a hi ghl y i nf l at i onar y economy as one t hat has
a cumul at i ve i nf l at i on r at e of appr oxi mat el y 100%or mor e over
a 3- year per i od. Ot her f act or s, such as t he t r end of
i nf l at i on, al so may suggest a hi ghl y i nf l at i onar y economy.

b. The FASB has concl uded t hat i f a f or ei gn ent i t y' s cur r ency has
l ost i t s ut i l i t y as a measur e of val ue because of hi gh
i nf l at i onar y condi t i ons, t he domest i c r epor t i ng cur r ency
shoul d be consi der ed t he f unct i onal cur r ency.

c. Si nce t he domest i c cur r ency i s vi ewed as t he f unct i onal
cur r ency, t he pr oper met hod f or r emeasur ement i s t he t empor al
met hod.

DI F: M OBJ : 6

Chapt er 11
11- 23
17. I n J anuar y, 20X3, Dudwi l Cor por at i on acqui r ed a f or ei gn subsi di ar y,
Hol man Company, by payi ng cash f or al l of t he out st andi ng common st ock
of Hol man. On t he pur chase dat e, Hol man Company' s account s wer e st at ed
f ai r l y i n l ocal cur r ency uni t s ( FC) . Subsequent sal es of Hol man' s common
st ock have been pur chased by Dudwi l t o mai nt ai n i t s 100%owner shi p.

Hol man' s t r i al bal ance, i n f unct i onal cur r ency uni t s ( same as t he l ocal
cur r ency uni t s) , on December 31, 20X7, f ol l ows:

Debi t Cr edi t
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58, 400
Mar ket abl e secur i t i es. . . . . . . . . . . . . . . . . . . . . . 32, 500
Account s r ecei vabl e ( net ) . . . . . . . . . . . . . . . . . . 51, 370
I nvent or i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108, 000
Sur r ender val ue of l i f e i nsur ance. . . . . . . . . . 7, 200
I nt angi bl e asset s. . . . . . . . . . . . . . . . . . . . . . . . . . 123, 900
Pr oper t y, pl ant , and equi pment . . . . . . . . . . . . . 636, 000
Accumul at ed depr eci at i on. . . . . . . . . . . . . . . . . . . 93, 850
Account s payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . 74, 000
Accr ued i nt er est payabl e. . . . . . . . . . . . . . . . . . . 7, 120
Not es payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 000
Bonds payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Capi t al st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83, 000
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 936, 300
Cost of goods sol d. . . . . . . . . . . . . . . . . . . . . . . . . 762, 000
I nt er est expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 120
Depr eci at i on expense. . . . . . . . . . . . . . . . . . . . . . . 39, 350
Amor t i zat i on expense- - i nt angi bl es. . . . . . . . . . 3, 100
Ot her expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84, 230
Gai n on sal e of equi pment . . . . . . . . . . . . . . . . . . 2, 400
I nt er est i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 800
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 913, 170 1, 913, 170
========= =========

The f ol l owi ng addi t i onal i nf or mat i on i s avai l abl e:

a. Hol man uses t he LI FO i nvent or y met hod t o account f or i t s
i nvent or y. Pur chases t ook pl ace uni f or ml y t hr oughout 20X7.
Ther e wer e no i nt er company sal es dur i ng 20X7.

b. Dur i ng 20X7, Hol man decl ar ed and pai d a di vi dend of 7, 000 FCs
at t he end of each cal endar quar t er .

c. The bal ances i n t he cont r i but ed capi t al account s r esul t f r om
t he f ol l owi ng t r ansact i ons:

Capi t al Pai d- i n Capi t al
Dat e St ock i n Excess of Par
J anuar y 1, 20X3, i ssuance. . . . . . 40, 000 FC 80, 000 FC
J une 30, 20X5, i ssuance. . . . . . . . 40, 000 104, 300
J anuar y 1, 20X6, i ssuance. . . . . . 10, 000 20, 000
August 1, 20X6, r et i r ement . . . . . ( 7, 000) ( 14, 000)
83, 000 FC 190, 300 FC
====== =======

The August 1, 20X6, r et i r ement of st ock i nvol ves st ock
or i gi nal l y i ssued on J anuar y 1, 20X3.

Chapt er 11
11- 24

d. The December 31, 20X6, r et ai ned ear ni ngs bal ance of 418, 400
FC, t r ansl at ed i nt o dol l ar s, i s $179, 460.

e. Sel ect ed t r ansl at i on r at es ar e as f ol l ows:

Dat e Rat e
J anuar y 1, 20X3. . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = $0. 30
20X3 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 32
20X4 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 38
Febr uar y 1, 20X5. . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 42
J une 30, 20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 45
20X5 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 45
J anuar y 1, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 50
Febr uar y 1, 20X6. . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 52
August 1, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 60
December 31, 20X6. . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 61
20X6 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 56
Mar ch 31, 20X7. . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 63
J une 30, 20X7. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 66
Sept ember 30, 20X7. . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 70
December 31, 20X7. . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 75
20X7 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 FC = 0. 70

Requi r ed:

Pr epar e a schedul e t o t r ansl at e t he December 31, 20X7, t r i al bal ance of
Hol man Company f r oml ocal cur r ency uni t s t o dol l ar s. The schedul e shoul d
show t he t r i al bal ance i n FCs, t he exchange r at es, and t he t r i al
bal ance. ( Do not ext end t he t r i al bal ance t o st at ement col umns.
Suppor t i ng schedul es shoul d be i n good f or m. )

Chapt er 11
11- 25
ANS:

Hol man Company
Schedul e of Tr i al Bal ance Tr ansl at i on
December 31, 20X7

Bal ance i n Exchange Bal ance
Funct i onal Rat e i n
Account Cur r ency ( FC) ( $/ FC) Dol l ar s

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . 58, 400 . 75 $ 43, 800
Mar ket abl e Secur i t i es. . . . . . . . . . 32, 500 . 75 24, 375
Account s r ecei vabl e ( net ) . . . . . . 51, 370 . 75 38, 528
I nvent or i es. . . . . . . . . . . . . . . . . . . . 108, 000 . 75 81, 000
Cash Sur r ender Val ue of
Li f e I nsur ance. . . . . . . . . . . . . . . 7, 200 . 75 5, 400
I nt angi bl e Asset s. . . . . . . . . . . . . . 123, 900 . 75 92, 925
Pr oper t y, Pl ant , and Equi pment . 636, 000 . 75 477, 000
Cost of Goods Sol d. . . . . . . . . . . . . 762, 000 . 70 533, 400
I nt er est Expense. . . . . . . . . . . . . . . 7, 120 . 70 4, 984
Depr eci at i on Expense. . . . . . . . . . . 39, 350 . 70 27, 545
Amor t i zat i on Expense-
I nt angi bl es. . . . . . . . . . . . . . . . . . 3, 100 . 70 2, 170
Ot her Expenses. . . . . . . . . . . . . . . . . 84, 230 . 70 58, 961
Tot al Debi t s. . . . . . . . . . . . . . . . . 1, 913, 170 $1, 390, 088
========= ==========

Accumul at ed Depr eci at i on. . . . . . . 93, 850 . 75 $ 70, 388
Account s Payabl e. . . . . . . . . . . . . . . 74, 000 . 75 55, 500
Accr ued I nt er est Payabl e. . . . . . . 7, 120 . 75 5, 340
Not es Payabl e. . . . . . . . . . . . . . . . . . 52, 000 . 75 39, 000
Bonds Payabl e. . . . . . . . . . . . . . . . . . 80, 000 . 75 60, 000
Capi t al St ock. . . . . . . . . . . . . . . . . . 83, 000 Schedul e A 32, 900
Pai d- i n Capi t al i n Excess of Par 190, 300 Schedul e B 76, 735
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . 390, 400 Schedul e C 160, 280
Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . 936, 300 . 70 655, 410
Gai n on Sal e of Equi pment . . . . . . 2, 400 . 70 1, 680
Ot her I ncome. . . . . . . . . . . . . . . . . . . 3, 800 . 70 2, 660
Cumul at i ve Tr ansl at i on
Adj ust ment s. . . . . . . . . . . . . . . . . . 230, 195
Tot al Cr edi t s. . . . . . . . . . . . . . . . 1, 913, 170 $1, 390, 088
========= ==========

Chapt er 11
11- 26
Exchange
Bal ance Rat e Bal ance
i n FCs ( $/ FC) i n Dol l ar s
Schedul e A: Tr ansl at i on of
Capi t al St ock:
J anuar y 1, 20X3, i ssuance. . . . 40, 000 . 30 $12, 000
J une 30, 20X5, i ssuance. . . . . . 40, 000 . 45 18, 000
J anuar y 1, 20X6, i ssuance. . . . 10, 000 . 50 5, 000
August 1, 20X6, r et i r ement . . . ( 7, 000) . 30 ( 2, 100)
83, 000 $32, 900
====== =======

Schedul e B: Tr ansl at i on of Pai d- i n
Capi t al :
J anuar y 1, 20X3, i ssuance. . . . 80, 000 . 30 $24, 000
J une 30, 20X5, i ssuance. . . . . . 104, 300 . 45 46, 935
J anuar y 1, 20X6, i ssuance. . . . 20, 000 . 50 10, 000
August 1, 20X6, r et i r ement . . . ( 14, 000) . 30 ( 4, 200)
190, 300 $76, 735
======= =======

Schedul e C: Ret ai ned Ear ni ngs
December 31, 20X6 bal ance. . . . 418, 400 N/ A $179, 460
20X7 di vi dends:
1st quar t er . . . . . . . . . . . . . . . . ( 7, 000) . 63 ( 4, 410)
2nd quar t er . . . . . . . . . . . . . . . . ( 7, 000) . 66 ( 4, 620)
3r d quar t er . . . . . . . . . . . . . . . . ( 7, 000) . 70 ( 4, 900)
4t h quar t er . . . . . . . . . . . . . . . . ( 7, 000) . 75 ( 5, 250)
390, 400 $160, 280
======= ========

DI F: D OBJ : 5

18. On J anuar y 1, 20X5, Cayane I nc. pur chased 90%of an Ger man f i r m, Br osch
Manuf act ur i ng. On J anuar y 1, 20X5, Br osch s equi t y consi st ed of t he
f ol l owi ng:

Common st ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000 eur os
Pai d- i n capi t al i n excess of par . . . . . . . . . . . . . 100, 000
Ret ai ned ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
750, 000 eur os
=======

Cayane pai d 800, 000 eur os f or i t s 90%i nt er est i n Br osch. The excess
over book val ue was at t r i but ed t o a bui l di ng wi t h a 20- year usef ul l i f e.
On J une 1, 20X5, Br osch decl ar ed a 50, 000- eur o di vi dend and pai d i t on
J ul y 1, 20X5. Wat er f or d r epor t ed net i ncome f or 20X5 of 150, 000 eur os.
The year - end cumul at i ve t r ansl at i on adj ust ment i s $10, 000. Rel evant
exchange r at es ar e as f ol l ows:

J anuar y 1, 20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = $. 65
J une 1, 20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = . 66
J ul y 1, 20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = . 67
December 31, 20X5. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = . 68
20X5 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 eur o = . 66

Chapt er 11
11- 27
Requi r ed:

Pr epar e al l t he j our nal ent r i es r el at ed t o Cayane s i nvest ment i n Br osch
and al l t he necessar y el i mi nat i ng and adj ust i ng ent r i es f or
consol i dat i on of Br osch, assumi ng t he use of t he si mpl e equi t y met hod.

ANS:

J an. 1
I nvest ment i n Br osch. . . . . . . . . . . . . . . . . . . . . . 520, 000
Cash ( 800, 000 x $. 65) . . . . . . . . . . . . . . . . . . . . . . 520, 000

J une 1
Di vi dends Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . 29, 700
I nvest ment i n Br osch ( 50, 000 x $0. 66 x 90%) 29, 700

J ul . 1
Cash- eur os ( 50, 000 x $0. 67 x 90%) . . . . . . . . . . . . . 30, 150
Gai n on For ei gn Cur r ency Tr ansact i on. . . . . . . 450
Di vi dends Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . 29, 700

Dec. 31
I nvest ment i n Br osch. . . . . . . . . . . . . . . . . . . . 89, 100
Subsi di ar y I ncome ( 150, 000 x $0. 66 x 90%) 89, 100

El i mi nat i on ent r i es:
Dec. 31
Subsi di ar y I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . 89, 100
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . 29, 700
I nvest ment i n Br osch. . . . . . . . . . . . . . . . . . 59, 400

Dec. 31
Begi nni ng Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . 87, 750
Common St ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292, 500
Pai d- i n Capi t al i n Excess of Par . . . . . . . . . . . 58, 500
Excess of Cost over Book Val ue. . . . . . . . . . . . . 81, 250
I nvest ment i n Br osch. . . . . . . . . . . . . . . . . . 520, 000

Dec. 31
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85, 000
Depr eci at i on Expense. . . . . . . . . . . . . . . . . . . . . . . 4, 125
Cumul at i ve Tr ansl at i on Adj ust ment . . . . . . . . 3, 625
Accumul at ed Depr eci at i on. . . . . . . . . . . . . . . . . 4, 250
Excess of Cost over Book Val ue. . . . . . . . . . . 81, 250

DI F: M OBJ : 5

Chapt er 11
11- 28
19. Ker r y Manuf act ur i ng Company i s a Ger man subsi di ar y of a U. S. company.
Ker r y r ecor ds i t s oper at i ons and pr epar es f i nanci al st at ement s i n eur os.
However , i t s f unct i onal cur r ency i s t he Br i t i sh pound. Ker r y was
or gani zed and acqui r ed by t he U. S. company on J une 1, 20X4. The
cumul at i ve t r ansl at i on adj ust ment as of December 31, 20X6, was $79, 860.
The val ue of t he subsi di ar y' s r et ai ned ear ni ngs expr essed i n Br i t i sh
pounds and U. S. dol l ar s as of December 31, 20X7, was 365, 000 pounds and
$618, 000, r espect i vel y. On Mar ch 1, 20X7, Ker r y decl ar ed a di vi dend of
120, 000 eur os. The t r i al bal ance of Ker r y i n mar ks as of December 31,
20X7, i s as f ol l ows:

Debi t Cr edi t
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240, 000
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . 2, 760, 000
I nvent or y ( at cost ) . . . . . . . . . . . . . . . . . . . . . . . . . 3, 720, 000
Mar ket abl e Secur i t i es ( at cost ) . . . . . . . . . . . . . 2, 040, 000
Pr epai d I nsur ance. . . . . . . . . . . . . . . . . . . . . . . . . . . 210, 000
Depr eci abl e Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . 8, 730, 000
Accumul at ed Depr eci at i on. . . . . . . . . . . . . . . . . . . . 1, 417, 000
Cost of Goods Sol d. . . . . . . . . . . . . . . . . . . . . . . . . . 17, 697, 000
Sel l i ng, Gener al , and
Admi ni st r at i ve Expense. . . . . . . . . . . . . . . . . . . 4, 762, 000
Sal es Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 430, 000
I nvest ment I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . 180, 000
Account s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 120, 000
Unear ned Sal es Revenue. . . . . . . . . . . . . . . . . . . . . . 960, 000
Loans and Mor t gage Payabl e. . . . . . . . . . . . . . . . . . 5, 872, 000
Common St ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 500, 000
Pai d- i n Capi t al i n Excess of Par . . . . . . . . . . . . 210, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 470, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 159, 000 40, 159, 000
========== ==========

The mar ket abl e secur i t i es wer e acqui r ed on November 1, 20X6, and t he
pr epai d i nsur ance was acqui r ed on December 1, 20X7. The cost of goods
sol d and t he endi ng i nvent or y ar e cal cul at ed by t he wei ght ed- aver age
met hod. The under l yi ng cost s have been i ncur r ed uni f or ml y t hr oughout t he
year . On J une 1, 20X4, 60%of t he depr eci abl e asset s exi st ed, and t he
bal ance was acqui r ed on Mar ch 1, 20X6. The depr eci abl e asset s ar e
amor t i zed over a 10- year per i od by t he st r ai ght - l i ne met hod. Of t he
t ot al depr eci at i on expense, 80%i s t r aceabl e t o t he cost of goods sol d
and t he bal ance i s i n gener al expenses. On November 1, 20X6, Ker r y
r ecei ved a cust omer pr epayment val ued at 3, 000, 000 eur os. On Febr uar y 1,
20X7, 2, 040, 000 eur os of t he pr epayment was ear ned. The bal ance r emai ns
unear ned as of December 31, 20X7.

Rel evant exchange r at es ar e as f ol l ows:
Pounds/ Eur o $/ Pound
J une 1, 20X4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0. 310 $1. 600
Mar ch 1, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0. 300 $1. 640
November 1, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0. 305 $1. 650
December 31, 20X6. . . . . . . . . . . . . . . . . . . . . . . . . . . 0. 310 $1. 680
Febr uar y 1, 20X7. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0. 302 $1. 670
Mar ch 1, 20X7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0. 300 $1. 660
December 1, 20X7. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0. 290 $1. 640
December 31, 20X7. . . . . . . . . . . . . . . . . . . . . . . . . . . 0. 288 $1. 640
20X7 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0. 297 $1. 660

Chapt er 11
11- 29
Requi r ed:

Pr epar e a r emeasur ed and t r ansl at ed t r i al bal ance of t he Ker r y
Manuf act ur i ng Company as of December 31, 20X7. Pr ovi de suppor t i ng
schedul es.

ANS:

For t he Tr i al Bal ance Tr ansl at i on, pl ease r ef er t o Answer 11- 1.

Schedul e A
Remeasur ement of Pr oper t y, Pl ant , and Equi pment
and Accumul at ed Depr eci at i on

Bal ance Exchange
i n Rat e Bal ance
eur os ( pds/ eur os) i n Pounds
Pr oper t y, pl ant , and equi pment :
J une 1, 20X4, acqui si t i on. . . . 5, 238, 000 0. 310 1, 623, 780
Mar ch 1, 20X6, acqui si t i on. . . . 3, 492, 000 0. 300 1, 047, 600
8, 730, 000 2, 671, 380
========= =========
Depr eci at i on expense:
J une 1, 20X4, acqui si t i on. . . . 523, 800 0. 310 162, 378
Mar ch 1, 20X6, acqui si t i on. . . . 349, 200 0. 300 104, 760
873, 000 267, 138
======= =======

Accumul at ed depr eci at i on:
( 5, 238, 000 10) 43/ 12. . . . . . 1, 876, 950 0. 310 581, 855
( 3, 492, 000 10) 22/ 12. . . . . . 640, 200 0. 300 192, 060
2, 517, 500 773, 915
========= =======

Schedul e B
Remeasur ement of Cost of Goods Sol d and Sel l i ng,
Gener al , and Admi ni st r at i ve Expenses

Cost of Sal es
eur os Pounds

Depr eci at i on. . . . . . . . 698, 400 213, 710 ( 267, 138 x 80%)
Ot her . . . . . . . . . . . . . . . 16, 998, 600 5, 048, 584 ( 16, 998, 600 x . 297)
Tot al . . . . . . . . . . . . . . . 17, 697, 000 5, 262, 294
========== =========

Sel l i ng, Gener al , and Admi ni st r at i ve
eur os Pounds

Depr eci at i on. . . . . . . . 174, 600 53, 428 ( 267, 138 x 20%)
Ot her . . . . . . . . . . . . . . . 4, 587, 400 1, 362, 458 ( 4, 487, 400 x . 297)
Tot al . . . . . . . . . . . . . . . 4, 762, 000 1, 415, 886
========= =========

Chapt er 11
11- 30
Schedul e C
Remeasur ement of Sal es Revenue

Bal ance
i n Exchange Rat e Bal ance
eur os ( pds/ eur os) i n Pounds
Sal es Ear ned:
Feb. 1, 20X7. . . . . . . . . . . . . . 2, 040, 000 0. 305 622, 200
Ot her Sal es. . . . . . . . . . . . . . . 24, 390, 000 0. 297 7, 243, 830
Tot al Sal es. . . . . . . . . . . . . . . 26, 430, 000 7, 866, 030
========== =========

DI F: M OBJ : 5

20. A f or ei gn subsi di ar y oper at es i n a hi ghl y i nf l at i onar y economy. The
company' s December 31, 20X2, t r i al bal ance i ncl udes t he f ol l owi ng:

Equi pment :
Acqui r ed on J une 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . 800, 000 FC
Acqui r ed on Oct ober 1, 20X2. . . . . . . . . . . . . . . . . . . . . . . . 600, 000 FC
I nvent or y:
Val ued at l ower cost or mar ket
Mar ket Val ue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182, 000 FC
A cost of 184, 000 FC r epr esent s 84, 000 FC acqui r ed
on December 1, 20X2, and 100, 000 FC acqui r ed on
Oct ober 1, 20X2.
Gai n on sal e of l and:
Thi s r epr esent s a gai n f r omsel l i ng l and t hat was
acqui r ed on J une 1, 20X1, at a cost of 50, 000 FC,
on Oct ober 1, 20X2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000 FC

Rel evant exchange r at es ar e as f ol l ows:

Dat e Rat e
J une 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 69
J ul y 1, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 68
Oct ober 1, 20X2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 71
December 1, 20X2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 72
December 31, 20X2. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 74
20X2 aver age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0. 70

Requi r ed:

a. Di scuss t he cr i t er i a t hat must be sat i sf i ed i n or der t o
qual i f y as a hi ghl y i nf l at i onar y economy.

b. Di scuss how t he r emeasur ement of st at ement s of compani es
oper at i ng i n such economi es af f ect s net i ncome.

c. Cal cul at e t he dol l ar val ue of t he t r i al bal ance account s as of
December 31, 20X2.

Chapt er 11
11- 31
ANS:

a. A hi ghl y i nf l at i onar y economy has a cumul at i ve i nf l at i on r at e
of appr oxi mat el y 100%or mor e over a 3- year per i od.

b. I n a hi ghl y i nf l at i onar y economy, f i nanci al st at ement s ar e
r emeasur ed usi ng t he t empor al met hod. The adj ust ment t hat
r esul t s f r omt hi s met hod i s i ncl uded as a component of i ncome
and not shown as a separ at e component of owner s' equi t y.

c. Equi pment :
800, 000 FC x $0. 69. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $552, 000
600, 000 FC x $0. 71. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426, 000
$978, 000
========

I nvent or y at l ower of cost or mar ket :
Mar ket Val ue:
182, 000 FC x $0. 74. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $134, 680
Cost :
84, 000 FC x $0. 72. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60, 480
100, 000 FC x $0. 71. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71, 000
$131, 480
========
Cost wi l l be used f or r epor t i ng pur poses.

Gai n on sal e of l and:
Cash ( 150, 000 x $0. 71) . . . . . . . . . . . . . . . . 106, 500
Land ( 50, 000 x $0. 69) . . . . . . . . . . . . . . 34, 500
Gai n on Sal e ( i nf er r ed) . . . . . . . . . . . . . 72, 000

DI F: M OBJ : 6

21. A Kuwai t i subsi di ar y of Hi awat ha Cor p. ( a U. S. f i r m) has cer t ai n bal ance
sheet account s on December 31, 20X4. The f unct i onal cur r ency i s t he U. S.
dol l ar and cur r ency of r ecor d i s t he di nar and t he par ent s books ar e
kept i n U. S. dol l ar s.

I nf or mat i on r el at i ng t o t hese account i n U. S. dol l ar s i s as f ol l ows:

Tr ansl at ed at
Cur r ent Rat e Hi st or i cal Rat e
Cash. . . . . . . . . . . . . . . . . . . . . . . $150, 000 $150, 000
Account s Recei vabl e. . . . . . . . 115, 000 110, 000
I nvent or i es . . . . . . . . . . . . . . . 285, 000 255, 000
Pr epai d I nsur ance. . . . . . . . . . 12, 000 10, 000
Land. . . . . . . . . . . . . . . . . . . . . . . 90, 000 180, 000
Bui l di ngs. . . . . . . . . . . . . . . . . . 500, 000 800, 000

Requi r ed:

Fr omt he above i nf or mat i on, pr epar e t he asset por t i on of t he
subsi di ar y' s t r i al bal ance.

Chapt er 11
11- 32
ANS:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 150, 000
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115, 000
I nvent or i es . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255, 000
Pr epai d I nsur ance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180, 000
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800, 000
Tot al Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 510, 000
==========

DI F: M OBJ : 6

22. Compl et e t he f ol l owi ng t abl e:

Remeasur ement Tr ansl at i on

I nvest ee s books of
r ecor d r emeasur ed i nt o
f unct i onal cur r ency -
TEMPORAL METHOD
Funct i onal cur r ency
t r ansl at ed i nt o
par ent / i nvest or s r epo
cur r ency - FUNCTI ONAL
CURRENCY METHOD
Asset s and Li abi l i t i es
Monet ar y i t ems

Not monet ar y
i t ems

Revenues and Expenses
Repr esent i ng
amor t i zat i on of
hi st or i cal
amount s

Not
r epr esent i ng
amor t i zat i on of
hi st or i cal
amount s

Equi t y
account s,
( excl udi ng
r et ai ned
ear ni ngs)

Recogni t i on of :
Measur ement
gai n/ l oss

Tr ansl at i on
adj ust ment

Chapt er 11
11- 33
ANS:

Remeasur ement Tr ansl at i on
I nvest ee s books of
r ecor d r emeasur ed i nt o
f unct i onal cur r ency -
TEMPORAL METHOD
Funct i onal cur r ency
t r ansl at ed i nt o
par ent / i nvest or s r epo
cur r ency - FUNCTI ONAL
CURRENCY METHOD
Asset s and Li abi l i t i es
Monet ar y i t ems Remeasur e usi ng t he
cur r ent exchange r at e
Tr ansl at e usi ng t he
Not monet ar y
i t ems
Remeasur e usi ng t he
hi st or i cal exchange
r at e
Revenues and Expenses
Repr esent i ng
amor t i zat i on
of hi st or i cal
amount s
r at e
wei ght ed aver age
exchange r at e
Not
r epr esent i ng
amor t i zat i on
of hi st or i cal
amount s
r at e
r at e
Equi t y
account s,
( excl udi ng
r et ai ned
ear ni ngs)
r at e
r at e
Recogni t i on of :
Measur ement
gai n/ l oss
As a component of net
i ncome
As a component of net
i ncome t r ansl at ed at
t he wei ght ed aver age
r at e f or t he per i od
Tr ansl at i on
adj ust ment
Not appl i cabl e Recogni ze as a
component of ot her
compr ehensi ve i ncome

DI F: D OBJ : 5

Chapt er 11
11- 34
23. On J anuar y 1, 20X2, U. S. A. I nc. cr eat ed an Al ger i an subsi di ar y, Ni ko,
I nc. The books ar e kept i n Al ger i an di nar s, but t he f unct i onal cur r ency
i s t he U. S. dol l ar . Di vi dends ar e pai d on December 31, and i ncome i s
ear ned evenl y t hr oughout t he year . The ear ni ngs and di vi dends of Ni ko i n
di nar s ar e as f ol l ows:

Net I ncome Di vi dends
20X2. . . . . . . . . . . . . . . 100, 000 50, 000
20X3. . . . . . . . . . . . . . . 200, 000 80, 000
20X4. . . . . . . . . . . . . . . 325, 000 105, 000

Exchange r at es ar e gi ven bel ow.

Year l y Aver age Dec. 31 Spot
20X2. . . . . . . . . . . . . . . . 0175 . 0185
20X3. . . . . . . . . . . . . . . . 0188 . 022
20X4. . . . . . . . . . . . . . . . 019 . 025

Requi r ed:

Cal cul at e t he bal ance i n r et ai ned ear ni ngs f or Ni ko i n dol l ar s as of
December 31, 20X4.

ANS:

100, 000 x . 0175 = $ 1, 750 50, 000 x . 0185 = $ 925
200, 000 x . 0188 = 3, 760 80, 000 x . 022 = 1, 760
325, 000 x . 019 = 6, 175 105, 000 x . 025 = 2, 265
Tot al $11, 685 Tot al $4, 950
======= ======

Ret ai ned ear ni ngs = $11, 685 - $4, 950 = $6, 735

DI F: M OBJ : 5

24. Rent a USA, I nc. f or med a f or ei gn subsi di ar y on J anuar y 1, 20X3. The
subsi di ar y' s books ar e kept i n t hei r f unct i on cur r ency. I ncome ear ned i n
20X3 and 20X4 t ot al ed 100, 000 FC and 120, 000 FC, r espect i vel y. Di vi dends
of 400, 000 FC have been pai d on December 31 or each year . I n addi t i on,
1000 shar es of common st ock ( no par ) wer e i ssued on J ul y 1, 20X4 f or 20
FC each.

Exchange r at es r el at i ng t hi s f or ei gn cur r ency t o U. S. dol l ar s ar e as
f ol l ows:

J anuar y 1, 20X3. . . . . . . . . . . . . . 1. 00
December 31, 20X3. . . . . . . . . . . . 1. 04
Aver age 20X3. . . . . . . . . . . . . . . . . 1. 02
J ul y 1, 20X4. . . . . . . . . . . . . . . . . 1. 05
December 31, 20X4. . . . . . . . . . . . 1. 10
Aver age 20X4. . . . . . . . . . . . . . . . . 1. 08

Chapt er 11
11- 35
Requi r ed:

Cal cul at e t he owner s' equi t y of t he subsi di ar y on December 31, 20X4.

ANS:

Common St ock:
150, 000 x 1. 00 = $150, 000
20, 000 x 1. 05 = 21, 000
Tot al $171, 000
========

Ret ai ned Ear ni ngs:
100, 000 x 1. 02 = $102, 000 40, 000 x 1. 04 = $41, 600
120, 000 x 1. 08 = 129, 600 40, 000 x 1. 10 = 44, 000
Tot al $231, 600 Tot al $85, 600
======== =======

Ret ai ned ear ni ngs = $231, 600 - $85, 600 = $146, 000

Common St ock. . . . . . . . . $171, 000
Ret ai ned Ear ni ngs. . . . 146, 000
Tot al Owner ' s Equi t y. $317, 000
========

DI F: E OBJ : 5
Chapt er 11
11- 36
Chapter 12 Interim Reporting and Disclosures about Segments
of an Enterprise

MULTIPLE CHOICE

1. The pr i mar y emphasi s of i nt er i mr epor t i ng i s on:
a. i nt er i mcash f l ow
b. t he i nt er i mst at ement of f i nanci al posi t i on
c. i nt er i mr et ai ned ear ni ngs
d. i nt er i mi ncome dat a


2. Whi ch of t he f ol l owi ng best descr i bes t he pr oper account i ng f or i nt er i m
f i nanci al r epor t s?
a. The i nt er i mper i od i s vi ewed as an i nt egr al par t of t he annual
account i ng per i od.
b. The i nt er i mper i od i s vi ewed as a di st i nct , i ndependent account i ng
per i od.
c. I nt er i mnet i ncome shoul d be det er mi ned by usi ng t he same
pr i nci pl es as t hose f or t he annual account i ng per i od.
d. Net i ncome shoul d be comput ed on t he cash basi s except f or sal es,
cost of goods sol d, and depr eci at i on.


3. I f a company i s ut i l i zi ng LI FO i nvent or y cost i ng, what mi ght be t he
ef f ect on t he cal cul at i on of Cost of Goods sol d i n an i nt er i mf i nanci al
st at ement ?
a. cost of goods sol d i s cal cul at ed on a hi st or i cal cost basi s onl y
b. t he i nt er i mcost of goods sol d i ncl udes t he r epl acement cost of
t empor ar i l y l i qui dat ed i nvent or y
c. cost of goods sol d i s not adj ust ed f or any changes due t o
l i qui dat i on of LI FO i nvent or y
d. any of t he ef f ect s of l i qui dat i on ar e def er r ed unt i l year end


4. Dur i ng t he f i r st quar t er , a company' s appl i cat i on of l ower of cost or
mar ket met hods i ndi cat ed a $150, 000 l oss f r oma t empor ar y mar ket
decl i ne, whi ch i s expect ed t o be r est or ed i n t he f i scal year . Dur i ng t he
second quar t er , t he mar ket r ever sed t he decl i ne. Whi ch of t he f ol l owi ng
si t uat i ons i ndi cat es a pr oper t r eat ment of t hese f act s?
a. A $37, 500 l oss r ecogni zed i n t he f i r st quar t er and no r ecover y
r ecogni zed i n t he second quar t er .
b. A $150, 000 l oss r ecogni zed i n t he f i r st quar t er and a $90, 000
r ecover y i n t he second quar t er .
c. A $150, 000 l oss r ecogni zed i n t he f i r st quar t er and a $50, 000
r ecover y i n t he second quar t er .
d. No l oss r ecogni zed i n t he f i r st quar t er and no r ecover y r ecogni zed
i n t he second quar t er .


Chapt er 12
12- 2
5. For i nt er i mr epor t i ng, whi ch of t he f ol l owi ng st at ement s i s NOT t r ue?
a. Under a st andar d cost syst em, al l var i ances shoul d be r ecogni zed
i n t he quar t er i n whi ch t hey occur .
b. Under t he LI FO met hod, r ecogni t i on of l ayer l i qui dat i ons, t hought
t o be t empor ar y, i s post poned by usi ng r epl acement cost i n t he
cal cul at i on of i nt er i mcost of goods sol d.
c. Under t he l ower of cost or mar ket det er mi nat i on of endi ng
i nvent or y, a gai n may not be r ecogni zed i n an i nt er i mper i od.


6. Abel Cor por at i on sol d Equi pment i n t he f i r st quar t er of 20X5 at a
$50, 000 l oss. How much of t he l oss shoul d appear i n t he 20X5 second- and
t hi r d- quar t er i ncome?
a. $37, 500 and $37, 500
b. $50, 000 and $50, 000
c. $0 and $0
d. $100, 000 and $0


7. I n or der t o gener at e i nt er i mf i nanci al r epor t s t hat cont ai n a r easonabl e
por t i on of annual expenses, whi ch of t he f ol l owi ng st at ement s i s t r ue?
a. an al l ocat i on of a por t i on of an annual bonus woul d be made as an
i nt er i madj ust ment
b. any adj ust ment s f or i nvent or y shr i nkage woul d be def er r ed t o year
end
c. t he al l owance f or uncol l ect i bl e account s r ecei vabl e wi l l be
r evi sed at year end
d. None of t he above ar e t r ue


8. Whi ch of t he f ol l owi ng st at ement s i s NOT t r ue concer ni ng t he
det er mi nat i on of t he ef f ect i ve t ax r at e t o be used f or i nt er i m
r epor t i ng?
a. Tax r at e changes shoul d not be account ed f or r et r oact i vel y.
b. The ef f ect i ve t ax r at e f or t he ent i r e year shoul d be est i mat ed.
c. The ef f ect i ve t ax r at e shoul d r ef l ect ant i ci pat ed t ax cr edi t s.
d. The est i mat ed t ax r at e shoul d r ef l ect ext r aor di nar y i t ems.


Chapt er 12
12- 3
9. Abi t z Cor por at i on has t he f ol l owi ng pr et ax oper at i ng i ncome i n i t s f i r st
t hr ee quar t er s of 20X5. The ef f ect i ve t ax r at e f or each quar t er i s
pr ovi ded. Det er mi ne t he t hi r d quar t er i ncome t ax or benef i t .

Cur r ent Ef f ect i ve
Quar t er Per i od Tax Rat e
Fi r st $40, 000 25%
Second ( 25, 000) 25%
Thi r d 50, 000 30%
a. $3, 750
b. $15, 000
c. $15, 750
d. $20, 000


10. Nonor di nar y i t ems r esul t i ng i n i ncome or l oss
a. i ncl ude unusual but not i nf r equent gai ns.
b. ar e t r eat ed t he same as or di nar y i t ems when cal cul at i ng t he
ef f ect i ve t ax r at e.
c. ar e al ways t r eat ed as a t ot al gr oup when cal cul at i ng t he ef f ect i ve
r at e f or t he quar t er .
d. ar e al ways excl uded f r omi nt er i mr epor t i ng.


11. Whi ch of t he f ol l owi ng st at ement s about i nt er i mr epor t i ng i s f al se?
a. I f a company r epor t s year - t o- dat e f i nanci al i nf or mat i on f or t he
cur r ent year , i t al so must r epor t t he l ast t wel ve mont h- t o- dat e
i nf or mat i on.
b. Under some ci r cumst ances, a company can r est at e t he f i nanci al
i nf or mat i on of an ear l i er cur r ent - year quar t er .
c. Tax benef i t s ar i si ng f r omear l i er i nt er i mper i ods i n t he cur r ent
year can be car r i ed f or war d t o t he cur r ent i nt er i mper i od t o
of f set t ax expense.
d. The t ot al of al l nonor di nar y l osses i n t he cur r ent quar t er
mul t i pl i ed by t he ef f ect i ve t ax r at e equal s t he amount of t ax
expense t o be al l ocat ed among t hose l osses.


12. The i ncr ement al i ncome t ax ef f ect ut i l i zed t o det er mi ne t he t ax ef f ect
of an ext r aor di nar y i t emi s cal cul at ed by:
a. appl yi ng t he est i mat ed ef f ect i ve t ax r at e agai nst t he amount of
t he ext r aor di nar y i t em
b. t he di f f er ence bet ween t he gr oss t ax cal cul at ed on cont i nui ng
oper at i ons and t he gr oss t ax on i ncome f r omal l sour ces, bef or e
t ax cr edi t s ar e appl i ed.
c. t he di f f er ence bet ween t he est i mat ed net t ax cal cul at ed on t he
pr oj ect ed annual i ncome f r omcont i nui ng oper at i ons and t he
est i mat ed net t ax cal cul at ed on pr oj ect ed annual i ncome, i ncl udi ng
t he non- or di nar y i t ems, af t er t ax cr edi t s have been consi der ed


Chapt er 12
12- 4
13. Whi ch of t he f ol l owi ng best descr i bes how t he t ax benef i t r esul t i ng f r om
t he ext r aor di nar y l oss i n an i nt er i mper i od i s r ecogni zed?
a. The t ax benef i t i s r ecogni zed i n t he per i od i n whi ch i t occur s
usi ng t he est i mat ed ef f ect i ve r at e.
b. The t ax benef i t i s r ecogni zed i n t he per i od i n whi ch i t occur s
usi ng t he aver age t ax r at e f or al l i ncome.
c. The t ax benef i t i s al l ocat ed over t he cur r ent and r emai ni ng
per i ods usi ng t he est i mat ed ef f ect i ve r at e.
d. The t ax benef i t i s r ecogni zed onl y i f , mor e l i kel y t han not , t he
l oss may be of f set agai nst i ncome.


14. Whi ch of t he f ol l owi ng best descr i bes t he t r eat ment gi ven a change i n
account i ng pr i nci pl es made dur i ng t he second quar t er ?
a. The cumul at i ve ef f ect shoul d be r ecogni zed i n t he quar t er i n whi ch
t he deci si on t o change i s made.
b. Regar dl ess of t he quar t er of change, t he r ecogni t i on i s def er r ed
unt i l year end.
c. The cumul at i ve ef f ect i s comput ed as of t he begi nni ng of t he year .
d. I nt er i mper i ods pr i or t o t he per i od of change ar e not r est at ed.


15. Whi ch of t he f ol l owi ng i t ems shoul d be r epor t ed wi t h i nt er i mdat a?
a. basi c and di l ut ed ear ni ngs per shar e
b. cont i ngent i t ems
c. changes i n account i ng est i mat es


16. When a company makes a second quar t er deci si on t o di scont i nue a segment ,
t he f i r st quar t er t ax expense:
a. Resul t s ar e not r est at ed.
b. i s spl i t bet ween t he t ax expense cal cul at ed on r est at ed quar t er
one i ncome f r omcont i nui ng oper at i ons and t he di scont i nued segment
by subt r act i ng t he t ax expenses cal cul at ed on t he r est at ed f i r st
quar t er i ncome f r omt he or i gi nal t ax expense cal cul at ed f or t he
f i r st quar t er , bef or e t he deci si on was made.
c. i s used t o det er mi ne t he i ncr ement al t ax ef f ect .
d. i s used t o cal cul at e t he ef f ect i ve t ax r at e f or t he di scont i nued
segment .


17. The acqui si t i on of a paper mi l l by a l ar ge publ i shi ng company i s an
exampl e of
a. hor i zont al i nt egr at i on.
b. ver t i cal i nt egr at i on.
c. di ver si f i cat i on.
d. consol i dat i on.


Chapt er 12
12- 5
18. I n det er mi ni ng i f t wo oper at i ng segment s may be combi ned i nt o one, whi ch
of t he f ol l owi ng f act or s shoul d be consi der ed?
a. si mi l ar i t i es r egar di ng pr of i t mar gi ns
b. whet her t he nat ur e of t he pr oduct s and ser vi ces i s si mi l ar
c. whet her t her e i s a si mi l ar amount of i nt r acompany sal es
d. whet her t her e i s a si mi l ar number of empl oyees


19. Whi ch of t he f ol l owi ng i s NOT consi der ed when det er mi ni ng whet her an
oper at i ng segment qual i f i es as a r epor t abl e segment ?
a. r evenue of t he segment
b. t he asset s of t he segment
c. t he number of f or ei gn of f i ces
d. t he absol ut e amount of i t s pr of i t or l oss


20. Whi ch of t he f ol l owi ng i s not a l i mi t at i on on t he number of r epor t abl e
segment s?
a. Consi st ency, i . e. , t he number of r epor t abl e segment s t hi s per i od,
must be t he same as l ast per i od.
b. Usual l y t he number of segment s shoul d not exceed 10.
c. At l east 75%of t he combi ned r evenue of sal es t o unaf f i l i at ed
f i r ms shoul d be t r aceabl e t o r epor t abl e segment s.
d. None of t he above i s a l i mi t at i on.


21. I n det er mi ni ng whet her a segment shoul d be r epor t ed, a pr of i t and l oss
t est can be used. The t est sel ect s segment s f or r epor t i ng by:
a. onl y i ncl udi ng pr of i t abl e segment s.
b. compar i ng t he absol ut e val ue of a segment ' s pr of i t or l oss t o 10%
of al l segment s cumul at i ve pr of i t or cumul at i ve l oss, whi chever i s
hi gher .
c. compar i ng t he absol ut e val ue of a segment ' s pr of i t or l oss t o 10%
of al l segment s combi ned pr of i t s and l osses.
d. compar i ng t he pr of i t or l oss of a segment t o 10%of al l segment
ext er nal r evenue.


22. A cor por at i on made up of an aut omobi l e manuf act ur er , a pl ast i cs maker , a
spar k pl ug manuf act ur er , a st eel mi l l , and a bat t er y maker i s an exampl e
of a
a. hor i zont al l y- i nt egr at ed company.
b. ver t i cal l y- i nt egr at ed company.
c. di ver si f i ed company.
d. congl omer at e.


Chapt er 12
12- 6
23. The management appr oach t o segment al r epor t i ng
a. f ocuses on how management or gani zes i nf or mat i on f or i nt er nal
deci si on maki ng.
b. r equi r es t hat t he company' s chi ef execut i ve of f i cer deci de what
segment s wi l l be r epor t ed.
c. separ at es t he cost s of management f r omt he cost s of oper at i ons t o
det er mi ne segment pr of i t or l oss.
d. i s r equi r ed onl y i n t he Uni t ed St at es.


24. Ansf i el d, I nc. has sever al pot ent i al l y r epor t abl e segment s. The
f ol l owi ng f i nanci al i nf or mat i on has been det er mi ned f or t he cur r ent
f i scal year :

Consol i dat ed net i ncome . . . . . . . . . . . . . . . . . . . . . . . . . $ 1, 000, 000
Oper at i ng i ncome bef or e t axes. . . . . . . . . . . . . . . . . . . . 1, 500, 000
Net oper at i ng i ncome of al l segment s. . . . . . . . . . . . . 1, 350, 000
Tot al consol i dat ed r evenue. . . . . . . . . . . . . . . . . . . . . . . 8, 000, 000
Tot al r evenue of al l segment s,
excl udi ng i nt er segment s sal es. . . . . . . . . . . . . . . . . . . . 7, 000, 000
Tot al i nt er segment sal es . . . . . . . . . . . . . . . . . . . . . . . . 1, 200, 000
Consol i dat ed t ot al asset s. . . . . . . . . . . . . . . . . . . . . . . . 50, 000, 000
Tot al asset s of al l segment s. . . . . . . . . . . . . . . . . . . . . 45, 000, 000

The mi ni mumamount of r evenues a segment must have t o qual i f y as
r epor t abl e i s __________.
a. $700, 000
b. $800, 000
c. $820, 000
d. The answer cannot be det er mi ned f r omt he i nf or mat i on gi ven.


f i scal year :


The mi ni mumamount of pr of i t or l oss a segment must have t o qual i f y as
r epor t ed i s __________.
a. $100, 000
b. $135, 000
c. $150, 000

Chapt er 12
12- 7

f i scal year :


The mi ni mumamount of asset s a segment must have t o qual i f y as
r epor t abl e i s __________.
a. $4, 500, 000
b. $5, 000, 000
c. $37, 500, 000


f i scal year :


For Ansf i el d, I nc. t o r epor t a si gni f i cant por t i on of i t s f i nanci al
i nf or mat i on as segment s, i t s segment s, i n t ot al , must r epr esent
a. $37, 500, 000 i n asset s.
b. $6, 000, 000 i n r evenues.
c. $1, 125, 000 i n oper at i ng i ncome bef or e t axes.


28. Wi t h r egar d t o maj or cust omer s, whi ch of t he f ol l owi ng i t ems i s not
t r ue?
a. I f i t qual i f i es, t he f eder al gover nment i s consi der ed a si ngl e
maj or cust omer .
b. The t ot al amount of t he sal es t o each maj or cust omer must be
di scl osed.
c. The names of t he maj or cust omer s must be di scl osed.
d. The i dent i t y of t he segment s maki ng t he sal es must be di scl osed.

Chapt er 12
12- 8

29. Whi ch of t he f ol l owi ng st at ement s about r equi r ed di scl osur es i n
segment al r epor t i ng i s not t r ue?
a. No mor e t han t en segment s may be r epor t ed.
b. The name of each maj or cust omer does not have t o be di scl osed.
c. Even i f t her e i s onl y one r epor t abl e segment , t he company must
r epor t r evenues f r omext er nal cust omer s f or each pr oduct or
ser vi ce or each gr oup of r el at ed pr oduct s or ser vi ces.
d. Segment al i nf or mat i on must be i ncl uded i n i nt er i mr epor t i ng.


30. I t i s possi bl e f or segment s t o qual i f y as r epor t abl e, but not r epr esent
a mat er i al por t i on of t he ent er pr i se. What t est i s appl i ed t o ensur e t he
segment s r epor t ed r epr esent a si gni f i cant por t i on of ent er pr i se
act i vi t y?
a. Combi ned ext er nal segment r evenues f or r epor t abl e segment s exceed
75%of i nt er nal and ext er nal segment r evenues.
b. Tot al i nt er nal and ext er nal segment r evenue exceeds 75%of t ot al
consol i dat ed r evenue.
c. Tot al ext er nal segment r evenue of t he r epor t abl e segment s exceeds
75%of consol i dat ed r evenue.
d. Tot al segment asset s of t he r epor t abl e segment s exceeds 75%of
t ot al consol i dat ed asset s.


PROBLEM

1. Expl ai n t he di f f er ence i n t he i ndependent and i nt egr al vi ewpoi nt s of
account i ng f or i nt er i mper i ods. Whi ch met hod best descr i bes t he accept ed
account i ng pr act i ce f or i nt er i mf i nanci al r epor t i ng?

ANS:

The i ndependent or di st i nct appr oach vi ews t he i nt er i mper i od as a
separ at e per i od f r omt hat of t he annual per i od. Consequent l y, account i ng
pr ocedur es used f or t he i nt er i mf i nanci al st at ement s shoul d be t he same
as t hose appl i ed f or annual pur poses.

The i nt egr al appr oach vi ews t he i nt er i mper i od as an i nt egr al par t of
t he annual per i od. Ther ef or e, adj ust ment s and est i mat es shoul d be made
so t hat pr edi ct i ons of annual amount s may be made.

The i nt egr al appr oach i s t he accept ed vi ewpoi nt under cur r ent account i ng
pr act i ces.

DI F: E OBJ : 1

Chapt er 12
12- 9
2. APB Opi ni on No. 28 per mi t s cer t ai n modi f i cat i ons t o year - end i nvent or y
r ul es.

Requi r ed:

Comment on t he accept abi l i t y of t he f ol l owi ng i ndependent si t uat i ons
concer ni ng i nvent or y val uat i on f or an i nt er i mper i od:

a. Management bel i eves t hat si nce i t s f i r mdoes not have a
per pet ual i nvent or y syst em, i t woul d be t oo cost l y t o t ake a
physi cal i nvent or y. Consequent l y, management has suggest ed t o
t he account i ng depar t ment t hat t hey est i mat e endi ng i nvent or y.

b. Si nce t he LI FO i nvent or y base was l i qui dat ed i n t he f i r st
quar t er , management has r ecommended t hat t he account i ng
depar t ment swi t ch t o FI FO val uat i on of i nvent or y.

c. Si nce t he f i r st quar t er i s a sl ow per i od f or a manuf act ur i ng
f i r m, management has suggest ed t hat t he unf avor abl e vol ume
var i ances f r omt he f i r m' s st andar d cost syst embe def er r ed
unt i l year end.

ANS:

a. Gr oss pr of i t and ot her sound met hods of est i mat i ng i nvent or y
ar e per mi t t ed.

b. Changi ng i nvent or y met hods must be j ust i f i ed. Swi t ches ar e
r ar e. Li qui dat i on of a base l ayer of i nvent or y gener al l y i s
not an accept abl e r eason f or a change. However , i f t he
l i qui dat i on i s t empor ar y, r epl acement cost can be used t o
det er mi ne t he cost of goods sol d.

c. Var i ances t hat ar e pl anned and expect ed t o be absor bed by year
end may be def er r ed at i nt er i mr epor t i ng dat es.

DI F: M OBJ : 2

3. Abbot t I nc. began t he year wi t h 750 uni t s of i nvent or y val ued at $20
each under LI FO. Dur i ng t he f i r st quar t er , 300 uni t s wer e pur chased at
$25 each and anot her 250 uni t s wer e pur chased at $28 each. Assume t hat
200 uni t s ar e on hand at t he end of t he f i r st quar t er and t hat t he
cur r ent r epl acement cost i s $30 per uni t .

Requi r ed:

I f Abbot t pl ans t o have 500 uni t s on hand at year end, det er mi ne t he
cost of goods sol d f or t he f i r st quar t er .

Chapt er 12
12- 10
ANS:

Uni t s sol d = 750 + 300 + 250 - 200 = 1100
Cost of goods sol d:

300 uni t s x $25/ uni t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7, 500
250 uni t s x $28/ uni t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7, 000
550 uni t s x $20/ uni t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11, 000
300 uni t s x $( 30- 20) / uni t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3, 000
$28, 500
=======

DI F: M OBJ : 2

4. The f ol l owi ng event s t ook pl ace i n Mor gan Cor por at i on' s second quar t er .

a. An expi r ed i nsur ance pol i cy was r epl aced by a $12, 000, 12- mont h
pol i cy.

b. Mor gan sol d mar ket abl e secur i t i es at a $10, 000 gai n.

c. Resear ch and devel opment cost s of $15, 000, whi ch wer e expect ed
t o benef i t t he company over t he next 12 mont hs, wer e i ncur r ed.

d. On t he f i r st day of t he quar t er , Mor gan si gned a one- year ,
$100, 000 bank not e car r yi ng an 8%i nt er est r at e.

e. Used equi pment wi t h a book val ue of $36, 000 was sol d f or
$18, 000.

Requi r ed:

Det er mi ne t he ef f ect of t he above event s on Mor gan Cor por at i on' s t hi r d-
quar t er i ncome.

ANS:

a. I nsur ance expense: $1, 000 x 3 = $3, 000 or $12, 000 4 = $3, 000

b. Gai n r ecogni zed i n cur r ent quar t er : $10, 000

c. Resear ch and devel opment expenses: $15, 000 x 1/ 4 = $3, 750

d. I nt er est expense accr ued: 100, 000 x . 08 x 1/ 4 = $2, 000

e. Loss r ecogni zed i n cur r ent quar t er : $36, 000 - $18, 00 = $18, 000

DI F: E OBJ : 2

Chapt er 12
12- 11
5. Lancast er I nc. expect s t o have t axabl e i ncome of $275, 000 f or 20X1 and a
t ax cr edi t of $12, 250. Assume t hat t he gr aduat ed t ax r at e schedul e i s as
f ol l ows:

$1- $100, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15%
$100, 000- 200, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22%
$200, 000- 460, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28%+ 5%sur t ax
$460, 000 and above. . . . . . . . . . . . . . . . . . . . . . . . . . 30%

Requi r ed:

Det er mi ne t he t ax expense f or t he f i r st quar t er , assumi ng t hat t axabl e
i ncome i s $65, 000.

ANS:

Est i mat ed annual t ax:
$100, 000 x . 15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15, 000
100, 000 x . 22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 000
75, 000 x . 33. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 750
$ 61, 750
Tax cr edi t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 12, 250)
Tot al t ax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49, 500
========

Ef f ect i ve r at e: $49, 500 = 18%
$275, 000

Fi r st - quar t er t ax expense = $65, 000 x . 18 = $11, 700

DI F: E OBJ : 3

6. Scot t I nc. expect s t o have t axabl e i ncome of $375, 000 f or 20X1 and
est i mat es annual t ax cr edi t s of $22, 500. I ncl uded i n Scot t ' s i ncome i s
i nt er est i ncome on muni ci pal secur i t i es t ot al i ng $45, 000 and meal s and
ent er t ai nment expenses of $62, 500 of whi ch 50%ar e not deduct i bl e under
cur r ent t ax code. Assume t hat t he gr aduat ed t ax r at e schedul e i s as
f ol l ows:

$1- $100, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15%
$100, 000- 200, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22%
$200, 000- 460, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28%
$460, 000 and above. . . . . . . . . . . . . . . . . . . . . . . . . . 30%

Requi r ed:

Det er mi ne t he t ax expense f or t he f i r st quar t er , assumi ng t hat t axabl e
i ncome i s $85, 000.

Chapt er 12
12- 12
ANS:

I ncome subj ect t o t ax:
Pr oj ect ed I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $375, 000
Per manent Di f f er ences- Muni I ncome. . . . . . . . . . . . . . . . ( 45, 000)
Per manent Di f f er ences- Meal s/ ent . . . . . . . . . . . . . . . . . . 31, 250
I ncome Subj ect t o Tax. . . . . . . . . . . . . . . . . . . . . . $361, 250

Est i mat ed annual t ax:
$100, 000 x . 15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15, 000
100, 000 x . 22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 000
161, 250 x . 28. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 150
$ 82, 150
Tax cr edi t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 22, 500)
Tot al t ax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59, 650
========

Ef f ect i ve r at e: $59, 650 = 16. 5%
$361, 250

Fi r st - quar t er t ax expense = $85, 000 x . 165 = $14, 025

DI F: M OBJ : 3

7. A l i st of sel ect ed i nf or mat i on f r omAanst ad I nc. f ol l ows. Regar di ng i t s
f i r st - quar t er per f or mance f or 20X1,

a. Sal es wer e $750, 000.

b. Cost of goods sol d was $502, 750.

c. Tot al depr eci at i on expense was $75, 000 ( par t of sel l i ng and
admi ni st r at i ve expenses) . As of t he begi nni ng of t he f i r st
quar t er , Aanst ad began usi ng st r ai ght - l i ne depr eci at i on. Had
t hey used t he ol d accel er at ed met hod, t he cur r ent depr eci at i on
woul d have been $80, 000. The cumul at i ve ef f ect of t hi s change
was a $120, 000 decr ease i n i ncome bef or e t axes.

d. Ot her sel l i ng and admi ni st r at i ve expenses wer e $30, 000
excl udi ng adver t i si ng expense. The t wo quar t er s of adver t i si ng
wer e pr epai d at $18, 000 at t he st ar t of t he f i r st quar t er .

e. The cost of goods sol d i ncl udes a f avor abl e vol ume var i ance of
$100, 000. The vol ume var i ance i s expect ed t o be of f set by t he
sl ow act i vi t y ant i ci pat ed i n t he f our t h quar t er .

f . Aanst ad' s est i mat ed ef f ect i ve t ax r at e i s 25%.

Requi r ed:

I n good f or m, pr epar e t he f i r st - quar t er i ncome st at ement f or Aanst ad.

Chapt er 12
12- 13
ANS:

Aanst ad I nc.
I ncome St at ement
For t he Fi r st Quar t er 20X1

Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 750, 000
Cost of goods sol d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 502, 500)
Gr oss pr of i t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 247, 500
Sel l i ng and admi ni st r at i ve expenses*. . . . . . . . . . . . . . . . . . . ( 114, 000)
I ncome f r omoper at i ons bef or e t axes. . . . . . . . . . . . . . . . . . . . $ 133, 500
I ncome t ax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 375
I ncome f r omoper at i ons bef or e ef f ect of change
i n account i ng pr i nci pl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100, 125
Cumul at i ve ef f ect i ve of change i n
account i ng pr i nci pl e ( net of t ax) **. . . . . . . . . . . . . . . . . . ( 90, 000)
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 125
=========

*$75, 000 + $30, 000 + $9, 000 = $114, 000
**$120, 000 x 25%= $90, 000

DI F: M OBJ : 2

8. Good Ti me, I nc. i s a wor l dwi de manuf act ur er of t oys and games. I n
accor dance wi t h gener al l y accept ed account i ng pr i nci pl es, quar t er l y
st at ement s ar e pr epar ed. At t he end of t he f i r st quar t er of 20X2, t he
f ol l owi ng dat a have been col l ect ed f r omt he f i nanci al r ecor ds:

a. Sal es wer e $14, 680, 000.

b. Expenses r el at ed di r ect l y t o t he sal es wer e $10, 600, 000, of
whi ch $9, 500, 000 r el at ed t o t he cost of goods sol d.

c. Good Ti me, I nc. empl oys t he LI FO met hod f or i nvent or y
val uat i on and has l i qui dat ed a por t i on of i t s begi nni ng
i nvent or y. The l i qui dat i on was i n t he amount of $600, 000,
whi ch i s i ncl uded i n t he cost of goods sol d of $9, 500, 000, and
t he cost t o r epl ace t hi s i nvent or y wi l l be $1, 400, 000.

d. Ot her t r ansact i ons dur i ng t he f i r st quar t er wer e as f ol l ows:
( 1) Resear ch and devel opment cost s wer e i ncur r ed i n t he
amount of $4, 000, 000 and ar e expect ed t o benef i t
equal l y t he next 3 year s.
( 2) Adver t i si ng cost s wer e $75, 000, of whi ch one- t hi r d
r el at ed t o t he f i r st - quar t er sal es.
( 3) Ther e was a gai n on t he ear l y ext i ngui shment of debt i n
t he amount of $1, 115, 000.

Assume t hat Good Ti me, I nc. had 500, 000 shar es of common st ock
out st andi ng t hr oughout t he f i r st quar t er .

Requi r ed:

I n good f or m, pr esent t he quar t er l y i ncome st at ement of Good Ti me, I nc.
( assume an ef f ect i ve i ncome t ax r at e of 40%) .

Chapt er 12
12- 14
ANS:

Good Ti me, I nc.
I ncome St at ement
For t he 3- Mont h Per i od Ended Mar ch 31, 20X1

Sal es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14, 680, 000
Cost of goods sol d. . . . . . . . . . . . . . . . . . . . . . . . . 10, 300, 000
1
Gr oss pr of i t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4, 380, 000
Expenses:
Sel l i ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 100, 000
Resear ch. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000, 000
Adver t i si ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 000 2, 125, 000
I ncome f r omcont i nui ng oper at i ons bef or e
i ncome t axes and ext r aor di nar y i t ems. . . . . $ 2, 255, 000
Pr ovi si on f or i ncome t axes. . . . . . . . . . . . . . . . . 902, 000
I ncome f r omcont i nui ng oper at i ons
bef or e ext r aor di nar y i t ems. . . . . . . . . . . . . . . $ 1, 353, 000
Ext r aor di nar y gai n on ear l y ext i ngui shment
of debt ( l ess appl i cabl e i ncome t axes
of $446, 000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669, 000
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2, 022, 000
===========

I ncome bef or e ext r aor di nar y gai n. . . . . . . . . . . $2. 706
Gai n on ear l y ext i ngui shment of debt . . . . . . . 1. 338
Net i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4. 044
======

1
( $9, 500, 000 - $600, 000 + $1, 400, 000)

DI F: D OBJ : 2

9. Cr acker Cor por at i on' s f i r st - quar t er 20X4, pr et ax i ncome i s $55, 000. The
company ant i ci pat es an annual t ax cr edi t of $15, 500. Cr acker i s
pr oj ect i ng i ncome f or t he r emai ni ng t hr ee quar t er s of $135, 000. For t he
second quar t er of 20X4, Cr acker r epor t s $85, 000 of pr et ax i ncome wi t h a
pr oj ect ed pr e- t ax i ncome f or t he r emai nder of t he year of $165, 000.
Cr acker does not have any per manent di f f er ences bet ween t axabl e i ncome
and f i nanci al i ncome.

I n t he second quar t er , Cr acker suf f er s an uni nsur ed l oss of one of i t s
war ehouses. The l oss i s det er mi ned t o be unusual i n nat ur e and
i nf r equent i n occur r ence. The amount of t he l oss i s det er mi ned t o be
$140, 000.

The cur r ent t ax schedul e i s:
$1- $100, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15%
$100, 000- 200, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22%
$200, 000- 460, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28%
$460, 000 and above. . . . . . . . . . . . . . . . . . . . . . . . . . 30%

Requi r ed:

Cal cul at e t he f i r st and second quar t er i nt er i mt ax expenses on
cont i nui ng i ncome and on t he non- or di nar y i t em.

Chapt er 12
12- 15
ANS:

Gr oss Tax Schedul e:
Non- Or d
Qt r 1 Qt r 2 Loss Qt r 2- Al l
YTD Act ual I ncome $ 55, 000 $140, 000
Pr oj ect ed Remai nder 135, 000 165, 000
Pr oj ect ed Annual I ncome $190, 000 $305, 000 $( 140, 000) $165, 000

Gr oss Tax* 34, 800 66, 400 29, 300
Tax Cr edi t s ( 15, 500) ( 15, 500) ( 15, 500)
Net Tax 19, 300 50, 900 13, 800
Ef f ect i ve Tax Rat e 10. 2% 16. 7%

*Gr oss Tax Cal cul at i on:
Qt r 1: 100, 000 x . 15 = 15, 000
90, 000 x . 22 = 19, 800
34, 800

Qt r 2: 100, 000 x . 15 = 15, 000
100, 000 x . 22 = 22, 000
105, 000 x . 28 = 29, 400
66, 400

Qt r 2- Al l : 100, 000 x . 15 = 15, 000
65, 000 x . 22 = 14, 300
29, 300

Tax Summar y Schedul e:
I ncome Ef f ect i ve Tax Tax Expense
Qt r YTD Rat e YTD Pr i or Qt r
Cont i nui ng:
Qt r 1 55, 000 55, 000 10. 2% 5, 610 0 5, 610
Qt r 2 85, 000 140, 000 16. 7% 23, 380 5, 610 17, 770

Non- Or d I t em:
Qt r 2 ( 140, 000) ( 140, 000) ** ( 37, 100) 0 ( 37, 100)

** I ncr ement al t ax ef f ect of t he bel ow t he l i ne i t emi s cal cul at ed by
t aki ng t he di f f er ence bet ween t he net t ax cal cul at ed on cont i nui ng
oper at i ons and t he net t ax cal cul at ed on al l sour ces:

Net Tax- Cont i nui ng Oper at i ons $50, 900
Net Tax- I ncome f r omAl l Sour ces 13, 800
I ncr ement al Benef i t of t he l oss $37, 100

DI F: D OBJ : 3, 4

Chapt er 12
12- 16
10. Mi l l st one Company' s f i r st - quar t er 20X3, pr et ax i ncome i s $25, 000. The
company ant i ci pat es an annual t ax cr edi t of $5, 500. Mi l l st one i s
pr oj ect i ng i ncome f or t he r emai ni ng t hr ee quar t er s of $95, 000. For t he
second quar t er of 20X4, Mi l l st one r epor t s $55, 000 of pr et ax i ncome wi t h
a pr oj ect ed pr e- t ax i ncome f or t he r emai nder of t he year of $65, 000.
Mi l l st one does not have any per manent di f f er ences bet ween t axabl e i ncome
and f i nanci al i ncome.

I n t he second quar t er , Mi l l st one deci ded t o change t hei r depr eci at i on
met hod used f or f i nanci al r epor t i ng pur poses. The change i n depr eci at i on
met hods has t he f ol l owi ng ef f ect on t he cal cul at i on and pr oj ect i on of
i ncome f or Mi l l st one:

Act ual I ncome Pr oj ect ed Remai nder
Qt r 1 20, 000 85, 000
Qt r 2 55, 000 65, 000

The ef f ect of t he change on pr i or year s woul d have been a decr ease t o
i ncome of $30, 000.

The cur r ent t ax schedul e i s:
$1- $100, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15%
$100, 000- 200, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22%
$200, 000- 460, 000. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28%
$460, 000 and above. . . . . . . . . . . . . . . . . . . . . . . . . . 30%

Requi r ed:

Cal cul at e t he f i r st and second quar t er i nt er i mt ax expenses on
cont i nui ng i ncome and on t he non- or di nar y i t em.

ANS:

Non- Or d
Qt r 1 Qt r 1R Loss Qt r 1- Al l
YTD Act ual I ncome $ 25, 000 $ 20, 000
Pr oj ect ed Remai nder 95, 000 85, 000
Pr oj ect ed Annual I ncome $120, 000 $105, 000 ( $30, 000) $75, 000

Gr oss Tax* 18, 300 16, 100 11, 250
Tax Cr edi t s ( 5, 500) ( 5, 500) ( 5, 500)
Net Tax 12, 800 10, 600 5, 750
Ef f ect i ve Tax Rat e 11. 1% 10. 1%

Qt r 1: 100, 000 x . 15 = 15, 000
20, 000 x . 22 = 4, 400
19, 400

Qt r 1Rest at ed: 100, 000 x . 15 = 15, 000
5, 000 x . 22 = 1, 100
16, 100

Qt r 1al l : 75, 000 x . 15 = 11, 250

Chapt er 12
12- 17
Non- Or d
Qt r 2 Loss Qt r 2- Al l
YTD Act ual I ncome $ 75, 000
Pr oj ect ed Remai nder 65, 000
Pr oj ect ed Annual I ncome $135, 000 ( $30, 000) $105, 000

Gr oss Tax* 22, 700 16, 100
Tax Cr edi t s ( 5, 500) ( 5, 500)
Net Tax 17, 200 10, 600
Ef f ect i ve Tax Rat e 12. 7%

Qt r 2: 100, 000 x . 15 = 15, 000
35, 000 x . 22 = 7, 700
22, 700

Qt r 2al l : 100, 000 x . 15 = 15, 000
5, 000 x . 22 = 1, 100
16, 100

Tax Summar y Schedul e:
I ncome Ef f ect i ve Tax Tax Expense
Qt r YTD Rat e YTD Pr i or Qt r
Cont i nui ng:
Qt r 1 25, 000 25, 000 11. 1% 2, 775 0 2, 775
Qt r 1R 20, 000 20, 000 10. 1% 2, 020 2, 775 ( 755)
Qt r 2 55, 000 75, 000 12. 7% 9, 525 2, 020 7, 505

Non- Or d I t em:
Qt r 1 ( 30, 000) ( 30, 000) ** ( 4, 850) 0 ( 4, 850)
Qt r 2 ( 30, 000) ** ( 6, 600) ( 4, 850) ( 1, 750)

** I ncr ement al t ax ef f ect of t he bel ow t he l i ne i t emi s cal cul at ed by
t aki ng t he di f f er ence bet ween t he net t ax cal cul at ed on cont i nui ng
oper at i ons and t he net t ax cal cul at ed on al l sour ces:

Qt r 1 Qt r 2
Net Tax- Cont i nui ng Oper at i ons $10, 600 $17, 200
Net Tax- I ncome f r omAl l Sour ce 5, 750 10, 600
I ncr ement al Benef i t of t he l oss $ 4, 850 $ 6, 600

DI F: D OBJ : 3, 4

11. Cor r i veau I ndust r i es deci ded t o swi t ch f r oman accel er at ed depr eci at i on
met hod t o a st r ai ght - l i ne met hod i n t he second quar t er of 20X1. Thi s i s
cl assi f i ed as a cumul at i ve ef f ect of a change i n account i ng pr i nci pl e.
The f i r st - quar t er , pr et ax i ncome r epor t ed was $30, 000, and pr oj ect ed
pr et ax i ncome f or 20X1 was $90, 000. I f Cor r i veau had used st r ai ght - l i ne
depr eci at i on f or t he quar t er , pr et ax i ncome woul d have been $35, 000 and
pr oj ect ed pr et ax i ncome f or 20X1 woul d have been $110, 000. The
cumul at i ve ef f ect on pr i or year s f r omt he change i s a $50, 000 i ncr ease
i n r et ai ned ear ni ngs. The second- quar t er i ncome usi ng st r ai ght - l i ne
depr eci at i on i s $20, 000, and t he expect ed annual ear ni ngs cont i nue t o be
$110, 000. Assume t hat Cor r i veau i s subj ect t o a f l at 25%st at ut or y t ax
r at e f or 20X1. Cor r i veau i s expect i ng $5, 000 of t ax- f r ee i ncome dur i ng
t he t hi r d and f our t h quar t er s of 20X1.

Chapt er 12
12- 18
Requi r ed:

For al l cat egor i es of i ncome, cal cul at e t he i nt er i mt ax expense f or t he
f i r st quar t er , f i r st quar t er r est at ed, and second quar t er .

ANS:

I ncome ( Loss)
Type of Cur r ent Year Ef f ect i ve
Quar t er I ncome Per i od t o Dat e Tax Rat e
Fi r st Cont i nui ng Oper at i on $30, 000 $30, 000 23. 61%
1
Fi r st , Rest at ed Cont i nui ng Oper at i on 35, 000 35, 000 23. 86%
2
Cumul at i ve Ef f ect 50, 000 50, 000
Second Cont i nui ng Oper at i on 20, 000 55, 000 23. 86%
2
Cumul at i ve Ef f ect 50, 000

Tax Expense ( Benef i t )
Type of Year Pr evi ousl y Cur r ent
Quar t er I ncome t o Dat e Repor t ed Per i od
Fi r st Cont i nui ng Oper at i on $ 7, 083 $ 0 $ 7, 083
Fi r st , Rest at ed Cont i nui ng Oper at i on 8, 351 0 8, 351
Cumul at i ve Ef f ect 12, 500
3
0 12, 500
Second Cont i nui ng Oper at i on 13, 123 8, 351 4, 772
Cumul at i ve Ef f ect 12, 500 12, 500 0

1
( $90, 000 - $5, 000) x . 25 = $21, 250

$21, 250 = 23. 61%
$90, 000

2
( $110, 000 - $5, 000) x . 25 = 23. 86%
$110, 000

3
The i ncr ement al t ax on t he cumul at i ve ef f ect i s $12, 500.

DI F: M OBJ : 3, 4

12. For each of t he f ol l owi ng i ndependent cases, det er mi ne t he est i mat ed
ef f ect i ve t ax r at e t o be used f or t he cur r ent quar t er ' s i nt er i m
st at ement s.

Case A Case B Case C Case D
Year - t o- dat e i ncome ( l oss) $ 80, 000 $( 20, 000) $( 30, 000) $( 120, 000)
Pr oj ect ed i ncome ( l oss)
f or t he bal ance of t he year 120, 000 60, 000 130, 000 60, 000
Per manent t ax di f f er ences
( t ax- f r ee i ncome) 10, 000 10, 000
Est i mat ed annual t ax cr edi t s 7, 000 2, 000
Pr i or 2 year s' i ncome ( l oss) N/ A ( 30, 000) N/ A 20, 000
Pr i or 2 year s' t ax r at e N/ A 35% N/ A 35%
I s pr oj ect ed i ncome " mor e
l i kel y t han not " ? N/ A No Yes Yes
Def er r ed t ax l i abi l i t i es
expect ed t o r ever se
i n next 20 year s N/ A N/ A N/ A 3, 000
Cur r ent st at ut or y t ax r at e 40% 40% 40% 40%

Chapt er 12
12- 19
ANS:

Case A Case B Case C Case D
Year - t o- dat e i ncome ( l oss) $ 80, 000 $( 20, 000) $( 30, 000) $( 120, 000)
Pr oj ect ed i ncome ( l oss) f or
t he bal ance of t he year 120, 000 60, 000 130, 000 60, 000
$200, 000 $ 40, 000 $100, 000 $ ( 60, 000)
Per manent di f f er ence ( 10, 000) - - ( 10, 000) - -
Tot al i ncome $190, 000 $ 40, 000 $ 90, 000 $ ( 60, 000)
======== ======== ======== =========

Tax ( benef i t ) at st at ut or y
r at e ( 40%) $ 76, 000 $ 16, 000 $ 36, 000 $( 24, 000)
Tax cr edi t s ( 7, 000) ( 2, 000)
Net t ax expense ( benef i t ) $ 69, 000 $ 16, 000 $ 36, 000 $( 26, 000)
======== ======== ======== ========
Benef i t l i mi t ed t o N/ A 0
1
N/ A ( 10, 000)
2
Est i mat ed ef f ect i ve t ax r at e 34. 5% 0% 36. 0% 8. 33%

1
The YTD l oss cannot be of f set by pr oj ect ed i ncome t hat i s not " mor e
l i kel y t han not . " No car r yback i ncome i s avai l abl e f or of f set .

2
When t he YTD l oss exceeds t he annual l oss, t he t ax benef i t and
ef f ect i ve t ax r at e must be based on t he YTD l oss. $20, 000 ( pr i or 2
year s) x 35%+ $3, 000 ( def er r ed t ax cr edi t s) = $10, 000.

DI F: M OBJ : 3

13. The f ol l owi ng l i st s account t i t l es f ound on t he books of I cel l
Cor por at i on:

a. Resear ch and Devel opment

b. I nvent or y

c. Annual Bonuses

d. Unf avor abl e Mat er i al s Usage Var i ance

Requi r ed:

Di scuss how each of t hese i t ems i s account ed f or i n i nt er i mf i nanci al
st at ement s.

Chapt er 12
12- 20
ANS:

a. Resear ch and Devel opment - - Thi s account , under nor mal f i scal -
year pol i ci es, woul d nor mal l y be expensed i n t he cur r ent
per i od. For i nt er i mpur poses, t he account bal ance may be
al l ocat ed among t hose i nt er i mper i ods of t he cur r ent year t hat
benef i t .

b. I nvent or y- - Thi s account i s handl ed as t he nor mal year - end
account , except f or cer t ai n var i at i ons. Speci f i cal l y, t he
i nvent or y may be val ued by t he gr oss pr of i t met hod, and a
wr i t e- down of i nvent or y t o l ower of cost or mar ket can be
r ecover ed i n l at er i nt er i mper i ods i f t he mar ket r ecover s.
Thi s opt i on ext ends onl y unt i l year end. Al so, t her e may be an
al l owance f or LI FO r epl acement .

c. Annual Bonuses- - A por t i on of est i mat ed annual bonuses must be
al l ocat ed t o each i nt er i mper i od of t he cur r ent year . Fai l ur e
t o r ecogni ze such bonuses on an i nt er i mbasi s woul d r educe t he
pr edi ct i ve val ue of t he i nt er i mdat a.

d. Unf avor abl e Mat er i al s Usage Var i ance- - The t r eat ment of t hi s
account i s based on whet her i t i s expect ed t o be absor bed by
year end. I f a usage var i ance has ar i sen i n an i nt er i mper i od
and i s expect ed t o be r ef l ect ed i n annual st at ement s, t he
var i ance shoul d be r ecogni zed i n t he i nt er i mper i od i n whi ch
i t occur s.

DI F: E OBJ : 1, 2

14. Fut ur a Cor por at i on r epor t ed pr et ax net i ncome of $30, 000 i n t he f i r st
quar t er of 20X1. The company ant i ci pat ed pr et ax net i ncome of $90, 000
f or t he year . Dur i ng t he second quar t er , af t er i ssui ng t he f i r st - quar t er
i nt er i mst at ement , Fut ur a deci ded t o di scont i nue i t s el ect r oni cs
di vi si on and adopt ed a f or mal pl an f or i t s di sposal .

Dur i ng t he f i r st quar t er , t he bi ot ech di vi si on r epor t ed a pr et ax l oss of
$70, 000 and est i mat ed a $270, 000 oper at i ng l oss f or t he year . Dur i ng t he
second quar t er , t he di vi si on exper i enced an oper at i ng l oss of $35, 000
pr i or t o t he measur ement dat e and $8, 000 i n t he r emai nder of t hat
quar t er . The ant i ci pat ed l oss on t he di sposal of t hat di vi si on' s asset s
was $40, 000.

Fut ur a had a f l at 25%t ax r at e f or 20X1. The f i r mi s expect i ng a $5, 000
t ax cr edi t at t r i but ed t o oper at i ons out si de of t he el ect r oni c di vi si on.
Second- quar t er pr et ax i ncome f or t he nonel ect r oni cs oper at i ons was
$40, 000. As of t he end of t he second quar t er , annual pr et ax i ncome of
$225, 000 was ant i ci pat ed f or cont i nui ng oper at i ons.

Requi r ed:

I n good f or m, pr epar e a schedul e showi ng t he i ncome ( l oss) and t ax
expense ( benef i t ) det er mi nat i on f or t he f i r st quar t er , t he r est at ed
f i r st quar t er , and t he second quar t er .

Chapt er 12
12- 21
ANS:

I ncome ( Loss)
Type of Cur r ent Year t o Ef f ect i ve
Quar t er I ncome Per i od Dat e Tax Rat e
Fi r st Cont i nui ng Oper at i on $ 30, 000 $ 30, 000 19. 44%
1
Fi r st , Rest at ed Cont i nui ng Oper at i on 100, 000 100, 000 23. 61%
2
Di scont i nued Oper at i on 70, 000) ( 70, 000) - -
Second Cont i nui ng Oper at i on 40, 000 140, 000 22. 78%
4
Di scont i nued Oper at i on ( 35, 000) ( 105, 000) 25. 00%
Loss on Di sposal ( 48, 000)
5
( 48, 000) 25. 00%

Fi r st Cont i nui ng Oper at i on $ 5, 832 $ 0 $ 5, 832
Fi r st , Rest at ed Cont i nui ng Oper at i on 23, 610 0 23, 610
Di scont i nued Oper at i on ( 17, 778)
3
0 ( 17, 778)
Di scont i nued Oper at i on ( 26, 250) ( 17, 778) ( 8, 472)
Loss on Di sposal ( 12, 000) 0 ( 12, 000)

1
$90, 000 x . 25 = $22, 500; $22, 500 - $5, 000 = 19. 44%
$90, 000

2
( $90, 000 + $270, 000) x . 25 = $90, 000; $90, 000 - $5, 000 = 23. 61%
$360, 000

3
$23, 610 - $5, 832 = $17, 778

4
( [ $225, 000 x . 25] - $5, 000) = 22. 78%
$225, 000

5
( $40, 000) est i mat ed l oss on di sposal + ( $8, 000) second- quar t er
oper at i ng l oss subsequent t o measur ement dat e = ( $48, 000)

DI F: D OBJ : 3, 4

15. Al l ee Co. has pr et ax, or di nar y i ncome of $7, 000 and $38, 000 i n t he f i r st
and second quar t er s, r espect i vel y. The pr oj ect ed or di nar y i ncome f or t he
t hi r d and f our t h quar t er s i s $60, 000 and $30, 000. Occur r i ng i n t he
second quar t er i s a pr et ax, nonor di nar y l oss of $50, 000 and pr et ax
nonor di nar y i ncome of $35, 000. The st at ut or y t ax r at e i s 15%on t he
f i r st $50, 000, 22%on t he next $50, 000, and 28%on i ncome over $100, 000.

Requi r ed:

Det er mi ne t he t ax i mpact t r aceabl e t o t he nonor di nar y i ncome and
nonor di nar y l oss.

Chapt er 12
12- 22
ANS:

Tax benef i t of nonor di nar y l oss ( $24, 100 - $38, 100) = $( 14, 000)
Tax expense of nonor di nar y i ncome ( $( 4, 200) - $( 14, 000) ) = $9, 800

Tot al I ncome
Excl udi ng
Non- Al l Non-
Or di nar y Tot al or di nar y or di nar y
I ncome I ncome Losses I t ems ( net )
Pr et ax I ncome $135, 000 $120, 000 $170, 000
Tax Expense ( benef i t ) A 28, 300 B 24, 100 C 38, 100 D 4, 200

A = $50, 000 x . 15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7, 500
50, 000 x . 22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 000
35, 000 x . 28. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 800
A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28, 300
=======

B = $50, 000 x . 15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7, 500
50, 000 x . 22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 000
20, 000 x . 28. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 600
B. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24, 100
=======

C = $50, 000 x . 15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7, 500
50, 000 x . 22. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 000
70, 000 x . 28. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 600
C. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38, 100
=======

D = Tax on al l nonor di nar y i t ems ( net ) ( $24, 100 - $28, 300) = $( 4, 200)

I ncr ement al t ax expense ( benef i t ) t r aceabl e t o:

D Al l nonor di nar y i t ems: ( $24, 100 - $28, 300) = ( $4, 200)
( St ep 1: B - A)

E Al l nonor di nar y l osses: ( $24, 100 - $38, 100) = ( $14, 000)
( St ep 2: B - C)

F Al l nonor di nar y gai ns: ( $4, 200) - ( $14, 000) = $9, 800
( St ep 3: D - E)

DI F: D OBJ : 4

Chapt er 12
12- 23
16. Consi der t he f ol l owi ng:

Case A I ncome ( l oss) f or quar t er s 1 t hr ough 4 i s ( $50, 000) ,
$30, 000, $40, 000, and $40, 000, r espect i vel y. Fut ur e pr oj ect ed
i ncome f or t he year i s uncer t ai n at t he end of quar t er s 1 and
2. Annual i ncome at t he end of quar t er 3 i s est i mat ed t o be
$20, 000. No car r yback benef i t exi st s, and any f ut ur e annual
benef i t i s uncer t ai n.

Case B Assume t he same f act s as i n Case A. However , at t he end
of quar t er s 1 t hr ough 3, annual i ncome i s est i mat ed t o be
$40, 000.

Case C Quar t er l y i ncome ( l oss) l evel s wer e $15, 000, ( $35, 000) ,
( $75, 000) , and $25, 000. A year l y oper at i ng l oss of $70, 000 was
ant i ci pat ed t hr oughout t he year . Pr i or year s' i ncome of
$28, 000 i s avai l abl e f or car r yback. The same t ax r at es wer e
r el evant t o t he car r yback per i od.

Requi r ed:

For cases A t hr ough C, compl et e t he schedul e t hat f ol l ows: Assume t hat
t he st at ut or y t ax r at e i s 15%on t he f i r st $50, 000 of i ncome, 25%on t he
next $25, 000, and 30%on i ncome i n excess of $75, 000.

Tax Expense
I ncome( Loss) ( Benef i t )
Year Year
Case Quar t er Cur r ent t o Dat e Tax Rat e t o Dat e Cur r ent
1
2
3
4

Chapt er 12
12- 24
ANS:

Tax Expense
I ncome( Loss) ( Benef i t )
Year Year
Case Quar t er Cur r ent t o Dat e Tax Rat e t o Dat e Cur r ent
A 1 $( 50, 000) $( 50, 000) 0 0 0
2 30, 000 ( 20, 000) 0 0 0
3 40, 000 20, 000 15% 3, 000 3, 000
4 40, 000 60, 000 16. 7% 10, 000 7, 000

B 1 ( 50, 000) ( 50, 000) 15% ( 7, 500) ( 7, 500)
2 30, 000 ( 20, 000) 15% ( 3, 000) 4, 500
3 40, 000 20, 000 15% 3, 000 6, 000
4 40, 000 60, 000 16. 7% 10, 000 7, 000

C 1 15, 000 15, 000 6%
a
900 900
2 ( 35, 000) ( 20, 000) 6% ( 1, 200) ( 2, 100)
3 ( 75, 000) ( 95, 000)
b
( 4, 200) ( 3, 000)
4 25, 000 ( 70, 000) 6% ( 4, 200) 0

a
Ef f ect i ve r at e = Tax benef i t = $4, 200 = 6%
Ant i ci pat ed l oss $70, 000

b
Because t he YTD l oss of $95, 000 i s gr eat er t han t he annual l oss of
$70, 000, t he YTD t ax benef i t must be based on t he YTD l oss.

DI F: M OBJ : 3, 4

17. East Company, a hi ghl y di ver si f i ed cor por at i on, r epor t s t he r esul t s of
oper at i ons quar t er l y. At t he begi nni ng of t he t hi r d quar t er , management
deci ded t o di scont i nue i t s r ecr eat i onal di vi si on. At t hi s t i me, a f or mal
pl an was aut hor i zed, cal l i ng f or di sposal by year end. Resul t s f or t he
cur r ent year , excl udi ng t axes, ar e as f ol l ows:

Cont i nui ng Di scont i nued
Quar t er Oper at i ons Segment
Fi r st . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $33, 000
Second. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 200
Thi r d. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62, 000 $( 6, 500)
Four t h. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71, 500 1, 200

The f ol l owi ng addi t i onal i nf or mat i on was pr ovi ded:

a. The f i r st t wo quar t er s i ncl ude r esul t s of oper at i ons of t he
di scont i nued segment . The segment r epor t ed f i r st and second
quar t er pr et ax l osses of $8, 000 and $12, 000, r espect i vel y.

b. The est i mat ed annual i ncome t ax r at e i n t he f i r st and second
quar t er s was 35%. Because of t he deci si on t o di scont i nue, t he
r evi sed annual ef f ect i ve t ax r at e was det er mi ned t o be 40%.

Requi r ed:

For each quar t er , pr esent t he r esul t s of oper at i ons and t he r el at ed t ax
expense or t ax benef i t . Wher e appl i cabl e, i ncl ude t he or i gi nal and
r est at ed amount s i n t he pr esent at i on.

Chapt er 12
12- 25

ANS:

I ncome ( Loss)
Type of Cur r ent Year Ef f ect i ve
Quar t er I ncome Per i od t o Dat e Tax Rat e
Fi r st Cont i nui ng Oper at i on $ 33, 000 $ 33, 000 35%
Fi r st - Rest at ed Cont i nui ng Oper at i on 41, 000 41, 000 40%
Di scont i nued Oper at i on ( 8, 000) ( 8, 000) 40%
Second Cont i nui ng Oper at i on 40, 200 73, 200 35%
Second- Rest at ed Cont i nui ng Oper at i on 52, 200 93, 200 40%
Thi r d Cont i nui ng Oper at i on 62, 000 155, 200 40%
Four t h Cont i nui ng Oper at i on 71, 500 226, 700 40%
Di scont i nued Oper at i on 1, 200 ( 25, 300) 40%

Fi r st Cont i nui ng Oper at i on $ 11, 550 $ 0 $11, 550
Fi r st - Rest at ed Cont i nui ng Oper at i on 16, 400 0 16, 400
Di scont i nued Oper at i on ( 4, 850) 0 ( 4, 850)
Second- Rest at ed Cont i nui ng Oper at i on 37, 280 16, 400 20, 880
Di scont i nued Oper at i on ( 11, 660) ( 4, 850) ( 6, 810)
Thi r d Cont i nui ng Oper at i on 62, 080 37, 280 24, 800
Di scont i nued Oper at i on ( 10, 600) ( 11, 660) 1, 060
Four t h Cont i nui ng Oper at i on 90, 680 62, 080 28, 600
Di scont i nued Oper at i on ( 10, 120) ( 10, 600) 480

DI F: D OBJ : 3, 4

18. AdamEnt er pr i se i ncl udes seven i ndust r y segment s. Oper at i ng pr of i t s
( l osses) r el at i ng t o t hose segment s ar e:

Oper at i ng
Pr of i t
Segment ( Loss)
1. . . . . . . . . . . . . . . . . . . . . . $ 100, 000
2. . . . . . . . . . . . . . . . . . . . . . 500, 000
3. . . . . . . . . . . . . . . . . . . . . . 400, 000
4. . . . . . . . . . . . . . . . . . . . . . ( 295, 000)
5. . . . . . . . . . . . . . . . . . . . . . ( 600, 000)
6. . . . . . . . . . . . . . . . . . . . . . ( 100, 000)
7. . . . . . . . . . . . . . . . . . . . . . ( 105, 000)

Requi r ed:

Based onl y on t he above oper at i ng pr of i t ( l oss) i nf or mat i on, whi ch of
Adam' s segment s woul d be r epor t ed separ at el y?

Chapt er 12
12- 26
ANS:

Tot al segment s r epor t i ng a pr of i t :
1. . . . . . . . . . . . . . . . . . . . . . $ 100, 000
2. . . . . . . . . . . . . . . . . . . . . . 500, 000
3. . . . . . . . . . . . . . . . . . . . . . 400, 000
Tot al $1, 000, 000

Tot al segment s r epor t i ng a l oss:
4. . . . . . . . . . . . . . . . . . . . . . ( 295, 000)
5. . . . . . . . . . . . . . . . . . . . . . ( 600, 000)
6. . . . . . . . . . . . . . . . . . . . . . ( 100, 000)
7. . . . . . . . . . . . . . . . . . . . . . ( 105, 000)
Tot al $( 1, 100, 000)

The gr eat er absol ut e val ue i s t he t ot al of t he ( l oss) segment s.
10%x 1, 100, 000 = 110, 000
Any segment r epor t i ng a pr of i t exceedi ng $110, 000 or a l oss exceedi ng
( $110, 000) woul d be r epor t ed.
Repor t abl e segment s: 2, 3, 4, 5

DI F: E OBJ : 6

19. Sant as Cor por at i on i s a di ver si f i ed f i r mwi t h oper at i ons i n t he Uni t ed
St at es, Canada, Chi l e, Spai n, and Fr ance, each of whi ch qual i f i es as a
geogr aphi c segment . Dat a wi t h r espect t o t hose segment s f ol l ows:

Revenues ( I n Thousands)
Unaf f i l i at ed I nt er segment Pr of i t
Segment Cust omer s Sal es Tot al ( Loss) Asset s
US. . . . . . . . . $ 800 $ 0 $ 800 $ 200 $ 300
Canada. . . . . 450 150 600 150 200
Chi l e. . . . . . 600 60 660 240 350
Spai n. . . . . . 280 0 280 ( 30) 180
Fr ance. . . . . 300 100 400 ( 110) 90
$2, 430 $310 $2, 740 $ 450 $1, 120

Cor por at e- l evel 700 0 700 100 1, 000
Tot al $3, 130 $310 $3, 440 $ 550 $2, 120
====== ==== ====== ===== ======

Requi r ed:

Det er mi ne whi ch of t he Sant as segment s woul d be r epor t abl e segment s, and
expl ai n why.

Chapt er 12
12- 27
ANS:

a. Revenue t est :

Oper at i ng pr of i t t est :

$2, 430 Unaf f i l i at ed sal es
310 I nt er segment sal es
$2, 740 Combi ned r evenue
x 10%
$ 274 Revenue mi ni mum
======

Al l segment s exceed r evenue mi ni mum.

b.
Segment Pr of i t Loss
US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200
Canada. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Chi l e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
Spai n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30
Fr ance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
$590 $140
==== ====

Mi ni mumpr of i t or l oss = $590 x . 1 = $59
Al l segment s except f or Spai n exceed t he mi ni mumpr of i t or l oss
cr i t er i on.

c. Asset t est :

$1, 120 x . 1 = $112 mi ni muml evel
Al l segment s except Fr ance meet mi ni mumasset cr i t er i on.

d. 75%Test :
Segment Revenue- Unaf f i l i at ed
US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 800
Canada. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450
Chi l e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Spai n. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
Fr ance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
$2, 430
======

75%Tot al Cor por at e Revenue: . 75 x 3, 130 = $2, 348
Repor t abl e segment s ar e consi der ed a si gni f i cant por t i on of
busi ness

DI F: M OBJ : 6

Chapt er 12
12- 28
20. I nf or mat i on about t he seven segment s of t he Kenny Cor por at i on i s
pr esent ed bel ow. Det er mi ne whi ch of t he segment s ar e r epor t abl e and why.

Gener al and
Revenue f r om Admi ni st r at i ve Tot al
Segment Al l Sour ces Cost of Sal es Expenses Asset s
1 $17, 450, 000 $15, 200, 000 $ 4, 500, 000 $ 55, 000, 000
2 25, 200, 000 20, 000, 000 4, 000, 000 80, 000, 000
3 9, 150, 000 7, 000, 000 1, 500, 000 28, 250, 000
4 780, 000 300, 000 100, 000 4, 750, 000
5 11, 500, 000 8, 900, 000 4, 250, 000 25, 500, 000
6 6, 800, 000 3, 400, 000 2, 000, 000 12, 000, 000
7 2, 100, 000 1, 000, 000 900, 000 10, 000, 000
Tot al $72, 980, 000 $55, 800, 000 $17, 250, 000 $215, 500, 000
=========== =========== =========== ============

ANS:

Revenue mi ni mum: $ 72, 980, 000 x 10%= $ 7, 298, 000
Asset mi ni mum: $215, 500, 000 x 10%= $21, 550, 000

Passed Passed Passed
Oper at i ng Pr of i t / Loss Revenue Asset
Segment Pr of i t Loss Test ? Test ? Test ?
1 $2, 250, 000 Yes Yes Yes
2 $1, 200, 000 Yes Yes Yes
3 650, 000 Yes Yes Yes
4 380, 000 No No No
5 1, 650, 000 Yes Yes Yes
6 1, 400, 000 Yes No No
7 200, 000 No No No
Tot al $5, 480, 000 $3, 900, 000
x 10%
$ 548, 000

Segment s 1, 2, 3, 5, and 6 ar e t he r epor t abl e segment s.

DI F: M OBJ : 6

21. The management of Tr i dent , I nc. i s t r yi ng t o det er mi ne i f t hr ee of t he
company' s nonr epor t abl e segment s shoul d be combi ned i nt o one si ngl e
segment f or r epor t i ng pur poses. I n what f i ve ways must t hese segment s be
si mi l ar i n or der t o be r epor t ed as one?

ANS:

The t hr ee segment s must be si mi l ar i n each of t he f ol l owi ng ar eas:

1. The nat ur e of t he pr oduct s and ser vi ces
2. The nat ur e of t he pr oduct i on pr ocess
3. The t ype or cl ass of cust omer f or t hei r pr oduct s and ser vi ces
4. The met hod used t o di st r i but e t hei r pr oduct s or pr ovi de t hei r
ser vi ces
5. The nat ur e of t he r egul at or y envi r onment , i f any

DI F: E OBJ : 5
Chapter 13 Partnerships: Characteristics, Formation, and
Accounting for Activities

MULTIPLE CHOICE

1. Whi ch of t he f ol l owi ng i s NOT a char act er i st i c of t he pr opr i et ar y
t heor y t hat i nf l uences account i ng f or par t ner shi ps?
a. Par t ner s' sal ar i es ar e vi ewed as a di st r i but i on of i ncome r at her
t han a component of net i ncome.
b. A par t ner shi p i s not vi ewed as a separ at e, di st i nct , t axabl e
ent i t y.
c. A par t ner shi p i s char act er i zed by l i mi t ed l i abi l i t y.
d. Changes i n t he owner shi p st r uct ur e of a par t ner shi p r esul t i n t he
di ssol ut i on of t he par t ner shi p.


2. Don and Key f or ma par t ner shi p. Don cont r i but es i nt o t he par t ner shi p a
per sonal comput er t hat he has used at home i n nonbusi ness r el at ed
act i vi t i es. Don had pai d $10, 000 f or t he comput er 2 year s ago. The
cur r ent mar ket val ue of t he comput er i s $9, 000. The par t ner s, af t er
r evi ewi ng I RS r ul es, assi gned t he comput er a usef ul l i f e of 5 year s.
For f i nanci al r epor t i ng pur poses, at what amount shoul d t he comput er be
r ecor ded i n t he par t ner shi p l edger ?
a. $10, 000
b. $9, 000
c. $7, 500
d. $6, 000


3. Whi ch of t he f ol l owi ng woul d be l east l i kel y t o be used as a means of
al l ocat i ng pr of i t s among par t ner s who ar e act i ve i n t he management of
t he par t ner shi p?
a. Sal ar i es
b. Bonus as a per cent age of net i ncome bef or e t he bonus
c. Bonus as a per cent age of sal es i n excess of a t ar get ed amount
d. I nt er est on aver age capi t al bal ances


4. Whi ch of t he f ol l owi ng best descr i bes t he use of i nt er est on i nvest ed
capi t al as a means of al l ocat i ng pr of i t s?
a. I f i nt er est on i nvest ed capi t al i s used, i t must be used f or al l
par t ner s.
b. I nt er est i s al l ocat ed onl y i f t her e i s par t ner shi p net pr of i t .
c. I nvest ed capi t al bal ances ar e never af f ect ed by dr awi ngs of t he
par t ner shi ps.
d. Use of begi nni ng or endi ng measur es of i nvest ed capi t al may be
subj ect t o mani pul at i on t hat di st or t s t he measur e of i nvest ed
capi t al .


Chapt er 13
13- 2
5. A par t ner shi p agr eement cal l s f or al l ocat i on of pr of i t s and l osses by
sal ar y al l ocat i ons, a bonus al l ocat i on, i nt er est on capi t al , wi t h any
r emai nder t o be al l ocat ed by pr eset r at i os. I f a par t ner shi p has a l oss
t o al l ocat e, gener al l y whi ch of t he f ol l owi ng pr ocedur es woul d be
appl i ed?
a. Any l oss woul d be al l ocat ed equal l y t o al l par t ner s.
b. Any sal ar y al l ocat i on cr i t er i a woul d not be used.
c. The bonus cr i t er i a woul d not be used.
d. The l oss woul d be al l ocat ed usi ng t he pr of i t and l oss r at i os,
onl y.


6. Ace & Bar nes par t ner shi p has i ncome of $110, 000 and Par t ner A i s t o be
al l ocat ed a bonus of 10%of i ncome af t er t he bonus, Par t ner A' s bonus
woul d be ______________.
a. $11, 000
b. $10, 000
c. $9, 091
d. $9, 000


7. Par t ner A f i r st cont r i but ed $20, 000 of capi t al i nt o an exi st i ng
par t ner shi p on Febr uar y 1, 20X1. On J une 1, 20X1, t he par t ner
cont r i but ed anot her $20, 000. On Sept ember 1, 20X1, t he par t ner wi t hdr ew
$15, 000 f r omt he par t ner shi p. Wi t hdr awal s i n excess of $5, 000 ar e
char ged t o t he par t ner ' s capi t al account . The par t ner shi p' s f i scal year
end i s December 31. The annual wei ght ed- aver age capi t al bal ance i s
______________.
a. $25, 000
b. $26, 667
c. $28, 334
d. $30, 000


8. Par t ner Al t a had a capi t al bal ance on J anuar y 1, 20X5 of $45, 000 and
made addi t i onal capi t al cont r i but i ons dur i ng 20X5 t ot al i ng $50, 000.
Dur i ng t he year 20X5, Al t a wi t hdr ew $8, 000 per mont h. Al t a s post -
cl osi ng capi t al bal ance on December 31, 20X5 i s $30, 000. Al t a s shar e
of 20X5 par t ner shi p i ncome i s _________________.
a. $96, 000
b. $50, 000
c. $31, 000
d. $8, 000


Chapt er 13
13- 3
9. Par t ner s A and B have a pr of i t and l oss agr eement wi t h t he f ol l owi ng
pr ovi si ons: sal ar i es of $20, 000 and $25, 000 f or A and B, r espect i vel y;
a bonus t o A of 10%of net i ncome af t er bonus; and i nt er est of 20%on
aver age capi t al bal ances of $40, 000 and $50, 000 f or A and B,
r espect i vel y. Any r emai nder i s spl i t equal l y. I f t he par t ner shi p had
net i ncome of $88, 000, how much shoul d be al l ocat ed t o Par t ner A?
a. $36, 000
b. $44, 500
c. $50, 000
d. $43, 500


a bonus t o A of 12%of net i ncome af t er sal ar i es and bonus; and
i nt er est of 10%on aver age capi t al bal ances of $50, 000 and $65, 000 f or
A and B, r espect i vel y. One- f our t h of any r emai ni ng pr of i t s ar e
al l ocat ed t o A and t he bal ance t o B. I f t he par t ner shi p had net i ncome
of $108, 600, how much shoul d be al l ocat ed t o Par t ner A?
a. $43, 225
b. $43, 816
c. $47, 850
d. $65, 375


A and B, r espect i vel y. One- t hi r d of any r emai ni ng pr of i t s or l osses ar e
al l ocat ed t o B and t he bal ance t o A. I f t he par t ner shi p had net i ncome
of $52, 000, how much shoul d be al l ocat ed t o Par t ner A?
a. $14, 000
b. $30, 000
c. $38, 000


Chapt er 13
13- 4
12. Par t ner s Acker , Becker & Checker have t he f ol l owi ng pr of i t and l oss
agr eement :

( 1) Acker & Becker r ecei ve sal ar i es of $40, 000 each
( 2) Checker get s a bonus of 10 per cent of net i ncome af t er sal ar i es and
bonus ( t he bonus i s zer o i f sal ar i es exhaust net i ncome)
( 3) Remai ni ng pr of i t s ar e shar ed by Acker , Becker & Checker i n t he
f ol l owi ng r at i os r espect i vel y: 3: 4: 3.

The par t ner shi p had a net i ncome of $91, 000. How much shoul d be
al l ocat ed t o Checker ?
a. $3, 300
b. $10, 300
c. $1, 000
d. $4, 000


A and B, r espect i vel y. One- t hi r d of any r emai ni ng pr of i t s ar e al l ocat ed
t o A and t he bal ance t o B. I f t he par t ner shi p had a net i ncome of
$36, 000, how much shoul d be al l ocat ed t o Par t ner A, assumi ng t hat t he
pr ovi si ons of t he pr of i t and l oss agr eement ar e r anked by or der of
pr i or i t y st ar t i ng wi t h sal ar i es?
a. $12, 000
b. $18, 000
c. $18, 720
d. $41, 600


14. Par t ner s Tuba and Dr umshar e pr of i t s and l osses of t hei r par t ner shi p
equal l y af t er 1) annual sal ar y al l owances of $25, 000 f or Tuba and
$20, 000 f or Dr umand 2) 10%i nt er est i s pr ovi ded on aver age capi t al
bal ances. Dur i ng 20X1, t he par t ner shi p had ear ni ngs of $50, 000; Tuba' s
aver age capi t al bal ance was $60, 000 and Dr um' s aver age capi t al bal ance
was $90, 000.

How shoul d t he $50, 000 of ear ni ngs be di vi ded?
Tuba Dr um
a. $26, 000 $24, 000
b. $27, 000 $23, 000
c. $25, 000 $25, 000
d. $27, 500 $22, 500


Chapt er 13
13- 5
15. Assumi ng t he same f act s as i n Quest i on #14, what woul d be t he cor r ect
answer i f an or der of pr i or i t y was i n t he par t ner shi p agr eement wher eby
sal ar y al l owances have a hi gher pr i or i t y t han i nt er est on capi t al
al l ocat i ons?
Tuba Dr um
a. $26, 000 $24, 000
b. $27, 000 $23, 000
c. $25, 000 $25, 000
d. $27, 500 $22, 500


16. Whi ch of t he f ol l owi ng st at ement s i s t r ue concer ni ng t he t r eat ment of
sal ar i es i n par t ner shi p account i ng?
a. Par t ner sal ar i es may be used t o al l ocat e pr of i t s and l osses; t hey
ar e not consi der ed expenses of t he par t ner shi p
b. Par t ner sal ar i es ar e equal t o t he annual par t ner dr aw.
c. The sal ar y of a par t ner i s t r eat ed i n t he same manner as sal ar i es
of cor por at e empl oyees.
d. Par t ner sal ar i es ar e di r ect l y cl osed t o t he capi t al account .


17. Par t ner s act i ve i n a par t ner shi p busi ness shoul d have t hei r shar e of
par t ner shi p pr of i t s based on t he f ol l owi ng
a. a combi nat i on of sal ar i es pl us i nt er est based on aver age capi t al
bal ances.
b. a combi nat i on of sal ar i es and per cent age of net i ncome af t er
sal ar i es and any ot her al l ocat i on basi s.
c. sal ar i es onl y.
d. per cent age of net i ncome af t er sal ar i es i s pai d t o i nact i ve
par t ner s.


18. Whi ch of t he f ol l owi ng st at ement s ar e t r ue when compar i ng cor por at i ons
and par t ner shi ps?
a. Par t ner shi p ent i t i es pr ovi de f or t axes at t he same r at es used by
cor por at i ons.
b. I n t heor y, par t ner shi ps ar e mor e abl e t o at t r act capi t al .
c. Li ke cor por at i ons, par t ner shi ps have an i nf i ni t e l i f e.
d. Unl i ke shar ehol der s, gener al par t ner s may have l i abi l i t y beyond
t hei r capi t al bal ances.


19. Par t ner shi p dr awi ngs ar e
a. al ways mai nt ai ned i n a separ at e account f r omt he par t ner ' s capi t al
account .
b. equal t o par t ner s' sal ar i es.
c. usual l y mai nt ai ned i n a separ at e dr aw account wi t h any excess
dr aws bei ng debi t ed di r ect l y t o t he capi t al account .
d. not di scussed i n t he speci f i c cont r act pr ovi si ons of t he
par t ner shi p.

Chapt er 13
13- 6

20. Maxwel l i s t r yi ng t o deci de whet her t o accept a sal ar y of $60, 000 or a
sal ar y of $25, 000 pl us a bonus of 20%of net i ncome af t er t he bonus as
a means of al l ocat i ng pr of i t among t he par t ner s. What amount of i ncome
woul d be necessar y so t hat Maxwel l woul d consi der t he choi ces t o be
equal ?
a. $35, 000
b. $85, 000
c. $140, 000
d. $210, 000


21. Maxwel l i s t r yi ng t o deci de whet her t o accept a sal ar y of $60, 000 or a
sal ar y of $25, 000 pl us a bonus of 20%of net i ncome af t er sal ar i es and
bonus as a means of al l ocat i ng pr of i t among t he par t ner s. Sal ar i es
t r aceabl e t o t he ot her par t ner s ar e est i mat ed t o be $75, 000. What
amount of i ncome woul d be necessar y so t hat Maxwel l woul d consi der t he
choi ces t o be equal ?
a. $175, 000
b. $210, 000
c. $285, 000
d. $310, 000


22. Maxwel l i s a par t ner and has an annual sal ar y of $30, 000 per year , but
he act ual l y dr aws $3, 000 per mont h. The ot her par t ner i n t he
par t ner shi p has an annual sal ar y of $40, 000 and dr aws $4, 000 per mont h.
What i s t he t ot al annual sal ar y t hat shoul d be used t o al l ocat e annual
net i ncome among t he par t ner s?
a. $14, 000
b. $50, 000
c. $70, 000
d. $84, 000


23. A par t ner shi p has t he f ol l owi ng account i ng amount s:

( 1) Sal es = $70, 000
( 2) Cost of Goods Sol d = $40, 000
( 3) Oper at i ng Expenses = $10, 000
( 4) Sal ar y al l ocat i ons t o par t ner s = $13, 000
( 5) I nt er est pai d t o banks = $2, 000
( 6) Par t ner s' wi t hdr awal s = $8, 000

Par t ner shi p net i ncome ( l oss) i s ______________.
a. $20, 000
b. $18, 000
c. $5, 000
d. $( 3, 000)


Chapt er 13
13- 7
24. Whi ch of t he f ol l owi ng char act er i st i cs of a par t ner shi p most l i kel y
expl ai ns why a publ i c account i ng f i r mi s or gani zed as a par t ner shi p
f r oma publ i c pol i cy vi ewpoi nt ?
a. A par t ner shi p i s not a t axabl e ent i t y.
b. A par t ner shi p i s char act er i zed by unl i mi t ed l i abi l i t y.
c. A par t ner shi p i s char act er i zed by a f i duci ar y r el at i onshi p among
t he par t ner s.
d. Sal ar i es t o t he par t ner s ar e not consi der ed a component of net
i ncome.


25. For f i nanci al account i ng pur poses, asset s of an i ndi vi dual par t ner
cont r i but ed t o a par t ner shi p ar e r ecor ded by t he par t ner shi p at
a. hi st or i cal cost .
b. book val ue.
c. f ai r mar ket val ue.
d. l ower of cost or mar ket .


26. Whi ch of t he f ol l owi ng i s not an advant age of a par t ner shi p over a
cor por at i on?
a. Ease of f or mat i on
b. Unl i mi t ed l i abi l i t y
c. The el i mi nat i on of t axes at t he ent i t y l evel
d. Al l of t he above


27. Under t he ent i t y t heor y, a par t ner shi p i s
a. vi ewed t hr ough t he eyes of t he par t ner s.
b. vi ewed as havi ng i t s own exi st ence apar t f r omt he par t ner s.
c. a separ at e l egal and t ax ent i t y.
d. unabl e t o ent er i nt o cont r act s i n i t s own name.


28. Of t he f ol l owi ng component s used t o al l ocat e pr of i t s among par t ner s,
whi ch i s l ess l i kel y t o be f ound i n a par t ner shi p of l andscape
ar chi t ect s?
a. Sal ar i es
b. Bonuses
c. I nt er est on i nvest ed capi t al
d. Pr of i t and l oss per cent ages


Chapt er 13
13- 8
29. Del l a Rei se was admi t t ed t o a par t ner shi p. She cont r i but ed $25, 000 cash
pl us equi pment she pur chased f or $50, 000 and whi ch had accumul at ed
depr eci at i on f or t ax pur poses of $20, 000. The f ai r val ue of t he
equi pment was $35, 000. She al so assumed 1/ 3 of par t ner shi p debt of
$15, 000. Her begi nni ng capi t al bal ance was $48, 000. For t ax pur poses
her par t ner shi p i nt er est shoul d be i ni t i al l y val ued at
a. $60, 000
b. $48, 000
c. $55, 000
d. $65, 000

ANS: A
Cash of $25, 000 + X' s t ax basi s of equi p $30, 000 + Li abi l i t y assumed
$5, 000 = $60, 000

DI F: D OBJ : 5

30. Whi ch of t he f ol l owi ng does not decr ease a par t ner ' s t ax basi s i n a
par t ner shi p?
a. The basi s of ot her par t ner s' l i abi l i t i es assumed by t he
par t ner shi p
b. The basi s of t hat par t ner ' s l i abi l i t i es assumed by t he par t ner shi p
c. Di st r i but i ons t o t he i ndi vi dual par t ner
d. The par t ner ' s shar e of t axabl e l osses


31. For t ax pur poses, asset s of an i ndi vi dual par t ner t hat ar e cont r i but ed
t o a par t ner shi p ar e r ecor ded by t he par t ner shi p at
a. hi st or i cal cost .
b. f ai r mar ket val ue.
c. t he i ndi vi dual par t ner ' s t ax basi s.
d. book val ue.


32. The di sadvant ages of doubl e t axat i on f or an ent i t y wi t h t wo owner s may
not be avoi ded i f t he ent i t y i s
a. or gani zed as a par t ner shi p.
b. or gani zed as a Subchapt er S cor por at i on.
c. di st r i but i ng al l of i t s i ncome i n t he f or mof di vi dends.
d. None of t he above.


Chapt er 13
13- 9
PROBLEM

1. Car ey and Dr ew f or med a par t ner shi p on J anuar y 1, 20X1. Car ey i nvest ed
$100, 000, Dr ew $70, 000. Each wi t hdr ew $12, 000 on each of t he f ol l owi ng
dat es dur i ng 20X1: Febr uar y 1, August 1, and November 1. These
wi t hdr awal s i n t ot al wer e equal t o sal ar i es f or t he year . I nt er est of 8
per cent was t o be pai d par t ner s on t he basi s of t hei r aver age capi t al
bal ances excl udi ng net i ncome. Addi t i onal l y, Car ey was t o get a 20
per cent bonus based on par t ner shi p net i ncome af t er t he bonus, but
bef or e t he sal ar i es and i nt er est .

Any r emai ni ng pr of i t ( or l oss) was t o be al l ocat ed equal l y among t he
par t ner s.

Requi r ed:

I f par t ner shi p net i ncome was $150, 000, how was i t t o be al l ocat ed
bet ween Car ey and Dr ew?

Or der of al l ocat i on: bonus, sal ar i es, i nt er est . Round t o t he near est
whol e dol l ar .

ANS:

Unal l ocat ed
Tot al Car ey Dr ew
Tot al t o al l ocat e: . . . . . . . . . . . . . . . . $150, 000
As Bonus ( Not e A bel ow) . . . . . . . . . . . ( 25, 000) $25, 000
As Sal ar i es. . . . . . . . . . . . . . . . . . . . . . . ( 72, 000) 36, 000 $36, 000
As I nt er est ( Not e B bel ow) . . . . . . . . ( 10, 720) 6, 560 4, 160
Subt ot al : . . . . . . . . . . . . . . . . . . . . . . . . . $ 42, 280 $67, 560 $40, 160
Resi dual Pr of i t - shar i ng. . . . . . . . . . . ( 42, 280) 21, 140 21, 140
Fi nal Al l ocat i ons: . . . . . . . . . . . . . . . . $ 0 $88, 700 $61, 300
======== ======= =======

Not e A ( Bonus) :
Bonus = . 20( Net I ncome - Bonus)
1. 2( Bonus) = . 20( $150, 000) = 30, 000
Bonus = 30, 000/ 1. 2 = $25, 000
=======

Chapt er 13
13- 10
Not e B ( I nt er est ) :
Capi t al Fr act i on I nt er est
Car ey: Amount of Year Rat e = Subt ot al
$100, 000 1/ 12 0. 08 $ 667
( 12, 000)
88, 000 6/ 12 0. 08 3, 520
( 12, 000)
76, 000 3/ 12 0. 08 1, 520
( 12, 000)
$ 64, 000 2/ 12 0. 08 853
======== 1. 0000 $6, 560
====== ======

Capi t al Fr act i on I nt er est
Dr ew: Amount of Year Rat e = Subt ot al
$ 70, 000 1/ 12 0. 08 $ 467
( 12, 000)
58, 000 6/ 12 0. 08 2, 320
( 12, 000)
46, 000 3/ 12 0. 08 920
( 12, 000)
$ 34, 000 2/ 12 0. 08 453
======== 1. 0000 $4, 160
====== ======

DI F: M OBJ : 4

Chapt er 13
13- 11
2. Mat t and J ef f or gani zed t hei r par t ner shi p on 1/ 1/ 00. The f ol l owi ng
ent r i es wer e made i nt o t hei r capi t al account s dur i ng 00:

Debi t Cr edi t Bal ance
Mat t :
1/ 1 35, 000 35, 000
6/ 1 10, 000 45, 000
10/ 1 5, 000 50, 000

J ef f :
1/ 1 25, 000 25, 000
3/ 1 10, 000 35, 000
9/ 1 10, 000 25, 000
11/ 1 5, 000 20, 000
12/ 1 8, 000 28, 000

I f par t ner shi p pr of i t s f or t he year equal ed $66, 000, i ndi cat e t he
al l ocat i ons bet ween t he par t ner s under t he f ol l owi ng i ndependent
pr of i t - shar i ng al l ocat i on condi t i ons:

a. I nt er est of 10%i s al l ocat ed on wei ght ed aver age capi t al bal ance
and t he r emai nder i s di vi ded equal l y

b. A sal ar y of $9, 000 wi l l be al l ocat ed t o J ef f ; 10%i nt er est on
endi ng capi t al i s al l ocat ed t o t he par t ner s; r emai nder i s di vi ded
60/ 40 t o Mat t and J ef f , r espect i vel y

c. Sal ar i es ar e al l ocat ed t o Mat t and J ef f i n t he amount of $10, 000
and $15, 000, r espect i vel y and t he r emai nder i s al l ocat ed i n
pr opor t i on t o wei ght ed aver age capi t al bal ances

d. A bonus of 10%of par t ner shi p pr of i t s af t er bonus i s cr edi t ed t o
Mat t , a sal ar y of $35, 000 i s al l ocat ed t o J ef f , a $20, 000 sal ar y i s
al l ocat ed t o Mat t , 10%i nt er est on wei ght ed capi t al i s al l ocat ed, and
r emai nder i s spl i t equal l y

ANS:

Wei ght ed Aver age Capi t al Cal cul at i on:

Mat t :
Cap Bal # mont hs Gr oss Cap
1/ 1 t o 6/ 1 35, 000 5 175, 000
6/ 1 t o 10/ 1 45, 000 4 180, 000
10/ 1 t o 12/ 31 50, 000 3 150, 000
Tot al 505, 000
Aver age 42, 083
J ef f :
Cap Bal # mont hs Gr oss Cap
1/ 1 t o 3/ 1 25, 000 2 50, 000
3/ 1 t o 9/ 1 35, 000 6 210, 000
9/ 1 t o 11/ 1 25, 000 2 50, 000
11/ 1 t o 12/ 1 20, 000 1 20, 000
12/ 1 t o 12/ 31 28, 000 1 28, 000
Tot al 358, 000
Aver age 29, 833

Chapt er 13
13- 12
a. Mat t J ef f Tot al
Sal ar y $ N/ A $ N/ A $ 0
Bonus N/ A N/ A 0
I nt er est 4, 208 2, 983 7, 191
Subt ot al $ 4, 208 $ 2, 983 $ 7, 191
Remai nder 29, 404 29, 405 58, 809
Tot al $33, 612 $32, 388 $66, 000

b. Mat t J ef f Tot al
Sal ar y $ 0 $ 9, 000 $ 9, 000
Bonus N/ A N/ A 0
I nt er est 5, 000 2, 800 7, 800
Subt ot al $ 5, 000 $11, 800 $16, 800
Remai nder 29, 520 19, 680 49, 200
Tot al $34, 520 $31, 480 $66, 000

c. Mat t J ef f Tot al
Sal ar y $10, 000 $15, 000 $25, 000
Bonus N/ A N/ A 0
I nt er est N/ A N/ A 0
Subt ot al $10, 000 $15, 000 $25, 000
Remai nder 23, 992 17, 008 41, 000
Tot al $33, 992 $32, 008 $66, 000

d. Mat t J ef f Tot al
Sal ar y $20, 000 $35, 000 $55, 000
Bonus* 6, 000 N/ A 6, 000
I nt er est 4, 208 2, 983 7, 191
Subt ot al $30, 208 $37, 983 $68, 191
Remai nder ( 1, 096) ( 1, 095) ( 2, 191)
Tot al $29, 112 $36, 888 $66, 000

DI F: M OBJ : 4

Chapt er 13
13- 13
3. Ol sen and Kat ch or gani zed t he OK Par t ner shi p on 1/ 1/ 01. The f ol l owi ng
ent r i es wer e made i nt o t hei r capi t al account s dur i ng 01:

Ol sen:
Debi t s Cr edi t s
1/ 1 20, 000
4/ 1 5, 000
10/ 1 5, 000

Kat ch:
1/ 1 40, 000
3/ 1 10, 000
9/ 1 10, 000
11/ 1 10, 000

The par t ner shi p agr eement cal l ed f or t he f ol l owi ng i n t he al l ocat i on of
par t ner shi p pr of i t s and l osses:

Sal ar i es of $48, 000 and $36, 000 woul d be al l ocat ed t o Ol sen and
Kat ch, r espect i vel y

I nt er est of 8%on aver age capi t al bal ances wi l l be al l ocat ed

Kat ch wi l l r ecei ve a bonus of 10%on al l par t ner shi p bi l l i ngs
i n excess of $300, 000

Any r emai ni ng pr of i t s/ l osses wi l l be al l ocat ed 60/ 40 t o Ol sen
and Kat ch, r espect i vel y.

Requi r ed ( account f or each si t uat i on i ndependent l y) :

a. Det er mi ne t he di st r i but i on of par t ner shi p net i ncome. Assume
t he f ol l owi ng pr i or i t y of al l ocat i on: i nt er est , bonus,
sal ar i es, t hen r emai ni ng assumi ng par t ner shi p i ncome of
$85, 000; par t ner shi p bi l l i ngs amount ed t o $400, 000

b. Det er mi ne t he di st r i but i on of par t ner shi p net i ncome of
$165, 000 on bi l l i ngs of $400, 000. No speci f i c pr i or i t y i s
gi ven t o any of t he al l ocat i on cr i t er i a.

Chapt er 13
13- 14
ANS:

a.
Ol sen Kat ch Tot al Remai nder
Avai l abl e 85, 000
I nt er est $ 2, 000 $ 2, 400 $ 4, 400 80, 600
Bonus 10, 000 10, 000 70, 600
Sal ar i es 40, 343 30, 257 70, 600 0
Subt ot al s: $42, 343 $42, 657 $85, 000

Wei ght ed Aver age Cal cul at i on:

Ol sen:
Capi t al Gr oss
Bal ance # of Mont hs Capi t al
1/ 1 t o 4/ 1 20, 000 3 60, 000
4/ 1 t o 10/ 1 25, 000 6 150, 000
10/ 1 t o 12/ 31 30, 000 3 90, 000
Tot al 300, 000
Aver age 25, 000

Kat ch:
Capi t al Gr oss
Bal ance # of Mont hs Capi t al
1/ 1 t o 3/ 1 40, 000 2 80, 000
3/ 1 t o 9/ 1 30, 000 6 180, 000
9/ 1 t o 11/ 1 20, 000 2 40, 000
11/ 1 t o 12/ 31 30, 000 2 60, 000
Tot al 360, 000
Aver age 30, 000

$70, 600 i s not suf f i ci ent t o cover ent i r e sal ar y al l ocat i on. I t i s
spl i t bet ween Ol sen and Kat ch based on pr opor t i onat e sal ar i es:

Ol sen 48, 000/ 84, 000 x 70, 600 = 40, 343
Kat ch 36, 000/ 84, 000 x 70, 600 = 30, 257

b.
Ol sen Kat ch Tot al
Sal ar i es $48, 000 $36, 000 $ 84, 000
Bonus 10, 000 10, 000
I nt er est * 2, 000 2, 400 4, 400
Subt ot al s: 50, 000 48, 400 98, 400
Remai nder 39, 960 26, 640 66, 600
Fi nal Pr of i t : $89, 960 $75, 040 $165, 000
======= ======= ========

*see par t ' a' sol ut i on f or wei ght ed aver age capi t al cal cul at i on

DI F: D OBJ : 4

Chapt er 13
13- 15
4. Cabl e and J ones ar e consi der i ng f or mi ng a par t ner shi p wher eby pr of i t s
wi l l be al l ocat ed t hr ough t he use of sal ar i es and bonuses. Bonuses wi l l
be 10%of net i ncome af t er t ot al sal ar i es and t ot al bonuses. Cabl e wi l l
r ecei ve a sal ar y of $30, 000 and a 10%bonus. J ones has t he opt i on of
r ecei vi ng a sal ar y of $40, 000 and a 10%bonus or si mpl y r ecei vi ng a
sal ar y of $52, 000.

Requi r ed:

Det er mi ne t he l evel of i ncome t hat woul d be necessar y so t hat J ones
woul d be i ndi f f er ent t o t he pr of i t - shar i ng opt i on sel ect ed.

ANS:

J ones woul d have t o r ecei ve a bonus of $12, 000 t o be i ndi f f er ent t o t he
t wo pr of i t - shar i ng opt i ons. Si nce Cabl e woul d r ecei ve t he same bonus,
t he t ot al bonus woul d have t o be $24, 000. Ther ef or e,

$24, 000 = 10%x ( Net i ncome - Sal ar i es - Bonuses)
$24, 000 = 10%x ( Net i ncome - [ 30, 000 + 40, 000] - 24, 000)
$24, 000 = 10%x ( Net i ncome - 94, 000)
$24, 000 = 10%x Net i ncome - 9, 400
$33, 400 = 10%x Net i ncome
Net i ncome = $334, 000

DI F: E OBJ : 4

5. Tupper and Tol i n have deci ded t o f or ma par t ner shi p t o pr ovi de
envi r onment al t est i ng ser vi ces t o i ndust r y. The i ndi vi dual s wi l l shar e
pr of i t s equal l y and have conveyed t he f ol l owi ng asset s and l i abi l i t i es
t o t he par t ner shi p:

Tupper Tol i n
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20, 000
Equi pment :
Tax basi s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 $40, 000
Book basi s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 000 34, 000
Vehi cl es:
Tax basi s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Book basi s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000 20, 000

Requi r ed:

Cal cul at e t he t ax basi s and t he book basi s of each par t ner i n t he
par t ner shi p.

Chapt er 13
13- 16
ANS:

Tupper ' s Basi s Tol i n' s Basi s
Tax Book Tax Book
Cash. . . . . . . . . . . . . . . . . . . . . . $20, 000 $20, 000
Equi pment . . . . . . . . . . . . . . . . . 10, 000 12, 000 $ 40, 000 $ 34, 000
Vehi cl es. . . . . . . . . . . . . . . . . . 0 6, 000
Li abi l i t i es:
Tot al . . . . . . . . . . . . . . . . . . . . . ( 8, 000) ( 20, 000)
Ot her par t ner ' s assumed. 10, 000 4, 000
Assumed by ot her par t ner ( 4, 000) ( 10, 000)
Basi s of par t ner ' s
i nt er est . . . . . . . . . . . . . . . . $36, 000 $24, 000 $ 34, 000 $ 20, 000
======= ======= ======== ========

DI F: M OBJ : 4, 5

6. Van and Shapi r o f or med a par t ner shi p. Af t er one year of oper at i on,
t he par t ner shi p had t he f ol l owi ng par t i al t r i al bal ance:

Debi t Cr edi t
Van, Capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70, 000
Shapi r o, Capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95, 000
Van, Wi t hdr awal s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000
Shapi r o, Wi t hdr awal s. . . . . . . . . . . . . . . . . . . . . . . . . . 14, 000
Ser vi ce Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Sal ar i es Expense ( t o empl oyees) . . . . . . . . . . . . . . . 100, 000
Rent Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36, 000
Suppl i es Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 000
Ot her Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . 15, 000

Par t ner s spl i t pr of i t s as f ol l ows:

( 1) A sal ar y of $30, 000 i s pai d t o Van.

( 2) Remai ni ng pr of i t s ( or l osses) ar e spl i t 40%t o Van, t he
r emai nder t o Shapi r o.

Ot her f act s:

Van cont r i but ed equi pment whose cost t o her was $60, 000, wi t h
accumul at ed depr eci at i on f or t ax pur poses of $36, 000. The par t ner shi p
awar ded her $40, 000 t owar ds her par t ner shi p i nt er est f or t he equi pment .
The par t ner shi p assumed $10, 000 of Shapi r o' s per sonal debt s when she
was admi t t ed i nt o t he par t ner shi p.

Requi r ed:

Cal cul at e t he t wo par t ner s' endi ng capi t al bal ances:

a. f or book pur poses
b. f or t ax pur poses

Chapt er 13
13- 17
ANS:

Tot al Van Shapi r o
Al l ocat i on of Net I ncome: . . . . . . . . . $ 300, 000
( 100, 000)
( 36, 000)
( 28, 000)
( 15, 000)
$ 121, 000
Al l ocat i on of Sal ar y: . . . . . . . . . . . . . ( 30, 000) $30, 000
Subt ot al : . . . . . . . . . . . . . . . . . . . . . . . . . $ 91, 000 $30, 000 $ 0
Shar i ng of Remai nder : . . . . . . . . . . . . . ( 91, 000) 36, 400 54, 600
Al l ocat i on of Net I ncome: . . . . . . . . . $ 0 $66, 400 $54, 600
========= ======= =======

Par t ner s' Capi t al Tot al Van Shapi r o
Capi t al , Begi nni ng. . . . . . . . . . . . . . . . $165, 000 $ 70, 000 $ 95, 000
Net I ncome. . . . . . . . . . . . . . . . . . . . . . . . 121, 000 66, 400 54, 600
Less: Wi t hdr awal s: . . . . . . . . . . . . . . . . ( 29, 000) ( 15, 000) ( 14, 000)

Capi t al , Endi ng ( f or book pur poses) $257, 000 $121, 400 $135, 600

Tax Adj ust ment s:
Van ( $40, 000 book val ue
l ess $24, 000 t ax basi s) . . . . . . . . . . . ( 16, 000) ( 16, 000)

Shapi r o ( $10, 000 of per sonal
l i abi l i t y assumed) : . . . . . . . . . . . . ( 10, 000) ( 10, 000)
Capi t al , Endi ng ( f or t ax pur poses) $231, 000 $105, 400 $125, 600
======== ======== ========

DI F: D OBJ : 3, 5

7. The Amat o, Ber gi n, Chel sey par t ner shi p pr of i t al l ocat i on agr eement
cal l s f or sal ar i es of $15, 000 and $30, 000 f or Anat o & Ber gi n,
r espect i vel y. Amat o i s al so t o r ecei ve a bonus equal t o 10%of
par t ner shi p i ncome af t er her bonus. I nt er est at t he r at e of 10%i s t o
be al l ocat ed t o Chel sey based on hi s wei ght ed aver age capi t al af t er
dr aws. Chel sey began t he cur r ent year wi t h a capi t al bal ance of $54, 000
and had t he f ol l owi ng subsequent act i vi t y:

Mar ch 1: Wi t hdr aw $20, 000
J ul y 1: Wi t hdr aw $10, 000
Sept ember 1: Cont r i but ed $ 5, 000
Oct ober 1: Cont r i but ed $12, 000

Requi r ed:

Assumi ng t he par t ner shi p has i ncome of $66, 000, det er mi ne t he amount s
t o be al l ocat ed t o each par t ner .

Chapt er 13
13- 18
ANS:

Par t ner s
Cumul at i ve
Amat o Ber gi n Chel sey Tot al
Sal ar y. . . . . . . . . . . . . . $15, 000 $30, 000 - - $45, 000
Bonus. . . . . . . . . . . . . . . 6, 000 - - 51, 000
I nt er est . . . . . . . . . . . . - - - - 3, 700 54, 700
Bal ance. . . . . . . . . . . . . 3, 767 3, 767 3, 766 66, 000
$24, 767 $33, 767 $7, 466
======= ======= ======

Bonus = 10%x ( 66, 000 - Bonus)
Bonus = 6, 000

I nt er est = ( ( [ $54, 000 x 2 mont hs]
+ [ $34, 000 x 4 mont hs]
+ [ $24, 000 x 2 mont h]
+ [ $29, 000 x 1 mont h]
+ [ $41, 000 x 3 mont hs] )
12 mont hs) x 10%

DI F: E OBJ : 7

8. Tur ner , I ke, and Gi bson f or med a par t ner shi p i n 20X2 t hat pr ovi ded f or
each member t o r ecei ve a sal ar y of $20, 000. Gi bson was t o r ecei ve a
bonus of 10%of par t ner shi p i ncome af t er t he bonus. I nt er est on endi ng
capi t al bal ances of 10%was al so used as a component f or al l ocat i ng
pr of i t s t o Tur ner and Gi bson. Any r emai ni ng pr of i t s/ l osses wer e t o be
al l ocat ed 30%, 30%, and 40%f or Tur ner , l i ke, and Gi bson, r espect i vel y.
I n ear l y 20X3, i t was di scover ed t hat t he 20X2 i ncome of $54, 000 was
over st at ed by $22, 000. Tur ner and Gi bson suggest t hat t he er r or be
of f set agai nst t he 20X3 i ncome. I ke ar gued t hat t hey ar e bei ng har med
by t hi s deci si on. Di scuss t he mer i t s of I ke' s posi t i on.

ANS:

The er r or woul d have no ef f ect on t he amount of sal ar i es al l ocat ed t o
t he par t ner s. However , Gi bson' s bonus i n 20X2 i s over st at ed by $2, 000.
( Bonus er r or = 10%/ [ $22, 000 er r or - bonus er r or ] ) . As a r esul t of t hi s
over st at ement , t he def i ci t ( r esul t i ng f or mt he al l ocat i on of sal ar i es,
bonus, and i nt er est ) i s over st at ed and Tur ner and I ke must absor b t hi s
shar e of t hi s over st at ement . Gi bson, however , r ecei ves $2, 000 mor e t han
she shoul d and absor bs onl y $800 ( $2, 000 x 40%) of t he r esul t i ng
def i ci t . The f ai l ur e t o cor r ect t he er r or i n 20X2 wi l l al so unf ai r l y
af f ect t he i nt er est on capi t al f or 20X3. Al t hough t he er r or has no
ef f ect on t he 20X2 capi t al bal ances used, t hese bal ances ar e i n t ot al
over st at ed by $22, 000 at t he end of 20X3. The deci si on t o of f set t he
er r or agai nst 20X3 i ncome ver sus begi nni ng 20X3 capi t al bal ances wi l l
r esul t i n al l ocat i ng an over st at ed amount of i nt er est t o Tur ner and
Gi bson i n 20X3. Fi nal l y, t o t he ext ent t hat dr awi ngs may be r el at ed t o
capi t al bal ances, a t i me val ue of money f act or must be consi der ed.

DI F: E OBJ : 4

Chapt er 13
13- 19
ESSAY

1. Bar nes and Nobl e, bot h l awyer s, have deci ded t o f or ma par t ner shi p.
They have asked your advi ce on how t he pr of i t s and l osses shoul d be
di vi ded and have pr ovi ded you wi t h t he f ol l owi ng i nf or mat i on:

I ni t i al Capi t al Cont r i but i on:
Bar nes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20, 000
Nobl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80, 000
Ti me Devot ed t o Busi ness Oper at i ons:
Bar nes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75%
Nobl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%

Per sonal f act s:
Bar nes has an excel l ent r eput at i on i n t he communi t y and i s ver y wel l
known. Subst ant i al l y al l new cl i ent wi l l come f r omher ef f or t s.

Nobl e has a ver y st r ong t echni cal and oper at i onal backgr ound, and i s an
excel l ent super vi sor of st af f l awyer s who ar e expect ed t o do mor e of
t he l egal r esear ch and i ni t i al pr epar at i on of l egal document at i on.

Requi r ed:

How woul d you advi se t he par t ner s t o shar e i n pr of i t s and l osses?

ANS:

Ther e ar e sever al aspect s of t hi s new par t ner shi p whi ch wi l l gui de how
t he pr of i t and l oss al l ocat i on shoul d be set up. Si nce t he par t ner s
have such di ver se cont r i but i ons t o t he par t ner shi p, a st r i ct or equal
per cent age woul d pr obabl y not be i n t he best i nt er est s of ei t her
par t ner as an al l ocat i on met hod. Si nce bot h par t ner s ar e cont r i but i ng a
consi der abl e amount of t hei r t i me t o t he par t ner shi p, t her e i s
suf f i ci ent r eason t o al l ocat e a por t i on of pr of i t s usi ng a sal ar y
al l ocat i on. I n a l aw f i r m, t he al l ocat i on coul d be a f l at amount based
on est i mat ed val ue of t i me spent , or i t coul d be dependent upon
bi l l abl e hour s. Si nce Nobl e i s pr obabl y goi ng t o spend mor e t i me on
admi ni st r at i ve f unct i ons, ver sus bi l l abl e f unct i ons, a st r ai ght sal ar y
mi ght be mor e l ogi cal . I n addi t i on, si nce Bar nes' mai n pur pose i s t o
br i ng i n t he cl i ent s, some sor t of bonus t o Bar nes woul d seem
appr opr i at e, cor r espondi ng t o new cl i ent r evenue or hour s. Fi nal l y, due
t o t he di spar i t y i n cont r i but ed capi t al , i t woul d pr obabl y be advi sabl e
f or t her e t o be some sor t of i nt er est on capi t al al l ocat i on t o pr ovi de
a r et ur n on Nobl e' s si gni f i cant i nvest ment i nt o t he par t ner shi p.

DI F: M OBJ : 1, 2
Chapter 14 Partnerships: Ownership Changes and Liquidations

MULTIPLE CHOICE

1. Whi ch of t he f ol l owi ng r esul t s i n di ssol ut i on of a par t ner shi p?
a. cont r i but i on of addi t i onal asset s t o t he par t ner shi p by an
exi st i ng par t ner
b. r ecei pt of a dr aw by an exi st i ng par t ner
c. wi ndi ng up of t he par t ner shi p and t he di st r i but i on of r emai ni ng
asset s t o t he par t ner s
d. wi t hdr awal of a par t ner f r oma par t ner shi p


2. Changes i n par t ner shi p owner shi p ar e pr esumed t o be ar m' s l engt h
t r ansact i ons t hat may r equi r e whi ch of t he f ol l owi ng act i ons?
a. r ecogni t i ons of goodwi l l t o exi st i ng par t ner s
b. r eval uat i on of exi st i ng par t ner shi p asset s
c. r ecogni t i on of goodwi l l or ot her i nt angi bl e asset s at t r i but abl e t o
t he i ncomi ng par t ner
d. al l of t he above ar e possi bl e


3. The admi ssi on of a new par t ner under t he bonus met hod wi l l r esul t i n a
bonus t o
a. t he ol d par t ner s onl y.
b. t he new par t ner onl y.
c. ei t her t he new par t ner or t he ol d par t ner s, but not bot h.


4. When a new par t ner i s admi t t ed t o a par t ner shi p under t he goodwi l l
met hod, an or i gi nal par t ner ' s capi t al account may be adj ust ed f or
a. a pr opor t i onat e shar e of t he i ncomi ng par t ner ' s i nvest ment .
b. hi s or her shar e of pr evi ousl y unr ecor ded i nt angi bl e asset s
t r aceabl e t o t he or i gi nal par t ner s.
c. hi s or her shar e of pr evi ousl y unr ecor ded i nt angi bl e asset s
t r aceabl e t o t he i ncomi ng par t ner .


Chapt er 14
14- 2
5. Under t he bonus met hod, when a new par t ner i s admi t t ed t o t he
par t ner shi p, t he t ot al capi t al of t he new par t ner shi p i s equal t o:
a. t he book val ue of t he pr evi ous par t ner shi p + t he f ai r mar ket val ue
of t he consi der at i on pai d t o t he exi st i ng par t ner shi p by t he
i ncomi ng par t ner
b. t he book val ue of t he pr evi ous par t ner shi p + any necessar y asset
wr i t e ups f r ombook val ue t o mar ket val ue + t he f ai r mar ket val ue
of t he consi der at i on pai d t o t he exi st i ng par t ner shi p by t he
i ncomi ng par t ner
c. t he book val ue of t he pr evi ous par t ner shi p - any asset wr i t e downs
f r ombook t o mar ket val ue + t he f ai r mar ket val ue of t he
consi der at i on pai d t o t he exi st i ng par t ner shi p by t he i ncomi ng
par t ner
d. t he f ai r mar ket val ue of t he new par t ner shi p as i mpl i ed by t he
val ue of t he i ncomi ng par t ner ' s consi der at i on i n exchange f or an
owner shi p per cent age i n t he new par t ner shi p


6. I f a bonus i s t r aceabl e t o t he pr evi ous par t ner s r at her t han an
i ncomi ng par t ner , i t i s al l ocat ed among t he par t ner s accor di ng t o t he
a. pr of i t - shar i ng per cent ages of t he pr evi ous par t ner shi p.
b. pr of i t - shar i ng per cent ages of t he new par t ner shi p.
c. capi t al per cent ages of t he pr evi ous par t ner s.
d. capi t al per cent ages of t he new par t ner shi p.


7. Whi ch of t he f ol l owi ng char act er i zes t he bonus met hod, compar ed t o t he
goodwi l l met hod, when unr ecor ded i nt angi bl es ar e t r aceabl e t o t he
pr evi ous par t ner s?
a. The i nt angi bl es ar e act ual l y r ecor ded.
b. The l egal si gni f i cance of a change i n owner shi p st r uct ur e of t he
par t ner shi p i s emphasi zed.
c. Thi s met hod gener al l y pr oduces mor e equi t abl e r esul t s i f t he
f or mer par t ner s do not shar e pr of i t s and l osses i n t he same
r el at i onshi p t o each ot her as t hey di d bef or e a new par t ner was
admi t t ed.
d. The mar ket val ue concept r at her t han t he hi st or i cal cost concept
i s emphasi zed.


8. The f ai r mar ket val ue of a par t ner shi p can be i mpl i ed by
a. addi ng t he i ncomi ng par t ner ' s mar ket val ue of consi der at i on t o t he
book val ue of t he exi st i ng par t ner shi p.
b. t he t ax basi s of t he ol d par t ner ' s asset s added t o t he i ncomi ng
par t ner ' s consi der at i on.
c. The i ncomi ng par t ner ' s mar ket val ue of consi der at i on di vi ded by
t he i ncomi ng par t ner ' s per cent age shar e i n pr of i t and l oss.
d. The i ncomi ng par t ner ' s mar ket val ue of consi der at i on di vi ded by
t he i ncomi ng par t ner ' s per cent age owner shi p shar e i n t he new
par t ner shi p.

Chapt er 14
14- 3

Chapt er 14
14- 4
9. I f goodwi l l i s t r aceabl e t o t he pr evi ous par t ner s, i t i s
a. al l ocat ed among t he pr evi ous par t ner s accor di ng t o t hei r i nt er est
i n capi t al .
b. al l ocat ed among t he pr evi ous par t ner s onl y i f t her e ar e no ot her
asset s t o be r eval ued.
c. al l ocat ed among t he pr evi ous par t ner s accor di ng t o t hei r or i gi nal
pr of i t - and- l oss- shar i ng per cent ages.
d. not possi bl e f or goodwi l l t o al so be t r aceabl e t o t he i ncomi ng
par t ner .


10. I f goodwi l l i s t r aceabl e onl y t o t he pr evi ous par t ner s,
a. t he book val ue of t he pr evi ous par t ner shi p pl us t he i nvest ment of
t he i ncomi ng par t ner wi l l be gr eat er t han t he f ai r mar ket val ue of
t he par t ner shi p as suggest ed by t he i ncomi ng par t ner ' s i nvest ment .
b. t he new par t ner ' s i ni t i al capi t al bal ance i s equal t o hi s or her
i nvest ment i n t he par t ner shi p.
c. exi st i ng asset s of t he pr evi ous par t ner shi p wi l l never be
r eval ued.


11. I f goodwi l l i s t r aceabl e t o t he i ncomi ng par t ner , t he new par t ner ' s
capi t al bal ance equal s
a. t he f ai r mar ket val ue of consi der at i on pai d by t he i ncomi ng
par t ner
b. t he book val ue of t he ol der par t ner shi p di vi ded by t he exi st i ng
par t ner s' owner shi p per cent age i n t he new par t ner shi p mi nus t he
book val ue of t he ol d par t ner shi p.
c. i ncomi ng par t ner ' s owner shi p per cent age mul t i pl i ed by t he capi t al
of t he new par t ner shi p


12. Pal i t buys Qui ncy' s par t ner shi p i nt er est i n t he Q- R- S par t ner shi p.
Qui ncy t hus r et i r es, l eavi ng Real e and Susi en as Pal i t ' s co- par t ner s.
Pr i or t o Pal i t ent er i ng t he par t ner shi p, Qui ncy, Real e, and Susi en
spl i t pr of i t s and l osses equal l y. Pal i t pays $75, 000 f or Qui ncy' s
capi t al whi ch, at t he t i me, t ot al ed $60, 000. No r eval uat i on of
par t ner shi p asset s or l i abi l i t i es occur s at t he t i me. I n r ecor di ng t hi s
event on t he par t ner shi p books
a. Goodwi l l i s booked based on t he book val ue/ f ai r val ue di f f er ence.
b. $7, 500 bonuses ar e added t o Real e and Susi en capi t al .
c. $5, 000 bonuses ar e added t o Qui ncy, Real , and Susi en capi t al .
d. Pal i t capi t al i s cr eat ed i n t he amount of $60, 000.


Chapt er 14
14- 5
13. I f an exi st i ng par t ner wi t hdr aws f r oma par t ner shi p,
a. hi s or her i nt er est may be sol d t o t he par t ner shi p or an
i ndi vi dual par t ner .
b. t he consi der at i on r ecei ved f or t hat par t ner ' s i nt er est may suggest
t he exi st ence of under val ued exi st i ng asset s and/ or goodwi l l .
c. ei t her t he bonus or t he goodwi l l met hod may be used t o r ecor d t he
t r ansact i on i f t he par t ner shi p acqui r es t he wi t hdr awi ng par t ner ' s
i nt er est .
d. al l of t he above.


14. I f goodwi l l i s suggest ed by t he consi der at i on pai d t o a wi t hdr awi ng
par t ner ,
a. onl y t he goodwi l l t r aceabl e t o t he wi t hdr awi ng par t ner may be
r ecor ded.
b. goodwi l l t r aceabl e t o t he or i gi nal par t ner shi p i s al l ocat ed among
t he par t ner s accor di ng t o t hei r r espect i ve i nt er est s i n capi t al .
c. t he goodwi l l t r aceabl e t o t he wi t hdr awi ng par t ner r epr esent s t he
di f f er ence bet ween t he par t ner ' s capi t al bal ance and t he
consi der at i on he or she r ecei ves.


15. Cal l i e i s admi t t ed t o t he Adams & Beal Par t ner shi p under t he bonus
met hod. Cal l i e cont r i but es cash of $20, 000 and noncash asset s wi t h a
mar ket val ue of $30, 000 and book val ue of $15, 000 i n exchange f or a 20%
owner shi p i nt er est i n t he new par t ner shi p. Pr i or t o t he admi ssi on of
Cal l i e, t he capi t al of t he exi st i ng par t ner shi p was $130, 000 and an
appr ai sal showed t he par t ner shi p net asset s wer e f ai r l y st at ed.

What wi l l be Cal l i e s i ni t i al capi t al bal ance?
a. $36, 000
b. $50, 000
c. $35, 000
d. $30, 000

ANS: A
New Par t ner shi p Capi t al = 130, 000 + 50, 000 = 180, 000
Cal l i e Capi t al = 20%x 180, 000

DI F: D OBJ : 2

Chapt er 14
14- 6
16. Cal l i e i s admi t t ed t o t he Adams & Beal Par t ner shi p under t he bonus
met hod. Cal l i e cont r i but es cash of $20, 000 and noncash asset s wi t h a
mar ket val ue of $30, 000 and book val ue of $15, 000 i n exchange f or a 20%
owner shi p i nt er est i n t he new par t ner shi p. Pr i or t o t he admi ssi on of
Cal l i e, t he capi t al of t he exi st i ng par t ner shi p was $130, 000 and an
appr ai sal showed t he par t ner shi p net asset s wer e f ai r l y st at ed. Adams &
Beal shar ed pr of i t s and l osses at a r at i o of 80/ 20, r espect i vel y.

Whi ch of t he f ol l owi ng bonus amount s woul d be r ecor ded?
a. $14, 000 t o Cal l i e capi t al
b. $2, 800 i ncr ease t o Beal capi t al
c. $2, 800 decr ease t o Beal capi t al
d. $7, 000 i ncr ease t o Adams capi t al

ANS: B
New Par t ner shi p Capi t al = 130, 000 + 50, 000 = $180, 000
Cal l i e Capi t al = 20%x 180, 000 = 36, 000
Bonus = 50, 000 - 36, 000 = 14, 000; 80%i ncr ease t o Adams capi t al ; 20%
i ncr ease t o Beal capi t al

DI F: D OBJ : 2

17. Assume t he exi st i ng capi t al of a par t ner shi p i s $100, 000. Two par t ner s
cur r ent l y own t he par t ner shi p and spl i t pr of i t s 40/ 60. A new par t ner i s
t o be admi t t ed and wi l l cont r i but e net asset s wi t h a f ai r val ue of
$50, 000. An appr ai sal of exi st i ng par t ner shi p asset s i ndi cat es account s
r ecei vabl e over st at ed by $10, 000, i nvent or y over st at ed by $12, 000 and
l and under st at ed by $25, 000. What i s t he t ot al capi t al of t he new
par t ner shi p i f t he bonus met hod i s bei ng used?
a. $153, 000
b. $128, 000
c. $175, 000
d. $150, 000


18. Assume t hat t he capi t al of an exi st i ng par t ner shi p i s $90, 000 and al l
exi st i ng asset s r ef l ect f ai r mar ket val ues. I f an i ncomi ng par t ner
acqui r es a 40%i nt er est i n t he par t ner shi p f or $55, 000, t he goodwi l l
t r aceabl e t o t he i ncomi ng par t ner i s
a. $15, 000
b. $5, 000
c. $3, 000
d. $2, 000


19. Assume t hat t he capi t al of an exi st i ng par t ner shi p i s $130, 000 and t hat
exi st i ng asset s ar e over val ued by $10, 000. I f an i ncomi ng par t ner
acqui r es a 25%i nt er est i n t he par t ner shi p f or $37, 000, goodwi l l
t r aceabl e t o t he i ncomi ng par t ner i s __________.
a. $1, 000
b. $9, 667
c. $3, 000
d. $5, 000

Chapt er 14
14- 7


20. The f ol l owi ng i s t he pr i or i t y sequence i n whi ch l i qui dat i on pr oceeds
wi l l be di st r i but ed f or a par t ner shi p:
a. par t ner shi p dr awi ngs, par t ner shi p l i abi l i t i es, par t ner shi p l oans,
par t ner shi p capi t al bal ances.
b. par t ner shi p l i abi l i t i es, par t ner shi p l oans, par t ner shi p capi t al
bal ances.
c. par t ner shi p l i abi l i t i es, par t ner shi p l oans, par t ner shi p dr awi ngs,
par t ner shi p capi t al bal ances.
d. par t ner shi p l i abi l i t i es, par t ner shi p capi t al bal ances, par t ner shi p
l oans.


21. Whi ch of t he f ol l owi ng st at ement s i s cor r ect r egar di ng a par t ner ' s
debi t capi t al bal ances?
a. The par t ner shoul d make cont r i but i ons t o r educe t he debi t bal ance
t o what ever ext ent possi bl e.
b. I f cont r i but i ons ar e not possi bl e, t he ot her par t ner s wi t h cr edi t
capi t al bal ances wi l l be al l ocat ed a por t i on of t he debi t bal ance
based on t hei r pr opor t i onat e pr of i t - and- l oss- shar i ng per cent ages.
c. Par t ner s who absor b anot her ' s debi t capi t al bal ance have a l egal
cl ai magai nst t he def i ci ent par t ner .
d. Al l of t hese st at ement s ar e cor r ect .


22. The doct r i ne of mar shal i ng of asset s
a. i s appl i cabl e onl y i f t he par t ner shi p i s i nsol vent .
b. al l ows par t ner s t o f i r st cont r i but e per sonal asset s t o unsat i sf i ed
par t ner shi p cr edi t or s.
c. i s appl i cabl e i f ei t her t he par t ner shi p i s i nsol vent or i ndi vi dual
par t ner s ar e i nsol vent .
d. pr ovi des t hat when t he Uni f or mPar t ner shi p Act i s adopt ed, amount s
owed t o per sonal cr edi t or s and t o t he par t ner shi p f or debi t
capi t al bal ances ar e shar ed pr opor t i onat el y f r omt he per sonal
asset s of t he par t ner s.


23. I f a par t ner shi p has onl y noncash asset s, al l l i abi l i t i es have been
pr oper l y di sbur sed, and no addi t i onal l i qui dat i on expenses ar e
expect ed, t he maxi mumpot ent i al l oss t o t he par t ner shi p i n t he
l i qui dat i on pr ocess i s:
a. t he f ai r mar ket val ue of t he noncash asset s
b. t he book val ue of t he noncash asset s
c. t he est i mat ed pr oceeds f r omt he sal e of t he asset s l ess t he book
val ue of t he noncash asset s


Chapt er 14
14- 8
24. Al l en, Br anden & Cayl i n ar e i n t he pr ocess of l i qui dat i ng t hei r
par t ner shi p. They have t he f ol l owi ng capi t al bal ances and pr of i t and
l oss per cent ages:
Capi t al Bal ance Pr of i t / Loss %
Al l en 5, 000 debi t 20%
Br anden 18, 000 cr edi t 50%
Cayl i n 6, 000 cr edi t 30%

The par t ner shi p bal ance sheet shows cash of $5, 000, noncash asset s of
$14, 000, and no l i abi l i t i es. Assumi ng no l i qui dat i on expenses, what
saf e payment coul d be made?
a. $5, 000 spl i t bet ween Br anden & Cayl i n by a r at i o of 5/ 8 and 3/ 8,
r espect i vel y.
b. $5, 000 t o Br anden onl y
c. $1, 000 t o Al l en, $2, 500 t o Br anden, and $1, 500 t o Cayl i n
d. $18, 000 t o Br anden onl y


25. A par t ner ' s maxi muml oss absor babl e i s cal cul at ed by
a. di vi di ng t he par t ner ' s capi t al bal ance by hi s or her pr of i t - and-
l oss- shar i ng per cent age.
b. mul t i pl yi ng t he par t ner ' s capi t al bal ance by hi s or her pr of i t -
and- l oss- shar i ng per cent age.
c. mul t i pl yi ng di st r i but abl e asset s by t he par t ner ' s pr of i t - shar i ng
per cent age.
d. di vi di ng t he par t ner ' s capi t al bal ance by hi s or her per cent age
i nt er est i n capi t al .


26. Under t he doct r i ne of mar shal i ng of asset s, unsat i sf i ed par t ner shi p
cr edi t or s
a. must f i r st pr oceed agai nst t he par t ner wi t h t he l ar gest capi t al
bal ance.
b. may at t ach t o t he asset s of an i ndi vi dual par t ner bef or e
i ndi vi dual cr edi t or s have been sat i sf i ed.
c. may pr oceed agai nst any per sonal l y sol vent par t ner .
d. may pr oceed agai nst any per sonal l y sol vent par t ner but onl y t o t he
ext ent of t hei r capi t al bal ance i n t he par t ner shi p.


27. Par t ner T i s per sonal l y i nsol vent , owi ng $400, 000. Per sonal asset s wi l l
onl y br i ng $150, 000 when l i qui dat ed. At t he same t i me, T has a cr edi t
capi t al bal ance i n t he par t ner shi p of $85, 000. The capi t al amount s of
t he ot her par t ner s t ot al a ( cr edi t ) bal ance of $200, 000. Under t he
doct r i ne of mar shal i ng of asset s, t he per sonal cr edi t or s of T can
col l ect up t o __________.
a. $150, 000
b. $235, 000
c. $400, 000
d. $435, 000

Chapt er 14
14- 9

28. Par t ner s Thomas, Adams and J ones have capi t al bal ances of $24, 000,
$45, 000, and $90, 000 r espect i vel y. They spl i t pr of i t s i n t he r at i o of
3: 3: 4, r espect i vel y. Under a pr edi st r i but i on pl an, one of t he par t ner s
wi l l get t he f ol l owi ng t ot al amount i n l i qui dat i on bef or e any ot her
par t ner s get anyt hi ng:
a. $22, 500
b. $30, 000
c. $40, 000
d. $75, 000


29. Assume t hat a par t ner shi p had asset s wi t h a book val ue of $240, 000 and
a mar ket val ue of $195, 000, out si de l i abi l i t i es of $70, 000, l oans
payabl e t o par t ner Abl e of $20, 000, and capi t al bal ances f or par t ner s
Abl e, Baker , and Chapman of $70, 000, $30, 000, and $50, 000. How much
woul d Abl e r ecei ve upon l i qui dat i on of t he par t ner shi p assumi ng pr of i t s
and l osses ar e al l ocat ed equal l y?
a. $70, 000
b. $90, 000
c. $75, 000
d. $55, 000


Abl e, Baker , and Chapman of $70, 000, $30, 000, and $50, 000. How woul d
t he f i r st $100, 000 of avai l abl e asset s be di st r i but ed assumi ng pr of i t s
and l osses ar e al l ocat ed equal l y?
a. $70, 000 t o out si de l i abi l i t i es, $20, 000 t o Abl e, and t he bal ance
equal l y among t he par t ner s
b. $70, 000 t o out si de l i abi l i t i es and $30, 000 t o Abl e
c. $70, 000 t o out si de l i abi l i t i es, $25, 000 t o Abl e, and $5, 000 t o
Chapman
d. $40, 000 t o Abl e, $20, 000 t o Chapman, and t he bal ance equal l y among
t he par t ner s


Abl e, Baker , and Chapman of $70, 000, $30, 000, and $50, 000. I f al l
out si de cr edi t or s and l oans t o par t ner s had been pai d, how woul d t he
bal ance of t he asset s be di st r i but ed assumi ng t hat Chapman had al r eady
r ecei ved asset s wi t h a val ue of $30, 000 assumi ng pr of i t s and l osses ar e
al l ocat ed equal l y?
a. Each of t he par t ner s woul d r ecei ve $25, 000.
b. Each of t he par t ner s woul d r ecei ve $40, 000.
c. Abl e: $70, 000, Baker : $30, 000, Chapman: $20, 000
d. Abl e: $55, 000, Baker : $15, 000, Chapman: $5, 000

Chapt er 14
14- 10

32. Par t ner s Abl e, Baker , and Chapman have t he f ol l owi ng per sonal asset s,
per sonal l i abi l i t i es, and par t ner shi p capi t al bal ances:

Abl e Baker Chapman
Per sonal asset s. . . . . . . . . $30, 000 $ 80, 000 $60, 000
Per sonal l i abi l i t i es. . . . 25, 000 50, 000 72, 000
Capi t al bal ances. . . . . . . . 50, 000 ( 32, 000) 70, 000

Assume pr of i t s and l osses ar e al l ocat ed equal l y.

Af t er appl yi ng t he doct r i ne of mar shal i ng of asset s, t he capi t al
bal ances f or Abl e, Baker , and Chapman, r espect i vel y, woul d be
a. $50, 000, $( 2, 000) , and $58, 000.
b. $48, 000, 0, and $58, 000.
c. $49, 000, 0, and $57, 000.
d. $34, 000, 0, and $54, 000.


33. Par t ner s Dal t on, Edwar ds, and Fi nl ey have capi t al bal ances of $40, 000,
90, 000 and $30, 000, r espect i vel y, i mmedi at el y pr i or t o l i qui dat i on.
Tot al r emai ni ng asset s have a book val ue of $160, 000, t he l i abi l i t i es
havi ng been pai d. Among t hese r emai ni ng asset s i s a machi ne wi t h a f ai r
val ue of $35, 000. The par t ner s spl i t pr of i t s and l osses equal l y.
Edwar ds covet s t he machi ne and i s wi l l i ng t o accept i t f or $35, 000 i n
l i eu of cash. The ot her par t ner s have no desi gns on speci f i c asset s,
onl y cash i n l i qui dat i on. How much cash, i n addi t i on t o t he machi ne,
woul d be f i r st di st r i but ed t o Edwar ds, bef or e any of t he ot her par t ner s
r ecei ved anyt hi ng?
a. $15, 000
b. $50, 000
c. $166, 667
d. $300, 000


PROBLEM

1. Lee, Al ver ez, and Tyne have a par t ner shi p. Thei r capi t al bal ances ar e
$50, 000, $70, 000 and $30, 000, r espect i vel y. The par t ner pr of i t
per cent ages ar e 30%, 40%, and 30%, r espect i vel y. They ar e consi der i ng
on what basi s t o admi t Pat t on, a pr ospect i ve new par t ner . Based on
appr ai sal anal ysi s, t he net asset s of t he par t ner shi p ar e wor t h
$180, 000. Pat t on i s wi l l i ng t o put up cash of $30, 000, pl us a machi ne
wi t h book val ue of $12, 000 and a f ai r val ue of $20, 000.

Requi r ed:

Chapt er 14
14- 11
Cal cul at e, usi ng t he goodwi l l met hod, what t he par t ner shi p bal ances
wi l l be i f t he exi st i ng par t ner s r ecogni ze t he di f f er ent i al bet ween
f ai r val ue and book val ue of t he par t ner shi p' s net asset s as goodwi l l .
What wi l l Pat t on' s per cent age of par t ner shi p capi t al be, assumi ng t he
above deal goes t hr ough?

Chapt er 14
14- 12
ANS:

Capi t al Bal ances:
Lee Al ver ez Tyne Pat t on Tot al
Pr i or Capi t al $50, 000 $70, 000 $30, 000 $150, 000
Goodwi l l 9, 000 12, 000 9, 000 30, 000
Resul t i ng Amount s 59, 000 82, 000 39, 000 0 $180, 000
New I nvest ment 50, 000 50, 000
Bal ances $59, 000 $82, 000 $39, 000 $50, 000 $230, 000
======= ======= ======= ======= ========

Pat t on' s i nt er est i n par t ner shi p capi t al :

50, 000
- - - - - - - - x 100%= 21. 74%
230, 000 =====

DI F: E OBJ : 3

2. Smi t h, Thompson and Ni ckel s have a par t ner shi p. Thei r capi t al bal ances
ar e $90, 000, $130, 000 and $150, 000, r espect i vel y. They shar e pr of i t s
and l osses 25%, 35%and 40%, r espect i vel y. Fost er want s t o become a
par t ner wi t h a 10 per cent shar e i n par t ner shi p capi t al wi t h a $60, 000
cash cont r i but i on t o t he par t ner shi p. Appr ai sal of t he par t ner shi p
r eveal s t hat t he asset s of t he par t ner shi p ar e f ai r l y val ued.

Requi r ed:

Cal cul at e Smi t h, Thompson, and Ni ckel ' s endi ng capi t al bal ances under
t he:
a. Bonus Met hod
b. Goodwi l l Met hod

ANS:

a.
Pr i or Capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $370, 000
Fost er Cont r i but i on. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Book Val ue - New Par t ner shi p. . . . . . . . . . . . . . . . . . . . . . $430, 000

Fost er ' s Capi t al = 10%x 430, 000 = 43, 000
Bonus = 60, 000 - 43, 000 = 17, 000
Bonus i s spl i t 25%t o Smi t h = $4, 250
35%t o Thompson = $5, 950
40%t o Ni ckel s = $6, 800

Smi t h Thompson Ni ckel Fost er Tot al
Pr i or Capi t al $90, 000 $130, 000 $150, 000 $370, 000
Fost er ' s capi t al $43, 000 $ 43, 000
Bonus t o ol d par t ner s 4, 250 5, 950 6, 800 $ 17, 000

Endi ng Capi t al $94, 250 $135, 950 $156, 800 $43, 000 $430, 000
========

Chapt er 14
14- 13
b. I mpl i ed Fai r Mar ket Val ue- New Par t ner shi p: $ 60, 000 = $600, 000
10%
Book Val ue of New Par t ner shi p = $370, 000 + 60, 000 = $430, 000
Goodwi l l = $600, 000 - $430, 000 = 170, 000
Goodwi l l i s spl i t 25%t o Smi t h = $42, 500
35%t o Thompson = $59, 500
40%t o Ni ckel s = $68, 000

Smi t h Thompson Ni ckel Fost er Tot al
Pr i or Capi t al $ 90, 000 $130, 000 $150, 000 $370, 000
Fost er ' s capi t al $60, 000 $ 60, 000
Goodwi l l - ol d par t ner s 42, 500 59, 500 68, 000 $170, 000

Endi ng Capi t al $132, 500 $189, 500 $218, 000 $60, 000 $600, 000
========

DI F: M OBJ : 2, 3

3. Wr i ght , Smi t h, and Young ar e par t ner s wi t h pr esent capi t al bal ances of
$60, 000, $35, 000, and $30, 000, r espect i vel y. The par t ner s shar e pr of i t s
and l osses accor di ng t o t he f ol l owi ng per cent ages: 40%f or Wr i ght , 30%
f or Smi t h, and 30%f or Young. Locke i s t o j oi n t he par t ner shi p upon
cont r i but i ng $40, 000 t o t he par t ner shi p i n exchange f or a 20%i nt er est
i n capi t al and a 20%i nt er est i n pr of i t s and l osses. The exi st i ng
asset s of t he or i gi nal par t ner shi p ar e under val ued by $20, 000. The
or i gi nal par t ner s wi l l shar e t he bal ance of pr of i t s and l osses i n
pr opor t i on t o t hei r or i gi nal per cent ages.

Requi r ed:

Cal cul at e t he capi t al bal ances f or each i ndi vi dual i n t he new
par t ner shi p, assumi ng use of t he bonus and goodwi l l met hods.

Chapt er 14
14- 14
ANS:

Bonus met hod:
Wr i ght Smi t h Young Locke
Or i gi nal capi t al bal ance. . . . . $60, 000 $35, 000 $30, 000
I nvest ment of new par t ner :
Bonus*. . . . . . . . . . . . . . . . . . . . . 2, 800 2, 100 2, 100
Capi t al bal ance*. . . . . . . . . . . $33, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . $62, 800 $37, 100 $32, 100 $33, 000
======= ======= ======= =======

* ( $60, 000 + $35, 000 + $30, 000 + $40, 000) x 20%= $33, 000
$40, 000 - $33, 000 = $7, 000 bonus
( $7, 000 x 40%= $2, 800; $7, 000 x 30%= $2, 100)

Goodwi l l met hod:

Or i gi nal capi t al bal ance. . . . . $60, 000 $35, 000 $30, 000
Asset r eval uat i on. . . . . . . . . . . . 8, 000 6, 000 6, 000
Goodwi l l **. . . . . . . . . . . . . . . . . . . 6, 000 4, 500 4, 500
I nvest ment of new par t ner . . . . $40, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . $74, 000 $45, 500 $40, 500 $40, 000
======= ======= ======= =======

** $40, 000 20%= $200, 000;
$200, 000 - ( $60, 000 + $35, 000 + $30, 000 + $20, 000 + $40, 000) = $15, 000
goodwi l l

DI F: M OBJ : 2, 3

4. Mar t el , Tusk, and Davi s ar e par t ner s wi t h pr esent capi t al bal ances of
and l osses accor di ng t o t he f ol l owi ng per cent ages: 60%f or Mar t el , 30%
f or Tusk, and 10%f or Davi s. Fr ank i s t o j oi n t he par t ner shi p upon
cont r i but i ng $40, 000 t o t he par t ner shi p i n exchange f or a 25%i nt er est
i n capi t al and a 20%i nt er est i n pr of i t s and l osses. An appr ai sal of
t he exi st i ng par t ner shi ps' asset s r eveal s t he f ol l owi ng:

Account s Recei vabl e $20, 000 over val ued
I nvent or y $10, 000 over val ued
Land $10, 000 under val ued
Bui l di ng $15, 000 under val ued

Requi r ed:

par t ner shi p assumi ng use of t he bonus and goodwi l l met hods.

Chapt er 14
14- 15
ANS:

Bonus met hod:
Mar t el Tusk Davi s Fr ank
Or i gi nal capi t al bal ance. . . . . $ 40, 000 $50, 000 $20, 000
Asset r eval uat i on. . . . . . . . . . . . ( 18, 000) ( 9, 000) ( 3, 000)
I nvest ment of new par t ner :
Bonus*. . . . . . . . . . . . . . . . . . . . . 6, 000 3, 000 1, 000
Capi t al bal ance*. . . . . . . . . . . $30, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . $ 28, 000 $44, 000 $18, 000 $30, 000
======== ======= ======= =======

* New Par t ner shi p Capi t al : Capi t al - Ol d Par t ner shi p $110, 000
Asset Wr i t edown ( 30, 000)
Fr ank Consi der at i on 40, 000
Capi t al - New Par t ner shi p $120, 000

Fr ank' s Capi t al = 25%* 120, 000 = 30, 000
Bonus = 40, 000 - 30, 000 = 10, 000

Goodwi l l met hod:

Or i gi nal capi t al bal ance. . . . . $ 40, 000 $50, 000 $20, 000
Asset Wr i t e Down. . . . . . . . . . . . . ( 18, 000) ( 9, 000) ( 3, 000)
Asset Wr i t e Up. . . . . . . . . . . . . . . 15, 000 7, 500 2, 500
Goodwi l l **. . . . . . . . . . . . . . . . . . . 9, 000 4, 500 1, 500
I nvest ment of new par t ner . . . . $40, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . $ 46, 000 $53, 000 $21, 000 $40, 000
======== ======= ======= =======

** $40, 000 25%= $160, 000;
$160, 000 - ( $110, 000 - $30, 000 + $25, 000 + 40, 000) = $15, 000 goodwi l l

DI F: D OBJ : 2, 3

5. Long- t er mpar t ner s, Pop, Pi ng, and Pamhave capi t al bal ances of
$60, 000, $45, 000 and $30, 000, r espect i vel y. They shar e i n pr of i t s and
l osses 50%/ 30%/ 20%, r espect i vel y. Al l asset s ar e val ued f ai r l y. Pam
deci des t o r et i r e f r omt he par t ner shi p. Cal cul at e t he r emai ni ng
par t ner s' capi t al bal ances af t er t he Pamwi t hdr awal under t he f ol l owi ng
si t uat i ons:

a. Pamsel l s t he i nt er est t o Pi ng f or $25, 000.
b. Pamsel l s t he i nt er est t o t he par t ner shi p f or $25, 000; bonus
met hod i s used
c. Pamsel l s t he i nt er est t o t he par t ner shi p f or $40, 000; goodwi l l
at t r i but abl e onl y t o t he exi t i ng par t ner i s r ecor ded

Chapt er 14
14- 16
ANS:

a. Capi t al Bal ances: Tot al Pop Pi ng Pam
Bef or e r et i r ement : $135, 000 $60, 000 $45, 000 $ 30, 000
PamWi t hdr aws: _______ 30, 000 ( 30, 000)
Af t er Ret i r ement : $135, 000 $60, 000 $75, 000 $ 0
======== ======= ======= ========

b. Capi t al Bal ances: Tot al Pop Pi ng Pam
PamWi t hdr aws: ( 25, 000) 3, 125 1, 875 ( 30, 000)
======== ======= ======= ========

Pr i ce pai d t o Pam= $25, 000
PamCapi t al = $30, 000
Bonus t o Pop/ Pi ng = $5, 000; spl i t on r emai ni ng pr of i t and l oss of 5/ 8
and 3/ 8, r espect i vel y.

c. Capi t al Bal ances: Tot al Pop Pi ng Pam
Pam' s shar e GW: 10, 000 10, 000
PamWi t hdr aws: ( 40, 000) ________ ( 40, 000)
======== ======= ======= ========

Pr i ce pai d t o Pam= $40, 000
PamCapi t al = $30, 000
Pam' s shar e of Goodwi l l = $10, 000

DI F: M OBJ : 2, 3, 6

6. Oak, Pi ne, and Mapl e ar e par t ner s wi t h pr esent capi t al bal ances of
and l osses accor di ng t o t he f ol l owi ng per cent ages: 20%f or Oak, 20%f or
Pi ne, and 60%f or Mapl e. The exi st i ng asset s of t he or i gi nal
par t ner shi p have mar ket val ues equal t o book val ues except f or t he
f ol l owi ng:

Account s Recei vabl e: over val ued by $10, 000
Land: under val ued by $30, 000.

Pi ne has agr eed t o sel l her i nt er est t o t he par t ner shi p f or $45, 000.

Requi r ed:

par t ner shi p, assumi ng use of t he bonus and goodwi l l met hods. The
goodwi l l met hod shoul d r ecogni ze t he goodwi l l t r aceabl e t o al l
par t ner s.

Chapt er 14
14- 17
ANS:

Bonus met hod:
Tot al Oak Pi ne Mapl e
Or i gi nal capi t al bal ance. . . . . . . . $171, 000 $42, 000 $ 39, 000 $90, 000
Asset r eval uat i on. . . . . . . . . . . . . . . ( 10, 000) ( 2, 000) ( 2, 000) ( 6, 000)
Di st r i but i on
t o wi t hdr awi ng par t ner :
Bonus*. . . . . . . . . . . . . . . . . . . . . . . . ( 8, 000) ( 2, 000) ( 6, 000)
Capi t al bal ance*. . . . . . . . . . . . . . ( 37, 000) ( 37, 000)
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . $116, 000 $38, 000 $ 0 $78, 000
======== ======= ======== =======

* Pr i ce Pai d t o Pi ne = $45, 000
Pi ne' s Adj ust ed Capi t al = $37, 000
( af t er asset r eval uat i on)
Bonus = $( 8, 000)
Spl i t t o Oak and Mapl e on r emai ni ng pr of i t and l oss r at i os of 2/ 8 and
6/ 8, r espect i vel y

Goodwi l l met hod:

Tot al Oak Pi ne Mapl e
Or i gi nal capi t al bal ance. . . . . . . . $171, 000 $42, 000 $ 39, 000 $ 90, 000
Asset r eval uat i on. . . . . . . . . . . . . . . ( 10, 000) ( 2, 000) ( 2, 000) ( 6, 000)
Asset r eval uat i on. . . . . . . . . . . . . . . 30, 000 6, 000 6, 000 18, 000
Di st r i but i on
t o wi t hdr awi ng par t ner :
Goodwi l l *. . . . . . . . . . . . . . . . . . . . . 10, 000 2, 000 2, 000 6, 000
Capi t al bal ance*. . . . . . . . . . . . . . ( 45, 000) ( 45, 000)
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . $156, 000 $48, 000 $ 0 $108, 000
======== ======= ======== ========

* Pr i ce Pai d t o Pi ne = $45, 000
Pi ne' s Adj ust ed Capi t al = $43, 000
( af t er asset r eval uat i on)
Pi ne' s shar e of Goodwi l l = $2, 000
Tot al Goodwi l l i mpl i ed = $10, 000 ( $2, 000 / 20%)

DI F: D OBJ : 2, 3, 6

7. The par t ner shi p of Abl e, Bower , and Cr amer was l i qui dat ed. The par t ner s
have shar ed pr of i t s and l osses i n t he r at i o of 2: 4: 4. Pr i or t o
l i qui dat i on, t hei r capi t al bal ances wer e t he f ol l owi ng*:

Abl e Bower Cr amer
$10, 000 $( 5, 000) $( 15, 000)

* Def i ci t shown i n par ent heses

Cash t ot al ed $20, 000, wi t h l i abi l i t i es amount i ng t o $30, 000. A r evi ew
of t he i ndi vi dual par t ner s' per sonal f i nanci al st at us r eveal s t he
f ol l owi ng:
Asset s Li abi l i t i es
Abl e $ 5, 000 $20, 000
Baker 6, 000 4, 000
Cr amer 30, 000 20, 000

Chapt er 14
14- 18
Requi r ed:

Pr epar e a wor ksheet t o l i qui dat e t he par t ner shi p.

ANS:

Cash Li abs Abl e Bower Cr amer
Begi nni ng: $ 20, 000 $( 30, 000) $( 10, 000) $ 5, 000 $ 15, 000
Payment of l i abs: ( 20, 000) 20, 000
$ 0 $( 10, 000) $( 10, 000) $ 5, 000 $ 15, 000
Cr amer / Baker pay i n
Fr omper sonal wor t h
t o cover
def i ci t bal ances: 12, 000 ( 2, 000) ( 10, 000)
$ 12, 000 $( 10, 000) $( 10, 000) $ 3, 000 $ 5, 000
Payment of l i abs: ( 10, 000) 10, 000
$ 2, 000 $ 0 $( 10, 000) $ 3, 000 $ 5, 000
Al l ocat i on of
Def i ci t bal ances: 8, 000 ( 3, 000) ( 5, 000)
$ 2, 000 $ 0 $ ( 2, 000) $ 0 $ 0
Abl e pai d: ( 2, 000) 2, 000
$ 0 $ 0 $ 0 $ 0 $ 0
======== ======== ======== ======= ========

DI F: M OBJ : 7, 9

8. Mer z, Decht er , and Fl ower s ar e par t ner s i n a par t ner shi p and shar e
pr of i t s and l osses 40%, 40%, and 20%, r espect i vel y. The par t ner s have
agr eed t o l i qui dat e t he par t ner shi p and ant i ci pat e t hat l i qui dat i on
expenses wi l l t ot al $14, 000. Pr i or t o t he l i qui dat i on, t he par t ner shi p
bal ance sheet r ef l ect s t he f ol l owi ng book val ues:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25, 000
Noncash asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Not e payabl e t o Fl ower s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 000
Ot her l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165, 000
Capi t al , Mer z. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000
Capi t al Decht er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 000
Capi t al def i ci t , Fl ower s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 10, 000)

Requi r ed:

Assumi ng t hat t he act ual l i qui dat i on expenses ar e $20, 000 and t hat
noncash asset s ar e sol d f or $160, 000, det er mi ne how t he asset s wi l l be
di st r i but ed. Fl ower s has net per sonal asset s of $10, 000.

ANS:


DI F: D OBJ : 7, 8, 9

Chapt er 14
14- 19
9. The Ni ce, Ri ce, and Di ce Par t ner shi p has not been successf ul . The
par t ner s have det er mi ned t hey must l i qui dat e t hei r par t ner shi p. The
par t ner s have agr eed t o l i qui dat e t he par t ner shi p and ant i ci pat e t hat
l i qui dat i on expenses wi l l t ot al $1, 000. Pr i or t o t he l i qui dat i on, t he
par t ner shi p bal ance sheet r ef l ect s t he f ol l owi ng book val ues:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18, 000
Noncash asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 000
Not e r ecei vabl e- Ni ce. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 000
Ot her l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Capi t al , Ni ce. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Capi t al , Ri ce. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
Capi t al , Di ce. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 000

Pr of i t s and l osses ar e shar ed 45%t o Ni ce, 35%t o Ri ce, and 20%t o
Di ce. A r evi ew of t he i ndi vi dual par t ner ' s per sonal net wor t h r eveal s
t he f ol l owi ng:

Ni ce 165, 000 162, 000
Ri ce 200, 000 110, 000
Di ce 185, 000 90, 000

The f ol l owi ng t r ansact i ons occur :
a. Asset s havi ng a book val ue of $40, 000 ar e sol d f or $22, 000 cash
b. Li abi l i t i es ar e pai d, wher e possi bl e
c. Par t ner s cont r i but e f r omt hei r per sonal net wor t h, accor di ng t o
UPA r equi r ement s and Mar shal i ng of Asset s concept s

Requi r ed:

Pr epar e l i qui dat i on schedul e and det er mi ne how t he avai l abl e asset s
wi l l be di st r i but ed usi ng a schedul e of saf e payment s.

Chapt er 14
14- 20
ANS:

Cash Noncash Li abs Ni ce* Ri ce Di ce
Begi nni ng: $ 18, 000 $ 51, 000 $( 20, 000) $( 3, 000) $( 30, 000) $( 16, 000)
Sal e of Asset : 22, 000 ( 40, 000) 8, 100 6, 300 3, 600
Payment of
l i abs: ( 20, 000) 20, 000
Bal ance: $ 20, 000 $ 11, 000 $ 0 $ 5, 100 $( 23, 700) $( 12, 400)

Ni ce pays i n f r om
per sonal wor t h
t o cover
def i ci t
bal ances: 3, 000 ( 3, 000)
Bal ance $ 23, 000 $ 11, 000 $ 0 $ 2, 100 $( 23, 700) $( 12, 400)
Al l ocat i on of
Def i ci t
bal ance: ( 2, 100) 1, 336 764
$ 23, 000 $ 11, 000 $ 0 $ 0 $( 22, 364) $( 11, 636)

Schedul e of
Saf e Payment s:
Expect ed
Li qui dat i on
Expenses ( 1, 000) 636 364
Max Loss Poss. : $( 11, 000) 7, 000 4, 000
Bal ance $ 22, 000 $ 0 $ 0 $ 0 $( 14, 728) $ ( 7, 272)
======== ======== ======== ======= ======== ========

DI F: M OBJ : 10

10. The Tyl er , Russel l , and Col by par t ner shi p i s l i qui dat i ng. The t hr ee
par t ner s shar e pr of i t s and l osses equal l y. The f ol l owi ng i s t he post -
cl osi ng t r i al bal ance f or t he par t ner shi p:

Dr . Cr .
Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $177, 000
Li abi l i t i es ( i ncl udi ng
$15, 000 l oan f r omRussel l . . . . . . . . . . . . . . . . $85, 000
Tyl er , Capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
Russel l , Capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 000
Col by, Capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000

Requi r ed:

Dr af t a pr edi st r i but i on pl an f or t he par t ner shi p l i qui dat i on and
pr ovi de a schedul e of payment s.

Chapt er 14
14- 21
ANS:

Capi t al Bal ances Maxi mumLoss Absor babl e
Tyl er Russel l Col by Tyl er Russel l Col by
Pr of i t and l oss
per cent age 1/ 3 1/ 3 1/ 3
Capi t al and
l oan bal ance $30, 000 $27, 000 $ 50, 000
Maxi muml oss
absor babl e $90, 000 $81, 000 $150, 000
Amount t o r educe
t o next hi ghest
r anked MLA ( 60, 000)
$90, 000 $81, 000 $ 90, 000
Reduct i on i n
capi t al ( 20, 000)
New capi t al
bal ance $30, 000 $27, 000 $30, 000
Amount t o r educe
t o next hi ghest
r anked MLA ( 9, 000) ( 9, 000)
$81, 000 $81, 000 $ 81, 000
Reduct i on i n ======= ======= ========
capi t al ( 3, 000) ( 3, 000)
New capi t al
bal ance $27, 000 $27, 000 $27, 000
======= ======= =======

Payabl e t o
Amount Li abi l i t i es Tyl er Russel l Col by
Fi r st $70, 000 $70, 000
Next $20, 000 100%
Next $6, 000 50% 50%
Addi t i onal payment s 1/ 3 1/ 3 1/ 3

DI F: M OBJ : 10

11. The J & L Par t ner shi p has t ot al asset s of $20, 000 and t ot al l i abi l i t i es
of $26, 000. I nf or mat i on r el at i ng t o i ndi vi dual par t ner s i s as f ol l ows:

J acoby Lar son
Tot al per sonal asset s. . . . . . . . . . . . . . . . . . . . . $21, 000 $25, 000
Tot al per sonal l i abi l i t i es. . . . . . . . . . . . . . . . 16, 000 20, 000
Par t ner shi p capi t al bal ance. . . . . . . . . . . . . . . ( 8, 000) 2, 000

Requi r ed:

a. Pr epar e a schedul e showi ng t he cor r ect di st r i but i on of asset s
i n accor dance wi t h t he mar shal i ng of asset s.

b. Pr epar e a schedul e showi ng t he cor r ect di st r i but i on of asset s
i n accor dance wi t h t he f eder al bankr upt cy l aw.

c. Di scuss whi ch di st r i but i on seems mor e equi t abl e, and gi ve
r easons suppor t i ng your concl usi on.

Chapt er 14
14- 22
ANS:


b. Based on t he t heor y t hat al l par t ner s ar e act ual l y i n a
posi t i on of unl i mi t ed l i abi l i t y when act i ng i n t he
par t ner shi p' s busi ness, t he mar shal i ng of asset s i s mor e
equi t abl e because t he r esponsi bi l i t y of each i ndi vi dual
par t ner i s r ecogni zed di r ect l y, as evi denced by t he
cont r i but i on r equi r ed of Lar son f or J acoby' s debt .

c. Under t he mar shal i ng of asset s doct r i ne, t he par t ner s ar e
i ndi vi dual l y r esponsi bl e f or t he pr oper conduct and management
of bot h t hei r per sonal and par t ner shi p af f ai r s. Mar shal i ng
does not combi ne or commi ngl e expl i ci t l y t he obl i gat i ons
ar i si ng f r omones di st i nct per sonal and busi ness af f ai r s.
However , under bankr upt cy l aw, t he posi t i on of per sonal
cr edi t or s i s weakened because t hey ar e r equi r ed t o shar e
per sonal asset s pr opor t i onal l y wi t h par t ner shi p cl ai ms.

DI F: D OBJ : 7, 8, 9

12. The par t ner shi p of Al t , Br own, and Car ns has t ot al asset s and
l i abi l i t i es of $30, 000 and $25, 000, r espect i vel y. I nf or mat i on r el at i ng
t o t he par t ner s i s as f ol l ows:

Al t Br own Car ns
Tot al per sonal asset s. . . . . . . . . . . . . . $90, 000 $20, 000 $12, 000
Tot al per sonal l i abi l i t i es. . . . . . . . . 60, 000 15, 000 15, 000
Par t ner shi p capi t al bal ance
( def i ci t ) . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 ( 2, 000) ( 3, 000)

Requi r ed:

a. Assumi ng t hat t he Uni f or mPar t ner shi p Act i s appl i cabl e,
i ndi cat e how t he par t ner s' per sonal asset s woul d be
di st r i but ed.

b. Assumi ng t hat f eder al bankr upt cy l aws ar e appl i cabl e, i ndi cat e
how t he par t ner s' per sonal asset s woul d be di st r i but ed.

c. Assume t hat t he par t ner shi p had a def i ci t of $10, 000,
al l ocat ed among Al t , Br own, and Car ns as f ol l ows: $2, 000
sur pl us, $7, 000 def i ci t , and $5, 000 def i ci t , r espect i vel y.
I ndi cat e how t he def i ci t woul d be sat i sf i ed when bankr upt cy
l aws ar e appl i cabl e.

Chapt er 14
14- 23
ANS:

a. Di st r i but i on of asset s per t he UPA:
Al t Br own Car ns
Per sonal asset s. . . . . . . . . . . . . . . . . $ 90, 000 $ 20, 000 $ 12, 000
Per sonal l i abi l i t i es. . . . . . . . . . . . ( 60, 000) ( 15, 000) ( 12, 000)
Par t ner shi p debt s. . . . . . . . . . . . . . . 0 ( 2, 000) 0
Bal ance. . . . . . . . . . . . . . . . . . . . . . . . . $ 30, 000 $ 3, 000 $ 0
======== ======== ========

b. Di st r i but i on of asset s per bankr upt cy l aw:
Al t Br own _Car ns*
Per sonal asset s. . . . . . . . . . . . . . . . . $ 90, 000 $ 20, 000 $ 12, 000
Per sonal l i abi l i t i es. . . . . . . . . . . . ( 60, 000) ( 15, 000) ( 10, 000)
Par t ner shi p debt s. . . . . . . . . . . . . . . 0 ( 2, 000) ( 2, 000)
Bal ance. . . . . . . . . . . . . . . . . . . . . . . . . $ 30, 000 $ 3, 000 $ 0
======== ======== ========

*The per sonal asset s ar e al l ocat ed as f ol l ows:

For per sonal debt : $12, 000 x $15, 000 = $10, 000
$15, 000 + $3, 000

For par t ner shi p debt : $12, 000 x $3, 000 = $2, 000
$15, 000 + $3, 000

c. Par t ner shi p def i ci t . . . . . . . . . . . . . . . . . . $( 10, 000)
Capi t al cont r i but i ons by:
Car ns. . . . . . . . . . . . . . . . . . . . . . . . . . . . $3, 000
1
Al t & Br own. . . . . . . . . . . . . . . . . . . . . 7, 000
2
10, 000
Remai ni ng def i ci t . . . . . . . . . . . . . . . . . . . . $ 0
========

1
Car ns' s per sonal asset s ar e al l ocat ed t o par t ner shi p debt s as
f ol l ows:

$12, 000 x $5, 000 = $3, 000
$15, 000 + $5, 000

2
The $7, 000 coul d be col l ect ed f r omAl t & Br own i n any of t he
f ol l owi ng combi nat i ons:

a. $7, 000 f r omAl t onl y
b. $2, 000 f r omAl t + $5, 000 f r omBr own ( $20, 000 -
$15, 000) ( pr ef er r ed)
c. Any combi nat i on of Al t and Br own, but Br own' s cont r i but i on cannot
exceed $5, 000 ( f or exampl e, $4, 000 f r omAl t and $3, 000 f r om
Br own)

DI F: M OBJ : 7, 8

13. Ri char dson and Geor ge have been par t ner s i n t he medi cal suppl y busi ness
si nce J ul y 18, 20X3. Si nce t he f or mat i on of t he par t ner shi p, pr of i t s
and l osses have been shar ed i n t he r at i o of 55: 45, r espect i vel y.
Capi t al bal ances on December 31, 20X7, wer e $159, 000 f or Ri char dson and
$106, 000 f or Geor ge. They have agr eed t o admi t Kel l er as a par t ner on
J anuar y 1, 20X8. Kel l er wi l l r ecei ve a 30%i nt er est i n par t ner shi p
capi t al , and f ut ur e pr of i t s and l osses wi l l be al l ocat ed equal l y among
t he par t ner s.
Chapt er 14
14- 24

Requi r ed:

Pr epar e j our nal ent r i es i n t he par t ner shi p books t o r ecor d Kel l er ' s
admi ssi on i n each of t he f ol l owi ng si t uat i ons:

a. Kel l er deal s di r ect l y wi t h Ri char dson and agr ees t o exchange
l and wi t h a book val ue of $60, 000 and a f ai r mar ket val ue of
$87, 000 f or 50%of Ri char dson' s i nt er est i n capi t al . Recor d
Kel l er ' s cont r i but i on under t he t wo al t er nat i ve met hods. What
assumpt i on i s made under each al t er nat i ve?

b. Kel l er cont r i but es $130, 000 cash and a 1- year not e wi t h a
val ue of $20, 000 t o t he par t ner shi p ent i t y. Recor d j our nal
ent r i es under t he bonus and goodwi l l met hods.

c. Usi ng t he bonus met hod, assume t hat ( 1) Kel l er cont r i but es
$84, 000 and an est abl i shed cl i ent el e, or ( 2) Kel l er ' s
cont r i but i on of $84, 000 i s suf f i ci ent because exi st i ng
par t ner shi p asset s ar e over val ued.

d. Kel l er i nvest s $84, 000 i n t he par t ner shi p ent i t y. Use t he
goodwi l l met hod and assume t hat net asset s shoul d not be
wr i t t en down.

ANS:
a. Al t er nat i ve 1:
Ri char dson, Capi t al ( 50%x $159, 000) . . . . 79, 500
Kel l er , Capi t al . . . . . . . . . . . . . . . . . . . . . . . 79, 500

Under t hi s al t er nat i ve, t he consi der at i on pai d by Kel l er i s
not used t o suggest t he i mput ed f ai r mar ket val ue of t he
par t ner shi p. The t r ansact i on i s bet ween t he par t ner s, and t he
par t ner shi p mer el y r ecor ds t he t r ansf er of 50%of Ri char dson' s
capi t al i nt er est t o Kel l er ' s capi t al account .

Al t er nat i ve 2:
Asset s and/ or Goodwi l l . . . . . . . . . . . . . . . . . . 25, 000
Ri char dson, Capi t al . . . . . . . . . . . . . . . . . . . 13, 750
Geor ge, Capi t al . . . . . . . . . . . . . . . . . . . . . . . 11, 250

Ri char dson, Capi t al
( 50%x [ $159, 000 + $13, 750] ) . . . . . . . . 86, 375
Kel l er , Capi t al . . . . . . . . . . . . . . . . . . . . . . . 86, 375

Under t hi s al t er nat i ve, t he $87, 000 pai d by Kel l er f or a 30%
i nt er est suggest s t hat t he f ai r mar ket val ue of t he
par t ner shi p ent i t y i s $290, 000. The di f f er ence bet ween t he
i mput ed val ue of $290, 000 and t he book val ue of $265, 000
r epr esent s under val ued exi st i ng asset s and/ or goodwi l l of
$25, 000. Thi s al t er nat i ve i s not nor mal l y empl oyed t o r ecor d
t r ansact i ons bet ween i ndi vi dual par t ner s.

Chapt er 14
14- 25

b. Bonus met hod: Tot al capi t al of t he new par t ner shi p equal s
$415, 000 ( $159, 000 + $106, 000 + $150, 000) . Kel l er ' s 30%
i nt er est equal s $124, 500.

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130, 000
Not e Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Geor ge, Capi t al . . . . . . . . . . . . . . . . . . . . . . . 11, 475
Kel l er , Capi t al . . . . . . . . . . . . . . . . . . . . . . . 124, 500

Goodwi l l met hod: Kel l er ' s $150, 000 i nvest ment f or a 30%
i nt er est suggest s a par t ner shi p f ai r mar ket val ue of $500, 000.
The $500, 000 l ess t he $415, 000 book val ue r epr esent s $85, 000
of goodwi l l t o be r ecogni zed.

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130, 000
Not e Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85, 000
Geor ge, Capi t al . . . . . . . . . . . . . . . . . . . . . . . 38, 250
Kel l er , Capi t al . . . . . . . . . . . . . . . . . . . . . . . 150, 000

c. ( 1) Bonus cr edi t ed t o new par t ner : Tot al capi t al i n new
par t ner shi p equal s $349, 000 ( $159, 000 + $106, 000 + $84, 000) .
Kel l er ' s 30%i nt er est equal s $104, 700 ( 30%x $349, 000) .

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84, 000
Ri char dson, Capi t al . . . . . . . . . . . . . . . . . . . . . 11, 385
Geor ge, Capi t al . . . . . . . . . . . . . . . . . . . . . . . . . 9, 315
Kel l er , Capi t al . . . . . . . . . . . . . . . . . . . . . . . 104, 700

( 2) Exi st i ng par t ner shi p asset s ar e over val ued: $84, 000 i nvest ment
f or a 30%i nt er est i mpl i es t hat capi t al of new par t ner shi p equal s
$280, 000. The $280, 000 l ess t he $84, 000, or $196, 000, r epr esent s
a f ai r mar ket val ue of t he ol d par t ner s' capi t al . A wr i t e- down of
$69, 000 ( [ $159, 000 + $106, 000] - $196, 000) i s r equi r ed.

Ri char dson, Capi t al . . . . . . . . . . . . . . . . . . . . . 37, 950
Geor ge, Capi t al . . . . . . . . . . . . . . . . . . . . . . . . . 31, 050
Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69, 000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84, 000
Kel l er , Capi t al . . . . . . . . . . . . . . . . . . . . . . 84, 000

d. Goodwi l l met hod: The $265, 000 or i gi nal book val ue shoul d
r epr esent 70%of t he new par t ner shi p capi t al , or $378, 571. Kel l er
shoul d have pai d $113, 571 ( $378, 571 - $265, 000) , but onl y pai d
$84, 000; t her ef or e, goodwi l l of $29, 571 i s suggest ed.

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29, 571
Kel l er , Capi t al . . . . . . . . . . . . . . . . . . . . . . . 113, 571

DI F: M OBJ : 2, 3, 5

Chapt er 14
14- 26
14. Luc, Deni s, and Rol l ande have capi t al bal ances of $30, 000, $70, 000, and
$15, 000, r espect i vel y. The par t ner s shar e pr of i t s/ l osses 2: 6: 2. Al l
asset s book val ues equal mar ket except as not ed. The par t ner shi p
agr eement st at es t he bonus met hod i s t o be used t o account f or par t ner
sal e of i nt er est t o t he par t ner shi p.

Requi r ed:

Cal cul at e Luc' s new capi t al bal ance r esul t i ng f r omeach of t he
f ol l owi ng i ndependent si t uat i ons:

Si t uat i on 1: Rol l ande sel l s hi s i nt er est t o t he par t ner shi p f or
$25, 000. Bonus met hod i s used.

Si t uat i on 2: Rol l ande sel l s hi s i nt er est t o Luc f or $25, 000.

Si t uat i on 3: Mar t el pur chases a 20%i nt er est f r omt he par t ner shi p f or
$35, 000. The bonus met hod i s used t o account f or t he
i ncomi ng par t ner .

Si t uat i on 4: The same as Si t uat i on 3 except t hat t he goodwi l l met hod
i s used t o account f or t he i ncomi ng par t ner .

ANS:

Si t uat i on 1: Luc' s new capi t al bal ance i s $27, 500 ( $30, 000 - $2, 500) .
Payment f r omt he par t ner shi p of $25, 000 f or Rol l ande' s
$15, 000 capi t al bal ance r esul t s i n a bonus pai d by t he
r emai ni ng par t ner s t o Rol l ande of $10, 000. The bonus i s
spl i t t o t he r emai ni ng par t ner s based on t hei r r emai ni ng
pr of i t and l oss r at i os. ( 2/ 8 t o Luc, 6/ 8 t o Deni s)

Si t uat i on 2: Luc' s new capi t al bal ance i s $45, 000 ( $30, 000 + $15, 000) .
Because t he t r ansact i on i nvol ves i ndi vi dual par t ner s and
not t he par t ner shi p, Rol l ande' s bal ance i s mer el y
t r ansf er r ed t o Luc' s.

Si t uat i on 3: Luc' s new capi t al bal ance i s $31, 000 ( $30, 000 + $1, 000
bonus) . The new book val ue of t he par t ner shi p i s
$150, 000. ( BV of ol d $115, 000 + $35, 000 new par t ner
cont r i but i on) . Mar t el ' s capi t al bal ance i s $30, 000. ( New
Par t ner Owner shi p %of 20%* $150, 000 new par t ner shi p
book val ue) The r esul t i s a bonus of $5, 000 at t r i but abl e
t o t he or i gi nal par t ner s. ( New Par t ner cont r i but i on of
$35, 000 - $30, 000 new par t ner capi t al bal ance) The bonus
wi l l be spl i t t o t he or i gi nal par t ner s based on t hei r
pr of i t and l oss r at i o.

Si t uat i on 4: Luc' s new capi t al bal ance i s $35, 900 ( $30, 000 + $5, 000
goodwi l l ) . A $35, 000 cont r i but i on i n exchange f or a 20%
owner shi p i nt er est i mpl i es a t ot al f ai r mar ket val ue of
$175, 000. ( $35, 000 / . 20) No asset r eval uat i ons ar e
not ed, so t he i mpl i ed f ai r mar ket val ue of $175, 000
exceeds t he new par t ner shi p book val ue of $150, 000 by
$25, 000. The $25, 000 r epr esent s goodwi l l and wi l l be
spl i t among t he or i gi nal par t ner s based on pr of i t and
l oss r at i os.

Chapt er 14
14- 27

DI F: M OBJ : 2, 3, 5, 6

15. Roger s, Davi s, and Smukal l a have capi t al bal ances of $50, 000, $26, 100,
and $10, 900, r espect i vel y. The par t ner s shar e pr of i t s/ l osses equal l y.

Requi r ed:

Cal cul at e Roger s' new capi t al bal ance r esul t i ng f r omeach of t he
f ol l owi ng i ndependent si t uat i ons:

Si t uat i on 1: Smukal l a sel l s hi s i nt er est i n t he par t ner shi p t o Roger s
f or $25, 000.

Si t uat i on 2: Meyer s pur chases a one- f our t h i nt er est f r omt he
par t ner shi p f or $35, 000. The bonus met hod i s used t o
account f or t he i ncomi ng par t ner .

Si t uat i on 3: The same as Si t uat i on 2 except t hat t he goodwi l l met hod
i s used t o account f or t he i ncomi ng par t ner .

Si t uat i on 4: Davi s sel l s her i nt er est t o t he par t ner shi p f or $30, 000.
The t ot al amount of suggest ed goodwi l l i s t o be
r ecor ded.

ANS:

Si t uat i on 1: Roger s' new capi t al bal ance i s $75, 000 ( $50, 000 +
$25, 000) . Because t he t r ansact i on i nvol ves i ndi vi dual
par t ner s and not t he par t ner shi p, Smukal l a' s bal ance i s
mer el y t r ansf er r ed t o Roger s' .

Si t uat i on 2: Roger s' new capi t al bal ance i s $51, 500 ( $50, 000 + $1, 500
bonus) . The book val ue of t he ol d par t ner shi p pl us
Meyer s' cont r i but i on t ot al s $122, 000. Meyer s' i nt er est
i n t hi s t ot al i s $30, 500 ( $122, 000 x 25%) . The
cont r i but i on i n excess of Meyer s' i nt er est of $4, 500
( $35, 000 - $30, 500) i s al l ocat ed equal l y among t he
or i gi nal par t ner s.

goodwi l l ) . Meyer s' pur chase pr i ce of $35, 000 suggest s
t hat t he whol e par t ner shi p has a val ue of $140, 000
( $35, 000 25%) . The book val ue of t he ol d par t ner shi p
pl us Meyer s' cont r i but i on t ot al s $122, 000. Ther ef or e,
$18, 000 ( $140, 000 - $122, 000 of goodwi l l i s t o be
al l ocat ed equal l y among t he or i gi nal par t ner s.

goodwi l l ) . I f Davi s sel l s t hi s i nt er est f or $3, 900
( $30, 000 - $26, 100) mor e t han book val ue, t hen a one-
t hi r d shar e of t he t ot al goodwi l l must be $3, 900.
Roger s, i n t ur n, has a si mi l ar i nt er est i n t he goodwi l l .

DI F: M OBJ : 2, 3, 5, 6

Chapt er 14
14- 28
16. The ALPHA, BETA, AND DELTA par t ner shi p has t ot al asset s of $260, 000.
Capi t al bal ances f or par t ner s ALPHA, BETA, and DELTA ar e $50, 000,
$30, 000, and $50, 000, r espect i vel y. The pr of i t / l oss per cent ages f or
par t ner s ALPHA, BETA, and DELTA ar e 30%, 40%, and 30%, r espect i vel y.
I ncl uded i n t he l i abi l i t i es i s a $9, 000 l oan payabl e t o ALPHA. The
par t ner shi p has el ect ed t o l i qui dat e over t he next sever al mont hs.
Li qui dat i on expenses ar e est i mat ed t o be $15, 000.

Requi r ed:

Assumi ng asset s wi t h a book val ue of $80, 000 wer e sol d f or $60, 000, and
t hat $160, 000 cash i s avai l abl e, how shoul d t he avai l abl e cash be
di st r i but ed?

ANS:

Of f set Capi t al Bal ances
Asset s Li abi l i t i es ALPHA BETA DELTA
Begi nni ng bal ances $ 260, 000 $ 121, 000 $ 59, 000 $30, 000 $50, 000
Loss on sal e of
asset s. . . . . . . . . . ( 20, 000) ( 6, 000) ( 8, 000) ( 6, 000)
Pay l i abi l i t i es. . . ( 121, 000) ( 121, 000)
Bal ance. . . . . . . . . . . $ 119, 000 $ 0 $ 53, 000 $22, 000 $44, 000
Payment of par t ner
( See Schedul e) . . ( 24, 000) ( 16, 500) ( 7, 500)
Bal ances. . . . . . . . . . $ 95, 000 $ 0 $ 36, 500 $22, 000 $36, 500
========= ========= ======== ======= =======

Schedul e of Saf e Payment s
ALPHA BETA DELTA Tot al
Pr of i t and l oss per cent age 30% 40% 30%

Capi t al bal ances bef or e
di st r i but i on. . . . . . . . . . . . $ 53, 000 $ 22, 000 $ 44, 000 $119, 000
Est i mat ed l i qui dat i on
expenses. . . . . . . . . . . . . . . . ( 4, 500) ( 6, 000) ( 4, 500) ( 15, 000)
Maxi muml oss possi bl e. . . . . ( 24, 000) ( 32, 000) ( 24, 000) ( 80, 000)
1
Al l ocat e debi t bal ances. . . ( 8, 000) 16, 000 ( 8, 000) 0
Saf e payment . . . . . . . . . . . . . . $ 16, 500 $ 0 $ 7, 500 $ 24, 000
======== ======== ======== ========

1
Thi s amount r epr esent s t he asset bal ance of $119, 000 af t er payi ng t he
l i abi l i t i es of $121, 000. I f $160, 000 cash was avai l abl e, t hen $39, 000
i s avai l abl e af t er payi ng t he l i abi l i t i es. Ther ef or e, $80, 000 ( $119, 000
- $39, 000) of asset s ar e not i n a cash f or m.

The $160, 000 cash i s account ed f or as f ol l ows:

Payment of l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $121, 000
Ret ai ned f or l i qui dat i on expenses. . . . . . . . . . . . . . . . . . . . . . 15, 000
Pai d t o Par t ner ALPHA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 500
Pai d t o Par t ner BETA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 500
$160, 000
========

DI F: D OBJ : 7, 9, 10

Chapt er 14
14- 29

Chapt er 14
14- 30
17. On J ul y 1, 20X9, t he Cr awf or d Company has t he f ol l owi ng bal ance sheet :

Asset s Li abi l i t i es and Capi t al
Cash. . . . . . . . . . . . . . . . $ 17, 000 Account s payabl e. . . . . . . . . $ 32, 000
Ot her asset s. . . . . . . . 183, 000 Due t o Pal mer . . . . . . . . . . . . 12, 000
Ot her l i abi l i t i es. . . . . . . . 70, 000
Pal mer , capi t al . . . . . . . . . . 24, 000
Lake, capi t al . . . . . . . . . . . . 62, 000
Tot al asset s. . . . . . . . $200, 000 Tot al l i abi l i t i es and
======== capi t al . . . . . . . . . . . . . . . . $200, 000
========

As of J ul y 1, 20X9, t he par t ner s have per sonal net wor t h as f ol l ows:

Pal mer Lake
Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52, 000 $ 76, 000
Li abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47, 000 102, 000

The per sonal net wor t h of each par t ner does not i ncl ude any amount s due
t o or f r omt he par t ner shi p.

Requi r ed:

Assume t he ot her asset s ar e sol d f or $103, 000 af t er i ncur r i ng
l i qui dat i on expenses of $4, 000. Af t er l i qui dat i on of t he par t ner shi p,
det er mi ne how much i s avai l abl e t o Lake' s unsat i sf i ed per sonal
cr edi t or s based on t he f ol l owi ng:

a. Appl i cat i on of t he Uni f or mPar t ner shi p Act

b. Appl i cat i on of common l aw

ANS:


b. I f common l aw i s appl i ed, Pal mer ' s debi t bal ance woul d shar e
on an equal basi s wi t h per sonal cr edi t or s. Ther ef or e, $5, 887
( $52, 000 x 6, 000 53, 000) woul d be cont r i but ed t o t he
par t ner shi p. Lake woul d t hen have t o absor b onl y a $113
( $6, 000 - $5, 887) debi t bal ance on behal f of Pal mer .

DI F: D OBJ : 10
Chapt er 14
14- 31
Chapt er 14
14- 32
Chapt er 14
14- 33
Chapter 15 Governmental Accounting: The General Fund and the
Account Groups

MULTIPLE CHOICE

1. What i s t he cor ner st one of ext er nal f i nanci al r epor t i ng f or
gover nment al uni t s and not - f or - pr of i t or gani zat i ons?
a. show t he f l ow of f i nanci al r esour ces
b. t o det er mi ne pr of i t or l oss
c. t o compar e budget ed t o act ual r esour ces
d. account abi l i t y


2. A pr i mar y di st i nct i on bet ween t he f l ow of r esour ces t hr ough a busi ness
ent er pr i se and t hr ough a gover nment al ent i t y i s t hat oper at i ons i n a
gover nment al ent i t y consume r esour ces and asset s t o
a. pr oduce goods and ser vi ces t o ci t i zens ent i t l ed t o r ecei ve t hem.
b. gener at e r et ur n on i nvest ment .
c. gener at e net i ncome.
d. gener at e capi t al f or f ut ur e i nvest ment s.


3. The body cur r ent l y r esponsi bl e f or devel opi ng l ocal gover nment al
account i ng st andar ds i s t he
a. Fi nanci al Account i ng St andar ds Boar d ( FASB)
b. Gover nment al Account i ng St andar ds Boar d ( GASB) .
c. Nat i onal Counci l on Gover nment al Account i ng ( NCGA) .
d. Gover nment al Fi nance Of f i cer s Associ at i on ( GFOA)


4. Recent l y ef f ect i ve account i ng st andar ds r equi r e t he pr epar at i on of t wo
separ at e set s of f i nanci al st at ement s. The f i r st set of f und f i nanci al
st at ement s ar e si mi l ar t o t he hi st or i cal f und based r epor t i ng model .
Whi ch of t he f ol l owi ng st at ement s i s false concer ni ng t he addi t i onal
f i nanci al st at ement s t hat ar e now r equi r ed?
a. t he st at ement s ar e desi gned t o f ocus on t he gover nment al uni t as a
whol e
b. t he st at ement s consol i dat e al l gover nment oper at i ons on a f ul l
accr ual basi s
c. t he st at ement s ar e desi gned t o r epor t on t he pr of i t maki ng abi l i t y
of t he r esour ces col l ect ed
d. t he st at ement s adopt an economi c measur ement f ocus


Chapt er 15
15- 2
5. The ent r y t o r ecor d t he War wi ck Ci t y budget f or t he Gener al Fund
i ncl udes t he f ol l owi ng:

Est i mat ed Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4, 000, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 850, 000
Est i mat ed Ot her Fi nanci ng Uses. . . . . . . . . . . . . . . . . . . 400, 000
Est i mat ed Ot her Fi nanci al Sour ces. . . . . . . . . . . . . . . . 150, 000

The ent r y t o r ecor d t hi s budget woul d i ncl ude a debi t t o
a. Est i mat ed Ot her Fi nanci ng Uses.
b. Appr opr i at i ons.
c. Budget ar y Fund Bal ance.
d. Encumbr ances.


6. The gover nment al Account i ng St andar ds Boar d has st at ed gover nment al
f i nanci al r epor t i ng shoul d be desi gned t o show:
a. account abi l i t y
b. i nt er per i od equi t y
c. whet her f ut ur e t axpayer s wi l l be r equi r ed t o assume bur den f or
ser vi ces pr evi ousl y r epor t ed


7. The modi f i ed accr ual met hod of account i ng i s appl i ed t o whi ch of t he
f ol l owi ng f unds or asset gr oups?
a. Pr opr i et ar y f unds
b. Gover nment al f unds
c. Pr opr i et ar y t ype f i duci ar y f unds
d. Per manent f unds


8. Whi ch of t he f ol l owi ng cor r ect l y por t r ays t he necessar y j our nal i zat i on
of t he budget j our nal ent r y?
Debi t Cr edi t
a. Appr opr i at i ons Est i mat ed Revenues
b. Est i mat ed Revenues Est . Ot her Fi n. Sour ces
c. Est i mat ed Revenues Appr opr i at i ons
d. Est i mat ed Ot her Fi nanci ng Est . Ot her Fi n. Sour ces
Uses


9. Whi ch of t he f ol l owi ng woul d not be consi der ed a budget ar y account i n
t he Gener al Fund?
a. Est i mat ed Ot her Fi nanci al Sour ces
b. Appr opr i at i ons
c. Est i mat ed Revenues
d. Fund Bal ances- - Reser ved f or I nvent or y


Chapt er 15
15- 3
10. Whi ch one of t he f ol l owi ng st at ement s i s f al se concer ni ng t he
account i ng f or t he budget i n t he gener al f und gener al l edger ?
a. The budget ar y account s ar e af f ect ed r egul ar l y as r evenues and
expendi t ur es ar e r ecogni zed.
b. The budget ar y account s can be adj ust ed dur i ng t he year t o r ef l ect
mat er i al changes i n est i mat es.
c. The budget ar y account s ar e cl osed at t he end of t he per i od.
d. The budget ar y account f or expendi t ur es i s cal l ed appr opr i at i ons.


11. Goods or der ed and or i gi nal l y encumber ed at $7, 500 wer e r ecei ved wi t h an
i nvoi ce pr i ce of $7, 700. I n r ecor di ng t hi s event ,
a. Encumbr ances woul d be debi t ed f or $200.
b. Fund Bal ances- - Reser ved f or Encumbr ances woul d be debi t ed f or
$7, 500.
c. Expendi t ur es woul d be debi t ed f or $7, 500.
d. Appr opr i at i ons woul d be debi t ed f or $200.


12. Pr oper t y t axes ar e r ecor ded as r evenue i n t he Gener al Fund
a. when t he pr oper t y t axes ar e l evi ed.
b. when t he pr oper t y t axes ar e due.
c. when pr oper t y t ax payment s ar e r ecei ved.
d. on a mont hl y pr o r at a basi s.


13. The ent r y i n t he Gener al Fund t o r ecor d t he post i ng of a t ax l i en by a
ci t y woul d i ncl ude a cr edi t t o
a. Tax Li en Recei vabl e.
b. Revenue.
c. Taxes Recei vabl e.
d. Tax Recei vabl e- - Del i nquent .


14. Revenue f r omot her f i nanci ng sour ces i ncl udes al l of t he f ol l owi ng
except f or :
a. I ssui ng gener al l ong t er mdebt
b. Recei pt of i nt er f und t r ansf er s
c. Revenues f r omt he donat i on of capi t al asset s
d. Sal es of capi t al asset s


Chapt er 15
15- 4
15. Whi ch of t he f ol l owi ng cor r ect l y i dent i f i es how cer t ai n t r ansact i ons
ar e r ecor ded i n t he gener al f und?
Debi t s Cr edi t s
a. Expendi t ur es Ot her f i nanci ng uses
b. Expendi t ur es Ot her f i nanci ng sour ces
c. Ot her f i nanci ng sour ces Ot her f i nanci ng uses
d. Revenues Expendi t ur es


16. Whi ch one of t he f ol l owi ng equat i ons wi l l yi el d t he unobl i gat ed bal ance
i n an expendi t ur e subsi di ar y l edger account ? Unobl i gat ed Bal ance =
a. Appr opr i at i ons - Expendi t ur es t ot al
b. Appr opr i at i ons - Encumbr ances bal ance
c. Appr opr i at i ons - Expendi t ur es t ot al - Encumbr ances bal ance
d. Appr opr i at i ons - Expendi t ur es t ot al + Encumbr ances bal ance


17. Whi ch of t he f ol l owi ng i s not a t ype of account cl assi f i cat i on f ound i n
t he gener al f und?
a. per manent bal ance sheet account s
b. budget ar y account s
c. f or ecast account s
d. oper at i ng account s


18. A speci al assessment l evi ed on ci t i zens f or a ser vi ce t hey ar e
r ecei vi ng f r oma l ocal gover nment shoul d be account ed f or i n a f und
t hat mat ches t he nat ur e of t he speci al assessment . Whi ch of t he
f ol l owi ng f unds woul d not mat ch a ser vi ce act i vi t y?
a. Capi t al Pr oj ect s Fund
b. Gener al Fund
c. Speci al Revenue Fund
d. Ent er pr i se Fund


19. Whi ch of t he f ol l owi ng account s woul d not be f ound i n t he year - end
Gener al Fund bal ance sheet of a ci t y?
a. Cash
b. Al l owance f or Uncol l ect i bl e Taxes
c. Land- - Par ks
d. Fund Bal ance- - Reser ved f or Encumbr ances


Chapt er 15
15- 5
20. Whi ch of t he f ol l owi ng i t ems woul d be f ound i n a ci t y' s Gener al Fund
st at ement of r evenues, expendi t ur es, and changes i n f und bal ance?
a. Depr eci at i on expendi t ur e
b. Appr opr i at i on
c. Encumbr ances
d. Ot her f i nanci ng sour ces


21. Pr oper t y t axes i n t he amount of $3, 000, 000 ar e bi l l ed t o ci t y pr oper t y
owner s. I t i s est i mat ed t hat t wo per cent wi l l pr ove t o be
uncol l ect i bl e. I n r ecor di ng t hi s event ,
a. est i mat ed Revenues woul d be cr edi t ed f or $2, 940, 000.
b. bad Debt s woul d be debi t ed f or $60, 000.
c. t ax Li ens Recei vabl e woul d be debi t ed f or $60, 000.
d. al l owance f or Uncol l ect i bl e Cur r ent Pr oper t y Taxes woul d be
cr edi t ed f or $60, 000.


22. Af t er t he cl osi ng ent r i es have been j our nal i zed and post ed, but pr i or
t o t he next account i ng per i od, whi ch of t he f ol l owi ng account s woul d
have a bal ance?
a. Fund Bal ance- - Unr eser ved, Undesi gnat ed
b. Appr opr i at i ons
c. Ot her Fi nanci ng Uses
d. Revenues


23. GASB St at ement 34 al l ows t he gover nment t o avoi d char gi ng depr eci at i on
on i nf r ast r uct ur e asset s i f :
a. t he gover nment al uni t can demonst r at e t hey have i ncur r ed cost s t o
pr eser ve t he asset s at or above a condi t i onal l evel .
b. t he asset i s not expect ed t o be r epl aced.
c. t he asset has a usef ul l i f e of l ess t han f i ve year s.
d. t he asset wi l l be r epl aced wi t hi n f i ve year s.


24. When r ecor di ng t he acqui si t i on of a f i xed asset i n a ci t y' s Gener al
Fi xed Asset Account Gr oup ( GFAAG) , t he debi t ent r y shoul d be sel ect ed
f r omone of t he f ol l owi ng account s except
a. Land
b. Expendi t ur es
c. Machi ner y and Equi pment
d. Const r uct i on i n Pr ogr ess


Chapt er 15
15- 6
25. When r ecor di ng t he acqui si t i on of a f i xed asset i n a ci t y' s Gener al
Fi xed Asset Account Gr oup, t he cr edi t ent r y may be t o whi ch one of t he
f ol l owi ng account s?
a. I nvest ment i n Gener al Fi xed Asset s- - Gener al Fund
b. Fund Bal ance Reser ved f or Encumbr ances
c. Cont r i but ed Capi t al
d. Fund Bal ance- - Expended


26. To r ecor d t he sal e of a f i xed asset car r i ed i n t he Gener al Fi xed Asset s
Account Gr oup, a ci t y coul d debi t whi ch one of t he f ol l owi ng account s
i n t he GFAAG?
a. Cash
b. Expendi t ur es
c. Account s Recei vabl e
d. I nvest ment i n Gener al Fi xed Asset s- - Donat i ons


27. I f a ci t y uses a Gener al Fi xed Asset Account Gr oup ( GFAAG) and r ecor ds
depr eci at i on i n ant i ci pat i on of t he ci t y wi de f i nanci al r epor t s,
accumul at ed depr eci at i on account s ar e cr edi t ed i n t he GFAAG. What woul d
be t he cor r espondi ng debi t ent r y?
a. Expendi t ur e i n t he Gener al Fund
b. Depr eci at i on expendi t ur e i n t he GFAAG
c. The appr opr i at e i nvest ment i n gener al f i xed asset s account i n t he
GFAAG
d. Account i ng f or usage i s not per mi t t ed i n t he Gener al Fund or GFAAG


28. Whi ch of t he f ol l owi ng account s woul d not be f ound on a ci t y' s Gener al
Fund Bal ance Sheet ?
a. Ot her Fi nanci al Sour ces
b. Voucher s Payabl e
c. Al l owance f or Uncol l ect i bl e Tax Li ens
d. Due f r omSt at e Gover nment


29. I f a ci t y i ssues a t er mbond t o pur chase pr oper t y f or a ci t y par k,
whi ch of t he f ol l owi ng ent r i es woul d be made?
a. Ot her Fi nanci ng Sour ces woul d be cr edi t ed i n a Capi t al Pr oj ect s
Fund.
b. Cash woul d be debi t ed i n t he Gener al Long- Ter mCapi t al Debt
Account Gr oup.
c. Ter mBonds Payabl e woul d be cr edi t ed i n t he Gener al Fund.
d. Al l of t hese ent r i es woul d be made.


Chapt er 15
15- 7
30. The Ci t y of Ol bur g f ai l ed t o r ecor d i nvoi ced expendi t ur es f or t he l ast
year of $15, 000 t hat wer e not encumber ed. Of t hi s amount , $10, 000 was
pai d t hi s year debi t ed t o Expendi t ur es( Cont r ol ) . The unpai d por t i on has
not been voucher ed. The ent r y t o r ecor d t hi s event woul d i ncl ude a
a. $15, 000 cr edi t t o Expendi t ur es.
b. $15, 000 debi t t o Fund Bal ance- - Unr eser ved and Undesi gnat ed.
c. $5, 000 debi t t o Expendi t ur es.
d. $10, 000 cr edi t t o Fund Bal ance- - Unr eser ved and Undesi gnat ed.


31. I f t he Ci t y of Bi l l i ngs det er mi nes t hat i t has $200, 000 of unf unded
pensi on l i abi l i t y, i t woul d r ecor d t hi s l i abi l i t y as a( n)
a. expendi t ur e i n t he Gener al Fund
b. def er r ed l i abi l i t y i n t he GLTDAG
c. unf unded pensi on l i abi l i t y i n t he GLTDAG
d. due t o pensi on t r ust f und i n t he Gener al Fund


32. A ci t y shoul d r ecor d a l i abi l i t y f or a cl ai mf r oma ci t i zen who f i l es
sui t because t hei r t oddl er dr owned i n t he communi t y swi mmi ng pool
unat t ended by a l i f eguar d i f
a. i t i s pr obabl e t he l awsui t wi l l be set t l ed.
b. t he amount of t he j udgment or set t l ement can be est i mat ed.
c. t he l i f eguar d has no pr i vat e i nsur ance t o pay t he cl ai m.
d. a and b


33. I f a gover nment ent er s i nt o a secur i t i es l endi ng agr eement or r ever se
r epur chase t r ansact i on, t hey woul d r ecor d as asset s
a. t he asset s l ent and t he col l at er al r ecei ved whi ch woul d
" doubl ecount " t he asset s.
b. onl y t he col l at er al r ecei ved.
c. onl y t he asset s or i gi nal l y hel d and l ent .
d. t he f ai r mar ket val ue of t he asset i f sol d.


34. I f t he pol i ce depar t ment pur chases a pol i ce car f or $20, 000 and t r ades
i n t he ol d car f or $6, 000 payi ng a net cash payment of $14, 000, t he
ent r y i n t he Gener al Fund woul d
a. debi t Aut omobi l es f or $14, 000.
b. debi t Expendi t ur es f or $14, 000.
c. cr edi t Aut omobi l es f or $6, 000.
d. debi t Expendi t ur es f or $20, 000.


Chapt er 15
15- 8
35. I f t he ci t y expends mor e dur i ng t he budget year t han i t r ecei ves dur i ng
t he budget year i n r evenues t hat ar e avai l abl e t o f i nance t he
expendi t ur es, i t wi l l
a. i ncr ease i nt er per i od equi t y.
b. decr ease i nt er per i od equi t y.
c. i ncr ease t axes.
d. f or ce t he ci t y t o f i r e some empl oyees.


PROBLEM

1. Why shoul d a ci t y be concer ned wi t h gener al l y accept ed account i ng
pr i nci pl es ( GAAP) ?

ANS:

Ci t i es may need l ong- t er mcapi t al t o f i nance expendi t ur es such as maj or
bui l di ng pr ogr ams. J ust as an i ndi vi dual mi ght not be abl e t o pur chase
a home wi t hout a l ong- t er mmor t gage, a gover nment may not be abl e t o
under t ake maj or bui l di ng pr ogr ams wi t hout l ong- t er mf i nanci ng t hr ough
bonds. A gover nment t hat pl ans t o i ssue debt must obt ai n a bond r at i ng
f r omMoody' s, St andar d & Poor s or Fi t ch r at i ng agenci es. Fai l ur e t o
compl y wi t h GAAP may adver sel y af f ect a ci t y' s bond r at i ng or r esul t i n
no r at i ng at al l . An unf avor abl e bond r at i ng wi l l make l ong- t er mdebt
mor e expensi ve as a r esul t of a hi gher i nt er est r at e or per haps
unavai l abl e i f an i nvest ment - gr ade r at i ng i s not obt ai ned. Gener al l y,
pur chaser s of muni ci pal bonds r equi r e an i nvest ment - gr ade r at i ng.
Ci t i es t hat r ecei ve f eder al f unds al so must compl y wi t h GAAP under t he
si ngl e audi t r equi r ement s of OMB Ci r cul ar A- 128 and t he Si ngl e Audi t
Act .

DI F: E OBJ : 1

2. What i s i nf r ast r uct ur e and wher e woul d i t be account ed f or ?

ANS:

I nf r ast r uct ur e ar e asset s such as st r eet s, st r eet l i ght s, si dewal ks,
r oads and ot her si mi l ar asset s of t he gover nment al uni t . I nf r ast r uct ur e
woul d be r ecor ded as asset s i n t he Gener al Fi xed Asset Account Gr oup i f
t he gover nment el ect s t o do so. Under cur r ent GASB r equi r ement s, t hey
wi l l be r epor t ed f or i n t he gover nment wi de f i nanci al st at ement s.

DI F: E OBJ : 10

Chapt er 15
15- 9
3. Expl ai n why gover nment al f unds use budget ar y account s.

ANS:

The budget ar y account s ar e expendi t ur es, encumbr ances, r evenues,
est i mat ed r evenues, appr opr i at i ons, budget ar y f und bal ance, est i mat ed
ot her f i nanci ng sour ces, est i mat ed ot her f i nanci ng uses, ot her
f i nanci ng sour ces, and ot her f i nanci ng uses. The gover nment al f unds use
t he modi f i ed accr ual basi s of account i ng t o capt ur e t he f l ow of
f i nanci al r esour ces t hat ar e avai l abl e and measur abl e t o f i nance t he
cur r ent budget ' s expendi t ur es. The budget ar y account s st ar t each f i scal
per i od at zer o and ar e cr eat ed t o r ecor d t he budget ar y t r ansact i ons and
event s. At t he end of each f i scal per i od, t he budget ar y account s ar e
cl osed and t he ef f ect of t he economi c event s dur i ng t hi s budget year
wi l l be r ef l ect ed i n t he endi ng f und bal ance.

DI F: E OBJ : 6

4. Descr i be t he t hr ee basi c f und t ypes and account gr oups and expl ai n what
changes, i f any, t he adopt i on of GASB st andar d #34 has made on t hese
cl assi f i cat i ons?

ANS:

The t hr ee basi c f unds ar e:
Gover nment al Funds: These f unds account f or al l t he act i vi t i es t hat
pr ovi de ser vi ces f i nanced t hr ough t axes, f i nes,
and gover nment al gr ant s. The mai n t ypes of
gover nment al f unds ar e t he Gener al Fund,
Speci al Revenue Fund, Capi t al Pr oj ect s Fund,
and a new f und r esul t i ng f r omt he adopt i on of
GASB #34, t he Per manent Fund. Per manent Funds
account f or r esour ces t hat ar e r est r i ct ed and
onl y t he i ncome on t hese r esour ces can be
ut i l i zed t o f i nance oper at i ons.
Pr opr i et ar y Funds: These f unds account f or t he busi ness t ype
act i vi t i es conduct ed by gover nment al uni t s.
They der i ve t he maj or i t y of t hei r r evenue
t hr ough user char ges. The basi c t ypes of f unds
i n t hi s gr oup ar e Ent er pr i se Funds and I nt er nal
Ser vi ce Funds.

Fi duci ar y Funds: These f unds account f or r esour ces wher e t he
gover nment al uni t act s as a t r ust ee or agent .

Account Gr oups: The t wo account gr oups, Gener al Fi xed Asset
Account Gr oup and t he Long Ter mLi abi l i t y
Account Gr oup ar e no l onger r equi r ed under GASB
St at ement #34 but ar e st i l l ut i l i zed by
gover nment al uni t s as a way t o keep t r ack of
t he det ai l ed t r ansact i ons af f ect i ng t hese
gr oups.

DI F: M OBJ : 4

Chapt er 15
15- 10
5. The Vi l l age of Appl egat e Gener al Fund has t he f ol l owi ng account s:

a. Budget ar y Fund Bal ance
b. Pr oper t y Taxes Recei vabl e
c. Fund Bal ance Reser ved f or Encumbr ances
d. Voucher s Payabl e
e. Expendi t ur es
f . Ot her Fi nanci ng Sour ce- - Bond Pr oceeds
g. Appr opr i at i ons
h. I nvest ment s
i . Unr eser ved- - undesi gnat ed Fund Bal ance

Requi r ed:

I dent i f y t he nor mal bal ance expect ed f or each account dur i ng t he f i scal
year bef or e cl osi ng ent r i es. Sel ect f r omdebi t , cr edi t or ei t her .

ANS:

a. Ei t her d. Cr edi t g. Cr edi t
b. Debi t e. Debi t h. Debi t
c. Cr edi t f . Cr edi t i . Cr edi t

DI F: E OBJ : 5

6. What i s t he concept of i nt er per i od equi t y?

ANS:

The concept of i nt er per i od equi t y woul d measur e whet her t he equi t y of
t he gover nment al uni t i ncr eased or decr eased acr oss gener at i ons
( i nt er gener at i onal ) or per i ods ( i nt er per i od) equi t y. Wer e cur r ent
r esour ces/ r evenues adequat e t o pay f or cur r ent ser vi ces? For exampl e,
Ross Per ot campai gned f or Pr esi dent showi ng sever al bar char t s t hat
i ndi cat ed how t he f eder al def i ci t and debt has i ncr eased acr oss t i me.
Ross Per ot demonst r at ed t hr ough hi s char t s and gr aphs t hat cur r ent
r evenues wer e not adequat e t o pay f or f eder al expendi t ur es, and as a
r esul t , our gr andchi l dr en wer e goi ng t o have t o pay f or cur r ent
ser vi ces i . e. , i nt er per i od equi t y was decr easi ng acr oss t i me.

DI F: E OBJ : 3

7. The f ol l owi ng sel ect ed account bal ances f or t he Ci t y of Hampt on on
J anuar y 1, 20X8 ar e l i st ed bel ow:

Del i nquent Taxes Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . $34, 000 Dr .
Al l owance f or Uncol l ect i bl e Del i nquent Taxes. . . . . . . 11, 000 Cr .
Tax Li ens Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 000 Dr .
Al l owance f or Uncol l ect i bl e Tax Li ens. . . . . . . . . . . . . . 5, 000 Cr .

Chapt er 15
15- 11
Requi r ed:

Recor d t he f ol l owi ng t r ansact i ons t hat occur r ed dur i ng 20X8:

a. Cur r ent pr oper t y t axes ar e l evi ed at $750, 000 wi t h a 4%
al l owance f or uncol l ect i bl e pr oper t y t axes.

b. Pr oper t y t o whi ch t ax l i ens appl y i s sol d f or $6, 000 and t he
account i s cl osed.

c. Cur r ent pr oper t y t axes ar e col l ect ed i n t he amount of
$702, 000.

d. Pr evi ous del i nquent pr oper t y t axes ar e conver t ed t o t ax l i ens
and t he cur r ent pr oper t y t axes ar e consi der ed del i nquent .

ANS:

a. Taxes Recei vabl e- - Cur r ent . . . . . . . . . . . . . . 750, 000
Al l owance f or Uncol l ect i bl e Cur r ent Taxes. 30, 000
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . 720, 000

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Tax Li ens Recei vabl e. . . . . . . . . . . . . . . . . . . . . . 6, 000

Al l owance f or Uncol l ect i bl e Tax Li ens. . 5, 000
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000
Tax Li ens Recei vabl e. . . . . . . . . . . . . . . . . . . . . 6, 000

c. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702, 000
Taxes Recei vabl e- - Cur r ent . . . . . . . . . . . . . . . . . 702, 000

d. Tax Li ens Recei vabl e. . . . . . . . . . . . . . . . . . . 34, 000
Taxes Recei vabl e- - Del i nquent . . . . . . . . . . . . . . 34, 000

Al l ow f or Uncol l ect i bl e Del i nquent Taxes 11, 000
Al l owance f or Uncol l ect i bl e Tax Li ens. . . . . 11, 000

Taxes Recei vabl e- - Del i nquent . . . . . . . . . . 48, 000
Taxes Recei vabl e- - Cur r ent . . . . . . . . . . . . . . . . . 48, 000

Al l ow f or Uncol l ect i bl e Cur r ent Taxes. . . 30, 000
Al l ow. f or Uncol l ect i bl e Del i nquent Taxes. 30, 000

DI F: M OBJ : 5

Chapt er 15
15- 12
8. The Ci t y of Fr ankl i n has adopt ed t he Gener al Fund budget f or t he next
f i scal year . The det ai l s of t he budget ar e:

Revenue and ot her f i nanci al sour ces:
Pr oper t y t axes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500, 000
Fi nes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
St at e and f eder al gr ant s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000
Est i mat ed r ecei pt of f unds f r omt he cl osi ng of
t he Muni ci pal Swi mmi ng Pool , account f or as an
Ent er pr i se Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000
Est i mat ed r ecei pt f r omWat er Ut i l i t y Fund t o f i nance
Expendi t ur es ( not i n l i eu of pr oper t y t axes) . . . . . . . . 50, 000

Expendi t ur es and ot her uses:
Equi pment pur chases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150, 000
Gener al oper at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450, 000
Est i mat ed t r ansf er t o Debt Ser vi ce f und t o pay
i nt er est on bond i ndebt edness. . . . . . . . . . . . . . . . . . . . . . . 30, 000

Requi r ed:

Pr epar e j our nal ent r i es t o r ecor d t he budget f or t he Ci t y of Fr ankl i n.

ANS:

Est i mat ed Revenues. . . . . . . . . . . . . . . . . . . . . . . . . 625, 000
Est i mat ed Ot her Fi nanci ng Sour ces. . . . . . . . . . . . 65, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600, 000
Est i mat ed Ot her Fi nanci ng Uses. . . . . . . . . . . . . . . 30, 000
Budget ar y Fund Bal ance. . . . . . . . . . . . . . . . . . . . . . . 60, 000

DI F: M OBJ : 6

9. The f ol l owi ng t r ansact i ons wer e made by t he Ci t y of Mor r el l :

J une 2, 20X5 Pur chase or der s of $57, 000 wer e appr oved.

J une 17, 20X5 Goods of $32, 000 of t he pur ch or der s wer e
r ecei ved. These i t ems ar e i n good or der .
The i nvoi ces t ot al ed $29, 000 and voucher s wer e
appr oved f or payment .

J une 30, 20X5 Make ent r i es f or t he Ci t y of Mor el l s
year - end and t he st ar t of t he next f i scal
year on J ul y 1, 20X5.

J ul y 16, 20X5 The r emai ni ng i t ems ar r i ved i n good or der
The i nvoi ces t ot al ed $25, 000.

Requi r ed:

Make t he necessar y j our nal ent r i es t o r ecor d t he t r ansact i ons i n t he
Gener al Fund.

Chapt er 15
15- 13
ANS:

J une 2, 20X5 Encumbr ances. . . . . . . . . . . . . . 57, 000
Fund Bal ance- -
Reser ved f or Encumbr ances 57, 000

J une 17, 20X5 Fund Bal ance- - Reser ved
f or Encumbr ances. . . . . . 32, 000
Encumbr ances. . . . . . . . . . . . 32, 000

Expendi t ur es. . . . . . . . . . . . . . 29, 000
Voucher s Payabl e. . . . . . . . 29, 000

J une 30, 20X5 Fund Bal ance- - Unr eser ved,
Undesi gnat ed. . . . . . . . . . 25, 000
Encumbr ances. . . . . . . . . . . . 25, 000

J ul y 1, 20X5 Encumbr ances. . . . . . . . . . . . . . 25, 000
Fund Bal ance- - Unr eser ved,
Undesi gnat ed. . . . . . . . . . 25, 000

J ul y 16, 20X5 Fund Bal ance- - Reser ved f or
Encumbr ances. . . . . . . . . . 25, 000
Encumbr ances. . . . . . . . . . . . 25, 000

Expendi t ur es. . . . . . . . . . . . . . 25, 000

DI F: M OBJ : 5

10. The f ol l owi ng t r ansact i ons wer e made by Cape Ci t y:

August 1, 20X9 A weal t hy busi ness per son donat es a downt own
of f i ce bui l di ng t o Cape Ci t y. I t s f ai r mar ket
val ue i s $2, 500, 000. The ci t y i nt ends t o sel l t he
bui l di ng.

August 15, 20X9 The ci t y pur chases a war ehouse t o be used f or
st or age and pays $1, 500, 000 f r omt he Gener al Fund.

Sept ember 1, 20X9 The donat ed of f i ce bui l di ng i s sol d f or $2, 600, 000.

Requi r ed:

Make t he j our nal ent r i es necessar y t o r ecor d t he t r ansact i ons i n t he
Gener al Fund and i n t he Gener al Fi xed Asset s Account Gr oup.

Chapt er 15
15- 14
ANS:

Gener al Fund:
August 1, 20X9 No ent r y r equi r ed

August 15, 20X9 Expendi t ur es. . . . . . . . . . . . . . . . . 1, 500, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . 1, 500, 000

Sept ember 1, 20X9 Cash. . . . . . . . . . . . . . . . . . . . . . . . . 2, 600, 000
Ot her Fi nanci ng Sour ce- -
Di sposal of Asset . . . . . . . . 2, 600, 000

Gener al Fi xed Asset Account Gr oup:
August 1, 20X9 Of f i ce Bui l di ng. . . . . . . . . . . . . . 2, 500, 000
I nvest ment i n Gener al Fi xed
Asset s- - Donat i ons. . . . . . . . 2, 500, 000

August 15, 20X9 War ehouse. . . . . . . . . . . . . . . . . . . . 1, 500, 000
I nvest ment i n Gener al Fi xed
Asset s- - Gener al Fund. . . . . 1, 500, 000

Sept ember 1, 20X9 I nvest ment i n Gener al Fi xed
Asset s- - Donat i ons. . . . . . . . . 2, 500, 000
Of f i ce Bui l di ng. . . . . . . . . . . . 2, 500, 000

DI F: M OBJ : 10

11. Lake Ci t y had t he f ol l owi ng t r ansact i ons.

J ul y 1, 20X9 Lake Ci t y l evi ed $500, 000 i n pr oper t y t axes t o
be pai d by i t s ci t i zens bef or e Oct ober 1, 20X9.
Est i mat ed uncol l ect i bl es ar e 1%of t he t axes l evi ed.

J ul y 31, 20X9 Dur i ng J ul y, $10, 000 was col l ect ed f or l i censes
and per mi t s.

August 1, 20X9 Recei ved a gr ant f r omt he st at e gover nment t o pay
f or a dr ug enf or cement of f i cer f or one year . The
amount i s $50, 000 and t he of f i cer i s t o begi n on
Oct ober 1, 20X9.

Requi r ed:

Gener al Fund. Lake Ci t y has a J une 30 year end.

Chapt er 15
15- 15
ANS:

J ul y 1, 20X9 Taxes Recei vabl e- - Cur r ent . . . . 500, 000
Revenues. . . . . . . . . . . . . . . . . . . 495, 000
Al l owances f or Uncol l ect i bl e
Taxes- Cur r ent . . . . . . . . . . . . . 5, 000

J ul y 31, 20X9 Cash. . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Revenues. . . . . . . . . . . . . . . . . . . 10, 000

August 1, 20X9 Cash. . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Revenues. . . . . . . . . . . . . . . . . . . 37, 500
Def er r ed Revenues. . . . . . . . . . 12, 500

DI F: M OBJ : 7

12. Usi ng t he i nf or mat i on i n Fi gur e 15- 1, pr epar e t he J une 30, 20X9,
Gener al Fund bal ance sheet f or Got hamCi t y.
____________________________________________________________________

Fol l owi ng i s t he year - end t r i al bal ance f or t he
Gener al Fund of Got hamCi t y.

Got hamCi t y
Gener al Fund Tr i al Bal ance
J une 30, 20X9 ___

Debi t Cr edi t
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230, 000
Taxes Recei vabl e- - Cur r ent . . . . . . . . . . . . . . . . . . . . 150, 000
Al l owances f or Uncol l ect i bl e Taxes- -
Cur r ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Taxes Recei vabl e- - Del i nquent . . . . . . . . . . . . . . . . . 25, 000
Del i nquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
I nvent or y of Suppl i es. . . . . . . . . . . . . . . . . . . . . . . . 55, 000
Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110, 500
Tax Ant i ci pat i on Not es Payabl e. . . . . . . . . . . . . . . 100, 000
Fund Bal ance- - Reser ved f or I nvent or y
of Suppl i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55, 000
Fund Bal ance- - Unr eser ved, Undesi gnat ed. . . . . . . 50, 000
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 455, 000
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 255, 000
Ot her Fi nanci ng Sour ces. . . . . . . . . . . . . . . . . . . . . . 110, 000
Ot her Fi nanci ng Uses. . . . . . . . . . . . . . . . . . . . . . . . . 95, 500
Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125, 000
Fund Bal ance- - Reser ved f or Encumbr ances. . . . . . 125, 000
Est i mat ed Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 450, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 300, 000
5, 545, 500 5, 545, 500
========= =========

The I nvent or y of Suppl i es and Fund Bal ance- - Reser ved f or I nvent or y of
Suppl i es have been adj ust ed t o r ef l ect endi ng i nvent or y. The begi nni ng
i nvent or y bal ance was $0. Fund Bal ance- - Unr eser ved- Undesi gnat ed was
$5, 000 bef or e t he adj ust ment .
Chapt er 15
15- 16

Figure 15-1

ANS:

Got hamCi t y
Gener al Fund Bal ance Sheet
J une 30, 20X9

Asset s

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $230, 000
Tax r ecei vabl e- - cur r ent . . . . . . . . . . . . . . . . . . . . . . $150, 000
Less al l owance f or uncol l ect i bl e cur r ent
t axes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000 140, 000
Tax r ecei vabl e- - del i nquent . . . . . . . . . . . . . . . . . . . $ 25, 000
Less al l owances f or uncol l ect i bl e
del i nquent t axes. . . . . . . . . . . . . . . . . . . . . . . . . 20, 000 5, 000
I nvent or y of suppl i es. . . . . . . . . . . . . . . . . . . . . . . . 55, 000
$430, 000
========

Li abi l i t i es and Fund Equi t y

Li abi l i t i es:
Voucher s payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . $110, 500
Tax ant i ci pat i on not es payabl e. . . . . . . . . . . . . 100, 000
$210, 500

Fund Bal ances:
Reser ved f or encumbr ances. . . . . . . . . . . . . . . . . . $125, 000
Reser ved f or i nvent or y of suppl i es. . . . . . . . . 55, 000
Fund bal ance- - unr eser ved- undesi gnat ed. . . . . . 39, 500 219, 500
$430, 000
========

DI F: D OBJ : 9

Chapt er 15
15- 17
13. Usi ng t he i nf or mat i on i n Fi gur e 15- 1, pr epar e a St at ement of Revenues,
Expendi t ur es, and Change i n Fund Bal ance- - Budget and Act ual f or t he
Gener al Fund f or Got hamCi t y f or t he year end J une 30, 20X9.
____________________________________________________________________


Got hamCi t y
J une 30, 20X9 ___

Debi t Cr edi t
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230, 000
Cur r ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Del i nquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
of Suppl i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55, 000
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 455, 000
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 255, 000
Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 300, 000
5, 545, 500 5, 545, 500
========= =========


Chapt er 15
15- 18
Figure 15-1

ANS:

Got hamCi t y
Gener al Fund St at ement of Revenues, Expendi t ur es, and
Change i n Fund Bal ance - Budget t o Act ual
For t he Fi scal Year Ended J une 30, 20X9

Var i ance- -
Favor abl e
Budget Act ual ( Unf avor abl e)
Revenues. . . . . . . . . . . . . . . . . . . . . . $2, 450, 000 $2, 455, 000 $ 5, 000
Expendi t ur es. . . . . . . . . . . . . . . . . . 2, 300, 000 2, 255, 000 45, 000
Excess of r evenues over
expendi t ur es $ 150, 000 $ 200, 000 $50, 000
Ot her f i nanci ng sour ces
( uses) 14, 000 14, 500 500
Excess of r evenues and ot her
sour ces over expendi t ur es
and ot her uses. . . . . . . . . . . . . . $ 164, 000 $ 214, 500 $50, 500
Fund bal ance J ul y 1, 20X8. . . . . 5, 000 5, 000 0
Fund bal ance J une 30, 20X9. . . . $ 169, 000 $ 219, 500 $50, 500
========== ========== =======

DI F: D OBJ : 9

Chapt er 15
15- 19
14. Usi ng t he i nf or mat i on i n Fi gur e 15- 1, pr epar e t he cl osi ng ent r i es f or
t he Gener al Fund of Got hamCi t y on J une 30, 20X9.
____________________________________________________________________


Got hamCi t y
J une 30, 20X9 ___

Debi t Cr edi t
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230, 000
Cur r ent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Del i nquent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
of Suppl i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55, 000
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 455, 000
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 255, 000
Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 300, 000
5, 545, 500 5, 545, 500
========= =========


Chapt er 15
15- 20
Figure 15-1

ANS:

Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 300, 000
Est i mat ed Ot her Fi nanci ng Uses. . . . . . . . . . . . . . 96, 000
Budget Fund Bal ance- - Unr eser ved. . . . . . . . . . . . . 164, 000
Est i mat ed Revenue. . . . . . . . . . . . . . . . . . . . . . . . . 2, 450, 000
Est i mat ed Ot her Fi nanci ng Sour ces. . . . . . . . . 110, 000

Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 455, 000
Ot her Fi nanci ng Sour ces. . . . . . . . . . . . . . . . . . . . . 110, 000
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 255, 000
Ot her Fi nanci ng Uses. . . . . . . . . . . . . . . . . . . . . . 95, 500
Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125, 000
Fund Bal ance- - Unr eser ved, Undesi gnat ed. . . . 89, 500

DI F: M OBJ : 7

15. Fol l owi ng i s a l i st of sel ect ed t r ansact i ons f or t he Ci t y of Al pena:

a. The ci t y used gener al pr oper t y t axes t o pur chase a comput er
f or t he pol i ce depar t ment . The cost of t he comput er was
$30, 000. I t was not encumber ed.

b. J oseph Gr een donat ed l and and a bui l di ng t o t he ci t y wi t h book
val ues of $25, 000 and $150, 000, r espect i vel y. When t he gi f t
was made, t he appr ai sal val ues wer e $35, 000 f or t he l and and
$135, 000 f or t he bui l di ng.

c. The ci t y sol d an ol d pol i ce car or i gi nal l y pur chased by t he
Gener al Fund f or $10, 000. The sel l i ng pr i ce was $2, 500.

Requi r ed:

Make t he necessar y j our nal ent r i es i n t he f unds and account gr oups
af f ect ed.

Chapt er 15
15- 21
ANS:

a. Gener al Fund Expendi t ur es. . . . . . . . . . . . . . 30, 000

GFAAG Equi pment . . . . . . . . . . . . . . . . . 30, 000
I nvest ment i n Gener al
Fi xed Asset s- -
Gener al Fund. . . . . . . . . . 30, 000

b. GFAAG Land. . . . . . . . . . . . . . . . . . . . . . 35, 000
Bui l di ng. . . . . . . . . . . . . . . . . . 135, 000
Fi xed Asset s- -
Donat i on. . . . . . . . . . . . . . 170, 000

c. Gener al Fund Cash. . . . . . . . . . . . . . . . . . . . . . 2, 500
Ot her Fi nanci ng
Sour ce- - Di sposal of Asset 2, 500

GFAAG I nvest ment i n Gener al
Fi xed Asset s- - Gener al Fund 10, 000
Equi pment . . . . . . . . . . . . . . . 10, 000

DI F: M OBJ : 7, 10

16. Fol l owi ng i s a l i st of sel ect ed t r ansact i ons f or t he Ci t y of Andr ew:

a. The ci t y i ssued $750, 000 i n t er mbonds. The bonds sol d at 102.

b. Af t er t he payment of i nt er est , t he ci t y t r ansf er r ed $100, 000
f r omt he Gener al Fund t o r et i r e ser i al bonds.

c. The bonds i n b ar e r et i r ed.

Requi r ed:

Make t he necessar y j our nal ent r i es i n t he f unds and account gr oups
af f ect ed except t he Debt Ser vi ce Fund.

Chapt er 15
15- 22
ANS:

a. Gener al Fund Cash. . . . . . . . . . . . . . . . . . . . . 765, 000
Ot her Fi nanci ng
Sour ce- - Bond Pr oceeds 765, 000

Gener al Amount t o Be Pr ovi ded
Long- t er mDebt f or Payment of Ter m
Account Gr oup Bonds. . . . . . . . . . . . . . . . 750, 000
Ter mBonds. . . . . . . . . . . . . 750, 000

b. Gener al Fund Ot her Fi nanci ng Use. . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . 100, 000

GLTDAG Amount Avai l abl e i n Debt
Ser vi ce Fund- - Ser i al
Bonds. . . . . . . . . . . . . . . . 100, 000
Amount t o Be Pr ovi ded
f or Payment of
Ser i al Bonds. . . . . . . . . 100, 000

c. GLTDAG Ser i al Bonds Payabl e. . . . . 100, 000
Amount Avai l abl e i n
Debt Ser vi ce Funds- -
Ser i al Bonds. . . . . . . . . 100, 000

DI F: D OBJ : 7, 10

17. The f ol l owi ng act i vi t i es t ook pl ace i n t he ci t y of Li t t l ewood dur i ng
20x2. Make t he necessar y j our nal ent r i es t o account f or t hese
t r ansact i ons, i ncl udi ng t he year end cl osi ng ent r y. Li t t l ewood does not
ut i l i ze an encumbr ance syst em.

a. The budget f or 20x2 was appr oved.
Est i mat ed Revenues $1, 300, 000
Est i mat ed Ot her Fi nanci ng Sour ces 50, 000
Est i mat ed Oper at i ng Expendi t ur es 800, 000
Est i mat ed Equi pment Pur chases 100, 000
Est i mat ed Ot her Fi nanci ng Uses 10, 000

b. The gener al t ax l evy f or 20x2 was $1, 000, 000 wi t h a 5%est i mat e of
uncol l ect i bl es. The r emai ni ng bal ance f r omt he 2001 f i scal year
was $75, 000 i n Taxes Recei vabl e- Cur r ent wi t h and Al l owance of
$20, 000.

c. Equi pment was pur chased t hat was i nvoi ced at $93, 500.

d. I nvoi ces wer e r ecei ved f or oper at i ng expendi t ur es i n t he amount
of $805, 000 and voucher ed.

e. Payment was made on i t ems ' c' and ' d' above.

f . Col l ect i ons of $895, 000 on cur r ent t axes and $5, 000 on
Del i nquent t axes wer e r ecei ved. A st at e gr ant was r ecei ved i n t he
amount of $250, 000.

g. Fi nes and f ees ar e col l ect ed i n t he amount of $85, 000.

Chapt er 15
15- 23
h. The Wat er Ut i l i t y, an Ent er pr i se f und of t he ci t y, wi l l pay
$50, 000 f or ci t y ser vi ces t hat ar e not cover ed by pr oper t y t axes.

i . The ci t y wi l l pay t he mot or pool f und, an i nt er nal ser vi ce f und,
$10, 000 f or i nsur ance cost s on muni ci pal vehi cl es.

ANS:

a. Est i mat ed Revenues 1, 200, 000
Appr opr i at i ons 900, 000
Budget ed Fund Bal ance 340, 000

b. Tax Recei vabl e - Del i nquent 75, 000
Al l owance f or Uncol l ect i bl e- Cur r ent 20, 000
Tax Recei vabl e - Cur r ent 75, 000
Al l owance f or Uncol l ect i bl e- Del i nquent 20, 000
Tax Recei vabl e - Cur r ent 1, 000, 000
Al l owance f or Uncol l ect i bl e- Cur r ent 50, 000
Revenue 950, 000

c. Expendi t ur e 93, 500
Voucher s Payabl e 93, 500
**an ent r y may al so be made i n a gener al f i xed asset account
gr oup

d. Expendi t ur es 805, 000
Voucher s Payabl e 805, 000

e. Voucher s Payabl e 898, 500
Cash 898, 500

f . Cash 900, 000
Tax Recei vabl e - Cur r ent 895, 000
Tax Recei vabl e - Del i nquent 5, 000
Cash 250, 000
Revenue 250, 000

g. Cash 85, 000
Revenue 85, 000

h. Due f r omEnt er pr i se Fund-
Wat er Ut i l i t y 50, 000
Revenue 50, 000

i . Expendi t ur e 10, 000
Due t o I nt er nal Ser vi ce Fund 10, 000

CLOSI NG ENTRY
Budget ed Fund Bal ance 340, 000
Est i mat ed Revenue 1, 300, 000

Revenue 1, 335, 000
Ot her Fi nanci ng Sour ces 50, 000
Chapt er 15
15- 24
Expendi t ur es 898, 500
Ot her Fi nanci ng Uses 10, 000
Fund Bal ance Unr eser ved 476, 500

DI F: D OBJ : 7

18. On J ul y 1, 20X0, t he begi nni ng of i t s f i scal year , t he t r i al bal ance of
t he Gener al Fund of t he Ci t y of St . Bea was as f ol l ows:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Tax Recei vabl e- - Del i nquent . . . . . . . . . . . . . . . . . . . 120, 000
Al l owances f or Uncol l ect i bl e Del i nquent
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 000
I nt er est and Penal t i es Recei vabl e on
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
Al l owance f or Uncol l ect i bl e I nt er est
and Penal t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
Due f r omOt her Funds. . . . . . . . . . . . . . . . . . . . . . . . . 28, 000
Fund Bal ance Reser ved f or Encumbr ances. . . . . . . 16, 000
176, 000 176, 000
======= =======

Requi r ed:

Pr epar e j our nal ent r i es t hat woul d be made i n t he Gener al Fund f or t he
f ol l owi ng event s. Omi t expl anat i ons.

a. The budget shows est i mat ed Gener al Fund r evenues of $450, 000
and est i mat ed expendi t ur es ( i ncl udi ng amount encumber ed i n t he
pr i or year ) of $392, 000.

b. Lat e i n J une 20X0, an or der was pl aced and an encumbr ance
r ecor ded f or $16, 000. Lat er i n J ul y, t he i t emwas r ecei ved at
an i nvoi ce cost of $16, 400. A voucher i s pr epar ed.

c. Pr oper t y t axes amount i ng t o $300, 000 wer e l evi ed, wi t h 4%
est i mat ed t o be uncol l ect i bl e.

d. Cash col l ect i ons dur i ng t he year wer e as f ol l ows:

Cur r ent t axes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $270, 000
Del i nquent t axes ( i n f ul l set t l ement ) . . . . . . . . . . . . . . . . 104, 000
I nt er est and penal t i es on l ast year ' s
t axes ( i n f ul l set t l ement ) . . . . . . . . . . . . . . . . . . . . . . . . . 7, 600
Due f r omot her f unds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 000
$409, 600
========

The cont r ol l er wi shes var i at i ons i n est i mat es t o be r ecor ded i n t he
appr opr i at e r evenue or expendi t ur e account .

e. Pur chase or der s t ot al i ng $276, 000 wer e pl aced. Lat er , i nvoi ces
f or $260, 000 wer e r ecei ved and voucher ed; suppl i es i nvent or y
pur chases wer e $16, 000 of t he t ot al . The

Chapt er 15
15- 25
f . Payr ol l s of $50, 000 wer e pai d. ( I gnor e payr ol l t axes and ot her
deduct i ons. ) I n addi t i on, voucher s t ot al i ng $280, 000 wer e
pai d. ( Suppl i es I nvent or y pur chases wer e $16, 000 of t he
t ot al . )

g. An aut omobi l e was pur chased f or t he f i r e depar t ment . I t cost
$16, 000 and was not pr evi ousl y encumber ed. The i nvoi ce i s
voucher ed.

h. At year end, $6, 000 i n suppl i es wer e on hand. Ther e wer e no
suppl i es on hand a year ago. The ci t y wi shes t o show t he
i nvent or y and t o est abl i sh a pr oper r eser ve.

ANS:

a. Est i mat ed Revenues 450, 000
Budget ar y Fund Bal ance- - Unr eser ved. . . . . . . 58, 000
To r ecor d budget .

b. Encumbr ances . . . . . . . . . . . . . . . . 16, 000
Fund Bal ance- - Unr eser ved, Undesi gnat ed. 16, 000
To r ei nst at e encumbr ance.

Expendi t ur es . . . . . . . . . . . . . . . . 16, 400
Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . 16, 400
To r ecor d voucher .

Fund Bal ance- - Reser ved f or Encumbr ances. 16, 000
Encumbr ances . . . . . . . . . . . . . . . . . . . 16, 000
To r ever se encumbr ance ent r y.

c. Taxes Recei vabl e- - Cur r ent . . . . . . . . . . . . . 300, 000
Al l owance f or Uncol l ect i bl e
Cur r ent Taxes ( 4%) . . . . . . . . . . . . . . . . 12, 000
Revenues . . . . . . . . . . . . . . . . . . . . . . . 288, 000
To r ecor d t ax l evy.

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409, 600
Del i nquent Taxes. . . . . . . . . . . . . . . . . . 12, 000
I nt er est and Penal t i es. . . . . . . . . . . . 800
Revenues . . . . . . . . . . . . . . . . . . . . 3, 600
Taxes Recei vabl e- - Cur r ent . . . . . . . . . . . 270, 000
Taxes Recei vabl e- - Del i nquent . . . . . . . . 120, 000
I nt er est and Penal t i es Recei vabl e
on Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
Due f r omOt her Funds. . . . . . . . . . . . . . . . 28, 000
To r ecor d r ecei pt s.

Chapt er 15
15- 26
e. Encumbr ances . . . . . . . . . . . . . . . . . . . . . 276, 000
Fund Bal ance- -
Reser ved f or Encumbr ances. . . . . . . . . 276, 000
To r ecor d encumbr ances.

Suppl i es I nvent or y. . . . . . . . . . . . . . . . . . . . 16, 000
Expendi t ur es . . . . . . . . . . . . . . . . . . . . . 244, 000
Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . 260, 000
To r ecor d voucher s.

Budget ar y Fund Bal ance- -
Reser ved f or Encumbr ances. . . . . . . . . . . . . 254, 000
Encumbr ances . . . . . . . . . . . . . . . . . . . 254, 000
To r ecor d encumbr ance ent r y.

f . Expendi t ur es . . . . . . . . . . . . . . . . . . . . . 50, 000
Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . 280, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330, 000
To r ecor d payment s.

g. Expendi t ur es . . . . . . . . . . . . . . . . 16, 000
Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . . 16, 000
To r ecor d voucher f or aut omobi l e.

h. Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
I nvent or y of Suppl i es. . . . . . . . . . . . . . . 10, 000
To r ecor d use of i nvent or y.

Fund Bal ance- - Unr eser ved, Undesi gnat ed 6, 000
of Suppl i es. . . . . . . . . . . . . . . . . . . . . . 6, 000
To est abl i sh desi r ed r eser ve.

DI F: D OBJ : 7

19. The pr e- cl osi ng t r i al bal ance of t he Gener al Fund of Vol t er Vi l l age at
t he end of i t s f i scal year , J une 30, 20X1, i s as f ol l ows:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 800
Tax Recei vabl e- - Del i nquent . . . . . . . . . . . . . . . . . 40, 000
Al l owance f or Uncol l ect i bl e Del i nquent
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 400
Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 000
Fund Bal ance- - Reser ved f or Encumbr ances. . . . 22, 000
Fund Bal ance- - Unr eser ved, Undesi gnat ed. . . . . 46, 000
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . 201, 600
Expendi t ur es . . . . . . . . . . . . . . . . . . . . . 215, 200
Encumbr ances . . . . . . . . . . . . . . . . . . . . . 22, 000
Est i mat ed Revenues . . . . . . . . . . . . . . . 200, 000
Appr opr i at i ons . . . . . . . . . . . . . . . . . . . 196, 000
Budget ar y Fund Bal ance- - Unr eser ved. . . . . . . . . 4, 000
497, 000 497, 000
======= =======

Chapt er 15
15- 27
Requi r ed:

a. Pr epar e cl osi ng ent r i es.

b. Pr epar e a st at ement of r evenues, expendi t ur es, and changes i n
f und bal ances f or t he Gener al Fund f or t he year ended J une 30,
20X1.

c. Pr epar e t he Gener al Fund bal ance sheet as of J une 30, 20X1.

ANS:

a. Appr opr i at i ons . . . . . . . . . . . . . . . . 196, 000
Budget ar y Fund Bal ance- - Unr eser ved. . . . . . 4, 000
Est i mat ed Revenues . . . . . . . . . 200, 000
To r ever se ent r y t hat r ecor ded
t he budget .

Revenues . . . . . . . . . . . . . . . . . . . . . . 201, 600
Fund Bal ance- - Unr eser ved, Undesi gnat ed. . 35, 600
Expendi t ur es . . . . . . . . . . . . . . . . 215, 200
Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . 22, 000
To cl ose act ual account bal ances.

b.
Vol t er Vi l l age
Gener al Fund
St at ement of Revenues, Expendi t ur es, and
Changes i n Fund Bal ances
For t he Fi scal Year Ended J une 30, 20X1

Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $201, 600
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215, 200
Excess of r evenues over expendi t ur es. . . . . . . . . . . . . . . . . . . $( 13, 600)
Fund bal ances, J ul y 1, 20X0. . . . . . . . . . . . . . . . . . . . . . . . . . . . 46, 000
Fund bal ances, J une 30, 20X1. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32, 400
========

Chapt er 15
15- 28
c.
Vol t er Vi l l age
Gener al Fund Bal ance Sheet
J une 30, 20X1

Asset s

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19, 800
Tax r ecei vabl e- - del i nquent . . . . . . . . . . . . . . . . . . $40, 000
Less al l owance f or uncol l ect i bl e
del i nquent t axes. . . . . . . . . . . . . . . . . . . . . . . . 8, 400 31, 600
Tot al asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . $51, 400
=======

Li abi l i t i es and Fund Equi t y

Li abi l i t i es: Voucher s payabl e. . . . . . . . . . . . . . . $19, 000
Fund bal ances:
Reser ved f or encumbr ances. . . . . . . . . . . . . . . . . $22, 000
Unr eser ved, Undesi gnat ed. . . . . . . . . . . . . . . . . . 10, 400
Tot al f und equi t y. . . . . . . . . . . . . . . . . . . . . . 32, 400
Tot al l i abi l i t i es and f und equi t y. . . . . . $51, 400
=======

DI F: D OBJ : 9

20. Consi der t he f ol l owi ng event s:

a. The Gener al Fund voucher ed t he pur chase of t r ucks f or $65, 000.
The pur chase had been encumber ed ear l i er i n t he year at
$60, 000.

b. Sever al year s ago, equi pment cost i ng $15, 000 was acqui r ed wi t h
Gener al Fund Revenues. I t was sol d f or $5, 000, wi t h pr oceeds
bel ongi ng t o t he Gener al Fund.

c. Ear l y i n t he year , a ci t i zen donat ed l and appr ai sed at
$100, 000 t o t he ci t y. She submi t t ed pl ans f or a new l i br ar y
and agr eed t o cover t he t ot al cost of const r uct i on, payi ng t he
company di r ect l y as wor k pr oceeds. At year end, t he bui l di ng
was t wo- t hi r ds f i ni shed, wi t h cost s t o dat e of $300, 000.

d. A snow pl ow was pur chased wi t h Gener al Fund cash f or $48, 000,
whi ch r epr esent ed a cost of $61, 000 l ess t r ade- i n of $13, 000
f or an ol d snow pl ow or i gi nal l y pur chased f or $35, 000 f r om
Speci al Revenue Funds. As an emer gency pur chase, t he
acqui si t i on of t he new snow pl ow had not been encumber ed.

Requi r ed:

Pr epar e j our nal ent r i es t o r ecor d t he event s usi ng t he Gener al Fund and
t he Gener al Fi xed Asset s Account Gr oup:

Chapt er 15
15- 29
ANS:

Ent r y i n Ent r y i n Gener al Fi xed
Gener al Fund Asset s Account Gr oup

a. Expendi t ur es Machi ner y and
. . . . . . 65, 000 Equi pment . . . . . . . 65, 000
Voucher I nvest ment i n
Payabl e. . . . 65, 000 Gener al Fi xed
To r ecor d voucher . Asset s- - Gener al
Fund. . . . . . . . . . 65, 000
To r ecor d pur chase.

Fund Bal ances
Reser ved f or
Encumbr ances. . . 60, 000
Encumbr ances. 60, 000
To r ever se encumbr ance.

b. Cash. . . . . . . . . . . 5, 000 I nvest ment i n
Ot her Fi nanci ng Gener al Fi xed
Sour ces 5, 000 Asset s- - Gener al
To r ecor d pr oceeds Fund. . . . . . . . . . . . . 15, 000
f r omequi pment sal e. Machi ner y and
Equi pment . . . . . . 15, 000
To r emove equi pment sol d.

c. No ent r y. Land. . . . . . . . . . . 100, 000
I nvest ment i n
Gener al Fi xed
Asset s- - Donat i ons 100, 000
To r ecor d donat ed l and.

Const r uct i on i n
Pr ocess. . . . . . . . . 300, 000
I nvest ment i n
Gener al Fi xed
Asset s- -
Donat i ons. . . . . 300, 000
To r ecor d par t i al l y f i ni shed
donat ed bui l di ng.

d. Expendi t ur es I nvest ment i n
. . . . . . . 48, 000 Gener al Fi xed
Cash. . . . . . . . . . 48, 000 Asset s- - Speci al
To r ecor d payment Revenue Fund. . . . . 35, 000
f or snow pl ow. Machi ner y and
Equi pment . . . . . . 35, 000
To r emove t r aded snow pl ow.

Machi ner y and
Equi pment . . . . . . . . 61, 000
I nvest ment i n
Gener al Fi xed
Asset s- - Gener al
Fund. . . . . . . . . . 61, 000
To r ecor d new snow pl ow
acqui r ed.

Chapt er 15
15- 30
DI F: M OBJ : 7, 10

21. The f ol l owi ng t r ansact i ons occur r ed i n t he Ci t y of Mai nevi l l e dur i ng
20X1:

a. Gener al obl i gat i on t er mbonds wi t h a f ace val ue of $2, 500, 000
wer e sol d f or $2, 550, 000. The pr oceeds f r omt he bond i ssue
wer e t o be used t o const r uct a new l i br ar y and wer e r ecei ved
by t he Capi t al Pr oj ect s Fund.

b. $200, 000 was t r ansf er r ed f r omt he Gener al Fund t o t he Debt
Ser vi ce Fund t o begi n savi ng f or t he r et i r ement of t he bonds
i n t r ansact i on a. at mat ur i t y.

c. $150, 000 was t r ansf er r ed f r omt he Gener al Fund t o t he Debt
Ser vi ce Fund t o r et i r e a por t i on of a ser i al bond due i n 20X1.

d. A pol i ce car was pur chased f or $18, 000 and t he t r ade- i n of an
ol d pol i ce car or i gi nal l y pur chased f or $15, 000 f r omt he
Gener al Fund. The new vehi cl e had a l i st pr i ce and f ai r mar ket
val ue of $21, 500.

e. The ser i al bonds f unded i n t r ansact i on c. wer e r et i r ed on
t hei r mat ur i t y dat e.

f . By year end, $450, 000 of t he wor k had been compl et ed on t he
new l i br ar y.

Requi r ed:

Pr epar e t he necessar y j our nal ent r i es t o r ecor d t he t r ansact i ons and
i dent i f y t he f und or account gr oup i n whi ch i t woul d be r ecor ded.
Ent r i es i n t he Debt Ser vi ce and Capi t al Pr oj ect s Funds shoul d be
i gnor ed.

ANS:

Fund or
Ent r y Gr oup

a. Amount t o Be
Pr ovi ded f or
Payment of
Ter mBonds. . . . . . . . 2, 500, 000 GLTDAG
Ter mBonds. . . . . . 2, 500, 000

b. Ot her Fi nanci ng
Uses. . . . . . . . . . . . . . 200, 000 Gener al
Cash. . . . . . . . . . . . 200, 000 Fund

Amount Avai l abl e. .
i n Debt Ser vi ce
Funds- Ter m
Bonds. . . . . . . . . . . . . 200, 000 GLTDAG
Amount t o Be
Pr ovi ded f or
Payment of
Ter mBonds. . . . . . 200, 000
Chapt er 15
15- 31

Chapt er 15
15- 32
c. Ot her Fi nanci ng
Uses. . . . . . . . . . . . . . 150, 000 Gener al
Cash. . . . . . . . . . . . 150, 000 Fund

Amount Avai l abl e. .
i n Debt Ser vi ce
Funds- - Ser i al
Bond. . . . . . . . . . . . . . 150, 000 GLTDAG
Amount t o be
Pr ovi ded f or
Payment of
Ser i al Bonds. . . . 150, 000

d. Expendi t ur es. . . . . . 18, 000 Gener al
Cash. . . . . . . . . . . . 18, 000 Fund

Equi pment . . . . . . . . . 21, 500 GFAAG
I nvest ment i n
Gener al Fi xed
Asset s- -
Gener al Fund. . . . 21, 500

Fi xed Asset s- - Gener al
Fund. . . . . . . . . . . . . . 15, 000
Equi pment . . . . . . . 15, 000

e. Ser i al Bonds
Payabl e. . . . . . . . . . . 150, 000 GLTDAG
Amount Avai l abl e
i n Debt Ser vi ce
Funds- - Ser i al
Bonds. . . . . . . . . . . 150, 000

f . Const r uct i on i n
Pr ogr ess. . . . . . . . . . 450, 000 GFAAG
I nvest ment i n
Gener al Fi xed Asset s
- - Capi t al Pr oj ect s Fund 450, 000

DI F: E OBJ : 7

22. Whi ch f und and/ or account gr oup woul d account f or t he f ol l owi ng
act i vi t i es?

a. pr oper t y t axes
b. pur chase a f i r e t r uck
c. or der some gener al suppl i es
d. bui l d a ci t y hal l
e. pay pr i nci pal and i nt er est on l ong- t er mdebt
f . i ssue l ong- t er mdebt t o bui l d t he ci t y hal l
g. pay t he cur r ent por t i on of pensi on l i abi l i t y

Chapt er 15
15- 33
ANS:

a. gener al f und
b. gener al f und and gener al f i xed asset account gr oup
c. gener al f und
d. capi t al pr oj ect s f und and gener al f i xed asset account gr oup
e. gener al f und, debt ser vi ce f und, and gener al l ong- t er mdebt
account gr oup
f . capi t al pr oj ect s f und and gener al l ong- t er mdebt account gr oup
g. gener al f und

DI F: E OBJ : 5
Chapter 16 Governmental Accounting: Other Governmental Funds,
Proprietary Funds, and Fiduciary Funds

MULTIPLE CHOICE

1. Capi t al i mpr ovement s whi ch ar e f i nanced by speci al assessment debt f or
whi ch t he gover nment i s obl i gat ed i n some manner woul d be r ecor ded i n
t he Gener al Fi xed Asset s Account Gr oup as a( n)
a. debi t t o Expendi t ur es.
b. debi t t o Asset s f or t he por t i on owned by t he gover nment .
c. i nvest ment i n Gener al Fi xed Asset s- - Capi t al Pr oj ect Funds.
d. Bonds Payabl e.


2. Whi ch of t he f ol l owi ng act i vi t i es woul d NOT be account ed f or i n a
Speci al Revenue Fund?
a. hot el t axes r est r i ct ed f or t our i smexpendi t ur es
b. l ot t er y pr oceeds r est r i ct ed f or pr oper t y t ax r el i ef
c. i nt er est ear ned on t empor ar y i nvest ment s of l ong t er mbond
pr oceeds
d. par k f ees r est r i ct ed t o cover a smal l por t i on of par k upkeep and
mai nt enance


3. Whi ch of t he f ol l owi ng f und t ypes have account i ng pr i nci pl es most
cl osel y r el at ed t o t hose of t he Gener al Fund?
a. Pensi on Tr ust
b. Ent er pr i se
c. Agency
d. Speci al Revenues


4. When a ci t y pays i t s wat er and sewer bi l l f or i t s admi ni st r at i on
of f i ces t o t he ci t y owned wat er company, t he f ol l owi ng ent r y woul d be
made
a. Cr edi t t o Revenue i n t he Ut i l i t y Fund
b. Debi t t o Revenues i n t he Gener al Fund
c. Cr edi t t o Expendi t ur es i n t he Gener al Fund
d. Debi t Admi ni st r at i ve Expense i n t he Gener al Fund


5. Debt Ser vi ce f unds account f or
a. r evenue bonds.
b. payment of pr i nci pal and i nt er est on gener al obl i gat i on debt .
c. ar bi t r age.
d. moni es i r r evocabl y set asi de f or an i n- subst ance def easance.


Chapt er 16
16- 2
6. Capi t al pr oj ect s expect ed t o t ake sever al year s t o compl et e and i nvol ve
l ar ge amount s of money
a. oper at e under an annual budget , i ncl udi ng expect ed r evenues and
est i mat ed expendi t ur es f or t he cur r ent f i scal year .
b. oper at e under an annual budget , i ncl udi ng expect ed r evenues and
est i mat ed expendi t ur es f or t he ent i r e pr oj ect l i f e.
c. budget f or est i mat ed expendi t ur es onl y and onl y f or t he cur r ent
f i scal per i od.
d. do not ut i l i ze any annual budget i ng ent r i es.


7. On December 1, $125, 000 was deposi t ed wi t h a f i scal agent f or payment
on bonds payabl e i n t he amount of $90, 000 and i nt er est payabl e f or
$35, 000 due mat ur i ng on t he l ast day of December . Thi s wi l l r equi r e a
debi t of
a. $125, 000 t o t he Expendi t ur e account i n t he Gener al Fund.
b. $35, 000 t o t he Expendi t ur e account i n t he Gener al Fund.
c. $125, 000 t o t he Ot her Fi nanci ng Uses- - Oper at i ng Tr ansf er s Out
account i n t he Gener al Fund.
d. $35, 000 t o t he Expendi t ur e account i n t he Debt Ser vi ce Fund.


8. Per manent Funds ar e est abl i shed t o
a. account f or gener al oper at i ng act i vi t i es
b. account f or publ i c pur pose t r ust f or whi ch onl y t he ear ni ngs ar e
expendabl e f or a speci f i c pur pose
c. r ecor d ear ni ngs and pr i nci pal expended f or publ i c pur pose t r ust s
f or speci f i c pur poses
d. account f or pr i vat e pur pose t r ust s


9. The basi s of account i ng f or t he Expendabl e Tr ust Fund i s t he
a. accr ual basi s.
b. cash basi s.
c. modi f i ed accr ual basi s.
d. modi f i ed cash basi s.


10. Whi ch of t he f ol l owi ng i s an expendi t ur e i n t he Debt Ser vi ce Fund?
a. The payment of pr i nci pal of a mat ur ed bond account ed f or i n t he
Gener al Long- Ter mDebt Account Gr oup
b. Payment of pr i nci pal or i nt er est on speci al assessment debt f or
whi ch t he gover nment i s obl i gat ed i n some manner
c. Tr ansf er s t o f i scal agent s f or payment of bond i nt er est
d. Al l of t hese ar e expendi t ur es i n t he Debt Ser vi ce Fund.


Chapt er 16
16- 3
11. Ut i l i zi ng ser i al bonds t o r ai se l ong t er mr esour ces i s pr ef er r ed i n
debt ser vi ce f unds because:
a. t he f ace val ue becomes due at one t i me at a mor e di st ant mat ur i t y
dat e.
b. ser i al bonds do not r equi r e a subst ant i al accumul at i on of money i n
a si nki ng f und.
c. i t assi st s i n t he budget i ng pr ocess.
d. t he pr i mar y f unct i on i s t o account f or f i xed asset acqui si t i ons.


12. An ent er pr i se f und shoul d be used t o account f or
a. a f r ee ci t y- r un swi mmi ng pool pai d f or wi t h pr oper t y t ax.
b. a ci t y- r un wat er ut i l i t y ser vi ng t he gener al publ i c.
c. any act i vi t y whi ch t he ci t y pl ans t o sel l t o ext er nal user s f or a
f ee ei t her now or i n t he f ut ur e.
d. Bot h b and c ar e cor r ect .


13. A quasi - ext er nal t r ansact i on such as t he sal e of power by t he ci t y
ut i l i t y f und t o t he gener al f und shoul d be account ed f or as
a. Expendi t ur e i n t he Gener al Fund.
b. Oper at i ng Revenue i n t he Ut i l i t y Fund.
c. i f t he t r ansact i on had occur r ed wi t h an ext er nal par t y.


14. Whi ch of t he f ol l owi ng i s not a t ypi cal year - end st at ement f or an
Ent er pr i se Fund?
a. Bal ance sheet
b. St at ement of Revenue, Expenses and Changes i n Ret ai ned Ear ni ngs
c. St at ement of cash f l ows
d. Al l of t hese f i nanci al st at ement s woul d be used at year end by an
Ent er pr i se Fund.


15. The act i vi t i es of a cent r al mot or pool t hat suppl i es and ser vi ces
vehi cl es f or t he use of muni ci pal empl oyees on of f i ci al busi ness shoul d
be account ed f or i n a( n) ?
a. Gener al Fund
b. Agency Fund
c. I nt er nal Ser vi ce Fund
d. Speci al Revenue Fund


Chapt er 16
16- 4
16. I f a count y col l ect s t axes on behal f of t he ci t y and school di st r i ct ,
i t woul d r ecor d t he t axes i n t he
a. Gener al Fund.
b. Speci al Revenue Fund.
c. Agency Fund.
d. Tr ust Fund.


17. The best f und i n whi ch t o account f or t he i nt er est and di vi dends f r om
an endowment t o pur chase l i br ar y books f or a ci t y woul d be a( n)
a. Expendabl e Tr ust Fund.
b. Agency Fund.
c. Endowment Fund.
d. Nonexpendabl e Tr ust Fund.


18. A r edempt i on of t he f i nal ser i al of gener al obl i gat i on bonds, i ncl udi ng
a def i ci ency cover ed by t he gener al f und, woul d af f ect whi ch f unds
and/ or account gr oups?
a. Gener al , Debt Ser vi ce, Gener al Long Ter mDebt Account Gr oup
b. Debt Ser vi ce, Gener al Long Ter mDebt Account Gr oup, Agency Fund
c. Gener al , Debt Ser vi ce
d. Gener al , Debt Ser vi ce, Gener al Long Ter mDebt Account Gr oup,
Capi t al Pr oj ect s


19. The Si ngl e Audi t Act r equi r es t hat a gover nment al uni t have a si ngl e
audi t i f t hey
a. r ecei ve any Feder al Funds even on a pass- t hr ough basi s.
b. ar e not i n compl i ance wi t h t he Feder al gr ant condi t i ons.
c. r ecei ve mor e t han $300, 000 i n Feder al f unds annual l y.
d. onl y r ecei ve one Feder al gr ant .


20. I nt er f und t r ansact i ons i ncl ude al l of t he f ol l owi ng except f or :
a. one f und' s r ei mbur sement of anot her f or suppl i es pai d on i t s
behal f
b. i nt er f und oper at i ng t r ansf er s bet ween gover nment f unds f or
ser vi ces pr ovi ded and used and r ecor ded as ot her f i nanci ng sour ces
and uses
c. i nt er f und l oan t r ansf er s cl assi f i ed as Due t o/ f r omot her Funds
d. i nt er f und non- r eci pr ocal t r ansf er s bet ween gover nment f unds
r ecor ded as i nt er f und t r ansf er s appear i ng af t er nonoper at i ng
r evenues


Chapt er 16
16- 5
21. I f gener al obl i gat i on debt i s r ef unded t o l ower t he i nt er est r at e and
t he pr oceeds ar e i r r evocabl y pl aced wi t h an escr ow agent or t r ust ee t o
pay of f t he ol d debt as i t comes due, t he gover nment must
a. pr ovi de a gener al descr i pt i on of t he t r ansact i on i n t he newspaper .
b. cal cul at e t he economi c gai n or Bal ance- - Empl oyer Cont r i but i ons.
c. adj ust t he GLTDAG f or t he i ncr ease or decr ease i n t he amount of
l ong- t er mdebt
d. Bot h b and c ar e cor r ect .


22. Whi ch of t he f ol l owi ng t er ms best descr i bes t he account i ng met hods used
t o account f or a ci t y' s Pensi on Tr ust Fund?
a. Cash basi s
b. Modi f i ed cash basi s
c. Accr ual basi s
d. Modi f i ed accr ual basi s


23. The mai n di f f er ence bet ween an agency f und and a t r ust f und i s:
a. an agency f und usual l y does not have end of per i od bal ances
b. agency f unds account f or asset s i nvest ed t o pr oduce ear ni ngs f or a
desi gnat ed pur pose
c. agency f unds account f or asset s, l i abi l i t i es, and changes i n net
asset s of ext er nal par t i ci pant s i n an i nvest ment pool
d. agency f unds account f or cont r i but i ons t o r et i r ement pl ans


24. A gover nment may deci de t o do an advance r ef undi ng of l ong- t er mdebt t o
r emove l egal i mpai r ment s or l ower t he ef f ect i ve i nt er est r at e. I f t he
r ef undi ng does not pay of f t he ol d debt , but si mpl y set s asi de moni es
i r r evocabl y wi t h a t r ust ee t o pay i t as i t comes due, i t i s a( n)
a. dupl i cat e bor r owi ng.
b. i n- subst ance def easance.
c. t r ansact i on t o onl y di scl ose i n t he f oot not es.
d. t r ust t o r ecor d i n t he nonexpendabl e t r ust f und.


25. Whi ch of t he f ol l owi ng f unds or account gr oups woul d be af f ect ed by a
t r ansf er of pr oper t y t ax r ecei pt s t o pay bond pr i nci pal and i nt er est
payment s? The bonds wer e i ssued sever al year s ago t o f und t he
const r uct i on of a new l i br ar y.
a. Capi t al Pr oj ect Fund
b. Li br ar y Fund
c. Debt Ser vi ce Fund
d. Gener al Fi xed Asset Account Gr oup


Chapt er 16
16- 6
26. Whi ch of t he f ol l owi ng f unds woul d use t he f l ow of f i nanci al r esour ces
as i t s measur ement f ocus?
a. Gener al Fund
b. Agency Fund
c. I nt er nal Ser vi ce Fund
d. Nonexpendabl e Tr ust Fund


27. When a ci t y pl ans t o bui l d a f i r e st at i on by i ssui ng l ong- t er mdebt , i t
coul d obt ai n money t o st ar t const r uct i on bef or e t he bonds ar e sol d by
a. sel l i ng ol d f i r e t r ucks.
b. bor r owi ng f r omt he pensi on t r ust f und.
c. i ssui ng Bond Ant i ci pat i on Not es.
d. i ssui ng Tax Ant i ci pat i on Not es.


28. I n t he Compr ehensi ve Annual Fi nanci al Repor t ( CAFR) of a gover nment al
uni t , t he account gr oups ar e i ncl uded i n
a. bot h t he combi ned bal ance sheet and t he combi ned st at ement of
r evenues, expendi t ur es, and changes i n f und bal ances.
b. t he combi ned st at ement of r evenues, expendi t ur es, and changes i n
f und bal ances, but NOT t he combi ned bal ance sheet .
c. t he combi ned bal ance sheet but NOT t he combi ned st at ement of
d. nei t her t he combi ned bal ance sheet nor t he combi ned st at ement of


PROBLEM

1. The f ol l owi ng summar y event s ar e f or t he Vi l l age of Car sonvi l l e:

a. The annual budget f or t he Speci al Revenue f und was adopt ed as
f ol l ows:

Est i mat ed Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150, 000

b. The st at e t r ansf er s $160, 000 t o t he ci t y f or i t s cur r ent
year ' s shar e of gasol i ne t ax.

c. $148, 000 was spent on r oad r epai r s and mai nt enance dur i ng t he
year .

d. Cl osi ng ent r i es ar e made f or t he year .

Requi r ed:

Pr epar e t he j our nal ent r i es necessar y t o r ecor d t hese event s i n t he
Speci al Revenue Fund. The f und was est abl i shed t o r ecor d t he ci t y' s
shar e of st at e gasol i ne t ax, whi ch i s used f or st r eet mai nt enance.
Chapt er 16
16- 7

ANS:

a. Est i mat ed Revenues. . . . . . . . . . . . . . . . . . . . . . 170, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Budget ar y Fund Bal ance. . . . . . . . . . . . . . . . 20, 000

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160, 000
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160, 000

c. Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . 148, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148, 000

d. Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Budget ar y Fund Bal ance. . . . . . . . . . . . . . . . . . 20, 000
Est i mat ed Revenues. . . . . . . . . . . . . . . . . . . . 170, 000

Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160, 000
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . 148, 000
Fund Bal ance- - Unr eser ved, Undesi gnat ed 12, 000

DI F: M OBJ : 4

2. On J ul y 1, 20X5, Rhodes Ci t y appr oved t he const r uct i on of a new l i br ar y
cost i ng $8, 000, 000. The pr oj ect was t o be f i nanced wi t h a $4, 000, 000
gener al obl i gat i on bond i ssue and a mat chi ng st at e gr ant .

Requi r ed:

Recor d t he f ol l owi ng event s i n t he Capi t al Pr oj ect Fund f or Rhodes Ci t y
dur i ng 20X5.

a. The ci t y est i mat ed t hat appr oxi mat el y one- f our t h of t he
cont r act pr i ce woul d be pai d f or i n t he cur r ent f i scal year
and t hat t he bond i ssue wi l l be sol d t hi s year . The pr oj ect
shoul d be compl et ed and t he mat chi ng gr ant r ecei ved next year .

b. The bonds ar e sol d at 102 and pr emi umt o be used f or f ut ur e
pr i nci pal payment , f or war ded t o t he Debt Ser vi ce Fund.

c. A cont r act was si gned t o const r uct t he l i br ar y at a cost of
$7, 900, 000 wi t h a r et ai ned per cent age of 10%unt i l f i nal
i nspect i on at compl et i on.

d. The cont r act or submi t s a $1, 000, 000 pr ogr ess bi l l i ng.

e. The books ar e cl osed at year end.

Chapt er 16
16- 8
ANS:

a. Memor andument r y onl y t o r ecor d aut hor i zat i on t o expend
$8, 000, 000 f or const r uct i on of t he l i br ar y. Budget ent r y i s
opt i onal :

Est i mat ed Ot her Fi nanci ng Sour ces. . . . . . . . . . 4, 000, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000, 000
Budget ar y Fund Bal ance. . . . . . . . . . . . . . . . . . . . 2, 000, 000

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 080, 000
Ot her Fi nanci ng Sour ces- - Bond Pr oceeds. . . . 4, 080, 000

Ot her Fi nanci ng Uses- - Oper at i ng Tr ansf er Out 80, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000

c. Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 900, 000
Fund Bal ance- Reser ved f or Encumbr ances. . . . 7, 900, 000

d. Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000, 000
Cont r act s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . 900, 000
Cont r act s Payabl e- - Ret ai ned Per cent age. . . . . 100, 000

Fund Bal ance- - Reser ved f or Encumbr ances. . . . . 1, 000, 000
Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000, 000

e. Ot her Fi nanci ng Sour ces- - Bond Pr oceeds. . . . . . 4, 080, 000
Unr eser ved- - undesi gnat ed Fund Bal ance. . . . . . . 3, 900, 000
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000, 000
Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 900, 000
Ot her Fi nanci ng Uses- - Oper at i ng Tr ansf er Out 80, 000

DI F: M OBJ : 4

3. On 1- 1- 01, t he Ci t y of Mi dvi l l e r ecei ved $100, 000 f r oma ci t i zen, who
speci f i es t he pr i nci pal amount shoul d r emai n i nt act . Ear ni ngs on t he
pr i nci pal ar e t o be used f or par k beaut i f i cat i on pr oj ect s and upkeep.

Requi r ed:

Recor d t he f ol l owi ng event s i n t he appr opr i at e Per manent Fund and
Speci al Revenue Fund, as necessar y.

a. The deposi t i s made of t he cash r ecei ved.

b. The cash i s i nvest ed i n mar ket abl e secur i t i es.

c. Tot al i nt er est accr ued on i nvest ment s f or t he year i s $8, 000; A
l i abi l i t y i s est abl i shed i n t he per manent f und f or what i s owed
t o speci al r evenue f und.

d. The i nt er est i s col l ect ed and t r ansf er r ed t o t he appr opr i at e
speci al r evenue f und.

e. Par k Oper at i ng expenses ar e $2, 500 and $5, 500 i s spent on new
par k benches.

Chapt er 16
16- 9
Requi r ed:

Usi ng t hi s i nf or mat i on, make t he necessar y ent r i es i n al l ot her
af f ect ed f unds or gr oups and i dent i f y t he f und f or each event . I f no
ot her f und or gr oup i s af f ect ed, so not e. Cl osi ng ent r i es ar e not
r equi r ed.

ANS:

a. Per manent Fund:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Oper at i ng Revenues. . . . . . . . . . . . . . . . . 100, 000

b. Per manent Fund:
I nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000

c. Per manent Fund:
I nt er est Recei vabl e. . . . . . . . . . . . . . . . . . . . . . 8, 000
Oper at i ng Revenues. . . . . . . . . . . . . . . . . 8, 000
Oper at i ng Tr ansf er Out . . . . . . . . . . . . . . . . . . . . 8, 000
Due t o Speci al Revenue Fund. . . . . . . . 8, 000
Speci al Revenue Fund:
Due f r omPer manent Fund. . . . . . . . . . . . . . . . . . 8, 000
Ot her Fi nanci ng Sour ces - Oper at i ng
Tr ansf er I n. . . . . . . . . . . . . . . . . . . . 8, 000

d. Per manent Fund:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
I nt er est Recei vabl e. . . . . . . . . . . . . . . . . 8, 000
Due t o Speci al Revenue Fund. . . . . . . . . . . . . . . 8, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
Speci al Revenue Fund:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
Due f r omPer manent Fund. . . . . . . . . . . . . 8, 000

e. Speci al Revenue Fund:
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000

DI F: D OBJ : 4

Chapt er 16
16- 10
4. The f ol l owi ng event s occur r ed i n t he Ci t y of Boonebur y dur i ng 20X5.

a. On J anuar y 1, t he ci t y sel l s $600, 000 of gener al obl i gat i on
bonds at 101. The pr emi umi s t o be used t o pay i nt er est . The
bonds have a 6%st at ed i nt er est r at e and mat ur e i n 20XX.
I nt er est i s payabl e on J ul y 1 and J anuar y 1.

b. On J une, enough cash i s t r ansf er r ed f r omt he Gener al Fund t o
ser vi ce t he bonds descr i bed i n a.

c. A check i s wr i t t en t o t he f i scal agent handl i ng t he bonds on
J une 30.

d. Not i f i cat i on i s r ecei ved f r omt he f i scal agent on August 1
t hat i nt er est has been pai d t o t he bondhol der s.

e. On Sept ember 30, enough cash i s t r ansf er r ed f r omt he Gener al
Fund t o r et i r e $150, 000 of a ser i al bond i ssue pl us $3, 000 of
i nt er est . The cash i s i mmedi at el y f or war ded t o t he f i scal
agent .

Requi r ed:

Pr epar e t he j our nal ent r i es necessar y t o r ecor d t he event s i n t he Debt
Ser vi ce Fund. The Ci t y of Boonebur y i s a cal endar - year ci t y.

ANS:

a. J anuar y 1, 20X5
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Ot her Fi nanci ng Sour ces. . . . . . . . . . . . . . . 6, 000

b. J une 30, 20X5
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 000
Mat ur ed I nt er est Payabl e. . . . . . . . . . . . . . 18, 000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 000
Ot her Fi nanci al Sour ces. . . . . . . . . . . . . . . 12, 000

c. J une 30, 20X5
Cash wi t h Fi scal Agent . . . . . . . . . . . . . . . . . . 18, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 000

d. August 1, 20X5
Mat ur ed I nt er est Payabl e. . . . . . . . . . . . . . . . 18, 000
Cash wi t h Fi scal Agent . . . . . . . . . . . . . . . . 18, 000

e. Sept ember 30, 20X5
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . 153, 000
Mat ur ed Bonds Payabl e. . . . . . . . . . . . . . . . . 150, 000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153, 000
Ot her Fi nanci al Sour ces. . . . . . . . . . . . . . . 153, 000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153, 000

Chapt er 16
16- 11

DI F: M OBJ : 4

5. The Ci t y of Newpor t oper at es i t s own sol i d wast e l andf i l l and char ges
f ees t o user s who dump sol i d wast e i n t he l andf i l l . When shoul d
est i mat ed cost s f or cl osur e and post cl osur e car e be account ed f or ?

ANS:

The Ci t y of Newpor t must begi n r ecogni zi ng an expense and a l i abi l i t y
i n each per i od t hat t he l andf i l l i s oper at ed f or a pr o r at a shar e of
cl osur e and post cl osur e car e. The est i mat ed cl osur e and post cl osur e
cost s ar e al l ocat ed acr oss t he year s t hat t he l andf i l l oper at es based
upon cumul at i ve capaci t y used dur i ng each per i od of t he est i mat ed
expect ed usabl e l andf i l l ar ea. Est i mat ed cl osur e and post cl osur e cost s
shoul d al so be adj ust ed each year f or t he ef f ect s of i nf l at i on or
def l at i on. The r eason GASB r equi r es t hat t hi s expense and l i abi l i t y be
r ecor ded i s t o ensur e t hat t he gover nment al uni t s oper at i ng a sol i d
wast e l andf i l l begi n t o r ecogni ze t he l i abi l i t y f or cl osur e and
post cl osur e cost s dur i ng i t s oper at i on and begi n t o f und or pl an f or
f undi ng t hese cost s.

DI F: E OBJ : 2

6. The Ci t y of War wi ck aut hor i zed a pr oj ect t o moder ni ze i t s st r eet
l i ght i ng.

a. The pr oj ect wi l l t ake appr oxi mat el y ni ne mont hs t o compl et e
and wi l l cost $290, 000. The pr oj ect wi l l be f i nanced by a
$60, 000 gr ant f r omt he f eder al gover nment and a $15, 000
t r ansf er f r omt he Gener al Fund. I n addi t i on, t he ci t y wi l l
i ssue $125, 000 of speci al assessment ser i al bonds. Speci al
assessment s of $180, 000, t o be col l ect ed i n t wo equal
i nst al l ment s due November 1 each year , wi l l be l evi ed. The
f i r st i nst al l ment i s t o go di r ect l y t o t he Capi t al Pr oj ect s
Fund. The r emai ni ng i nst al l ment wi l l be used t o r epay t he
r el at ed bond i ssue. The ci t y desi r es t hat budget ar y account s
be est abl i shed f or t he pr oj ect .

b. A const r uct i on cont r act f or $265, 000 i s si gned. The amount i s
encumber ed.

c. The i nst al l ment assessment s of $180, 000 ar e l evi ed.

d. Al l but $1, 000 of t he f i r st i nst al l ment i s col l ect ed.

e. Ser i al bonds ar e sol d at a f ace val ue of $125, 000 on an
i nt er est payment dat e.

f . The t r ansf er f r omt he Gener al Fund and t he gr ant f r omt he
f eder al gover nment ar e r ecei ved.

Requi r ed:

Pr epar e j our nal ent r i es i n a Capi t al Pr oj ect s Fund f or t he above
event s:

Chapt er 16
16- 12
ANS:

a. Est i mat ed Revenues. . . . . . . . . . . . . . . . . . . . . . 150, 000
Est i mat ed Ot her Fi nanci ng Sour ces. . . . . . . 140, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . 290, 000
Est i mat ed Revenues:
I nst al l ment . . . . . . . . . . . . . . . $ 90, 000
Feder al Gr ant . . . . . . . . . . . . . 60, 000
Tot al . . . . . . . . . . . . . . . . . . . $150, 000
========
( Al t er nat i vel y, t hi s can be
r ecor ded as a memor andument r y. )

b. Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . . 265, 000
Budget ar y Fund Bal ance- - Reser ved f or
Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . 265, 000

c. Speci al Assessment s Recei vabl e- - Cur r ent . 90, 000
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 000
To r ecor d i ni t i al i nst al l ment .
( The r emai nder of t he assessment i s
r ecor ded i n t he Debt Ser vi ce Fund. )

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89, 000
Speci al Assessment s Recei vabl e- - Cur r ent 89, 000

e. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125, 000
Ot her Fi nanci ng Sour ces. . . . . . . . . . . . . . . . 125, 000

f . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Ot her Fi nanci ng Sour ces. . . . . . . . . . . . . . . . 15, 000

DI F: M OBJ : 4

Chapt er 16
16- 13
7. Ranki n Ci t y est abl i shed a Cent r al Pr i nt i ng and Repr oduct i ons Fund
dur i ng t he f i scal year endi ng 6/ 30/ 05. Tr ansact i ons af f ect i ng t he f und
ar e as f ol l ows:

a. The f und was est abl i shed wi t h a $100, 000 cont r i but i on f r omt he
Gener al Fund on 7/ 1/ 04. The t r ansf er wi l l be r ecor ded as
Cont r i but ed Capi t al f or t he f und. The oper at i on i s conduct ed
i n a f aci l i t y l eased on a mont h t o mont h basi s f r oma pr i vat e
l andl or d.

b. Equi pment cost i ng $30, 000 was acqui r ed on 7/ 3/ 04. The
equi pment i s assi gned a 10 year l i f e, no sal vage. I t wi l l be
pai d at a f ut ur e dat e.

c. Suppl i es cost i ng $65, 000 wer e acqui r ed. A physi cal i nvent or y
t aken on 6/ 30/ 05 of t he suppl i es and val ued at $11, 000. The
voucher wi l l be pai d at a l at er dat e.

d. Var i ous oper at i ng expenses wer e i ncur r ed f or a t ot al of
$67, 000. Of t hat amount , $7, 000 r epr esent ed char ges f r omt he
ci t y' s el ect r i c ut i l i t y. ( an ent er pr i se f und) Al l t he voucher s
wer e t hen pai d. The payment s f or t he equi pment and suppl i es
acqui si t i on ar e al so made.

e. Tot al bi l l i ngs t o t he ci t y' s var i ous depar t ment s wer e
$125, 000. Of t hi s amount , $9, 000 per t ai ned t o ser vi ces
per f or med f or t he ci t y' s el ect r i c ut i l i t y ( ent er pr i se f und) .

f . Cash was col l ect ed on t he above bi l l i ngs i n f ul l .

Requi r ed:

Make t he necessar y j our nal ent r i es f or f i scal year 2004- 2005 ( endi ng
6/ 30/ 05) f or Ranki n Ci t y' s I nt er nal Ser vi ce Fund i ncl udi ng any year end
adj ust i ng ent r i es. Cl osi ng ent r i es ar e not r equi r ed.

ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cont r i but ed Capi t al - Gener al Fund. . . . . . . . 100, 000

b. Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . 30, 000

c. Suppl i es I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . 65, 000

d. Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 67, 000
Due t o El ect r i c Ut i l i t y Fund. . . . . . . . . . . . . 7, 000

Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . 155, 000
Due t o El ect r i c Ut i l i t y Fund. . . . . . . . . . . . . 7, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162, 000

e. Due f r omt he Gener al Fund. . . . . . . . . . . . . . . . . . . 116, 000
Due f r omEl ect r i c Ut i l i t y Fund. . . . . . . . . . . . . . 9, 000
Oper at i ng Revenues. . . . . . . . . . . . . . . . . . . . . . . 125, 000

Chapt er 16
16- 14
f . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125, 000
Due f r omt he Gener al Fund. . . . . . . . . . . . . . . . 116, 000
Due f r omEl ect r i c Ut i l i t y Fund. . . . . . . . . . . 9, 000

Necessar y Year End Adj ust ment s
Depr eci at i on Expense. . . . . . . . . . . . . . . . . . . . . . . . 3, 000
Accumul at ed Depr eci at i on. . . . . . . . . . . . . . . . 3, 000
Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 54, 000
Suppl i es I nvent or y. . . . . . . . . . . . . . . . . . . . . . 54, 000

DI F: D OBJ : 2

8. Consi der t he f ol l owi ng event s:

a. A por t i on of t he pr oper t y t ax l evi ed was di r ect l y ear mar ked
f or , and pr evi ousl y r ecor ded i n, t he Debt Ser vi ce f und. Of
t hese pr oper t y t axes, $6, 600 was pr evi ousl y r ecl assi f i ed as
del i nquent . Fr omt he del i nquent t axes, $5, 000 i s now
col l ect ed, wi t h t he bal ance consi der ed uncol l ect i bl e. An
al l owance f or uncol l ect i bl e del i nquent of $2, 000 exi st ed.

b. Pr evi ousl y def er r ed pr oper t y t axes amount i ng t o $50, 000 wi l l
be subj ect ed t o col l ect i on dur i ng t he cur r ent year . A 4%
al l owance i s t o be cr eat ed t o cover uncol l ect i bl e amount s.

c. The st at e has r emi t t ed $45, 000 as t he muni ci pal i t y' s por t i on
of a shar ed sal es t ax. No r ecei vabl e had pr evi ousl y been
r ecor ded. The amount i s t o be used f or debt ser vi ce and i s t o
be r ecor ded di r ect l y i n t hat f und.

d. The Gener al Fund t r ansf er r ed $80, 000 t o t he Debt Ser vi ce Fund,
$70, 000 f or ser i al bond pr i nci pal r et i r ement , and $10, 000 f or
i nt er est payment .

e. A check f or $110, 000 i s sent by t he Debt Ser vi ce Fund t o t he
f i scal agent who handl es t he pr i nci pal and i nt er est payment s.
The amount cover s $70, 000 f or mat ur ed bond pr i nci pal and
$40, 000 f or i nt er est due.

f . The f i scal agent l at er r epor t s t hat al l payment s f or mat ur ed
pr i nci pal and i nt er est ment i oned i n i t eme above have been
made.

Requi r ed:

Pr epar e t he j our nal ent r i es t hat woul d be made i n a muni ci pal i t y' s Debt
Ser vi ce Fund f or each of t he f ol l owi ng event s:

Chapt er 16
16- 15
ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 000
Del i nquent Taxes. . . . . . . . . . . . . . . . . . . . 2, 000
Taxes Recei vabl e- - Del i nquent . . . . . . . . . . 6, 600
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

b. Def er r ed Revenues. . . . . . . . . . . . . . . . . . . . . . . 50, 000
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48, 000
Al l owance f or Uncol l ect i bl e Taxes. . . . . 2, 000

c. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 000
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 000

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000

e. Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . 110, 000
Mat ur ed Ser i al Bonds Payabl e. . . . . . . . . . 70, 000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110, 000

f . Mat ur ed Ser i al Bonds Payabl e. . . . . . . . . . . . 70, 000
Cash wi t h Fi scal Agent . . . . . . . . . . . . . . . . 110, 000

DI F: D OBJ : 4

9. The f ol l owi ng ar e sel ect ed act i vi t i es f or t he Mont er ey Ci t y Nat ur al Gas
Company, a gover nment al ent i t y:

a. Bi l l i ng f or t he year :
To out si de cust omer s. . . . . . . . . . . . . . . . . . . . $400, 000
To ot her Mont er ey Ci t y f unds. . . . . . . . . . . . 70, 000

b. Ser vi ce pr ovi ded t o out si de cust omer s but not bi l l ed by year
end t ot al ed $28, 000.

c. Dur i ng t he year , $2, 500 was col l ect ed f r omnew cust omer s as a
r ef undabl e connect i on f ee.

d. The ut i l i t y sol d $300, 000 of 6%r evenue bonds at 97 on an
i nt er est payment dat e. Pr oceeds ar e ear mar ked f or
const r uct i on.

e. Depr eci at i on f or t he year was as f ol l ows:
Bui l di ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30, 000
I mpr ovement s ot her t han bui l di ngs. . . . . . . 14, 000
Machi ner y and equi pment . . . . . . . . . . . . . . . . . 96, 000

f . The ut i l i t y r ecogni zed $52, 000 of const r uct i on i n pr ogr ess on
a pr oj ect t ot al l y f i nanced by t he st at e on behal f of t he
ut i l i t y.

g. The ut i l i t y r ef unded $1, 000 of deposi t s t o cust omer s who had
moved.
Chapt er 16
16- 16

Requi r ed:

Pr epar e j our nal ent r i es t o r ecor d t he act i vi t i es.

ANS:

a. Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . 400, 000
Due f r omOt her Funds. . . . . . . . . . . . . . . . . . . . 70, 000
Oper at i ng Revenues. . . . . . . . . . . . . . . . . . . . 470, 000

b. Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . 28, 000

c. Rest r i ct ed Asset s- - Cust omer s' Deposi t s
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 500
Cust omer s' Deposi t s Payabl e f r om
Rest r i ct ed Asset s. . . . . . . . . . . . . . . . . . . 2, 500

d. Rest r i ct ed Asset s- - Revenue Bond
Const r uct i on Cash. . . . . . . . . . . . . . . . . . . 291, 000
Unamor t i zed Bond Di scount on Revenue
Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 000
6%Revenue Bonds Payabl e. . . . . . . . . . . . . . 300, 000

e. Depr eci at i on Expense. . . . . . . . . . . . . . . . . . . . 140, 000
Accumul at ed Depr eci at i on- - Bui l di ng. . . . 30, 000
Accumul at ed Depr eci at i on- - I mpr ovement s
Ot her Than Bui l di ng. . . . . . . . . . . . . . . . . 14, 000
Accumul at ed Depr eci at i on- - Machi ner y
and Equi pment . . . . . . . . . . . . . . . . . . . . . . . 96, 000

f . Const r uct i on i n Pr ogr ess. . . . . . . . . . . . . . . . 52, 000
Cont r i but ed Capi t al - - St at e Gover nment . 52, 000

g. Cust omer s' Deposi t s Payabl e f r om
Rest r i ct ed Asset s. . . . . . . . . . . . . . . . . . . 1, 000
Rest r i ct ed Asset s- - Cust omer s' Deposi t s
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000

DI F: M OBJ : 2

Chapt er 16
16- 17
10. What i s escheat pr oper t y and how do we account f or i t ?

ANS:

Escheat pr oper t y i s pr oper t y t hat i s t r ansf er r ed t o t he gover nment when
t he r i ght f ul owner or hei r does not cl ai mi t wi t hi n a speci f i ed per i od
of t i me. For exampl e, i n many st at es i f t her e i s no act i vi t y on a
checki ng or savi ngs account f or t hr ee year s, i t becomes dor mant and i s
t r ansf er r ed t o t he St at e' s Escheat di vi si on. The St at e gener al l y i s
r equi r ed t o publ i sh a not i ce i n a newspaper bef or e such pr oper t y i s
di sposed of . Escheat pr oper t y i s account ed f or i n an expendabl e t r ust
f und. At t he t i me t hat t he pr oper t y can be conver t ed f or gener al
gover nment pur poses, i t wi l l be t r ansf er r ed t o t he gener al f und f r om
t he expendabl e t r ust f und.

DI F: M OBJ : 2

11. The Ci t y of Li ght Fal l s oper at es a cent r al i zed gar age and char ges t he
ot her depar t ment s on a per - mi l e basi s f or t he pur chase and mai nt enance
of most ci t y- owned vehi cl es.

Requi r ed:

Make j our nal ent r i es t o r ecor d t he f ol l owi ng sel ect i on of t r ansact i ons
concer ni ng t he mot or pool dur i ng t he f ol l owi ng year :

a. Sal ar i es of $360, 000 wer e pai d dur i ng t he year .

b. A bi l l f r omt he Wat er and Sewer Ent er pr i se Fund f or $8, 000 was
r ecei ved and pai d.

c. Ei ght new vehi cl es cost i ng $24, 000 each wer e pur chased f or
cash.

d. Bi l l i ng t o ot her ci t y f unds wer e as f ol l ows:
Gener al Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $550, 000
Ut i l i t y Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130, 000
Speci al Revenue Fund. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000

e. Al l of t he bi l l i ngs i n ( d) except $50, 000 f r omt he Ut i l i t y
Fund wer e pai d.

f . Depr eci at i on expense on t he mot or pool asset s was $225, 000 f or
t he year .

ANS:

a. Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . 360, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360, 000

b. Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . 8, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000

c. Vehi cl es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192, 000

Chapt er 16
16- 18
d. Due f r omGener al Fund. . . . . . . . . . . . . . . . . . . 550, 000
Due f r omUt i l i t y Fund. . . . . . . . . . . . . . . . . . . 130, 000
Due f r omSpeci al Revenue Fund. . . . . . . . . . . 20, 000
Oper at i ng Revenue. . . . . . . . . . . . . . . . . . . . . 700, 000

e. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650, 000
Due f r omGener al Fund. . . . . . . . . . . . . . . . . 550, 000
Due f r omUt i l i t y Fund. . . . . . . . . . . . . . . . . 80, 000
Due f r omSpeci al Revenue Fund. . . . . . . . . 20, 000

f . Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . 225, 000
Al l owance f or Depr eci at i on- - Vehi cl es. . 225, 000

DI F: M OBJ : 2

12. A Nonexpendabl e Tr ust Fund was est abl i shed t o hel p pay f or Li t t l e
League basebal l . A t ot al of $100, 000 was donat ed t o Babe Ci t y. The
ear ni ngs, not t he pr i nci pal , f r omt he donat i on coul d be used t o f und
basebal l .

Requi r ed:

Make t he ent r i es and i dent i f y t he f und i nt o whi ch t he f ol l owi ng
t r ansact i ons shoul d be made:

a. The donat i on i s r ecei ved and i nvest ed i mmedi at el y i n a mut ual
st ock f und.

b.

Cash di vi dends of $8, 500 wer e r ecei ved f r omt he mut ual f und
and made avai l abl e f or spendi ng.

c. Dur i ng t he f i r st basebal l season, $8, 300 was spent f r omt he
f und.

d. The cl osi ng ent r i es wer e made.

ANS:

a. Endowment Pr i nci pal Fund
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Fund Bal ance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000

I nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000

b. Endowment Pr i nci pal Fund
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 500
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 500

Oper at i ng Tr ansf er Out . . . . . . . . . . . . . . . . . . . . . . . . 8, 500
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 500

Endowment Ear ni ngs Fund
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 500
Ot her Fi nanci ng Sour ces. . . . . . . . . . . . . . . . . . . . . 8, 500

Chapt er 16
16- 19
c. Endowment Ear ni ngs Fund
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 300
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 300

d. Endowment Pr i nci pal Fund
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 500
Oper at i ng Tr ansf er Out . . . . . . . . . . . . . . . . . . . . . . 8, 500

Endowment Ear ni ngs Fund
Ot her Fi nanci ng Sour ces. . . . . . . . . . . . . . . . . . . . . . . 8, 500
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 300
Fund Bal ance- - Unr eser ved, Undesi gnat ed. . . . . . 200

DI F: M OBJ : 3

13. What r epor t i ng i s r equi r ed f or t he account i ng f or empl oyee Pensi on
Tr ust Funds.

ANS:

Empl oyee pensi on t r ust f unds ar e i mpor t ant because of t he si gni f i cant
amount s of moni es hel d i n a f i duci ar y r esponsi bi l i t y t o be pr udent l y
i nvest ed t o make f ut ur e payment s f or empl oyee pensi ons. GASB has j ust
updat ed gui dance f or account i ng and r epor t i ng f or def i ned- benef i t and
def i ned- cont r i but i on pl ans and now r equi r es a St at ement of Pl an Net
Asset s. The empl oyer s' annual r equi r ed cont r i but i on ( ARC) , act uar i al
accr ued l i abi l i t y ( AAL) , and net pensi on obl i gat i on ( NPO) ar e r equi r ed
t o be comput ed and r epor t ed. The i nt ent i s t o cl ear l y r eveal t he ext ent
of f undi ng. I s t he gover nment pr ovi di ng suf f i ci ent f undi ng t o meet t he
annual r equi r ed cont r i but i on ( ARC) or ar e t hey act ual l y post poni ng t hi s
t o t he f ut ur e ( decr easi ng i nt er per i od equi t y) and i ncr easi ng t he l evel
of unf unded pensi on l i abi l i t y?

DI F: E OBJ : 3

14. Consi der t he f ol l owi ng t r ansact i ons:

a. The Cl i ne Count y Tax Agency Fund was est abl i shed t o account
f or t he count y' s r esponsi bi l i t y of col l ect i ng Br ent Ci t y and
Cl i ne Count y pr oper t y t axes. The l evi es f or 20X1 wer e $800, 000
f or t he Count y Gener al Fund and $400, 000 f or t he Ci t y Gener al
Fund.

b. Col l ect i ons wer e $750, 000.

c. The count y i s ent i t l ed t o a f ee of 1%of t axes col l ect ed f or
Br ent Ci t y and Cl i ne Count y sends t he ci t y t he net amount due.
Li abi l i t i es t o al l f unds and uni t s wer e r ecor ded t o dat e.

d. Al l moneys col l ect ed t o dat e wer e r el eased t o each gover nment
uni t .

Requi r ed:

Pr epar e t he gener al j our nal ent r i es r equi r ed t o r ecor d t he f ol l owi ng
t r ansact i ons i n Cl i ne Count y Tax Agency Fund.
Chapt er 16
16- 20

ANS:

a. Tax Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . 1, 200, 000
Due t o Ot her Gover nment al Uni t s. . . . . . . 1, 200, 000

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750, 000
Tax Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . 750, 000

c. Due t o Ot her Gover nment al Uni t s. . . . . . . . . 750, 000
Due t o Cl i ne Count y Gener al Fund. . . . . . 502, 500
Due t o Br ent Ci t y. . . . . . . . . . . . . . . . . . . . . 247, 500

d. Due t o Cl i ne Count y Gener al Fund. . . . . . . . 502, 500
Due t o Br ent Ci t y. . . . . . . . . . . . . . . . . . . . . . . 247, 500
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750, 000

DI F: M OBJ : 4

15. I n t he space pr ovi ded, f i l l i n t he name of t he one f und or account
gr oup i n whi ch each of t he f ol l owi ng i t ems i s most l i kel y t o be
r ecor ded.

I t em Name of Fund or Gr oup
( 1) Ser vi ces f i nanced by user f ees
char ged agai nst ot her f unds __________________________________

( 2) Resour ces used f or
const r uct i on of maj or gener al
f i xed asset s __________________________________

( 3) Oper at i ons of gener al
gover nment al f unct i ons __________________________________

( 4) Asset s hel d f or di st r i but i on
t o ot her gover nment s or f or
i ndi vi dual s __________________________________

( 5) Accumul at i on of r esour ces f or
and payment of gener al l ong-
t er mdebt asset s __________________________________

( 6) Tot al hi st or i cal cost of
bui l di ngs owned by t he
gover nment __________________________________

( 7) Act i vi t i es r el at ed t o an
empl oyee r et i r ement pr ogr am __________________________________

( 8) Ser vi ces f i nanced by user
char ges agai nst t he gener al
publ i c __________________________________

( 9) Account abi l i t y f or asset s
whose pr i nci pal must be
pr eser ved __________________________________

Chapt er 16
16- 21
ANS:

( 1) I nt er nal Ser vi ce Fund
( 2) Capi t al Pr oj ect s Fund
( 3) Gener al Fund
( 4) Agency Fund
( 5) Debt Ser vi ce Fund
( 6) Gener al Fi xed Asset s Account Gr oup
( 7) Pensi on Tr ust Fund
( 8) Ent er pr i se Fund
( 9) Nonexpendabl e Tr ust Fund

DI F: E OBJ : 4

16. Pl ace a check mar k i n t he appr opr i at e col umn t o i ndi cat e i n whi ch of
t he f ol l owi ng f unds and account s gr oups t he gi ven account s woul d
commonl y be f ound:

Funds
Debt Capi t al
Account Ti t l e Gener al Ser vi ce Pr oj ect s Ent er pr i se
( 1) Cash _______ _______ _______ _______

( 2) Bui l di ngs _______ _______ _______ _______

( 3) I mpr ovement s ot her
t han bui l di ngs _______ _______ _______ _______

( 4) Depr eci at i on expense _______ _______ _______ _______

( 5) Const r uct i on i n pr ocess _______ _______ _______ _______

( 6) Amount avai l abl e i n
Debt Ser vi ce Fund _______ _______ _______ _______

( 7) Voucher s payabl e _______ _______ _______ _______

( 8) Mat ur ed bonds payabl e _______ _______ _______ _______

( 9) Gener al obl i gat i on
bonds payabl e _______ _______ _______ _______

( 10) Fund bal ance- - r eser ved
f or encumbr ances _______ _______ _______ _______

Chapt er 16
16- 22
Account Gr oups
Gener al Gener al
Fi xed Long- t er m
Account Ti t l e Asset s Debt
( 1) Cash _______ _______

( 2) Bui l di ngs _______ _______

( 3) I mpr ovement s ot her t han bui l di ngs _______ _______

( 4) Depr eci at i on expense _______ _______

( 5) Const r uct i on i n pr ocess _______ _______

( 6) Amount avai l abl e i n Debt Ser vi ce Fund _______ _______

( 7) Voucher s payabl e _______ _______

( 8) Mat ur ed bonds payabl e _______ _______

( 9) Gener al obl i gat i on bonds payabl e _______ _______

( 10) Fund bal ance- - r eser ved f or encumbr ances _______ _______

ANS:

Funds _
Debt Capi t al
Account Ti t l e Gener al Ser vi ce Pr oj ect s Ent er pr i se
( 1) Cash X X X X

( 2) Bui l di ngs X

( 3) I mpr ovement s ot her
t han bui l di ngs X

( 4) Depr eci at i on expense X

( 5) Const r uct i on i n pr ocess X

( 6) Amount avai l abl e i n
Debt Ser vi ce Fund

( 7) Voucher s payabl e X X X

( 8) Mat ur ed bonds payabl e X

( 9) Gener al obl i gat i on
bonds payabl e

( 10) Fund bal ance- - r eser ved
f or encumbr ances X X

Chapt er 16
16- 23
Account Gr oups
Gener al Gener al
Fi xed Long- t er m
Account Ti t l e Asset s Debt
( 1) Cash

( 2) Bui l di ngs X

( 3) I mpr ovement s ot her t han bui l di ngs X

( 4) Depr eci at i on expense

( 5) Const r uct i on i n pr ocess X

( 6) Amount avai l abl e i n Debt Ser vi ce Fund X

( 7) Voucher s payabl e

( 8) Mat ur ed bonds payabl e

( 9) Gener al obl i gat i on bonds payabl e X

( 10) Fund bal ance- - r eser ved f or encumbr ances

DI F: E OBJ : 4

17. Consi der t he f ol l owi ng t r ansact i ons:

a. The ci t y gover nment appr oved a $1, 500, 000 addi t i on t o t he
l i br ar y t o be f i nanced by a $1, 000, 000 gener al obl i gat i on bond
i ssue and a $500, 000 st at e gr ant . The ci t y ant i ci pat ed t hat
t he pr oceeds f r ombot h t he bond sal e and t he gr ant woul d be
r ecei ved i n 20X1. I t i s al so est i mat ed t hat 40%of t he pr oj ect
wi l l be compl et ed by year end.

b. The bonds ar e sol d at 101.

c. The gr ant i s appr oved by t he st at e f or payment .

d. A cont r act f or t he pr oj ect i s si gned t o bui l d t he addi t i on f or
$1, 440, 000.

e. The ar chi t ect ' s bi l l i s r ecei ved f or $15, 000 and pai d wi t hout
an encumbr ance.

f . One- hal f of t he gr ant i s r ecei ved f r omt he st at e.

g. A pr ogr ess bi l l i ng f or $576, 000 i s r ecei ved f r omt he
cont r act or .

h. The cl osi ng ent r i es f or 20X1 ar e made.

Requi r ed:

Capi t al Pr oj ect Fund of Chat hamdur i ng 20X1. Budget ar y account s ar e
used.

Chapt er 16
16- 24

ANS:

a. Est i mat ed Revenues. . . . . . . . . . . . . . . . . . . . . . . 500, 000
Est i mat ed Ot her Fi nanci ng Sour ces. . . . . . . . 1, 000, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . 600, 000
Budget ar y Fund Bal ance- - Unr eser ved. . . . . 900, 000

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 010, 000
Ot her Fi nanci ng Sour ces. . . . . . . . . . . . . . . . 1, 010, 000

Ot her Fi nanci ng Uses. . . . . . . . . . . . . . . . . . . . . 10, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000

c. Due f r omt he St at e. . . . . . . . . . . . . . . . . . . . . . . 500, 000
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000

d. Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 440, 000
Fund Bal ances- - Reser ved f or Encumbr ances 1, 440, 000

e. Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000

f . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250, 000
Due f r omt he St at e. . . . . . . . . . . . . . . . . . . . . 250, 000

g. Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 576, 000
Cont r act Payabl es. . . . . . . . . . . . . . . . . . . . . . 576, 000

Fund Bal ance- - Reser ved f or Encumbr ances. . 576, 000
Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . 576, 000

h. Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . 600, 000
Budget ar y Fund Bal ances Unr eser ved. . . . . . . 900, 000
Est i mat ed Revenues. . . . . . . . . . . . . . . . . . . . . 500, 000
Est i mat ed Ot her Fi nanci ng Sour ces. . . . . . 1, 000, 000

Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000
Ot her Fi nanci ng Sour ces. . . . . . . . . . . . . . . . . . 1, 010, 000
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . 591, 000
Ot her Fi nanci ng Uses. . . . . . . . . . . . . . . . . . . 10, 000

Fund Bal ance- - Unr eser ved, Undesi gnat ed. . . 864, 000
Encumbr ances. . . . . . . . . . . . . . . . . . . . . . . . . . . 864, 000

DI F: M OBJ : 4

Chapt er 16
16- 25
18. The f ol l owi ng sel ect ed event s occur r ed i n Her shey Ci t y' s I nt er nal
Ser vi ce Fund f or i t s aut omobi l e f l eet :

a. An aut omobi l e f l eet I nt er nal Ser vi ce Fund was est abl i shed. The
Gener al Fund pr ovi ded $85, 000 f or i t s wor ki ng capi t al . Of t hi s
amount , $40, 000 i s t o be r epai d i n equal annual i nst al l ment s
over a f i ve- year per i od. The r emai ni ng $45, 000 i s a
cont r i but i on t hat wi l l not be r epai d.

b. I n pr i or year s, account i ng f or f l eet act i vi t i es was conduct ed
i n t he Gener al Fund. The f ol l owi ng f i xed asset s pr evi ousl y
used f or t hi s act i vi t y ar e t r ansf er r ed t o t he Fl eet I nt er nal
Ser vi ce Fund. The mar ket val ue amount s r epr esent or i gi nal cost
l ess an est i mat e of accumul at ed depr eci at i on i f depr eci at i on
woul d have been r ecor ded si nce t hey wer e acqui r ed.

Cost Mar ket Val ue
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220, 000 $180, 000
Machi ner y and equi pment . . . . . . . . . . . . . . . . . . . $430, 000 $350, 000

c. Bi l l i ngs f or ser vi ces t o ot her f unds ar e as f ol l ows:
To t he Gener al Fund. . . . . . . . . . . . . . . . . . . . . . . $608, 000
To an Ent er pr i se Fund. . . . . . . . . . . . . . . . . . . . . $112, 000

d. A one- year i nsur ance pol i cy i s pur chased. By year end, one-
hal f of t he $18, 000 pr emi umpayment has expi r ed.

e. Depr eci at i on f or t he per i od:
Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4, 500
Machi ner y and equi pment . . . . . . . . . . . . . . . . . . . $65, 000

f . I nvoi ces f or var i ous goods and ser vi ces r ecei ved t ot al ed
$127, 000.

Requi r ed:

Omi t t i ng expl anat i ons, pr epar e j our nal ent r i es f or al l f unds and gr oups
af f ect ed, usi ng t he f ol l owi ng f or mat :

Funds or Account
Event Gr oups Af f ect ed J our nal Ent r i es

ANS:

Funds or Account
a. Gener al Fund Resi dual Equi t y
Tr ansf er . . . . . . . . . . . . . 45, 000
Advance t o Fl eet I nt er nal
Ser vi ce Fund. . . . . . . . . 40, 000
Cash . . . . . . . . . . . . . . . . . . 85, 000

Fl eet I nt er nal Cash. . . . . . . . . . . . . . . . . . . . . . 85, 000
Ser vi ce Fund Cont r i but ed Capi t al - -
Gover nment . . . . . . . . . . . 45, 000
Advance f r omGener al
Fund. . . . . . . . . . . . . . . . . 40, 000

Chapt er 16
16- 26
b. Gener al Fi xed I nvest ment s i n Gener al
Asset s Gr oup Fi xed Asset s- -
Gener al Fund. . . . . . . . . 650, 000
Bui l di ng. . . . . . . . . . . . . . . 220, 000
Machi ner y & Equi pment . . 430, 000

( Not e t o i nst r uct or : Pr evi ousl y, t hese wer e gener al f i xed asset s,
whi ch wer e not depr eci at ed. The asset s al so coul d be r ecor ded at net
book val ue. )

Funds or Account
Fl eet I nt er nal Bui l di ngs. . . . . . . . . . . . . . . . 220, 000
Ser vi ce Fund Machi ner y and Equi pment . . 430, 000
Accumul at ed Depr eci at i on
- Bui l di ngs. . . . . . . . . . . . 40, 000
Accumul at ed Depr eci at i on-
Machi ner y & Equi pment 80, 000
Cont r i but ed Capi t al -
Gover nment . . . . . . . . . . . . 530, 000

c. Fl eet I nt er nal Due f r omGener al Fund. . . . 608, 000
Ser vi ce Fund Due f r omEnt er pr i se Funds 112, 000
Oper at i ng Revenues. . . . . . 720, 000

Gener al Fund Expendi t ur es. . . . . . . . . . . . . 608, 000
Due t o Fl eet I nt er nal
Ser vi ce Fund. . . . . . . . . 608, 000

Ent er pr i se Fund Fl eet Rent al Expense. . . . . 112, 000
Due t o Fl eet I nt er nal
Ser vi ce Fund. . . . . . . . . 112, 000

d. Fl eet I nt er nal Pr epai d I t ems. . . . . . . . . . . . 18, 000
Ser vi ce Fund Cash. . . . . . . . . . . . . . . . . . . 18, 000

I nsur ance Expense. . . . . . . . 9, 000
Pr epai d I t ems. . . . . . . . . . 9, 000

e. Fl eet I nt er nal Depr eci at i on Expense. . . . . 69, 500
Ser vi ce Fund Accumul at ed Depr eci at i on
- Bui l di ng. . . . . . . . . . . . 4, 500
Accumul at ed Depr eci at i on- -
Machi ner y & Equi p. . . 65, 000

f . Fl eet I nt er nal Goods and Ser vi ces
Ser vi ce Fund Expense. . . . . . . . . . . . . . . 127, 000
Account s Payabl e. . . . . . . . 127, 000

DI F: D OBJ : 2

19. For each of t he f ol l owi ng i t ems, ei t her t he j our nal ent r y f or t he
or i gi nal event or t he j our nal ent r y i nvol vi ng onl y per i odi c adj ust ment s
t o t he f und bal ance account s f or a ci t y' s Pensi on Tr ust Fund i s
pr ovi ded.

Chapt er 16
16- 27
Requi r ed:

Pr epar e t he mi ssi ng j our nal ent r y or i ndi cat e t hat no ent r y woul d be
made. Omi t expl anat i ons.

J our nal Ent r i es i n t he Pensi on Tr ust Fund:

For t he Or i gi nal Event : For t he Fund Bal ance Account s:
a. Cash. . . . . . . . . . . . . . . 60, 000 a.
Oper at i ng
Revenues. . . . . . . . . 60, 000
To r ecor d cash cont r i but i ons
r ecei ved, t wo- t hi r ds f r om
ci t y, one- t hi r d f r omempl oyees.

b. Cash. . . . . . . . . . . . . . . 10, 000 b.
Oper at i ng
Revenues. . . . . . . . . 10, 000
To r ecor d ear ni ngs r ecei ved,
al l ocat ed t o:
Ci t y Cont r i -
but i ons. . . . . . 6, 000
Empl oyees con-
t r i but i ons. . . . . 3, 000
Benef i t
r eser ve. . . . . . 1, 000

c. c. Fund bal ance- -
Benef i t and
Di sabi l i t y
Reser ve. . . . . . . 14, 000
Fund Bal ance- -
Unr eser ved,
Undesi gnat ed 14, 000
To adj ust f und bal ances
f or cash payment s t o
r et i r ed empl oyees.

d. d. Fund Bal ance- -
Empl oyer
Cont r i but i ons. . 4, 000
Fund Bal ance- -
Empl oyee
Cont r i but i ons. . 2, 000
Fund Bal ance- -
Benef i t and Di s-
abi l i t y Reser ve 6, 000
To adj ust f und bal ances
f or t r ansf er s because of
empl oyee r et i r ement s.

e. Oper at i ng Expenses. 1, 800 e.
Cash. . . . . . . . . . . . . 1, 800
To r ecor d payment s t o
empl oyees who r esi gned and
r equest ed r epayment of
cont r i but i ons.

Chapt er 16
16- 28
ANS:

a. Fund Bal ance- - Unr eser ved, Undesi gnat ed. . . 60, 000
Fund Bal ance- - Empl oyer Cont r i but i ons. . . 40, 000
Fund Bal ance- - Empl oyee Cont r i but i ons. . . 20, 000

b. Fund Bal ance- - Unr eser ved, Undesi gnat ed. . . 10, 000
Fund Bal ance- - Empl oyer Cont r i but i ons. . . 6, 000
Fund Bal ance- - Empl oyee Cont r i but i ons. . . 3, 000
Fund Bal ance- - Benef i t and
Di sabi l i t y Reser ve. . . . . . . . . . . . . . . . . . . 1, 000

c. Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . . 14, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 000

d. No ent r y i s made f or t hi s event , ot her t han t he t r ansf er of f und
bal ances.

e. Fund Bal ance- - Empl oyee Cont r i but i ons. . . . . 1, 800

DI F: D OBJ : 3

20. The f ol l owi ng sel ect ed event s occur r ed i n t he Ci t y of Cant er bur y.

a. On December 31, 20X7, $250, 000 was t r ansf er r ed f r omt he
Gener al Fund t o est abl i sh a cent r al gar age t o ser vi ce t he
ci t y' s vehi cl es. Of t hi s amount , $150, 000 was spent on J anuar y
2, 20X8, t o acqui r e a bui l di ng wi t h an est i mat ed l i f e of 25
year s, $30, 000 was spent f or t he acqui si t i on of l and, and
$60, 000 was pai d f or equi pment wi t h an est i mat ed l i f e of 10
year s.

b. Dur i ng t he si x mont hs of oper at i on t o J une 30, 20X8, t he
gar age bi l l ed t he Gener al Fund f or $24, 000 and Ent er pr i se
Funds f or $50, 000. Except f or $8, 000 st i l l due f r omEnt er pr i se
Funds, t he bal ance i s col l ect ed.

c. Cancel ed checks r eveal ed t he f ol l owi ng payment s f or gar age
act i vi t i es:

Sal ar i es ( i gnor e deduct i ons and t axes) . . . . . . . . . . . . . . $31, 000
Par t s and suppl i es ( per pet ual syst em) . . . . . . . . . . . . . . . 19, 000
Ser vi ce pr ovi ded by t he ci t y- owned ut i l i t y. . . . . . . . . . 2, 000
Tot al payment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52, 000
=======

d. At f i scal year end, t he f ol l owi ng adj ust ment s wer e r el at ed t o
gar age oper at i ons:

I nvent or y of par t s and suppl i es on hand. . . . . . . $7, 000
Depr eci at i on. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . To be comput ed.

Chapt er 16
16- 29

e. On J ul y 1, 20X7, t he ci t y i ssued 10- year , $400, 000, 8%gener al
obl i gat i on ser i al bonds at 101 t o f i nance t he const r uct i on of
a publ i c heal t h cent er f or t he agi ng. The pr emi umon t he bond
sal e i s t r ansf er r ed t o t he Debt Ser vi ce Fund f or i nt er est
payment . Each $40, 000 ser i al i s r edeemabl e on J une 30, al ong
wi t h annual i nt er est on t he out st andi ng bond f ace val ue. The
pr oj ect i s est i mat ed t o cost $430, 000 and wi l l be compl et ed i n
l ess t han one year . The Gener al Fund wi l l t r ansf er r esour ces,
i f needed, t o cover t he t ot al cost . The ci t y uses budget ar y
account s f or t hese pr oj ect s.

f . Dur i ng t he f i scal year , const r uct i on of t he publ i c heal t h
cent er was compl et ed at a cost of $426, 000, of whi ch $400, 000
was pai d, t he r emai nder i s payabl e af t er one year under a
r et ai ned per cent age cont r act ar r angement . The $26, 000
def i ci ency was t r ansf er r ed f r omt he Gener al Fund.

g. On J une 28, 20X8, $68, 000 i s t r ansf er r ed f r omt he Gener al Fund
t o be appl i ed t o t he payment of t he f i r st $40, 000 bond ser i al
ment i oned i n e. , pl us i nt er est . On t hi s dat e, t he Debt Ser vi ce
Fund r ecor ds t he mat ur i ng bonds and i nt er est .

h. On J une 30, t he payment f or t he mat ur ed bond ser i al and
i nt er est i s made.

Requi r ed:

For each event , pr epar e t he necessar y j our nal ent r i es f or al l f unds and
account gr oups i nvol ved dur i ng t he f i scal year ended J une 30, 20X8.
I ndi cat e t he f und or gr oup i n whi ch t he ent r i es ar e made.

ANS:

a. I n t he Gener al Fund:
Resi dual Equi t y Tr ansf er . . . . . . . . . . . . . . . . 250, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250, 000
To r ecor d t r ansf er of cash t o
Gar age I nt er nal Ser vi ce Fund.

I n Gar age I nt er nal Ser vi ce Fund:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250, 000
Cont r i but ed Capi t al - - Gover nment . . . . . . . 250, 000
To r ecor d cash t r ansf er f r om
t he Gener al Fund.

Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240, 000
To r ecor d acqui si t i on of f i xed
asset s.

Chapt er 16
16- 30
b. I n Gar age I nt er nal Ser vi ce Fund:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66, 000
Due f r omOt her Funds. . . . . . . . . . . . . . . . . . . . 8, 000
To r ecor d r evenues f r omser vi ces
r ender ed.

I n t he Gener al Fund:
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 000
To r ecor d cash t r ansf er f or gar age
ser vi ces.

I n Ent er pr i se Funds:
Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . 50, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42, 000
Due t o Ot her Funds . . . . . . . . . . . . . . . . . . . 8, 000
To r ecor d payment and amount due
f or gar age ser vi ces.

c. I n Gar age I nt er nal Ser vi ce Fund:
I nvent or y of Par t s and Suppl i es. . . . . . . . . 19, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 000
To r ecor d cash di sbur sement s.
( Not e t hat ut i l i t y ser vi ce i s an
oper at i ng expense as a quasi -
ext er nal t r ansact i on. )

I n Ut i l i t y Ent er pr i se Fund:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000
To r ecor d payment r ecei ved f or
ut i l i t y ser vi ce t o Gar age
I nt er nal Ser vi ce Fund.

d. I n Gar age I nt er nal Ser vi ce Fund:
I nvent or y of Par t s and Suppl i es. . . . . . . 12, 000
To est abl i sh year - end i nvent or y.

Accumul at ed Depr eci at i on- - Bui l di ng. . . . 3, 000
Accumul at ed Depr eci at i on- - Equi pment . . . 3, 000
To r ecor d one- hal f year ' s depr eci at i on:
Bui l di ng: 1/ 2 x $150, 000 x 1/ 25 = $3, 000
Equi pment : 1/ 2 x $ 60, 000 x 1/ 10 = $3, 000

Chapt er 16
16- 31
e. I n Capi t al Pr oj ect s Fund:
Est i mat ed Ot her Fi nanci ng Sour ces. . . . . . . 430, 000
Appr opr i at i ons. . . . . . . . . . . . . . . . . . . . . . . . 430, 000
To r ecor d annual budget .

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404, 000
To r ecor d sal e of gener al
obl i gat i on ser i al bonds, wi t h
pr emi umdue t o t he Debt Ser vi ce
Fund.

Ot her Fi nanci ng Uses. . . . . . . . . . . . . . . . . . . . 4, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000
To r ecor d t r ansf er of bond pr emi um

I n Debt Ser vi ce Fund:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000
To r ecor d pr emi umon sal e of bonds
r ecei ved f r omCapi t al Pr oj ect s Fund.

I n Gener al Long- Ter mDebt Account Gr oup:
Amount t o Be Pr ovi ded f or Payment of 8%
Ser i al Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000
8%Ser i al Bonds Payabl e. . . . . . . . . . . . . . . 400, 000
To r ecor d l i abi l i t y f or gener al
obl i gat i on ser i al bonds i ssued
f or a capi t al pr oj ect .

f . I n Capi t al Pr oj ect s Fund:
Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . 426, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000
Cont r act Payabl e- - Ret ai ned Per cent age. 26, 000
To r ecor d compl et i on of heal t h
cent er .

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 000
To r ecor d t r ansf er r ecei ved f r om
t he Gener al Fund.

I n Gener al Fi xed Asset s Account Gr oup:
Bui l di ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426, 000
I nvest ment i n Gener al Fi xed Asset s- -
Capi t al Pr oj ect s Fund. . . . . . . . . . . . . . . 426, 000
To r ecor d compl et i on of heal t h
cent er .

I n Gener al Fund:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 000
To r ecor d t r ansf er t o Capi t al
Pr oj ect s Fund f or amount needed
t o cover t ot al cost of heal t h cent er .

Chapt er 16
16- 32
g. I n Gener al Fund:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68, 000
To r ecor d t r ansf er f or ser i al bond
pr i nci pal ( $40, 000) and i nt er est
payment ( $32, 000) l ess $4, 000
pr emi umal r eady t r ansf er r ed t o
Debt Ser vi ce Fund.

I n Debt Ser vi ce Fund:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68, 000
To r ecor d t r ansf er f r omGener al
Fund.

Expendi t ur es. . . . . . . . . . . . . . . . . . . . . . . . . . . . 72, 000
Mat ur ed Ser i al Bonds Payabl e. . . . . . . . . . 40, 000
Mat ur ed I nt er est Payabl e
( 8%x $400, 000) . . . . . . . . . . . . . . . . . . . . . 32, 000
To r ecor d mat ur ed bond ser i al
and i nt er est .

Amount Avai l abl e i n Debt Ser vi ce
Fund- - Ser i al Bonds. . . . . . . . . . . . . . . . . . 40, 000
Amount t o be Pr ovi ded f or Payment of
8%Ser i al Bonds. . . . . . . . . . . . . . . . . . . . . 40, 000
To r ecor d addi t i onal amount
avai l abl e f or ser i al bond
r edempt i on.

h. I n Debt Ser vi ce Fund:
Mat ur ed Ser i al Bonds Payabl e. . . . . . . . . . . . 40, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72, 000

8%Ser i al Bonds Payabl e. . . . . . . . . . . . . . . . . 40, 000
Amount Avai l abl e i n Debt Ser vi ce
Fund- - Ser i al Bonds. . . . . . . . . . . . . . . . . . 40, 000
To r ecor d r edempt i on of f i r st bond
ser i al .

DI F: M OBJ : 2

Chapt er 16
16- 33
21. Gi ven t he f ol l owi ng i nf or mat i on f or t he Ci t y of Youngst own Muni ci pal
Gol f Cour se:

Cash Bal ance 1/ 1/ 01 $ 25, 000
User Fees- Gr een Fees 375, 000
Net Repayment - Revol vi ng Loan 35, 000
Oper at i ng Tr ansf er Out - Gener al Fund
( pr oper t y t axes) 50, 000
User Fees- League Fees and out i ngs 100, 000
User Fees- Member shi ps 25, 000
Cash Expenses Pai d t o suppl i er s 95, 000
I nt er est / Di vi dends Recei ved 12, 000
Acqui si t i on/ I mpr ovement t o Cl ubhouse 75, 000
Cash Expenses Pai d t o empl oyees 105, 000
Cash Expenses Pai d Mai nt enance and Upkeep 100, 000
Pr i nci pal and I nt er est Payment s on Bond 50, 000

Pr epar e a cash f l ow st at ement f or t hi s ent er pr i se f und.

ANS:

Ci t y of Youngst own
Muni ci pal Gol f Cour se Fund
St at ement of Cash Fl ows
I ncr ease/ ( Decr ease) i n Cash and Cash Equi val ent s
For Year Ended 12/ 31/ 01

Cash Fl ows f r omOper at i ng Act i vi t i es:
Cash Recei ved f r omCust omer s 500, 000
Cash Pai d f or Oper at i ng Expenses ( 300, 000)
Net Cash Pr ovi ded- Oper at i ng Act i vi t i es 200, 000
Cash Fl ows f r omNoncapi t al
Fi nanci ng Act i vi t i es:
Net Repayment s- Revol vi ng Loan ( 35, 000)
Oper at i ng Tr ansf er s Out - t o ot her f unds ( 50, 000)
Net Cash Used- Noncapi t al
Fi nanci ng Act i vi t i es ( 85, 000)
Cash Fl ows f r omCapi t al
and Rel at ed Fi nanci ng Act i vi t i es:
Pr i nci pal and i nt er est pai d on bonds ( 50, 000)
Acqui si t i on and
const r uct i on- capi t al asset s ( 75, 000)
Net Cash Used- Capi t al and Rel at ed
Fi nanci ng Act i vi t i es ( 125, 000)
Cash Fl ows f r omI nvest i ng Act i vi t i es:
I nt er est and Di vi dends Recei ved 12, 000
Net Cash Recei ved- I nvest i ng Act i vi t i es 12, 000
Net I ncr ease i n Cash and Cash Equi val ent s 2, 000
Cash and Cash Equi val ent s 1/ 1/ 01 25, 000
Cash and Cash Equi val ent s 12/ 31/ 01 27, 000
=======

DI F: M OBJ : 2
Chapter 17 - Financial Reporting Issues

MULTIPLE CHOICE

1. The GASB St at ement No. 34 r epor t i ng model i ncl udes, but i s not l i mi t ed
t o whi ch of t he f ol l owi ng r epor t s?
a. Gover nment - wi de f i nanci al st at ement s
b. a management di scussi on and anal ysi s sect i on
c. f unds based f i nanci al st at ement s


2. Requi r ed suppl ement ar y i nf or mat i on now i ncl udes al l of t he f ol l owi ng
except f or :
a. A budget ar y compar i son st at ement or schedul e
b. Management di scussi on and anal ysi s
c. pensi on r el at ed i nf or mat i on
d. i nf or mat i on about t he condi t i on of i nf r a- st r uct ur e asset s


3. Whi ch of t he f ol l owi ng st at ement s r el at i ng t o t he r equi r ement s f or
f i nanci al r epor t i ng i s not t r ue?
a. Gener al pur pose f i nanci al st at ement s ar e a col umnar over vi ew of
t he f i nanci al posi t i on and oper at i ng r esul t s of al l f unds
b. Gener al pur pose f i nanci al st at ement s pr ovi de t he mi ni mumf i nanci al
r epor t i ng necessar y f or f ai r r epr esent at i on of gover nment act i vi t y
c. Gener al pur pose f i nanci al st at ement s ar e par t of t he f i nanci al
sect i on of a compr ehensi ve annual f i nanci al r epor t
d. Gener al pur pose f i nanci al st at ement s ar e par t of r equi r ed
suppl ement ar y i nf or mat i on


4. Whi ch of t he f ol l owi ng coul d be consi der ed a component uni t of a
pr i mar y gover nment uni t ?
a. wat er ut i l i t y ent er pr i se
b. st adi umt axi ng aut hor i t y boar d
c. pensi on pl an
d. af f i l i at ed boost er cl ub


Chapt er 17
17- 2
5. When oper at i ons of component uni t s of gover nment ar e bl ended wi t h t he
pr i mar y gover nment uni t , t he ar e r epor t ed by
a. a separ at e col umn on t he Gener al Pur pose Fi nanci al St at ement s of
t he pr i mar y gover nment al uni t
b. di scl osed i n a f oot not e t o t he pr i mar y gover nment uni t Gener al
Pur pose Fi nanci al St at ement s
c. Not r epor t ed or di scl osed separ at el y f r omt he pr i mar y gover nment al
uni t
d. a separ at e set of gener al pur pose f i nanci al st at ement s


6. Whi ch of t he f ol l owi ng wer e i nnovat i ons i n f i nanci al r epor t i ng
i nt r oduced by GASB St at ement No. 34?
a. An i nt r oduct or y nar r at i ve sect i on
b. An over al l vi ew of t he gover nment i n gover nment wi de st at ement s
c. Compr ehensi ve i nf or mat i on about t he cost of del i ver i ng ser vi ces t o
ci t i zens


7. The pur pose of t he Management Di scussi on and Anal ysi s sect i on i s
a. t o gi ve a conci se over vi ew and anal ysi s of t he f i nanci al
st at ement s
b. t o pr ovi de det ai l ed cost i nf or mat i on r el at i ng t o pr ovi di ng
ser vi ces t o ci t i zens
c. pensi on cost cal cul at i ons f or t he gover nment al uni t
d. det ai l ed i nf or mat i on about shor t t er mspendi ng and f i scal
compl i ance


8. Whi ch of t he f ol l owi ng i s/ ar e r epor t i ng r equi r ement s i n f unds- based
st at ement s under GASB St at ement No. 34?
a. t he st at ement s hi ghl i ght maj or f unds and aggr egat e non maj or f unds
i nt o one col umn
b. pr ovi de det ai l ed i nf or mat i on about shor t t er mspendi ng and f i scal
compl i ance
c. separ at e f unds based st at ement s ar e r equi r ed f or gover nment al ,
pr opr i et ar y, and f i duci ar y f unds


9. Maj or f unds ar e descr i bed as
a. t he gener al f und and ent er pr i se f unds
b. at l east 5%of al l gover nment and ent er pr i se f unds combi ned
c. t hose i n whi ch asset s, l i abi l i t i es, r evenues, or expendi t ur es ar e
at l east 10%of al l f unds i n t hat t ype.


Chapt er 17
17- 3
10. GASB St at ement No. 34 r equi r es t he r epor t i ng f or i nt er nal ser vi ce f unds
by
a. combi ni ng i ncome st at ement r esul t s wi t h gener al f und act i vi t i es
b. r equi r i ng i nt er nal ser vi ce f unds t o be r epor t ed separ at el y as
maj or f unds
c. cl assi f yi ng i nt er nal ser vi ce f unds as pr opr i et ar y f unds, l abel ed
as gover nment act i vi t i es


11. Whi ch of t he f ol l owi ng i s NOT a cl assi f i cat i on of t he equi t y account s
of a pr opr i et ar y f und?
a. Equi t y i nvest ed i n capi t al asset s, net of r el at ed debt
b. Equi t y r est r i ct ed bot h ext er nal l y and i nt er nal l y
c. Equi t y encumbr ances
d. Equi t y unr est r i ct ed


12. Under t he new r equi r ement s f or a St at ement of Cash Fl ow, what sect i ons
must be i ncl uded i n t he st at ement ?
1) Oper at i ng Cash Fl ows
2) Cash Fl ows f r omnoncapi t al f i nanci ng
3) Capi t al and r el at ed f i nanci ng f l ows
4) I nvest i ng Cash Fl ows
a. 1, 2, 4, and i nt er f und t r ansf er s i n
b. 1, 2, 3, 4
c. 2, 3, 4, and cash r ecei pt s f r omt axes
d. 1, 2, 3, and cash r ecei pt s f r omt axes


13. GASB St at ement No. 34 r equi r ement s f or t he r epor t i ng f or gener al f i xed
asset s i ncl ude
a. t he use of account gr oups
b. r epor t i ng gener al f i xed asset s as a maj or f und
c. gener al f i xed asset s wi l l be i ncl uded onl y i n t he gover nment wi de
f i nanci al st at ement s
d. r epor t gener al f i xed asset s as a component uni t


14. Reci pr ocal i nt er f und act i vi t i es i ncl ude al l but whi ch of t he f ol l owi ng?
a. i nt er f und l oans
b. i nt er f und ser vi ces bet ween gover nment and pr opr i et ar y f unds
c. advances t o/ f r omot her f unds
d. i nt er f und r ei mbur sement s


Chapt er 17
17- 4
15. Key char act er i st i c of t he st at ement of net asset s i ncl ude al l of t he
f ol l owi ng except :
a. gener al l ong- t er masset s at f ace val ue onl y
b. al l capi t al asset s
c. depr eci at i on on capi t al asset s except f or cer t ai n i nf r ast r uct ur e
except i ons
d. i nt er f und payabl es and r ecei vabl es bet ween gover nment al f unds ar e
el i mi nat ed


16. Whi ch of t he f ol l owi ng combi nat i on of r epor t s i s needed on t he
st at ement of act i vi t i es?
Revenue
Di r ect Al l ocat ed speci f i cal l y Pr ogr am
expenses by i ndi r ect connect ed t o gener al
pr ogr am expenses pr ogr ams f i xed asset s
a. yes yes no no
b. yes no yes no
c. yes yes yes no
d. yes yes no no


17. GASB St at ement No. 34 now r equi r es t he r epor t i ng f or i nf r ast r uct ur e
asset s. Speci al pr ovi si ons f or r epor t i ng i ncl ude
a. mandat or y st r ai ght l i ne depr eci at i on on al l i nf r ast r uct ur e asset s
b. depr eci at i on shoul d not be r ecor ded on any i nf r ast r uct ur e asset s
c. mal l gover nment uni t do not have t o r epor t on i nf r ast r uct ur e
asset s now or i n t he f ut ur e
d. al l owi ng var i ous appr oaches t o est i mat i ng i nf r ast r uct ur e cost s


18. The most common di f f er ence bet ween f unds- based and gover nment - wi de
f i nanci al st at ement s i s
a. gover nment - wi de st at ement s of act i vi t i es show oper at i ng dat a by
f unct i on
b. gover nment - wi de st at ement s of act i vi t i es use a f or mat t hat di f f er s
f r ompr opr i et ar y f unds st at ement s of r evenues
c. i nt er f und payabl es and r ecei vabl es must be el i mi nat ed i n t he
pr epar at i on of t he st at ement of act i vi t i es


Chapt er 17
17- 5
19. I n or der t o conver t t he gover nment al f und bal ance sheet t o a gover nment
wi de st at ement of net asset s r equi r es whi ch of t he f ol l owi ng
act i vi t i es?
1) Add gener al f i xed asset s, net of accumul at ed depr eci at i on
2) Add gener al l ong- t er mdebt , usi ng t he ef f ect i ve i nt er est
met hod
3) El i mi nat e t he asset s and l i abi l i t i es of most i nt er nal
ser vi ce f unds ( t hose whose pr i mar y cust omer i s t he
gener al gover nment )
4) El i mi nat e t he f und bal ance and cl assi f y t he net asset s
i nt o i nvest ed i n capi t al asset s, r est r i ct ed net asset s,
and unr est r i ct ed net asset s
a. 1, 2, 3, 4
b. 1, 3
c. 1, 2, 4
d. 3, 4


20. I n or der t o conver t t he gover nment al f und st at ement of r evenues t o a
gover nment wi de st at ement of act i vi t i es whi ch of t he f ol l owi ng
act i vi t i es i s necessar y?
1) El i mi nat e capi t al out l ay expendi t ur es
2) Recl assi f y r evenues bet ween pr ogr amr evenues and gener al
r evenues
3) Recor d bad debt expenses
4) Conver t f r omEconomi c f l ow of r esour ce met hod of account
t o cur r ent f i nanci al r esour ces modi f i ed accr ual based
account i ng
a. 1, 3, 4
b. 1, 2, 3
c. 1, 2, 3, 4
d. 1, 2, 4


21. Whi ch of t he f ol l owi ng i s not a pur pose of t he f i nanci al audi t t hat
accompani es st at ement s?
a. ensur i ng compl i ance wi t h f i scal r equi r ement s
b. r ender an opi ni on about whet her t he st at ement s pr esent f ai r l y t he
f i nanci al posi t i on, r esul t s of oper at i on, and cash f l ows of t he
gover nment
c. t o comment on t he economy, ef f i ci ency or pr ogr amr esul t s of a
gover nment al uni t
d. st at ement s have been pr epar ed i n accor dance wi t h GAAP, GASB, and
st at e, muni ci pal , and f eder al l aws


22. Audi t r epor t s pr epar ed under t he Si ngl e Audi t Act i ncl ude whi ch of t he
f ol l owi ng?
a. a r epor t on compl i ance wi t h l aws and r egul at i ons
b. a r epor t on t he st udy of t he i nt er nal cont r ol syst ems
c. an opi ni on on t he f ai r ness of f i nanci al st at ement pr esent at i on

Chapt er 17
17- 6


PROBLEM

1. Br i ef l y di scuss t he mi ni mumr equi r ement s of t he Management Di scussi on
and Anal ysi s sect i on i n t he compr ehensi ve annual f i nanci al r epor t .

ANS:

The management ' s di scussi on and anal ysi s ( MD&A) appear s bef or e t he
f i nanci al st at ement s of a gover nment al uni t and i s pr ovi ded t o gi ve an
over vi ew of t he gover nment ' s f i nanci al st at ement s. The basi c
r equi r ement s i ncl ude:

. Br i ef di scussi on on t he f i nanci al st at ement s
i ncl udi ng i nf or mat i on on di f f er ences
. Condensed cur r ent and pr i or year f i nanci al
i nf or mat i on f r omt he gover nment wi de f i nanci al
. Anal ysi s of gover nment ' s over al l f i nanci al
posi t i on, r esul t s of oper at i ons, and economi c
f act or s
. anal ysi s of i ndi vi dual f und f i nanci al i nf or mat i on,
i ncl udi ng i nf or mat i on on si gni f i cant f und changes
and pr oj ect i on of possi bl e f ut ur e l i mi t at i ons
. Var i ance anal ysi s of budget , f i nal budget and
act ual amount s
. Capi t al asset changes
. Long- t er ml i abi l i t i es changes
. Repor t on t he condi t i on of i nf r ast r uct ur e asset s
. Any ot her i nf or mat i on on i t ems t hat coul d have
a mat er i al ef f ect on t he gover nment al uni t ' s
f i nanci al posi t i on

DI F: M OBJ : 1

2. What i s t he f i nanci al r epor t i ng pyr ami d and how woul d you descr i be t he
GASB St at ement No. 34 r epor t i ng r equi r ement s?

ANS:

Ref er t o I l l ust r at i on 17- 1 i n t he t ext .

GASB St at ement No. 34 r epor t i ng r equi r ement s ar e t hat gover nment s wi l l
have t o pr esent ent i t y wi de summar i zed i nf or mat i on at t he t op of t he
pyr ami d. Fund based f i nanci al st at ement s ar e i ncl uded at a l ower l evel
i n t he pyr ami d.

DI F: E OBJ : 3

3. GASB St at ement No. 34 r equi r es a separ at e set of f i nanci al s st at ement s
f or each of t he t hr ee cat egor i es of f unds. Pr epar e an anal ysi s of t he
basi c t ypes of f und cat egor i es, what t he measur ement f ocus i s and t he
basi s of account i ng, and whi ch basi c f i nanci al st at ement s ar e needed.
Chapt er 17
17- 7

Chapt er 17
17- 8
ANS:

Fund Measur ement Basi s of Fi nanci al
Cat egor y Focus Account i ng St at ement s
Gover nment Cur r ent Fi nanci al Modi f i ed . Bal ance Sheet
Resour ces accr ual . St at ement of
Revenues and
Expendi t ur es
. Changes i n
Fund Bal ances

Pr opr i et ar y Economi c Accr ual . St at ement of
Resour ces r evenues,
expenses, and
changes i n
f und net
asset s/
equi t y
. St at ement of
Cash Fl ows

Fi duci ar y Economi c Accr ual . St at ement of
Resour ces f i duci ar y net
asset s
. St at ement of
changes i n
f i duci ar y net
asset s

DI F: M OBJ : 3

4. Fr omt he f ol l owi ng i nf or mat i on, pr epar e a st at ement of net asset s f or
t he ci t y of Fr ankl i n as of J une 30, 2003:

Cash and Cash equi val ent s, Gover nment al $ 500, 000
Cash and Cash equi val ent s, Busi ness Act i vi t i es 300, 000
Recei vabl es, Gover nment al 280, 000
I nvent or i es, Busi ness Act i vi t i es 135, 000
Capi t al Asset s, net , Gover nment al 1, 330, 000
Capi t al Asset s, net , Busi ness Act i vi t i es 750, 000
Account s Payabl e, Gover nment al 158, 000
Account s Payabl e, Busi ness Act i vi t i es 96, 000
Noncur r ent l i abi l i t i es, Gover nment al 1, 005, 000
Noncur r ent l i abi l i t i es, Busi ness Act i vi t i es 585, 000
Net Asset s i nvest ed i n Capi t al Asset s ( net of Debt )
Gover nment al 733, 000
Busi ness act i vi t i es 465, 000
Net Asset s Rest r i ct ed:
Busi ness Act i vi t i es 93, 000
Net Asset s Unr est r i ct ed:
Busi ness Act i vi t i es ( 54, 000)

Chapt er 17
17- 9
ANS:

Ci t y of Fr ankl i n
Schedul e of Net Asset s
J une 30, 2003

Gover nment al Busi ness Type Tot al
Act i vi t i es Act i vi t i es Pr i mar y Gover nment
Cur r ent and
Ot her asset s 780, 000 435, 000 1, 215, 000
Capi t al Asset s 1, 330, 000 750, 000 2, 080, 000
Tot al Asset s 2, 110, 000 1, 185, 000 3, 295, 000
Long Ter mDebt ( 1, 005, 000) ( 585, 000) ( 1, 590, 000)
Ot her Li abi l i t i es ( 158, 000) ( 96, 000) ( 254, 000)
Tot al Li ab ( 1, 163, 000) ( 681, 000) ( 1, 844, 000)
Net Asset s:
I nvest ed i n
Capi t al Asset s
( net of debt ) 733, 000 465, 000 1, 198, 000
Rest r i ct ed 132, 000 93, 000 225, 000
Unr est r i ct ed 82, 000 ( 54, 000) 28, 000
Tot al Net Asset s 947, 000 504, 000 1, 451, 000

DI F: D OBJ : 3

5. The Ci t y of Ter r yt own r epor t s t he f ol l owi ng i nf or mat i on:

Gover nment Act i vi t i es:
Gener al - Di r ect $ 85, 000
Pol i ce- Di r ect $115, 000
Fi r e Saf et y- Di r ect $ 95, 000
Publ i c Wor ks- Di r ect $185, 000
Recr eat i on- Di r ect $ 75, 000
Li br ar y- Di r ect $140, 000
I nt er est on Long t er mDebt - Di r ect $ 30, 000
Pol i ce- I ndi r ect Al l ocat i on $ 20, 000
Fi r e Saf et y- I ndi r ect Al l ocat i on $ 25, 000
Publ i c Saf et y- I ndi r ect Al l ocat i on $ 25, 000
Recr eat i on- I ndi r ect Al l ocat i on $ 10, 000
Li br ar y- I ndi r ect Al l ocat i on $ 20, 000
Char ges f or Pol i ce ser vi ce $ 90, 000
Char ges f or Fi r e Pr ot ect i on $ 50, 000
Char ges f or Publ i c Wor ks $105, 000
Char ges f or Li br ar y $ 25, 000
Char ges f or Recr eat i on $ 45, 000
Oper at i ng Gr ant s f or Fi r e Saf et y $ 15, 000
Capi t al Gr ant s f or Li br ar y $ 75, 000

Ther e ar e no busi ness t ype act i vi t i es f or t hi s ci t y or ot her component
uni t s. Taxes r ai sed f or gener al r evenues equal $200, 000 and t axes
r ai sed f or debt ser vi ce equal $25, 000. Ot her gener al r evenues wer e
gener at ed t hr ough f i nes, f ees, and per mi t s t hat t ot al $100, 000. The
ci t y al so sol d a pl ot of l and f or a gai n of $10, 000. The begi nni ng of
t he year net asset s t ot al ed $155, 000.

Chapt er 17
17- 10
Requi r ed:

Pr epar e a st at ement of act i vi t i es schedul e f or t he ci t y.

ANS:

Net
I ndi r ect Char ges f or Oper at i ng Capi t al Revenue
Expenses Exp Al l oc. Ser vi ces Gr ant s Gr ant s ( Expense)
Funct i on/ Pr ogr am:
Gener al $ 85, 000 $ 0 $ 0 $ 0 $ 0 $ ( 85, 000)
Pol i ce 115, 000 20, 000 90, 000 0 0 ( 45, 000)
Fi r e 95, 000 25, 000 50, 000 15, 000 0 ( 55, 000)
Publ i c
Wor ks 185, 000 25, 000 105, 000 0 0 ( 105, 000)
RecDept 75, 000 10, 000 45, 000 0 0 ( 40, 000)
Li br ar y 140, 000 20, 000 25, 000 0 75, 000 ( 60, 000)
I nt er est 30, 000 0 0 0 0 ( 30, 000)
Tot al $725, 000 $100, 000 $315, 000 $15, 000 $75, 000 $( 420, 000)

Gener al Revenues:
Pr oper t y Taxes-
Gener al 200, 000
Pr oper t y Taxes-
Debt Ser vi ce 25, 000
Fees/ Fi nes/
Per mi t s 100, 000
Gai n on Sal e
of l and 10, 000
Tot al Gener al Revenues,
speci al i t ems, and
t r ansf er s 335, 000
Changes i n
Net Asset s ( 85, 000)
Net Asset s- Begi nni ng 155, 000
Net Asset s- Endi ng 70, 000
=======

DI F: D OBJ : 3
Chapter 18 Accounting for Private Not-For-Profit
Organizations

MULTIPLE CHOICE

1. Whi ch of t he f ol l owi ng i s NOT a r equi r ed char act er i st i c of a pr i vat e
not - f or - pr of i t or gani zat i on per t he def i ni t i on gi ven by t he AI CPA?
a. no owner s or shar ehol der s
b. an oper at i ng pur pose ot her t han maki ng a pr of i t
c. an or gani zat i on dedi cat ed t o ser vi ce of t he publ i c good
d. Si gni f i cant cont r i but i ons f r ompr ovi der s who do not expect
r eci pr ocal goods or ser vi ces i n r et ur n


2. Al i ce makes a cash gi f t whi ch has no st r i ngs at t ached t o a pol i t i cal
par t y. I t i s r ecor ded as:
a. An Endowment .
b. Revenue- Unr est r i ct ed cont r i but i on.
c. Revenue- Tempor ar i l y Rest r i ct ed Cont r i but i on.
d. An i ncr ease i n t he f und bal ance of t he Gener al Fund.


3. At l ee makes a cash gi f t t o a not - f or - pr of i t l ocal bal l et company whi ch
i s desi gnat ed by t he donor t o buy cost umes f or a new bal l et st agi ng. I t
shoul d be account ed f or wi t h t he f ol l owi ng j our nal ent r y:
a. Cash XXX
Revenue- Unr est r i ct ed Cont r i but i on XXX
b. Cash XXX
Revenue- Tempor ar i l y Rest r i ct ed Cont r i but i on XXX
c. Cash XXX
Revenue- Endowment Fund XXX
d. Cash XXX
Revenue- Per manent l y Rest r i ct ed XXX


4. A maj or cor por at i on makes a donat i on of $10, 000, 000 t o t he l ocal ar t
museumf oundat i on f or t he const r uct i on of a new ar t museumpr ovi ded t he
communi t y can mat ch t he $10, 000, 000 wi t h ot her donat i ons. Thi s i s an
exampl e of a( n) :
a. Uncondi t i onal Pl edge
b. Unr est r i ct ed Cont r i but i on
c. Condi t i onal Pl edge
d. Endowment


Chapt er 18
18- 2
5. Gover nment gr ant s t hat r equi r e per f or mance by t he not - f or - pr of i t
or gani zat i on wi l l be account ed f or as:
a. Revenue- Unr est r i ct ed
b. Ref undabl e deposi t s unt i l ear ned, t hen Revenue- Unr est r i ct ed
c. Revenue- Tempor ar i l y Unr est r i ct ed
d. Endowment s


6. I n a not - f or - pr of i t or gani zat i on, depr eci at i on on capi t al asset s i s
r ecogni zed on al l but whi ch of t he f ol l owi ng?
a. cont r i but ed asset s.
b. bui l di ng.
c. equi pment .
d. wor ks of ar t i nt ended f or a di spl ay col l ect i on.


7. The l ocal chapt er of a CPA associ at i on, a not - f or - pr of i t or gani zat i on,
separ at e t hei r expenses bet ween pr ogr amf unct i ons and suppor t
f unct i ons. Whi ch of t he f ol l owi ng denot e a pr oper cl assi f i cat i on of
expenses?
Pr ogr amExpense Suppor t Expense
a. Cont i nui ng Educat i on Pr ogr ams Conf er ence Expenses
on Sal es/ Use Tax Requi r ement s on Sel ect i ng Account i ng
Sof t war e
b. Cont i nui ng Educat i on Pr ogr ams Execut i ve Di r ect or Sal ar y
on Sal es/ Use Tax Requi r ement s
c. Fund Rai si ng Expenses Cont i nui ng Educat i on
Pr ogr ams Conf er ence Expenses
on Sal es/ Use Tax
d. Fund Rai si ng Expenses Execut i ve Di r ect or Sal ar y


8. On t he f i nanci al st at ement s of a not - f or - pr of i t pr epar ed under FASB
117, t he t er m" f und bal ance" has been r epl aced wi t h t he t er m:
a. sur pl us/ def i ci t
b. Net I ncome/ Loss
c. Net Asset s
d. Net Equi t y


9. Whi ch of t he f ol l owi ng i s NOT a r equi r ed ext er nal f i nanci al st at ement
f or a not - f or - pr of i t or gani zat i on?
a. St at ement of Fi nanci al Posi t i on
b. St at ement of Funct i onal Expenses
c. St at ement of Act i vi t i es
d. Management Di scussi on and Anal ysi s


Chapt er 18
18- 3
10. Publ i c suppor t f or a vol unt ar y heal t h and wel f ar e or gani zat i on
i ncl udes:
a. news ar t i cl es about t he or gani zat i on.
b. banner s and pr omot i onal mat er i al s.
c. l egaci es and bequest s.
d. cel ebr i t y endor sement s.


11. Whi ch of t he f ol l owi ng or gani zat i ons woul d be cl assi f i ed as a vol unt ar y
heal t h and wel f ar e or gani zat i on?
a. t he l ocal bal l et company
b. t he Si er r a Foundat i on, an envi r onment al or gani zat i on
c. a pr i vat e el ement ar y school
d. a synagogue


12. Cur r ent l y, whi ch of t he f ol l owi ng has j ur i sdi ct i on over account i ng and
f i nanci al r epor t i ng st andar ds f or vol unt ar y heal t h and wel f ar e
or gani zat i ons?
a. The Gover nment al Account i ng St andar ds Boar d
b. The Fi nanci al Account i ng St andar ds Boar d
c. Amer i can I nst i t ut e of Cer t i f i ed Publ i c Account ant s
d. The Not - f or - Pr of i t Account i ng Boar d


13. A donat i on was r ecei ved by a vol unt ar y heal t h and wel f ar e or gani zat i on
speci f i cal l y t o car e f or i ndi gent pat i ent s. Whi ch of t he f ol l owi ng
shoul d be used t o r ecor d t he gi f t ?
a. Unr est r i ct ed Net Asset s
b. Publ i c Suppor t - - Unr est r i ct ed Cont r i but i on
c. Publ i c Suppor t - - Tempor ar i l y Rest r i ct ed Cont r i but i ons
d. Revenues- - Unr est r i ct ed


14. Depr eci at i on Expense i s r ecor ded i n whi ch of t he f ol l owi ng f unds f or a
vol unt ar y heal t h and wel f ar e or gani zat i on el ect i ng t o use f und
account i ng?
a. Cur r ent Unr est r i ct ed Fund
b. Pl ant Fund
c. Depr eci at i on i s r ecor ded i n bot h t he Cur r ent Unr est r i ct ed and
Pl ant f unds.
d. Depr eci at i on i s not nor mal l y r ecor ded by heal t h and wel f ar e
or gani zat i ons.


Chapt er 18
18- 4
15. A donat i on was r ecei ved by a vol unt ar y heal t h and wel f ar e or gani zat i on
of mat er i al s t o be used i n pr ovi di ng ser vi ces. How woul d t hese donat ed
mat er i al s be r ecor ded?
a. As i nvent or y
b. As r est r i ct ed cont r i but i ons
c. As asset s hel d f or r esal e
d. As cont r i but ed ser vi ces


16. A vol unt ar y wel f ar e or gani zat i on i s per mi t t ed t o use bui l di ng
f aci l i t i es r ent f r ee. Thi s shoul d be r ecor ded as:
a. a f oot not e i n t he f i nanci al st at ement s di scl osi ng t he r ent - f r ee
ar r angement .
b. a cont r i but i on.
c. r ent expense at t he f ai r mar ket val ue.
d. bot h b and c ar e cor r ect .


17. Whi ch of t he f ol l owi ng i t ems ar e consi der ed speci al event suppor t f or a
vol unt ar y heal t h and wel f ar e or gani zat i on?
a. bi ngo games and bake sal es
b. a donat ed pai nt i ng
c. donat ed st ock i n a publ i cl y t r aded company
d. bequest of a bui l di ng


18. A cont r i but i on made i n 1999 t o a vol unt ar y heal t h and wel f ar e
or gani zat i on, whi ch i s r est r i ct ed t o usage t o cel ebr at e t he mi l l enni um
i n t he year 2000, i s r ecor ded as a cr edi t t o:
a. Cont r i but i ons.
b. Revenue- - unr est r i ct ed.
c. Revenue- - t empor ar i l y r est r i ct ed.
d. Revenue- - per manent l y r est r i ct ed.


19. What i s t he pr oper met hod of car r yi ng i nvest ment s by a vol unt ar y heal t h
and wel f ar e or gani zat i on?
a. cost
b. l ower of cost or mar ket
c. ei t her cost or mar ket i f appl i ed consi st ent l y
d. mar ket val ue measur ed at year end


Chapt er 18
18- 5
20. Whi ch of t he f ol l owi ng f i nanci al st at ement s i s not r equi r ed when
r epor t i ng f or a vol unt ar y heal t h and wel f ar e or gani zat i on?
a. St at ement of Fi nanci al Posi t i on
b. St at ement of Suppor t , Revenue, Expenses and Changes i n Fund
Bal ances
c. St at ement of Funct i onal Expenses
d. St at ement of Cash Fl ows


21. Assume t hat i nvest ment s i n an Endowment Fund ar e bei ng car r i ed at
mar ket val ue. The annual net appr eci at i on of i nvest ment s shoul d:
a. not be r ecogni zed unt i l r eal i zed.
b. be r ecor ded as i nvest ment r evenue.
c. be r ecor ded as def er r ed r evenue.
d. be cr edi t ed di r ect l y t o t he Endowment Fund Bal ance.


22. The Amer i can Hear t Associ at i on i s havi ng i t s annual Hear t Bal l . The
bal l i s an on- goi ng event and a maj or annual event f or t he associ at i on.
Any di r ect cost s of t he bal l ar e consi der ed:
a. Cost of Speci al Event s
b. Oper at i ng Expenses
c. Fund Rai si ng Expenses


23. Whi ch of t he f ol l owi ng woul d appear i n t he Cust odi an ( Agency) Funds of
a vol unt ar y heal t h and wel f ar e or gani zat i on?

Revenues Li abi l i t i es
a. Yes Yes
b. No Yes
c. Yes No
d. No No


24. Gai ns and l osses, i n ot her t han t he f i r st year , f r ompool ed i nvest ment s
ar e di st r i but ed t o par t i ci pat i ng f unds based on:
a. cost of cont r i but ed asset s at t he t i me of or i gi nal pool i ng.
b. mar ket val ue of cont r i but ed asset s at t he t i me of or i gi nal
pool i ng.
c. mar ket val ue at t he t i me of any addi t i ons or wi t hdr awal s.
d. mar ket val ue at t he pr evi ous val uat i on dat e.


Chapt er 18
18- 6
25. Whi ch of t he f ol l owi ng expenses woul d be consi der ed a pr ogr amser vi ce
expense f or t he l ocal cancer soci et y?
a. sal ar y of a home car e nur se
b. sal ar y of t he l ocal di r ect or
c. r ent f or t he l ocal of f i ce
d. pr i nt i ng cost s f or a f und- r ai si ng br ochur e


26. A CPA donat es her ser vi ces t o pr epar e t he annual f i nanci al r epor t f or a
vol unt ar y heal t h and wel f ar e or gani zat i on. The ser vi ces shoul d be
r ecor ded as:
a. r evenues- unr est r i ct ed.
b. account i ng expenses.
c. a f oot not e di scl osur e i n t he f i nanci al r epor t .
d. bot h a and b ar e cor r ect .


27. Vol unt ar y heal t h and wel f ar e or gani zat i ons pr epar e a St at ement of
Act i vi t i es whi ch di spl ays pr ogr amand suppor t i ng ser vi ces cost s.
Pr ogr amexpenses f or a cancer soci et y woul d i ncl ude:
a. f und- r ai si ng cost s
b. chi ef execut i ve of f i cer sal ar y
c. pr ogr amcost s of cancer r esear ch
d. Br ochur es f or pr ospect i ve member s


28. Donat ed ser vi ces ar e r ecogni zed as a cont r i but i on i f :
a. t hey cr eat e or enhance nonf i nanci al asset s.
b. t hey r equi r e speci al i zed ski l l s and t he i ndi vi dual s per f or mi ng t he
donat ed ser vi ce possess t hose ski l l s.
c. t he or gani zat i on woul d ot her wi se pur chase t he ser vi ce.
d. Al l of t he above ar e cor r ect .


PROBLEM

1. a. Descr i be t he basi c account i ng f or pr i vat e not - f or - pr of i t gr oups
pr omot ed by FASB St at ement No. 117 i ncl udi ng a br i ef
descr i pt i on of t he t hr ee net asset cl asses.

b. I ndi cat e i n whi ch of t he net asset cl asses t he f ol l owi ng
t r ansact i ons bel ong:
1. Donor makes gi f t t o not - f or pr of i t whi ch must be i nvest ed
and mai nt ai ned i n per pet ui t y
2. I ncome Ear ned on donat i on not ed i n i t em#1 i s r est r i ct ed t o
cer t ai n pr ogr amexpendi t ur es
3. Gai ns/ Losses, bot h r eal i zed and unr eal i zed, on donat i on
not ed i n i t em#1. Not st i pul at ed i n donor agr eement or by
t he l aw
Chapt er 18
18- 7
4. Expenses pai d out f or pr ogr ams st i pul at ed i n donor
agr eement r el at i ng t o donat i on made i n i t em#1.

ANS:

a. Ful l accr ual account i ng met hods ar e r ecommended f or
not - f or - pr of i t or gani zat i ons f ol l owi ng FASB St at ement No. 117.
Ther e has been a shi f t away f r omf und account i ng and not - f or
pr of i t s no l onger ut i l i ze f und bal ances. I nst ead, t hr ee net
asset cl assi f i cat i ons ar e used. They ar e unr est r i ct ed,
t empor ar i l y r est r i ct ed, and per manent l y r est r i ct ed. The net
asset cl asses ar e desi gned t o show t he di st i nct i on bet ween
r esour ces ext er nal l y r est r i ct ed and t hose j ust i nt er nal l y
desi gnat ed by t he boar d.

b. 1. Per manent l y Rest r i ct ed
2. I ncome ear ned i s t empor ar i l y r est r i ct ed
3. Unr est r i ct ed
4. Tempor ar i l y r est r i ct ed movi ng t o unr est r i ct ed

DI F: E OBJ : 2, 4

2. How do you di f f er ent i at e bet ween a vol unt ar y heal t h and wel f ar e
or gani zat i on and anot her not - f or - pr of i t or gani zat i on?

ANS:

Vol unt ar y heal t h and wel f ar e or gani zat i ons have some publ i c heal t h and
wel f ar e pur pose as t hei r pr i mar y r eason f or exi st i ng. The Sal vat i on
Ar my and Red Cr oss ar e good exampl es of vol unt ar y heal t h and wel f ar e
or gani zat i ons. Ot her not - f or - pr of i t or gani zat i ons i ncl ude al l
or gani zat i ons t hat ar e not pr oper l y cl assi f i ed as a col l ege or
uni ver si t y, heal t h car e or gani zat i on, or vol unt ar y heal t h and wel f ar e
or gani zat i on. A count r y cl ub or pol i t i cal par t y ar e good exampl es of a
not - f or - pr of i t or gani zat i on.

DI F: E OBJ : 7

3. What ar e t he t wo maj or cat egor i es of r esour ces obt ai ned by vol unt ar y
heal t h and wel f ar e or gani zat i ons, and how do t hey di f f er ?

ANS:

The t wo maj or cat egor i es used t o r ecor d and communi cat e i nf l ows of
r esour ces ar e publ i c suppor t and r evenue. Publ i c suppor t i s t he i nf l ow
of r esour ces f r omvol unt ar y donor s who r ecei ve no di r ect , per sonal
benef i t f r omt he or gani zat i on' s usual pr ogr ams i n exchange f or t he
cont r i but i ons. Revenues ar e i nf l ows of r esour ces r esul t i ng f r oma
char ge f or ser vi ce or f r omf i nanci al act i vi t i es.

DI F: E OBJ : 7

Chapt er 18
18- 8
4. Descr i be t he ci r cumst ances t hat must be t r ue i n or der f or donat ed,
per sonal ser vi ces t o be r ecor ded as r evenue ( cont r i but i ons) i n a
vol unt ar y heal t h and wel f ar e or gani zat i on.

ANS:

Al l of t he f ol l owi ng cr i t er i a must be met i n or der t o r ecogni ze donat ed
ser vi ces as r evenue:

Ser vi ces cr eat i ng or enhanci ng non- f i nanci al asset s or ser vi ces
r equi r i ng speci al i zed ski l l s ar e pr ovi ded by i ndi vi dual s pr ocessi ng
t hose abi l i t i es and woul d have t o be pur chased by t he or gani zat i on i f
not donat ed.

DI F: M OBJ : 7

5. By pl aci ng a check mar k i n t he appr opr i at e col umn, i ndi cat e al l of t he
f unds of a vol unt ar y heal t h and wel f ar e or gani zat i on i n whi ch t he
f ol l owi ng event s mi ght cor r ect l y be r ecor ded. ( Hi nt : An event may
r equi r e ent r i es i n mor e t han one f und. )

Cur r ent Funds Pl ant Endowment
Event Unr est r i ct ed Rest r i ct ed Fund Fund
a. Al l ocat i on of
expenses t o
pr ogr ams and ser vi ces _______ _______ _______ _______

b. Recei pt of cash
cont r i but i ons. . . . . . . . _______ _______ _______ _______

c. Cr eat i on of a
desi gnat ed account
f r omunr est r i ct ed
net asset s. . . . . . . . . . . _______ _______ _______ _______

d. Recor di ng of
depr eci at i on
expense. . . . . . . . . . . . . . _______ _______ _______ _______

e. Expendi ng of or
r el easi ng cash f or
donor - speci f i ed
act i vi t y. . . . . . . . . . . . . _______ _______ _______ _______

Chapt er 18
18- 9
ANS:

a. Al l ocat i on of
expenses t o
pr ogr ams and ser vi ces. . X X X X

b. Recei pt of cash
cont r i but i ons. . . . . . . . . . X X X X

c. Cr eat i on of a
desi gnat ed account
f r omunr est r i ct ed
net asset s. . . . . . . . . . . . . X

d. Recor di ng of
depr eci at i on
expense. . . . . . . . . . . . . . . . X

e. Expendi ng of or
r el easi ng cash f or
donor - speci f i ed
act i vi t y. . . . . . . . . . . . . . . X X X

DI F: M OBJ : 7

6. The f ol l owi ng event s ar e f or t he Publ i c Heal t h Agency, a vol unt ar y
heal t h and wel f ar e or gani zat i on t hat conduct s t wo pr ogr ams: publ i c
heal t h r esear ch and publ i c heal t h educat i on:

a. The agency r ecei ved i t s f i r st cont r i but i on, consi st i ng of
1, 000 shar es of Par ker House common st ock val ued at $60, 000.
The st ock was donat ed by Ron Wol f , a l ocal f i nanci er , who
speci f i ed t hat ear ni ngs f r omt he per manent endowment woul d not
be subj ect t o any r est r i ct i ons.

b. Di anne St ei n, a wi dow who was a vol unt eer f or t he Publ i c
Heal t h Agency, di ed. Her wi l l est abl i shed a cash endowment of
$200, 000 and st i pul at ed t hat gai ns on t he sal e of any
i nvest ment s pur chased wi t h t hese f unds shoul d i ncr ease t he
per manent endowment . However , ear ni ngs shoul d be used f or t he
pur chase of equi pment . The cash was accept ed under t he t er ms
i n t he wi l l .

c. I nvest ment s wer e made f r omt he St ei n endowment f und. Ut i l i t y
bonds wi t h a f ace val ue of $100, 000 and a cont r act r at e of 12%
wer e pur chased at 104, pl us $2, 000 of accr ued i nt er est f or 2
mont hs on May 1, 20X7. The bonds mat ur e i n 40 mont hs. On t he
same dat e, $90, 000 was i nvest ed i n money mar ket cer t i f i cat es
yi el di ng 7%.

d. The f ol l owi ng r evenue was r ecei ved on Sept ember 1, 20X7:

Di vi dends on t he Par ker House common st ock. . . . . . . $3, 000
Semi annual i nt er est on t he ut i l i t y bonds. . . . . . . . . $6, 000

e. The Par ker House common st ock i s sol d at a net pr i ce of $67
per shar e on Oct ober 1, 20X7.
Chapt er 18
18- 10

f . The $67, 000 pr oceeds f r omt he sal e of Par ker House common
st ock wer e i nvest ed i n 10%i ndust r i al bonds wi t h a f ace val ue
of $70, 000 and a mar ket val ue of $67, 000 on an i nt er est
payment dat e. The bonds mat ur e i n 60 mont hs. Thi s t r ansact i on
had t he appr oval of Wol f , who r ecommended t hat onl y t he cash
f l ow be avai l abl e f or oper at i ons. The boar d agr eed t hat t hi s
was pr ef er abl e.

g. At year end, accr ued i nt er est f or f our mont hs on t he ut i l i t y
bonds was $4, 000; accr ued i nt er est f or t hr ee mont hs on t he
i ndust r i al bonds was $1, 750. The i nt er est on money mar ket
cer t i f i cat es was accr ued.

Requi r ed:

Pr epar e j our nal ent r i es f or t he year ended December 31, 20X7:

ANS:

a. I nvest ment s ( Par ker House Common St ock) . . . 60, 000
Cont r i but i ons- - Per manent l y Rest r i ct ed. . . 60, 000
To r ecor d mar ket val ue of
secur i t i es r ecei ved as a
per manent endowment f r omWol f .

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Legaci es and Bequest s- - Per manent l y
Rest r i ct ed. . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
To r ecor d l egacy f r omSt ei n.

c. Endowment I nvest ment s ( 12%Ut i l i t y Bonds) . 100, 000
Pr emi umon Ut i l i t y Bonds Pur chased. . . . . . . . 4, 000
Accr ued I nvest ment I ncome. . . . . . . . . . . . . . . . . 2, 000
Endowment I nvest ment s ( Money Mar ket
Cer t i f i cat e) . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196, 000
To r ecor d i nvest ment s f r omSt ei n
endowment .

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Accr ued I nvest ment I ncome. . . . . . . . . . . . . . . 2, 000
Endowment I ncome- - Tempor ar i l y Rest r i ct ed 3, 600
Pr emi umon Ut i l i t y Bonds Pur chased. . . . . . 400
To assi gn suf f i ci ent cash i nf l ow
f r omut i l i t y bonds t o pr ot ect
endowment pr i nci pal . Amor t i zat i on
of bond pr emi umi s f or 4 mont hs at
$100 per mont h ( $4, 000/ 40 mont hs) .

e. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67, 000
Endowment I nvest ment s ( Par ker House
Common St ock) . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Real i zed Gai n on Endowment I nvest ment
Tr ansact i ons- - Per manent l y Rest r i ct ed. . 7, 000

Chapt er 18
18- 11
f . Endowment I nvest ment s ( 10%I ndust r i al Bonds) 70, 000
Di scount on I ndust r i al Bonds Pur chased. . 3, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67, 000
To r ecor d bonds pur chased wi t h
pr oceeds f r ompar t e.

g. Accr ued I nvest ment I ncome. . . . . . . . . . . . . . . . . 4, 000
Pr emi umon Ut i l i t y Bonds Pur chased. . . . . . 400
Endowment I ncome, Tempor ar i l y Rest r i ct ed 3, 600
To r ecor d accr ual of 4 mont hs'
i nt er est and amor t i zat i on of
pr emi um, al ong wi t h l i abi l i t y t o
t he Pl ant Fund.

To r ecor d accr ual of i nt er est on
i ndust r i al bonds and l i abi l i t y
f or t hose ear ni ngs.

Di scount on I ndust r i al Bonds Pur chased. . . . 150
Endowment I ncome- - Tempor ar i l y Rest r i ct ed 150
To r ecor d accumul at i on of di scount
f or 3 mont hs at $50 per mont h
( $3, 000/ 60 mont hs) .

To r ecor d accr ual of 8 mont hs' i nt er est
on money mar ket cer t i f i cat es.

DI F: M OBJ : 8

7. Rapi t own Ar t s Counci l pr ovi des f i nanci al suppor t t o a number of
i ndependent f i near t pr oj ect s i n t he ci t y. Dat a concer ni ng sever al
event s f ol l ow:

a. Dur i ng 20X5, a f und- r ai si ng dr i ve yi el ded $100, 000 i n cash and
$25, 000 i n pl edges.

b. Based on past exper i ence, 10%of t he pl edges ar e est i mat ed t o
be uncol l ect i bl e.

c. A J ul y 4 ar t f ai r yi el ded $20, 000 i n gr oss r evenue. The
pr oceeds of t he f ai r ar e consi der ed unr est r i ct ed. The cost of
t he pr ogr amwas $8, 000, pai d i n cash.

d. $22, 000 of t he pl edges ment i oned i n par t ( a) ar e col l ect ed
dur i ng t he year .

e. The f ol l owi ng expenses wer e pai d:

Di r ect or ' s sal ar y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12, 000
Rent expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Post age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 500
Conf er ence expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000

Chapt er 18
18- 12
Requi r ed:

Make t he necessar y ent r i es t o r ecor d t he t r ansact i ons.

ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cont r i but i ons Recei vabl e. . . . . . . . . . . . . . . . . . 25, 000
Cont r i but i ons- - Unr est r i ct ed. . . . . . . . . . . . . 125, 000

b. Pr ovi si ons f or Uncol l ect i bl e Cont r i but i ons 2, 500
Cont r i but i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 500

c. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Speci al Event s Suppor t - - Unr est r i ct ed. . . . 20, 000

Cost of Speci al Event s. . . . . . . . . . . . . . . . . . . . 8, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 000
Cont r i but i ons Recei vabl e. . . . . . . . . . . . . . . . 22, 000

e. Sal ar y and Rel at ed Expenses. . . . . . . . . . . . . . . 12, 000
Rent Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Post age Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 500
Conf er ence Expenses. . . . . . . . . . . . . . . . . . . . . . . 2, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 500

DI F: M OBJ : 10

8. The f ol l owi ng event s af f ect ed t he Rapi t own Ar t s Counci l :

a. Cont r i but i ons of $20, 000, r est r i ct ed f or use i n t he chi l dr en' s
ar t pr ogr am, ar e r ecei ved.

b. St ocks wi t h a book val ue of $10, 000 and a f ai r mar ket val ue of
$11, 000 wer e donat ed. The pr oceeds f r omt he sal e of t he st ocks
ar e t o be used by t he l ocal dr ama gr oup.

c. A f amous aut hor l ect ur ed t o hi gh school st udent s i n t he
chi l dr en' s ar t pr ogr am. The cost was $3, 000 and was pai d by
t he cont r i but i ons f r ompar t ( a) .

d. The st ock donat ed i n par t ( b) i s sol d f or $11, 500.

Requi r ed:

Make t he necessar y j our nal ent r i es.

Chapt er 18
18- 13
ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Cont r i but i ons- - Tempor ar i l y Rest r i ct ed. . . 20, 000

b. I nvest ment s- - St ock. . . . . . . . . . . . . . . . . . . . . . . . 11, 000
Cont r i but i ons- - Tempor ar i l y Rest r i ct ed. . . 11, 000

c. Cost of Chi l dr en' s Ar t s Pr ogr am. . . . . . . . . . . 3, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 000

Recl assi f i cat i on Out - - Tempor ar i l y
Rest r i ct ed Sat i sf act i on of Pr ogr am
Rest r i ct i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 000
Recl assi f i cat i on I n- - Unr est r i ct ed
Sat i sf act i on of Pr ogr amRest r i ct i ons. . 3, 000

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 500
I nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 000
Real i zed Gai n on I nvest ment
Tr ansact i ons- - Tempor ar i l y Rest r i ct ed. . 500

DI F: M OBJ : 10

9. The f ol l owi ng event s ar e f or Sout h Ci t y Shel t er , a vol unt ar y heal t h and
wel f ar e or gani zat i on t hat pr ovi des emer gency shel t er and heal t h car e
f or t he homel ess, as wel l as educat i onal pr ogr ams:

a. A f und- r ai si ng pr ogr amf or a por t abl e medi cal cl i ni c yi el ded
cash cont r i but i ons of $50, 000 and pl edges of $100, 000. I n t he
past , 5%of pl edges have been shown t o be uncol l ect i bl e.

b. A not e f or $100, 000 was si gned t o f i nance t he r emai ni ng cost
of t he cl i ni c.

c. The mobi l e cl i ni c and suppor t mat er i al s wer e pur chased f or
$240, 000.

d. A not e payment of $5, 000 and $1, 500 i n i nt er est was pai d f or
t he not e i n par t ( c) .

Requi r ed:

Recor d t he necessar y j our nal ent r i es.

Chapt er 18
18- 14
ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Cont r i but i ons Recei vabl e. . . . . . . . . . . . . . . . . 100, 000
Cont r i but i ons- - Tempor ar i l y Rest r i ct ed. . 150, 000

Pr ovi si on f or Uncol l ect i bl e Cont r i but i ons 5, 000
Cont r i but i ons. . . . . . . . . . . . . . . . . . . . . . . . 5, 000

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Not e Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000

c. Land, Bui l di ng and Equi pment . . . . . . . . . . . . . 240, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240, 000
Rest r i ct ed- Sat i sf act i on of Pl ant
Acqui si t i on Rest r i ct i ons. . . . . . . . . . . . . 150, 000
Recl assi f i cat i on I n- - Unr est r i ct ed- -
Sat i sf act i on of Pl ant Acqui si t i on
Rest r i ct i ons. . . . . . . . . . . . . . . . . . . . . . . . . 150, 000

d. Not e Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 000
I nt er est Expense ( t o be al l ocat ed t o
pr ogr ams and suppor t ser vi ces) . . . . . . . . . . 1, 500
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 500

DI F: D OBJ : 8

10. Sout h Ci t y Shel t er i s a vol unt ar y heal t h and wel f ar e or gani zat i on t hat
pr ovi des emer gency shel t er and heal t h car e f or t he homel ess, as wel l as
educat i onal pr ogr ams. Sout h Ci t y Shel t er i ncur r ed t he f ol l owi ng
t r ansact i ons:

a. A comput er wi t h a book val ue of $500 ( or i gi nal cost , $2, 800)
was sol d f or $650.

b. Ki t chen equi pment wi t h a book val ue of $1, 100 ( or i gi nal cost ,
$3, 500) was damaged i n a f i r e and t aken t o t he dump.

c. Tot al depr eci at i on f or t he year was $60, 000.

d. To cl ose t he depr eci at i on expense, i t was det er mi ned t hat 70%
shoul d be al l ocat ed t o t he Shel t er Pr ogr am, 15%t o t he
Educat i on Pr ogr am, and 15%t o t he Heal t h Car e Pr ogr am.

Requi r ed:

Make t he necessar y j our nal ent r i es t o r ef l ect t he event s.

Chapt er 18
18- 15
ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650
Land, Bui l di ng and Equi pment . . . . . . . . . . 2, 800
Gai n on Sal e- - Unr est r i ct ed. . . . . . . . . . . . 150

b. Accumul at ed Depr eci at i on. . . . . . . . . . . . . . . . 2, 400
Loss on Di sposal of Pl ant . . . . . . . . . . . . . . . 1, 100
Land, Bui l di ng, and Equi pment . . . . . . . . . 3, 500

c. Depr eci at i on Expense. . . . . . . . . . . . . . . . . . . . 60, 000

d. Shel t er Pr ogr amExpense. . . . . . . . . . . . . . . . . 42, 000
Educat i on Pr ogr amExpense. . . . . . . . . . . . . . . 9, 000
Heal t h Car e Pr ogr amExpense. . . . . . . . . . . . . 9, 000
Depr eci at i on Expense. . . . . . . . . . . . . . . . . . 60, 000

DI F: D OBJ : 8

11. By pl aci ng a check mar k i n t he appr opr i at e col umn, i ndi cat e i n whi ch
f und of a vol unt ar y heal t h and wel f ar e or gani zat i on t he f ol l owi ng
event s nor mal l y woul d be r ecor ded. ( Not e: An event may r equi r e ent r i es
i n mor e t han one f und. )

a. Recei pt of donat ed
secur i t i es, r evenue
f r omwhi ch i s t o be
used f or bot h
unr est r i ct ed and
speci f i ed cur r ent
act i vi t i es. . . . . . . . . . . . . _______ _______ _______ _______

b. Recei pt of r evenue
f r omdonat ed secur i t i es
i n st ep ( a) . . . . . . . . . . . . _______ _______ _______ _______

c. Recei pt of donat ed
f i xed asset s, whi ch
ar e t o be sol d, wi t h
no r est r i ct i ons on
pr oceeds. . . . . . . . . . . . . . . _______ _______ _______ _______

d. Recor di ng of
depr eci at i on. . . . . . . . . . . _______ _______ _______ _______

e. Appr opr i at i on of t he
unr est r i ct ed net
asset s by t he boar d
of di r ect or s. . . . . . . . . . . _______ _______ _______ _______

Chapt er 18
18- 16
ANS:

a. Recei pt of donat ed
secur i t i es, r evenue
f r omwhi ch i s t o be
used f or bot h
unr est r i ct ed and
speci f i ed cur r ent
act i vi t i es. . . . . . . . . . . . . X

b. Recei pt of r evenue
f r omdonat ed secur i t i es
i n st ep ( a) . . . . . . . . . . . . X X

c. Recei pt of donat ed
f i xed asset s, whi ch
ar e t o be sol d, wi t h
no r est r i ct i ons on
pr oceeds. . . . . . . . . . . . . . . X

d. Recor di ng of
depr eci at i on. . . . . . . . . . . X

e. Appr opr i at i on of t he
unr est r i ct ed net
asset s by t he boar d
of di r ect or s. . . . . . . . . . . X

DI F: M OBJ : 7, 8

12. Seni or Wel l ness Cent er i s a vol unt ar y heal t h and wel f ar e or gani zat i on
devot ed t o heal t h educat i on f or t he el der l y. I t has i nvest ment s i n i t s
Rest r i ct ed Fund, i t s Pl ant Fund, and i t s Endowment Fund. On J anuar y 2,
t he or gani zat i on deci ded t o pool t he i nvest ment s of t he t hr ee f unds,
and t her eaf t er t o mai nt ai n al l i nvest ment account bal ances at mar ket
val ue.

a. On J anuar y 2, when i nvest ment s wer e pool ed, t he f ol l owi ng dat a
appl i ed:

I nvest ment s
Mar ket
Or i gi nal Val ues
Fund Basi s J anuar y 2
Rest r i ct ed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55, 000 $ 75, 000
Pl ant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70, 000 75, 000
Endowment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125, 000 100, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250, 000 $250, 000
======== ========

b. On Mar ch 31, t he end of t he f i r st quar t er , t he pool r epor t s
sal es of i nvest ment s car r i ed at $70, 000 f or $90, 000. Real i zed
gai ns and ot her r eal i zed i ncome ar e al l ocat ed t o f unds upon
r eal i zat i on. Per cent ages of equi t y may be r ounded t o t he
near est t ent h of one per cent . Tot al cash and mar ket val ue of
pool ed i nvest ment s on Mar ch 31 i s $275, 000.

Chapt er 18
18- 17

c. The second- quar t er r epor t as of J une 30 shows sal es of
i nvest ment s f or $90, 000 whi ch wer e car r i ed at $100, 000. Tot al
cash and mar ket val ue of pool ed i nvest ment s on J une 30 i s
$260, 000.

Requi r ed:

Pr epar e a schedul e of equi t i es i n pool ed i nvest ment s f or t he t hr ee
f unds at t he end of t he f i r st t wo quar t er s.

ANS:


DI F: D OBJ : 10

13. The Good Heal t h Agency i s a vol unt ar y heal t h and wel f ar e or gani zat i on
t hat conduct s t wo pr ogr ams: publ i c heal t h r esear ch and publ i c heal t h
educat i on.

a. Publ i c suppor t f or gener al act i vi t i es consi st ed of t he
f ol l owi ng:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60, 000
Gr oss pl edges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295, 000
Est i mat ed uncol l ect i bl e pl edges. . . . . . . . . . . . . . . . . . . 15, 000

b. Dur i ng t he year , sever al r ummage sal es wer e hel d t o r ai se
f unds f or gener al oper at i ons. Gr oss cash pr oceeds wer e
$17, 000, wi t h $4, 000 of di r ect cost s pai d i n cash.

c. Ter r y Wel l , a f or mer nur se, di ed. Her wi l l pr ovi ded $50, 000 t o
be used as t he boar d of di r ect or s saw f i t .

d. Cash col l ect ed f r ompl edges t ot al ed $230, 000. Pl edges wr i t t en
of f as uncol l ect i bl e amount ed t o $12, 000.

e. I ncome f r omi nvest ment s f or t he year t ot al ed $11, 800, of whi ch
$800 r epr esent s di vi dends decl ar ed but not yet r ecei ved.
I ncome i s unr est r i ct ed.

f . A heal t h cl ub was f or med by t he agency. I t s member s coul d use
var i ous f aci l i t i es of t he agency. Cash r ecei ved f r om
member shi p dues was $1, 700.

g. The f ol l owi ng expenses wer e voucher ed:

Sal ar i es and r el at ed expenses. . . . . . . . . . . . . . . . . . . . . $171, 900
Pr of essi onal f ees and expenses. . . . . . . . . . . . . . . . . . . . 75, 600
Admi ni st r at i ve expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 000
Rent expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 700
Conf er ence and meet i ng expenses. . . . . . . . . . . . . . . . . . . 16, 900
Pr i nt i ng and di st r i but i on expenses. . . . . . . . . . . . . . . . 19, 200
Tr anspor t at i on expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 700
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $371, 000
Chapt er 18
18- 18
========

h. A t ot al of $316, 000 i n voucher s was pai d.

i . A st at ement of f unct i onal expenses was pr epar ed and showed t he
f ol l owi ng al l ocat i ons:

Pr ogr ams:
Publ i c heal t h r esear ch. . . . . . . . . . . . . . . . . . . . . . . . . . . . $118, 300
Publ i c heal t h educat i on. . . . . . . . . . . . . . . . . . . . . . . . . . . 140, 800
Suppor t i ng Ser vi ces:
Management and gener al . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59, 500
Fund- r ai si ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52, 400
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $371, 000
========

Requi r ed:

Pr epar e j our nal ent r i es f or t hese event s. Char ge t he r espect i ve
ser vi ces f or t hei r shar e of expenses.

ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Cont r i but i ons Recei vabl e. . . . . . . . . . . . . . . . . . . 295, 000
Cont r i but i ons- - Unr est r i ct ed. . . . . . . . . . . . . . 355, 000
To r ecor d cash and pl edges r ecei ved.

Pr ovi si on f or Uncol l ect i bl e Cont r i but i ons. . 15, 000
Al l owance f or Uncol l ect i bl e Cont r i but i ons 15, 000
To r ecor d est i mat ed uncol l ect i bl e
cont r i but i ons.

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 000
Speci al Event s Suppor t - - Unr est r i ct ed. . . . . 17, 000
To r ecor d pr oceeds f r omr ummage
sal es.

Cost of Speci al Event s. . . . . . . . . . . . . . . . . . . . . 4, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000
To r ecor d payment of di r ect cost s.

c. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Legaci es and Bequest s- - Unr est r i ct ed. . . . . . 50, 000
To r ecor d l egacy f r omTer r y Wel l .

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230, 000
Al l owance f or Uncol l ect i bl e Cont r i but i ons. . 12, 000
To r ecor d cont r i but i on col l ect i ons
and wr i t e- of f .

e. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 000
Accr ued I nvest ment I ncome. . . . . . . . . . . . . . . . . . 800
I nvest ment I ncome- - Unr est r i ct ed. . . . . . . . . . 11, 800
To r ecor d i nvest ment r evenues.

Chapt er 18
18- 19
f . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 700
Member shi p Dues Revenue- - Unr est r i ct ed. . . . 1, 700
To r ecor d heal t h cl ub dues.

g. Sal ar i es and Rel at ed Expenses. . . . . . . . . . . . . . 171, 900
Pr of essi onal Fees and Expenses. . . . . . . . . . . . . 75, 600
Admi ni st r at i ve Expenses. . . . . . . . . . . . . . . . . . . . 35, 000
Rent Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 700
Conf er ence and Meet i ng Expenses. . . . . . . . . . . . 16, 900
Pr i nt i ng and Di st r i but i on Expenses. . . . . . . . . 19, 200
Tr anspor t at i on Expenses. . . . . . . . . . . . . . . . . . . . 17, 700
To r ecor d voucher s i ssued.

h. Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . 316, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316, 000
To r ecor d voucher s pai d.

i . Publ i c Heal t h Resear ch Pr ogr am. . . . . . . . . . . . . 118, 300
Publ i c Heal t h Educat i on Pr ogr am. . . . . . . . . . . . 140, 800
Management and Gener al Ser vi ces. . . . . . . . . . . . 59, 500
Fund- Rai si ng Ser vi ces. . . . . . . . . . . . . . . . . . . . . . 52, 400
Sal ar i es and Rel at ed Expenses. . . . . . . . . . . . 171, 900
Pr of essi onal Fees and Expenses. . . . . . . . . . . 75, 600
Admi ni st r at i ve Expenses. . . . . . . . . . . . . . . . . . 35, 000
Rent Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 700
Conf er ence and Meet i ng Expenses. . . . . . . . . . 16, 900
Pr i nt i ng and Di st r i but i on Expenses. . . . . . . 19, 200
Tr anspor t at i on Expenses. . . . . . . . . . . . . . . . . . 17, 700
To r ecor d expenses al l ocat i on per
st at ement of f unct i onal expenses.

DI F: D OBJ : 8

14. The El der Ci t i zens Agency i s a vol unt ar y heal t h and wel f ar e
or gani zat i on. The f ol l owi ng event s occur :

a. Thi s year ' s f und dr i ve r esul t ed i n unr est r i ct ed pl edges
t ot al i ng $130, 000. Pl edges of $25, 000 wer e r ecei ved f or a
speci al hot meal pr ogr am.

b. Cash col l ect ed f r ompl edges: unr est r i ct ed, $100, 000;
r est r i ct ed, $18, 000.

c. A phi l ant hr opi st , who i s an at t or ney, cont r i but ed a pai nt i ng
val ued at $4, 000, whi ch i s t o be auct i oned of f at a
Thanksgi vi ng supper or gani zed t o r ai se f unds f or a l egal
assi st ance pr ogr amf or t he el der l y. The event was an
unexpect ed success. The pai nt i ng was sol d f or $7, 800.
Addi t i onal gr oss cash r evenues wer e $4, 900. Di r ect cost s pai d
wer e $1, 700.

d. The agency r ecei ved $11, 000 f r omt he l ocal di vi si on of Uni t ed
Way f or gener al suppor t .

e. Sal ar i es amount ed t o $70, 000, payr ol l t axes wer e $6, 000, and
ot her empl oyee benef i t s amount ed t o $10, 000. Of t hese i t ems,
$5, 000 i s unpai d.
Chapt er 18
18- 20

Chapt er 18
18- 21

f . Ar r angement s have been made t o have a l ocal cat er i ng f i r m
br i ng i n a hot l unch. Seni or ci t i zens ar e char ged $0. 75 per
meal . To dat e, payment s t o t he cat er i ng ser vi ce ar e $2, 300.
Cash col l ect i ons f r omt he meal pr ogr amser vi ce t ot al ed $900.

g. I t i s est i mat ed t hat 10%of t he r emai ni ng unr est r i ct ed pl edges
and 5%of t he r emai ni ng r est r i ct ed pl edges wi l l pr ove
uncol l ect i bl e.

h. At t he end of t he pr evi ous year , $10, 000 of t he bal ance of t he
Unr est r i ct ed Net Asset s had been desi gnat ed f or a speci al
pr ogr amf or handi capped el der l y per sons. The pr ogr amwas t o be
conduct ed dur i ng t he cur r ent year i f suf f i ci ent suppor t coul d
be gener at ed. The i dea was abandoned t hi s year f or l ack of
i nt er est . The gover ni ng boar d aut hor i zes t he r ecl assi f i cat i on
of t he amount as undesi gnat ed.

i . The El der Ci t i zens Agency had budget ed $500 per mont h t o r ent
space t o conduct i t s gener al act i vi t i es. A gener ous ci t i zen
per mi t s t he agency t o occupy equi val ent space at a nomi nal f ee
of $100 per year . The annual f ee i s pai d, and t he appr opr i at e
expense f or t he year i s r ecor ded.

Requi r ed:

Pr epar e j our nal ent r i es t o r ecor d t he event s.

ANS:

a. Cont r i but i ons Recei vabl e. . . . . . . . . . . . . . . . . 155, 000
Cont r i but i ons- - Unr est r i ct ed. . . . . . . . . . . . 130, 000
To r ecor d pl edges r ecei ved.

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118, 000
Cont r i but i ons Recei vabl e. . . . . . . . . . . . . . . 118, 000
To r ecor d col l ect i ons on pl edges.

c. Pai nt i ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000
To r ecor d cont r i but i on of pai nt i ng.

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 800
Pai nt i ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000
Speci al Event s Suppor t - - Tempor ar i l y
Rest r i ct ed. . . . . . . . . . . . . . . . . . . . . . . . . 3, 800
To r ecor d sal e of pai nt i ng.

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 900
Speci al Event s Suppor t - - Tempor ar i l y
Rest r i ct ed. . . . . . . . . . . . . . . . . . . . . . . . . 4, 900
To r ecor d gr oss r evenue f r omsupper .

Cost of Speci al Event s. . . . . . . . . . . . . . . . . . . 1, 700
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 700
To r ecor d di r ect cost s pai d.

Chapt er 18
18- 22
d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 000
Revenue- - Feder at ed and Nonf eder at ed
Campai gns- - Unr est r i ct ed. . . . . . . . . . . . . . 11, 000
To r ecor d suppor t f r omUni t ed Way.

e. Sal ar i es Expense. . . . . . . . . . . . . . . . . . . . . . . . . 70, 000
Payr ol l Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Empl oyee Benef i t s Expense. . . . . . . . . . . . . . . . 10, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81, 000
Account s Payabl e. . . . . . . . . . . . . . . . . . . . . . . 5, 000
To r ecor d sal ar y- r el at ed i t ems.

f . Cost of Hot Lunch Pr ogr am. . . . . . . . . . . . . . . . 2, 300
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 300
To r ecor d payment s t o cat er er .

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Pr ogr amSer vi ces Fee- - Unr est r i ct ed. . . . . 900
To r ecor d col l ect i on on meal pr ogr am.

g. Pr ovi si on f or Uncol l ect i bl e Cont r i but i ons 3, 350
Cont r i but i ons. . . . . . . . . . . . . . . . . . . . . . . . . . 3, 350
To r ecor d est i mat ed col l ect i bl es:
Unr est r i ct ed: 10%x ( $130, 000 -
$100, 000)
Rest r i ct ed: 5%x ( $25, 000 - $18, 000)

h. Unr est r i ct ed Net Asset s- - Undesi gnat ed. . . . 10, 000
Unr est r i ct ed Net Asset s- - Desi gnat ed f or
Handi capped Pr ogr am. . . . . . . . . . . . . . . . 10, 000
To r ever se desi gnat i on.

i . Rent Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Cont r i but i ons- - Unr est r i ct ed. . . . . . . . . . . . 5, 900
To r ecor d r ent expense f or t he year
and cont r i but i on of space.

DI F: D OBJ : 8

15. The f ol l owi ng event s ar e f or t he Publ i c Heal t h Agency, a vol unt ar y
heal t h and wel f ar e or gani zat i on t hat conduct s t wo pr ogr ams: publ i c
heal t h r esear ch and publ i c heal t h educat i on:

a. The agency r ecei ved a donat i on of capi t al st ock wi t h a mar ket
val ue of $200, 000, wi t h t he st i pul at i on t hat t he i ncome and
pr i nci pal may be used onl y f or addi t i ons t o pl ant .

b. An adj oi ni ng bui l di ng and l and wer e pur chased at a cost of
$600, 000. A 10%cash down payment was made. A mor t gage not e
f or t he r emai nder was si gned.

c. Unused st er i l i zer s wi t h a cost of $15, 000 and a book val ue of
$5, 000 wer e sol d f or $3, 000 cash.

d. New st er i l i zer s cost i ng $28, 000 wer e pur chased.

e. A payment of $90, 000 was made t o cover semi annual mor t gage
Chapt er 18
18- 23
i nt er est of $20, 000 and r educt i on of pr i nci pal of $70, 000.

f . Annual depr eci at i on of $180, 000 was r ecor ded.

g. The di r ect or s appr oved t he f ol l owi ng per cent ages f or
al l ocat i ng al l expenses ( but not l osses) of t he Pl ant Fund:

Publ i c heal t h r esear ch pr ogr am. . . . . . . . . . . . . . . . . . . . 30%
Publ i c heal t h educat i on pr ogr am. . . . . . . . . . . . . . . . . . . 40%
Management and gener al ser vi ces. . . . . . . . . . . . . . . . . . . 10%
Fund- r ai si ng ser vi ces. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%
====

Requi r ed:

Pr epar e t he j our nal ent r i es f or t he event s.

ANS:

a. I nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Cont r i but i ons- - Tempor ar i l y Rest r i ct ed. 200, 000
To r ecor d r ecei pt of donat ed capi t al
st ock.

b. Land, Bui l di ng, and Equi pment . . . . . . . . . . . 600, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Mor t gage Not e Payabl e. . . . . . . . . . . . . . . . . 540, 000
To r ecor d pur chase of l and and
bui l di ng.

c. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 000
Accumul at ed Depr eci at i on
( $15, 000 - $5, 000) . . . . . . . . . . . . . . . . . . . . . 10, 000
Loss on Sal e of Equi pment . . . . . . . . . . . . . . . 2, 000
Land, Bui l di ng, and Equi pment . . . . . . . . . 15, 000
To r ecor d sal e of ol d st er i l i zer s.

d. Land, Bui l di ng, and Equi pment . . . . . . . . . . . 28, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28, 000
To r ecor d pur chase of new
st er i l i zer s.

e. I nt er est Expense. . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Mor t gage Not e Payabl e. . . . . . . . . . . . . . . . . . . 70, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 000
To r ecor d mor t gage i nt er est and
pr i nci pal pai d.

f . Depr eci at i on Expense. . . . . . . . . . . . . . . . . . . . 180, 000
To r ecor d annual depr eci at i on.

Chapt er 18
18- 24
g. Publ i c Heal t h Resear ch Pr ogr amExpense
( 30%x $200, 000) . . . . . . . . . . . . . . . . . . . . 60, 000
Publ i c Heal t h Educat i on Pr ogr amExpense
( 40%x $200, 000) . . . . . . . . . . . . . . . . . . . . 80, 000
Management and Gener al Ser vi ces Expense
( 10%x $200, 000) . . . . . . . . . . . . . . . . . . . . 20, 000
Fund- Rai si ng Ser vi ces Expense
( 20%x $200, 000) . . . . . . . . . . . . . . . . . . . . 40, 000
Depr eci at i on Expense. . . . . . . . . . . . . . . . . . 180, 000
I nt er est Expense. . . . . . . . . . . . . . . . . . . . . . 20, 000
To r ecor d al l ocat i on of expenses t o
pr ogr ams and ser vi ces.

DI F: D OBJ : 8

16. The Communi t y Dr ug Cl i ni c i s a vol unt ar y heal t h and wel f ar e
or gani zat i on t hat conduct s t wo pr ogr ams: dr ug abuse r esear ch and dr ug
abuse educat i on. An i nexper i enced account ant r ecor ded t he f ol l owi ng
ent r i es:

a. Pl edges Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . 200, 000
I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
To r ecor d si gned pl edges r ecei ved. Of
t he t ot al , 20%must be used f or a
speci al l ocal col l ege pr ogr am. I t i s
est i mat ed t hat 5%of t he unr est r i ct ed
pl edges wi l l pr ove uncol l ect i bl e.

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Recei ved money f r oma successf ul
busi ness per son, f or mer l y a dr ug
addi ct . Amount must be used t o
acqui r e a bui l di ng f or t he cl i ni c' s
pr ogr am.

c. Bui l di ng, et c. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
To r ecor d down payment on l and,
bui l di ng, and equi pment wi t h f unds
r ecei ved i n st ep ( b) . A mor t gage not e
was si gned f or an addi t i onal $150, 000.

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000
I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000
To r ecor d amount r ecei ved f or gener al
oper at i ons f r omt he wi l l of t he
f or mer mayor , who di ed.

e. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Pl edges Wr i t e- Of f Expense. . . . . . . . . . . . . . . . 5, 000
Pl edges Recei vabl e. . . . . . . . . . . . . . . . . . . . . 125, 000
To r ecor d col l ect i on of al l pl edges
f or speci al col l ege pr ogr am( st ep a)
and par t i al col l ect i on and some
wr i t e- of f s f or r emai ni ng pl edges.

Chapt er 18
18- 25
f . Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 000
To r ecor d pur chase of equi pment f r om
unr est r i ct ed f unds.

g. Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
To r ecor d payment of expenses, 80%of
whi ch ar e r el at ed t o unr est r i ct ed
act i vi t y and t he r emai nder t o
r est r i ct ed.

h. Depr eci at i on Expense. . . . . . . . . . . . . . . . . . . . . 4, 000
Accumul at ed Depr eci at i on. . . . . . . . . . . . . . . 4, 000
To r ecor d annual depr eci at i on
pr ovi si on.

i . No ot her ent r i es wer e made. An anal ysi s of expenses and t hei r
al l ocat i on t o pr ogr ams and ser vi ces was appr oved as f ol l ows:

Per cent age of Expenses Appl i cabl e t o:
Pr ogr ams on Dr ug Abuse_Ser vi ces
Fund-
Expenses Fi nanced by: Resear ch Educat i on Management r ai si ng Tot al
Unr est r i ct ed Funds. . . 40 30 20 10 100
Donor Rest r i ct ed
Funds- - Pr ogr ams. . . . . 40 50 10 0 100
Donor Rest r i ct ed- -
Pl ant Acqui si t i ons. . 50 20 20 10 100

Requi r ed:

Omi t t i ng expl anat i ons, pr epar e t he cor r ect ent r i es, i ncl udi ng t he ent r y
t o assi gn expenses t o pr ogr ams and ser vi ces. Assume t hat t he i ncor r ect
ent r i es of t he pr evi ous account ant ar e r ever sed pr i or t o your ent r i es.

ANS:

a. Cont r i but i ons Recei vabl e. . . . . . . . . . . . . . . . . . . 160, 000
Cont r i but i ons- - Unr est r i ct ed. . . . . . . . . . . . . . 160, 000
Cont r i but i ons Recei vabl e. . . . . . . . . . . . . . . . . . . 40, 000
Cont r i but i ons- - Tempor ar i l y Rest r i ct ed. . . . 40, 000
To r ecor d pl edges.

Pr ovi si on f or Uncol l ect i bl e Cont r i but i ons. . 8, 000
Al l owance f or Uncol l ect i bl e Cont r i but i ons 8, 000
To r ecor d uncol l ect i bl es.

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cont r i but i ons- Tempor ar i l y Rest r i ct ed. . . . . 100, 000
To r ecor d bui l di ng cont r i but i on.

Chapt er 18
18- 26
c. Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Bonds Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
To r ecor d acqui si t i on of f i xed asset s.

Rest r i ct ed- -
Sat i sf act i on Of Pl ant Acqui si t i on
Rest r i ct i ons. . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Rest r i ct i ons. . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
To adj ust f und bal ances f or cash
payment .

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000
Legaci es and Bequest s- - Unr est r i ct ed. . . . . . 15, 000
To r ecor d amount r ecei ved f r omwi l l
of f or mer mayor .

e. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Al l owance f or Uncol l ect i bl e Cont r i but i ons. . 5, 000
To r ecor d col l ect i on and wr i t e- of f of
pl edges.

f . Equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 000
To r ecor d equi pment pur chased f or Pl ant
Fund.

g. Oper at i ng Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Rest r i ct ed, Sat i sf act i on of Pr ogr am
Rest r i ct i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Recl assi f i cat i on I n- - Unr est r i ct ed,
Sat i sf act i on of Pr ogr amRest r i ct i ons 20, 000

h. Depr eci at i on Expense. . . . . . . . . . . . . . . . . . . . . . 4, 000
To r ecor d depr eci at i on.

i . Resear ch Expense. . . . . . . . . . . . . . . . . . . . . . . . . . 42, 000
Educat i on Expense. . . . . . . . . . . . . . . . . . . . . . . . . 34, 800
Management Expense. . . . . . . . . . . . . . . . . . . . . . . . 18, 800
Fund Rai si ng Expense. . . . . . . . . . . . . . . . . . . . . . 16, 400
Pr ovi si on f or Uncol l ect i bl es. . . . . . . . . . . . 8, 000
To assi gn expenses t o pr ogr ams and
ser vi ces i n accor dance wi t h per cent ages
pr ovi ded.

DI F: M OBJ : 8

Chapt er 18
18- 27
17. I n t he year 2005, a gr oup of mer chant s i n t he communi t y of Gunni ng
or gani zed a mer chant gr oup, The Gunni ng Gr oup, i n an ef f or t t o wor k
t oget her t o i ncr ease busi ness t o Gunni ng ar ea mer chant s. Each member
pays dues of $200 per year f or oper at i ons and f und r ai si ng. Al l dues
wer e col l ect ed i n 2005. Ot her gr oup act i vi t i es f or 2005 wer e as
f ol l ows:

Net Recei pt s- J ul y 4 f ood/ bever age boot h $35, 000
Unr est r i ct ed Donat i on $50, 000
I nvest ment of Donat i on made i nt o Mar ket abl e Secur i t i es $40, 000
I nt er est ear ned on I nvest ment $ 3, 200
Pr ogr amExpenses such as adver t i si ng Pai d $18, 500
Recei pt of Cont r i but i on r est r i ct ed t o Speaker Fees $ 5, 000
f or t he year 2001/ 2002
Expense made i n compl i ance wi t h donor r est r i ct i on-
Speaker Fee pai d f or annual meet i ng of mer chant s $ 1, 500
Recei ved a Gover nment Gr ant t o encour age
mi nor i t y busi ness devel opment i n Gunni ng $15, 000
Expenses i ncur r ed i n conj unct i on wi t h pr ovi si on
of t he gr ant $ 8, 000

Make t he necessar y ent r i es t o account f or t he above l i st ed
t r ansact i ons.

ANS:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Revenues- Unr est r i ct ed. . . . . . . 20, 000
To r ecor d member shi p dues

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 000
Revenues- Unr est r i ct ed. . . . . . . 35, 000
To r ecor d J ul y 4 boot h r ecei pt s

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Revenues- Unr est r i ct ed Cont r i but i on 50, 000
To r ecor d unr est r i ct ed donat i on

I nvest ment s. . . . . . . . . . . . . . . . . . . . . . 40, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . 40, 000
Recor d i nvest ment i n mar ket abl e secur i t i es

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 200
Revenue- Unr est r i ct ed. . . . . . . 3, 200

Oper at i ng Expenses. . . . . . . . . . . . . . . 18, 500
Cash. . . . . . . . . . . . . . . . . . . . . . . 18, 500

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 000
Revenues- Tempor ar i l y Rest r i ct ed 5, 000
Cont r i but i ons

Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 1, 500
Cash. . . . . . . . . . . . . . . . . . . . . . . 1, 500
Recor d speaker f ee pai d i n compl i ance wi t h donor r est r i ct i on

Chapt er 18
18- 28
Recl assi f i cat i on Out - Tempor ar i l y
Rest r i ct ed- Sat i sf act i on of Donor
Rest r i ct i ons. . . . . . . . . . . . . . . . . . . . 1, 500
Recl assi f i cat i on i n- Unr est r i ct ed- 1, 500
Sat i sf act i on of Donor Rest r i ct i ons

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000
US Gover nment Gr ant s Ref undabl e. . 15, 000

Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000

US Gover nment Gr ant s Ref undabl e. . . . . . . 8, 000
Revenues- Unr est r i ct ed. . . . . . . . . . . 8, 000

DI F: M OBJ : 10
Chapt er 18
18- 29

Chapter 19 - Accounting for Not-for-Profit Colleges and
Universities and Health Care Organizations

MULTIPLE CHOICE

1. What i s t he basi s of account i ng used i n account i ng f or not - f or - pr of i t
uni ver si t i es?
a. f und account i ng
b. accr ual basi s
c. modi f i ed accr ual basi s
d. cash basi s


2. Wi t h t he adopt i on of GASB st at ement #35 i n 1999, publ i c col l eges and
uni ver si t i es ar e r equi r ed t o r epor t t hei r act i vi t i es i n a manner mor e
l i ke a( n) :
a. gener al f und
b. speci al r evenue f und
c. ent er pr i se f und
d. f i duci ar y f und


3. Cur r ent l y, whi ch or gani zat i on has j ur i sdi ct i on over account i ng and
r epor t i ng st andar ds f or pr i vat e col l eges and uni ver si t i es?
a. Nat i onal Associ at i on of Col l ege and Uni ver si t y Busi ness Of f i cer s
b. t he Gover nment al Account i ng St andar ds Boar d
c. t he Fi nanci al Account i ng St andar ds Boar d
d. t he U. S. Depar t ment of Educat i on


4. Under new gover nment al st andar ds, whi ch of t he f ol l owi ng f i nanci al
st at ement s i s r equi r ed f or t he annual f i nanci al r epor t s of publ i c
col l eges and uni ver si t i es?
a. st at ement of r evenues, expenses, and changes i n net asset s
b. st at ement of act i vi t i es
c. si ngl e audi t r epor t
d. st at ement of changes i n f und bal ances


5. Whi ch of t he f ol l owi ng i s NOT an exampl e of one of t he maj or cat egor i es
of f unds f or a col l ege or uni ver si t y?
a. cur r ent f unds
b. pr opr i et ar y f unds
c. pl ant f unds
d. t r ust and agency f unds


Chapt er 19
19- 2
6. Whi ch of t he f ol l owi ng i s NOT an exampl e of Educat i onal and Gener al
Revenue i n a col l ege or uni ver si t y?
a. st udent at hl et i c f ees
b. r oomand boar d f ees r ecei ved by t he dor mi t or y
c. gover nment al gr ant s
d. endowment i ncome


7. Whi ch of t he f ol l owi ng r ecei pt s shoul d be r ecor ded i n t he r est r i ct ed-
cur r ent f und of a publ i c uni ver si t y?
a. endowment i ncome t o pr ovi de f or f acul t y t r avel
b. a cash donat i on t o pr ovi de l oans t o st udent s
c. a cash donat i on t o pr ovi de schol ar shi ps
d. a st at e- f unded r esear ch gr ant


8. Whi ch of t he f ol l owi ng i s not an exampl e of gener al and educat i onal
expenses r ecor ded by a col l ege or uni ver si t y?
a. pur chase of sweat shi r t s f or sal e i n t he col l ege bookst or e
b. expenses pai d f or i nst r uct or s i n t he cont i nui ng educat i on, non-
degr ee pr ogr am
c. consul t ant f ees pai d f or a r epor t on i ncr easi ng t he enr ol l ment
d. sal ar y of t he f oot bal l coach


9. Wher e shoul d an al umnus cont r i but i on of $10, 000 t o pay f or schol ar shi ps
f or i nt er nat i onal st udy- abr oad be account ed f or ?
a. schol ar shi p f und
b. cur r ent - unr est r i ct ed f und
c. cur r ent - r est r i ct ed f und
d. l oan f und


10. A publ i c uni ver si t y' s l ong- t er mbonds i ssued t o bui l d dor mi t or i es woul d
be r ecor ded i n t he
a. Cur r ent - Unr est r i ct ed Fund.
b. Agency Fund.
c. Ret i r ement of I ndebt edness Pl ant Fund.
d. I nvest ment i n Pl ant Fund.


Chapt er 19
19- 3
11. As expenses ar e made i n compl i ance wi t h donor r est r i ct i ons on
pr evi ousl y made cont r i but i ons, what t ype of j our nal ent r y must be made
t o r ecor d t he t r ansact i on f r omt he aspect of t he cur r ent , unr est r i ct ed
f und?
a. Recl assi f i cat i on Out - Tempor ar i l y Rest r i ct ed
Sat i sf act i on of donor r est r i ct i on XXX
Recl assi f i cat i on I n- Tempor ar i l y
Rest r i ct ed - Sat i sf act i on
of donor r est r i ct i on XXX
b. Cash XXX
Revenue- Tempor ar i l y Rest r i ct ed Cont r i but i ons XXX
c. Cash XXX
Revenue- Unr est r i ct ed XXX

d. I nt er f und Tr ansf er out - Temp Rest r i ct ed XXX
I nt er f und Tr ansf er I n- Unr est r i ct ed XXX


12. Al Al umni donat es $5, 000, 000 t o Gr eat Uni ver si t y f or a new Women' s
St udi es pr ogr am. Al want s t he pr i nci pal t o r emai n i nt act but t he
i nvest ment ear ni ngs can be expended t o suppor t t he Women' s St udi es
Pr ogr am. Thi s donat i on woul d be account ed f or i n t he
a. Quasi - Endowment Fund.
b. Endowment Fund.
c. Ter mEndowment Fund.
d. Agency Fund.


13. The quasi - endowment f und of a Uni ver si t y woul d account f or f unds set
asi de by
a. t he gover ni ng boar d of t he Uni ver si t y f or a f ut ur e pur pose.
b. a donor who i s uncer t ai n how t hey want t he f unds spent .
c. a l egal r est r i ct i on on an endowment whi ch may change.
d. a t r ust ee who makes t he donat i on cont i ngent upon a f ut ur e event .


14. The l oan f und woul d account f or l oans
a. t o hospi t al pat i ent s.
b. t o pur chase asset s.
c. t o Uni ver si t y st udent s.
d. due t o anot her f und.


15. Gover nment gr ant s, l i ke Pel l Gr ant s, whi ch ar e essent i al l y pass t hr ough
f i nanci al ai d t o st udent s ar e account ed f or as
a. t empor ar y r est r i ct ed f unds
b. unr est r i ct ed f unds
c. l oan f unds
d. agency t r ansact i ons

Chapt er 19
19- 4

16. Fr ank Bower s deci des t o cont r i but e $1, 000, 000 t o hi s al mamat er . Cape
Uni ver si t y agr ees t o pay Fr ank a f i xed amount ever y mont h f or t he next
20 year s i n exchange f or t he donat i on. Fr ank s donat i on woul d be
account ed f or i n t he
a. Annui t y Fund.
b. Endowment Fund.
c. Rest r i ct ed Cur r ent Fund.
d. Agency Fund.


17. Far l ey Col l ege budget s f unds f or t he mai nt enance and r epai r of i t s
bui l di ngs. Wher e woul d t hese f unds be account ed f or ?
a. Unexpended Pl ant Fund
b. Renewal and Repl acement
c. Ret i r ement of I ndebt edness
d. I nvest ment i n Pl ant


18. The Gr eat Gap Uni ver si t y i ssues l ong- t er mdebt t o bui l d a br i dge over
t he gap bet ween i t s t wo mai n campuses. The debt woul d be account ed f or
i n t he
a. Unexpended Pl ant Fund.
b. Pl ant Fund f or Renewal s and Repl acement .
c. Pl ant Fund f or Ret i r ement of I ndebt edness.
d. I nvest ment i n Pl ant .


19. Whi ch of t he f ol l owi ng i s a mandat or y t r ansf er by a Uni ver si t y?
a. pr el i mi nar y desi gn f ees t o an ar chi t ect t o pl an a bui l di ng
b. pur chase of l and
c. pr i nci pal and i nt er est payment s on l ong- t er mdebt
d. dor mi t or y mai nt enance.


20. I ncome ear ned on r est r i ct ed endowment r esour ces shoul d
a. r emai n i n t he endowment f und.
b. be t r ansf er r ed and r ecor ded di r ect l y i n t he unr est r i ct ed f und.
c. be r ecor ded i n t he endowment f und wi t h a l i abi l i t y est abl i shed f or
f ut ur e t r ansf er t o an unr est r i ct ed f und.
d. t r ansf er r ed i mmedi at el y and r ecor ded di r ect l y t o t he f und t he
donor desi gnat e t o r ecei ve t he i ncome/ benef i t .


21. A pl edge i s uncondi t i onal i f i t
a. depends onl y on t he passage of t i me.
b. depends on t he demand by t he uni ver si t y t o be pai d.
c. can be spent on any pur pose.
d. a and b ar e cor r ect .

Chapt er 19
19- 5


22. A cont r i but i on i s a( n)
a. condi t i onal t r ansf er of cash.
b. uncondi t i onal t r ansf er of cash.
c. donat i on of ser vi ces whi ch woul d not be pur chased ot her wi se.
d. donat i on of unski l l ed ser vi ces whi ch you mi ght pur chase.


23. Cont r i but i on of a wor k of ar t t o a museumf or publ i c exhi bi t woul d be
a. r ecogni zed as a cont r i but i on at f ai r mar ket val ue.
b. r ecogni zed as oper at i ng r evenue based upon admi ssi on f ees.
c. r ecogni zed as an asset subj ect t o depr eci at i on.
d. not be r ecogni zed as a cont r i but i on.


24. A l i f e i ncome f und i s used when:
a. r esour ces ar e accept ed wi t h a st i pul at i on t hat per i odi c payment s
wi l l be made t o t he donor f or a speci f i ed number of year s
b. endowment s ar e made t o t he col l ege or uni ver si t y
c. r esour ces ar e accept ed wi t h a st i pul at i on t hat per i odi c payment s
wi l l be made t o t he donor f or t he l i f et i me of t he donor
d. Al l i ncome ear ned on donat ed asset s i s t o be pai d t o t he donor
over t hei r l i f et i me.


25. Endowment i ncome was r est r i ct ed t o st udent ai d act i vi t i es. Cash i s pai d
f or al l act i vi t i es. Whi ch i s t he cr edi t necessar y f or cl assi f i cat i on?
a. Recl assi f i cat i on I n- - unr est r i ct ed, sat i sf act i on of pr ogr am
r est r i ct i ons
b. Recl assi f i cat i on Out - - unr est r i ct ed, sat i sf act i on of pr ogr am
r est r i ct i ons
c. Recl assi f i cat i on I n- - t empor ar i l y r est r i ct ed, sat i sf act i on of
pr ogr amr est r i ct i ons
d. Recl assi f i cat i on Out - - t empor ar i l y r est r i ct ed, sat i sf act i on of
pr ogr amr est r i ct i ons.


26. A f eder al gr ant was r ecei ved f or r esear ch. Whi ch i s t he cor r ect cr edi t ?
a. Def er r ed Revenue- - U. S. Gover nment gr ant s
b. Revenues- - U. S. Gover nment gr ant s
c. U. S. Gover nment gr ant s r ef undabl e
d. Revenues, Tempor ar i l y r est r i ct ed


Chapt er 19
19- 6
27. A col l ect i on of f i r st edi t i ons i s donat ed t o t he uni ver si t y f or i t s
l i br ar y. Whi ch i s t he cor r ect cr edi t ?
a. Net i nvest ment i n Pl ant
b. No ent r y i s r equi r ed
c. Revenues, t empor ar i l y unr est r i ct ed cont r i but i ons
d. Fund Bal ance, r est r i ct ed


28. Whi ch of t he f ol l owi ng i s not cor r ect ?
a. The di f f er ence i n pr i vat e vs. publ i c col l eges or uni ver si t i es
f ocuses on expenses r at her t han expendi t ur es.
b. Al l expenses ar e changes i n unr est r i ct ed net asset s.
c. Expenses denot e out l ays of r esour ces.
d. Expenses denot e " usi ng up" of r esour ces.


29. Di f f er ences i n account i ng f or pr i vat e col l eges and uni ver si t i es as
compar ed t o publ i c uni ver si t i es do not i ncl ude whi ch of t he f ol l owi ng:
a. Fi nanci al st at ement s may be pr esent ed on a f und gr oup basi s.
b. A st at ement of cash f l ows i s not r equi r ed.
c. Donor r est r i ct ed cont r i but i ons and uncondi t i onal pl edges ar e
r ecogni zed as r evenue i n t he per i od r ecei ved or pr omi sed.
d. Donat ed ser vi ces may be r ecogni zed as cont r i but i ons i f t hey meet
FASB cr i t er i a.


30. A cont r i but i on i s gi ven wi t hout donor r est r i ct i ons. Under whi ch f und
gr oup woul d t hi s be r ecor ded?
a. Cur r ent unr est r i ct ed f unds
b. Cur r ent r est r i ct ed f unds
c. Loan f und
d. Endowment f und


31. I n whi ch of t he pl ant f und subgr oups woul d you f i nd t he f ol l owi ng
t r ansact i on: A bond pr i nci pal payment i s made on a bond t hat was
i ssued wi t h t he pr oceeds bei ng desi gnat ed f or const r uct i on of a new
at hl et i c f aci l i t y?
a. Unexpended pl ant f und
b. I nvest ment i n pl ant asset
c. Pl ant f und f or r et i r ement of i ndebt edness
d. pl ant f und f or r enewal s


Chapt er 19
19- 7
32. Whi ch of t he f ol l owi ng i s an exampl e of an i nt er f und t r ansact i on?
a. A r et i r ed pr of essor donat es $100, 000 t o be used f or st udent ai d.
b. I nvest ment s and $18, 000 f r omAnnui t y f und i nvest ment i s r ecei ved.
c. A const r uct i on cont r act i s compl et ed and pai d i n f ul l .
d. Cash i s set asi de f or payment of a mor t gage.


33. The Boar d of Tr ust ees deci des t o set asi de $30, 000 t o consi der
pur chasi ng addi t i onal l and on t he f i r st day of t he next f i scal year .
What t ype of t r ansf er i s t hi s?
a. Mandat or y
b. Rest r i ct ed
c. Di scr et i onar y ( or nonmandat or y)
d. Unr est r i ct ed


34. Whi ch uni ver si t y f und i s most si mi l ar t o t he gover nment al gener al f und?
a. Agency
b. Annui t y and Li f e i ncome
c. Cur r ent - unr est r i ct ed
d. Loan


35. Heal t h car e r evenue r ecogni t i on i s det er mi ned by:
a. The gr oss amount bei ng char ged f or pat i ent ser vi ces
b. The cont r act ed amount t o be pai d, cal cul at ed by t hi r d par t y payer s
c. Gr oss char ges f or pat i ent ser vi ces, l ess an al l owance f or bad debt
d. Cost al l ocat i on model desi gned by t he physi ci an or hospi t al


36. Al i ce makes a cash gi f t whi ch has no st r i ngs at t ached t o a not - f or -
pr of i t hospi t al . I t i s r ecor ded as:

a. Pat i ent Ser vi ce Revenue.
b. Ot her Oper at i ng Revenue- - Unr est r i ct ed Cont r i but i on.
c. Nonoper at i ng Revenue- - Unr est r i ct ed Cont r i but i on.
d. an i ncr ease i n t he f und bal ance of t he Gener al Fund.


37. At l ee makes a cash gi f t t o a not - f or - pr of i t hospi t al whi ch i s
r est r i ct ed by t he donor t o buy t oys f or t he pedi at r i c war d. I t shoul d
be r ecor ded i n t he:
a. Gener al Fund.
b. Speci f i c- Pur pose Fund.
c. Endowment Fund.
d. Ent er pr i se Fund.


Chapt er 19
19- 8
38. A publ i c or gover nment al heal t hcar e or gani zat i on woul d pr ovi de whi ch of
t he f ol l owi ng combi nat i ons of f i nanci al st at ement s t o t hei r user s?
a. St at ement of Act i vi t i es; St at ement of Fi nanci al Posi t i on;
b. St at ement of Net Asset s; St at ement of Revenue, Expenses, and
Change i n Net Asset s; St at ement of Cash Fl ows
c. St at ement of Act i vi t i es; St at ement of Fi nanci al Posi t i on;
d. St at ement of Net Asset s; St at ement of Funct i onal Expenses;


39. Pl ant r epl acement and expansi on f unds account f or :
a. l andscapi ng.
b. l ong- t er mdebt i ssued t o pur chase bui l di ngs.
c. l and.
d. r esour ces f or i mpr ovi ng or const r uct i ng t he physi cal pl ant .


40. Ot her Oper at i ng Revenue i ncl udes:
a. r evenues f r omout pat i ent sur ger y.
b. r evenues f r omeducat i onal pr ogr ams.
c. r evenue f r omnur si ng ser vi ces f or post - oper at i ve car e.
d. r evenue f r omr adi ol ogy ser vi ces.


41. Mal pr act i ce cl ai ms r ecor ded as I BNR cl ai ms r epr esent
a. an est i mat ed amount of cur r ent l awsui t s pendi ng i n cour t
b. cl ai ms asser t ed and f i l ed, but not set t l ed on t he bal ance sheet
dat e
c. est i mat ed cl ai ms f or i nci dent s occur r i ng bef or e t he bal ance sheet
dat e wi t h no cl ai mf i l ed as of yet
d. est i mat ed amount of mal pr act i ce l oss not cover ed by physi ci an s
mal pr act i ce i nsur ance


42. The account , Cash- - Li mi t ed i n Use Under Mal pr act i ce Fundi ng
Ar r angement , woul d be f ound i n t he:
a. Tr ust Account f or sel f - i nsur ance.
b. Speci f i c- Pur pose Funds.
c. Annui t y Funds.
d. Endowment Funds.


Chapt er 19
19- 9
PROBLEM

1. Car l t on ( pr i vat e) Uni ver si t y r ecei ved t he f ol l owi ng pl edges dur i ng
20X5:

a. J ane Baker pl edges $30, 000 t o be used f or st udent
schol ar shi ps.

b. As a r esul t of a pl edge dr i ve, $400, 000 i s pl edged t o be pai d
by t he end of t he account i ng year . Ten per cent of pl edges i n
t he past have been shown t o be uncol l ect i bl e. These pl edges
ar e unr est r i ct ed.

Requi r ed:

Make t he j our nal ent r i es necessar y t o r ecor d t he pl edges.

ANS:

a. Account s ( Pl edges) Recei vabl e. . . . . . . . . . . . 30, 000
Revenues- - Tempor ar i l y Rest r i ct ed
Pr i vat e Gi f t s and Gr ant s. . . . . . . . . . . . . 30, 000

b. Account s ( Pl edges) Recei vabl e. . . . . . . . . . . . 400, 000
Revenues- - Unr est r i ct ed Pr i vat e
Gi f t s and Gr ant s. . . . . . . . . . . . . . . . . . . . . 400, 000

Pr ovi si on f or Uncol l ect i bl e Account s. . . . . 40, 000
Al l owance f or Uncol l ect i bl e Account s. . . 40, 000

DI F: E OBJ : 3

2. The r egi st r ar at East er n West Vi r gi ni a ( publ i c) Uni ver si t y has
summar i zed t he cur r ent semest er ' s st udent f ees and t ui t i on as f ol l ows:

Or i gi nal gr oss amount assessed st udent s. . . . . . . . . . . . . $3, 600, 000
Ref unds of or i gi nal amount s assessed pai d
t o st udent s who dr opped cl asses. . . . . . . . . . . . . . . . . . . 200, 000
Tui t i on r emi ssi ons t o di sadvant aged
st udent s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Schol ar shi ps gr ant ed t o st udent s, pai d
f r omUnr est r i ct ed Cur r ent Funds. . . . . . . . . . . . . . . . . . . 250, 000

Requi r ed:

Det er mi ne t he f ol l owi ng f or t he St at ement of Cur r ent Funds Revenues,
Expenses, and Ot her Changes:

a. The r evenues f r omst udent t ui t i on and f ees

b. The expense f or st udent ai d

Chapt er 19
19- 10
ANS:

a. Or i gi nal gr oss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3, 600, 000
l ess r ef unds of or i gi nal gr oss. . . . . . . . . . . . . . . . . . . . . 200, 000
$3, 400, 000
==========

b. Tui t i on r emi ssi on. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150, 000
pl us schol ar shi ps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250, 000
$400, 000
========

DI F: M OBJ : 4

3. The f ol l owi ng sel ect ed t r ansact i ons af f ect ed t he Unr est r i ct ed Cur r ent
Funds of Ti ger St at e Uni ver si t y ( publ i c) dur i ng t he cur r ent f i scal
year :

a. The Boar d of Cont r ol appr oved a budget est i mat i ng $10, 000, 000
i n r evenues and expenses of $9, 850, 000.

b. St udent t ui t i on assessed dur i ng t he year was $4, 000, 000, of
whi ch $3, 700, 000 had been col l ect ed, wi t h 3%consi der ed
uncol l ect i bl e.

c. St udent ai d i ncl uded $500, 000 i n cash schol ar shi ps and $75, 000
i n t ui t i on r emi ssi on.

d. Sal ar y and wages dur i ng t he year i ncl uded $5, 500, 000 f or
i nst r uct i on, $500, 000 f or academi c suppor t , and $700, 000 f or
i nst i t ut i onal suppor t .

e. Tr ansf er s t o t he Pl ant Funds i ncl uded $450, 000 i n t r ansf er s
f or a mor t gage payment and $155, 000 i n di scr et i onar y
t r ansf er s.

f . A gr ant r ecei ved of $10, 000 i n cash was r est r i ct ed t o use f or
l aser t echnol ogy r esear ch.

Requi r ed:

Make t he j our nal ent r i es necessar y t o r ecor d t he sel ect ed t r ansact i ons.

ANS:

a. Est i mat ed Revenues. . . . . . . . . . . . . . . . . . . . . . . 10, 000, 000
Est i mat ed Expenses. . . . . . . . . . . . . . . . . 9, 850, 000
Unal l ocat ed Bal ance. . . . . . . . . . . . . . . . . . . . 150, 000

b. Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . . 4, 000, 000
Revenues- - St udent Tui t i on and Fees. . . . . 3, 880, 000
Al l owance f or Uncol l ect i bl es. . . . . . . . . . . 120, 000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 700, 000
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . 3, 700, 000

Chapt er 19
19- 11
c. Expenses- - St udent Ai d. . . . . . . . . . . . . . . . 575, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000
Account s Recei vabl e- - Tui t i on and Fees. . 75, 000

d. Expenses- - I nst r uct i on. . . . . . . . . . . . . . . . 5, 500, 000
Expenses- - Academi c Suppor t . . . . . . . . . . . 500, 000
Expenses- - I nst i t ut i onal Suppor t . . . . . . 700, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 700, 000

e. Fund Bal ance ( Nonmandat or y Tr ansf er ) . . . . . 155, 000
Mandat or y Tr ansf er s f or Pr i nci pal Payment 450, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605, 000

f . No ent r y; r ecor ded i n Rest r i ct ed Cur r ent Fund.

DI F: M OBJ : 4

4. The f ol l owi ng sel ect ed t r ansact i ons af f ect ed t he Fr ankl i n St at e
( publ i c) Uni ver si t y dur i ng t he cur r ent f i scal year :

a. St udent t ui t i on and f eel s bi l l ed f or t he year f or $8, 000, 000,
whi ch was used f or educat i onal and gener al pur poses. Pr i or
exper i ence shows $100, 000 wi l l be uncol l ect i bl e.

b. $7, 200, 000 of t he bi l l i ngs i n ' a' wer e col l ect ed.

c. Unr est r i ct ed i ncome f r omendowment f unds amount ed t o $185, 000.

d. Auxi l i ar y ent er pr i se i ncl uded $175, 000 f or mst udent r esi dence
hal l s; $200, 000 f r omcaf et er i as; and $750, 000 f r omt he col l ege
st or e sal es. Al l amount s have been col l ect ed.

e. $300, 000 of Ter mEndowment s f unds ar e now avai l abl e f or
unr est r i ct ed use.

f . Oper at i ng Expenses ar e as f ol l ows: I nst r uct i on $300, 000;
Resear ch $150, 000; Academi c Suppor t $50, 000; St udent Ser vi ces
$25, 000; I nst i t ut i onal Suppor t $120, 000

g. Uni ver si t y' s st udent ai d commi t t ee gr ant ed st udent t ui t i on and
f ee r educt i ons of $200, 000.

h. Auxi l i ar y expenses amount ed t o $750, 000

i . The t r ust ees have speci f i ed cer t ai n cur r ent f und r evenues must
be t r ansf er r ed t o meet t he debt ser vi ce pr ovi si ons r el at i ng t o
t he uni ver si t y' s i nst i t ut i onal pr oper t i es. These mandat or y
t r ansf er s amount t o $550, 000.

Requi r ed:

Make t he j our nal ent r i es necessar y t o r ecor d t he sel ect ed t r ansact i ons.

Chapt er 19
19- 12
ANS:

a. Account s Recei vabl e. . . . . . . . . . . . . . . . 8, 000, 000
Revenue- St udent Tui t i on and Fees. . 8, 000, 000

Expenses- i nst r uct i on. . . . . . . . . . . . 100, 000
Al l owance f or Bad Debt . . . . . . . . . . . . 100, 000

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 200, 000
Account s Recei vabl e. . . . . . . . . . . . . . . 7, 200, 000

c. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185, 000
Revenue- Endowment I ncome. . . . . . . . . . 185, 000

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 125, 000
Revenue- Auxi l i ar y Ent er pr i ses. . . . 1, 125, 000

e. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Revenue- Endowment I ncome. . . . . . . . . 300, 000

f . Expenses- I nst r uct i on. . . . . . . . . . . . . . . . 300, 000
Expenses- Resear ch. . . . . . . . . . . . . . . . . . . 150, 000
Expenses- Academi c Suppor t . . . . . . . . . . . 50, 000
Expenses- St udent Ser vi ces. . . . . . . . . . . 25, 000
Expenses- I nst i t ui t i onal Suppor t . . . . . 120, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 645, 000

g. Expenses- St udent Ai d. . . . . . . . . . . . 200, 000
Account s Recei vabl e. . . . . . . . . . . . . . 200, 000

h. Expenses- Auxi l i ar y Ser vi ces. . . . . . . . . 750, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750, 000

i . Tr ansf er Out - Pl ant Funds. . . . . . . . . . . . . 550, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550, 000

DI F: D OBJ : 4

5. The f ol l owi ng event s i nvol ve a l oan f und of East Yor k publ i c
Uni ver si t y:

a. To est abl i sh t he Hanson St udent Loan Fund, t wo br ot her s
donat ed $40, 000 cash and secur i t i es t hat cost $80, 000. Mar ket
val ue of t he secur i t i es at t i me of donat i on was $160, 000.

b. The secur i t i es wer e l at er sol d f or $189, 000. The or i gi nal
agr eement st i pul at ed t hat any gai n on t he sal e or i ncome
r ecei ved f r omt he secur i t i es be added t o t he l oan f und.

c. An appr eci at i ve boar d of t r ust ees t r ansf er r ed $30, 000 cash
f r omt he Unr est r i ct ed Cur r ent Fund t o t he l oan f und.

d. Loans of $140, 000 wer e made t o st udent s at 6%annual i nt er est .

e. The boar d of t r ust ees agr eed t hat l oans t o st udent s i n t he
amount s of $9, 000 wer e uncol l ect i bl e. At year end, t he boar d
t ook act i on t o wr i t e of f t he uncol l ect i bl e l oans out st andi ng
of $9, 000.

Chapt er 19
19- 13

f . Col l ect i ons on Hanson l oans amount ed t o $13, 000 pl us $450 i n
i nt er est .

Requi r ed:

Pr epar e j our nal ent r i es t o r ecor d t he above event s.

ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000
I nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160, 000
Fund Bal ance- - Rest r i ct ed. . . . . . . . . . . . . . . 200, 000
To r ecor d est abl i shment of Hanson Loan
Fund.

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189, 000
I nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . 160, 000
Fund Bal ance- - Rest r i ct ed. . . . . . . . . . . . . . . 29, 000
To r ecor d sal e of i nvest ment s.

c. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
Fund Bal ance- - Unr est r i ct ed. . . . . . . . . . . . . 30, 000
To r ecor d di scr et i onar y t r ansf er f r om
Unr est r i ct ed Cur r ent Funds.

d. Loans Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . 140, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140, 000
To r ecor d l oans made.

e. Fund Bal ance- - Rest r i ct ed. . . . . . . . . . . . . . . . . 9, 000
Loans Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . 9, 000
To r ecor d uncol l ect i bl e st udent l oans
made f r omr est r i ct ed f unds.

f . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 450
Fund Bal ance- - Rest r i ct ed. . . . . . . . . . . . . . . 450
To r ecor d l oan r epayment s and i nt er est .

DI F: M OBJ : 4

6. The f ol l owi ng sel ect ed t r ansact i ons af f ect i ng t he Annui t y and Li f e
I ncome Funds of Tr emper St at e Uni ver si t y ( publ i c) occur r ed dur i ng t he
cur r ent f i scal year .

a. Upon hi s deat h, J ohn Sooner , a l ocal busi nessman, donat es a
por t f ol i o of st ock wi t h a cost basi s of $100, 000 and a mar ket
val ue of $125, 000. J ohn s wi f e i s t o r ecei ve an annui t y of
$8, 000 per year f or l i f e. Her l i f e expect ancy i s t en year s. An
est i mat ed r at e of r et ur n of 8%yi el ds a pr esent val ue of
$53, 681 f or t he annui t y.

b. Di vi dends of $7, 500 ar e r ecei ved f r omLi f e I ncome Fund
i nvest ment s.

c. Annui t y f und i nvest ment s wi t h a book val ue of $6, 000 ar e sol d
Chapt er 19
19- 14
f or $6, 500.

d. The benef i ci ar y of t he l i f e i ncome i nvest ment s descr i bed i n
par t ( b) ar e pai d.

e. The f i r st annui t y payment t o J ohn Sooner s wi f e i s made f r om
par t ( a) .

Requi r ed:

Make t he j our nal ent r i es necessar y t o r ecor d t he t r ansact i ons.

ANS:

a. I nvest ment s- - Annui t y. . . . . . . . . . . . . . . . . . . . 125, 000
Annui t i es Payabl e. . . . . . . . . . . . . . . . . . . . . 53, 681
Annui t y Fund Bal ance. . . . . . . . . . . . . . . . . . 71, 319

b. Cash- Li f e I ncome. . . . . . . . . . . . . . . . . . . . . . . . 7, 500
Li f e I ncome Payabl e. . . . . . . . . . . . . . . . . . . 7, 500

c. Cash- Annui t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 500
I nvest ment s- - Annui t y. . . . . . . . . . . . . . . . . . 6, 000
Annui t y Fund Bal ance. . . . . . . . . . . . . . . . . . 500

d. Li f e I ncome Payabl e. . . . . . . . . . . . . . . . . . . . . 7, 500
Cash- - Li f e I ncome. . . . . . . . . . . . . . . . . . . . . 7, 500

e. Annui t i es Payabl e. . . . . . . . . . . . . . . . . . . . . . . 8, 000
Cash- - Annui t y. . . . . . . . . . . . . . . . . . . . . . . . . 8, 000

Annui t y Fund Bal ance. . . . . . . . . . . . . . . . . . . . 593
Annui t i es Payabl e. . . . . . . . . . . . . . . . . . . . . 593

DI F: D OBJ : 4

7. Recor ds of t he i t ems t hat f ol l ow ar e mai nt ai ned i n a publ i c
uni ver si t y' s Pl ant Fund. Fi l l i n t he name or names of t he appr opr i at e
pl ant subgr oup f unds i n whi ch t he i t ems ar e r ecor ded.

Chapt er 19
19- 15
Pl ant Subgr oup
I t em Funds
( 1) Pl ant asset s whi ch wer e acqui r ed wi t h
Unr est r i ct ed Cur r ent Funds. . . . . . . . . . . . . 1. ___________________

( 2) Accumul at i on of r esour ces t o keep
pl ant i n oper at i ng condi t i on. . . . . . . . . . . 2. ___________________

( 3) Accumul at i on of r esour ces f or
acqui r i ng pr oper t i es. . . . . . . . . . . . . . . . . . . 3. ___________________

( 4) Accumul at i on of r esour ces t o
pay i nt er est and pr i nci pal of
Pl ant Fund debt . . . . . . . . . . . . . . . . . . . . . . . . 4. ___________________

( 5) Recor di ng of l ong- t er ml i abi l i t i es
r el at ed t o pl ant asset s. . . . . . . . . . . . . . . . 5. ___________________

( 6) Recei pt of pr oceeds f r ombond
i ssue f l oat ed t o cover cost
of const r uct i on pr oj ect . . . . . . . . . . . . . . . . 6. ___________________

( 7) Recor di ng of const r uct i on i n pr ogr ess
on pr oj ect ment i oned i n i t em6. . . . . . . . . 7. ___________________

( 8) Two subgr oups af f ect ed by compl et i on of
const r uct i on pr oj ect ment i oned i n
i t em7. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8. ___________________

( 9) Recor di ng of r ecei pt of donat ed l and. . . 9. ___________________

( 10) Two subgr oups af f ect ed by payment of
mor t gage t hat i s a l i en on pl ant
asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10. ___________________

ANS:

( 1) I nvest ment i n Pl ant Fund
( 2) Pl ant Fund f or Renewal s and Repl acement
( 3) Unexpended Pl ant Fund
( 4) Pl ant Fund f or Ret i r ement of I ndebt edness
( 8) Tr ansf er f r omUnexpended Pl ant Fund t o I nvest ment i n Pl ant Fund
( 10) Payment i s r ecor ded i n Ret i r ement of I ndebt edness Pl ant Fund.
Mor t gage r educt i on i s r ecor ded i n t he I nvest ment i n Pl ant Fund.

DI F: M OBJ : 4

Chapt er 19
19- 16
8. Sout her n Coast ( pr i vat e) Uni ver si t y r ecei ved t he f ol l owi ng pl edges
dur i ng 20X4:

a. J oy Dance pl edges $60, 000 t o be pai d over a t hr ee- year per i od
begi nni ng at t he end of t hi s year . Sout her n Coast di scount s
t hi s cont r i but i on at 10%. The pr esent val ue i s $49, 737.

b. As a r esul t of a pl edge dr i ve, $500, 000 i s pl edged t o be pai d
by t he end of t he account i ng year . Ten per cent of pl edges i n
t he past have been shown t o be uncol l ect i bl e.

Requi r ed:

Make t he necessar y j our nal ent r i es t o r ecor d t he pl edges.

ANS:

a. Cont r i but i ons Recei vabl e. . . . . . . . . . . . . . . . . 49, 737
Revenue- - Unr est r i ct ed Cont r i but i ons. . . . 49, 737

b. Cont r i but i ons Recei vabl e. . . . . . . . . . . . . . . . . 500, 000
Revenue- - Unr est r i ct ed Cont r i but i ons. . . . 500, 000

Pr ovi si on f or Doubt f ul Cont r i but i ons. . . . . 50, 000
Al l owance f or Doubt f ul Cont r i but i on. . . . 50, 000

DI F: M OBJ : 3

9. Pr epar e t he j our nal ent r i es t o r ecor d t he f ol l owi ng event s f or Cost
( pr i vat e) Uni ver si t y:

a. A f eder al gr ant of $100, 000 was r ecei ved f or r esear ch.

b. Expenses f or t he r esear ch pr oj ect t ot al ed $50, 000 t o dat e.

c. Endowment i ncome of $10, 000 i s r est r i ct ed t o st udent ai d
act i vi t i es.

d. Al l but $2, 000 of expenses ar e pai d f or st udent ai d.

ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
U. S. Gover nment Gr ant s Ref undabl e. . . . . . 100, 000

b. Expenses- - Resear ch. . . . . . . . . . . . . . . . . . . . . . . 50, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000

U. S. Gover nment Gr ant s Ref undabl e. . . . . . . . 50, 000
Revenues- - Unr est r i ct ed Gover nment Gr ant s
and Cont r act s. . . . . . . . . . . . . . . . . . . . . . . . 50, 000

c. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Revenues- - Tempor ar i l y Rest r i ct ed f or
Endowment s. . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000

Chapt er 19
19- 17
d. Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000

Recl assi f i cat i on Out - -
Tempor ar i l y Rest r i ct ed- -
Sat i sf act i on of Pr ogr amRest r i ct i ons. 10, 000
Sat i sf act i on of Pr ogr amRest r i ct i on. . 10, 000

DI F: M OBJ : 4

10. Consi der t he f ol l owi ng t r ansact i ons f or t he Uni ver si t y of Nor t hl and
( pr i vat e) :

a. On J anuar y 1st a gi f t of $100, 000 was r ecei ved f r oman
al umnus. She r equest ed one hal f be used f or st udent l oans and
t he ot her as a pur e endowment cont r i but i on.

b. Loans t ot al i ng $25, 000 ar e made t o st udent s. Col l ect i ons f r om
ot her l oans made t o st udent s t ot al $30, 000 pl us $3, 000
i nt er est .

c. Dur i ng t he year , i nvest ment s of $20, 000 wer e sol d f or $30, 000.
Any gai n i s r est r i ct ed f or i mpr ovement s i n cl assr oom
i nst r uct i on.

d. Dur i ng t he year , i nt er est char ges of $5, 000 wer e ear ned and
col l ect ed on l at e st udent f ee payment s.

e. A st udent l oan of $500 i s deemed uncol l ect i bl e.

f . Dur i ng t he year , oper at i ng expenses of $150, 000 wer e r ecor ded.
At t he end of t he year , $25, 000 r emai ns unpai d.

Requi r ed:

Pr epar e j our nal ent r i es necessar y t o r ecor d t he t r ansact i ons.

ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cont r i but i ons- - Per manent l y Rest r i ct ed. . 50, 000

b. Loans Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . 25, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 000

Sat i sf act i on of Pr ogr amRest r i ct i ons. 25, 000
Sat i sf act i on of Pr ogr amRest r i ct i on. . 25, 000

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 000
Revenues- - Unr est r i ct ed I nt er est I ncome. 3, 000
Chapt er 19
19- 18

c. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
I nvest ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Gai n on Sal e of I nvest ment - -
Tempor ar i l y Rest r i ct ed. . . . . . . . . . . . . . . 10, 000

d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 000
I nt er est I ncome- - Unr est r i ct ed. . . . . . . . . . 5, 000

e. Loans Cancel l at i on/ Wr i t e Of f s. . . . . . . . . . . . 500
Loans Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . 500

Expenses- - I nst i t ut i onal Suppor t . . . . . . . . . . 500
Loans Cancel l at i on/ Wr i t e Of f s. . . . . . . . . . 500

f . Expenses- - I nst i t ut i onal Suppor t . . . . . . . . . . 150, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125, 000

DI F: M OBJ : 4

11. The f ol l owi ng event s occur r ed as par t of oper at i ons i n Har d Knocks
( pr i vat e) Uni ver si t y:

a. To const r uct a new comput er cent er , t he Uni ver si t y f l oat ed at
par a $10, 000, 000 10%ser i al bond i ssued on J anuar y 1, payi ng
i nt er est December 31 and J une 30.

b. $100, 000 f or comput er equi pment was donat ed by a weal t hy
al umnus.

c. Payment s f or const r uct i on t o dat e t ot al $5, 000, 000.

d. I nt er est payment s ar e made on J une 30t h.

e. Const r uct i on of t he cent er i s compl et ed at an addi t i onal cost
of $7, 000, 000 and i t i s pai d i n f ul l .

f . The f i r st ser i al bond of $2, 000, 000 pl us i nt er est i s pai d.

g. A bui l di ng val ued at $100, 000 i s r ecei ved as a gi f t on t he
condi t i on t he uni ver si t y assumes t he $50, 000 mor t gage and uses
t he bui l di ng f or cl assr oompur poses onl y. The Uni ver si t y
el ect s t o " r el ease" t he r est r i ct i on over t he usef ul l i f e of
t he bui l di ng.

h. Depr eci at i on on t he bui l di ng t ot al ed $10, 000.

Requi r ed:

Pr epar e j our nal ent r i es f or t he above event s.

Chapt er 19
19- 19
ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000, 000
Bond Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000, 000

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Revenues- - Tempor ar i l y Rest r i ct ed. . . . . . . 100, 000

c. Const r uct i on I n Pr ogr ess. . . . . . . . . . . . . . . . . 5, 000, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 000, 000

d. Expenses I nst i t ut i onal Suppor t - -
I nt er est Expense. . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000

e. Comput er Cent er . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 000, 000
Const r uct i on I n Pr ogr ess. . . . . . . . . . . . . . . 5, 000, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 000, 000

f . Mor t gage Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . 2, 000, 000
Expenses I nst i t ut i onal Suppor t - -
I nt er est Expense. . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 100, 000

g. Bui l di ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Mor t gage Payabl e. . . . . . . . . . . . . . . . . . . . . . . 50, 000
Cont r i but i ons, Tempor ar i l y Rest r i ct ed. . 50, 000

h. Expenses- - Oper at i ons and Mai nt enance
of Pl ant - -
Depr eci at i on Expense. . . . . . . . . . . . . . . . . 10, 000

Sat i sf act i on of Pl ant Rest r i ct i ons. . . 10, 000
Recl assi f i cat i on I n- -
Unr est r i ct ed Sat i sf act i on
of Pl ant Rest r i ct i ons. . . . . . . . . . . . . . . . 10, 000

DI F: D OBJ : 4

12. Consi der t he f ol l owi ng event s af f ect i ng Pr i vat e Uni ver si t y:

a. A $2, 000, 000, 10%ser i al bond i ssue, payi ng i nt er est
semi annual l y, was sol d at f ace val ue on an i nt er est payment
dat e. Pr oceeds of t he bond i ssue ar e t o be used t o add a wi ng
t o t he l i br ar y.

b. A l ot val ued at $30, 000 was donat ed by a f or mer l i br ar i an t o
per mi t bui l di ng of t he pr oposed l i br ar y wi ng. No per manent
r est r i ct i ons wer e st i pul at ed by t he donor .

c. The St at e Bui l di ng Boar d appr oved t he pl ans submi t t ed by t he
ar chi t ect , who was pai d $20, 000. A cont r act f or $1, 900, 000 was
si gned f or const r uct i on of t he l i br ar y wi ng.

d. The bond i nt er est was pai d.

Chapt er 19
19- 20

e. At year end, appr oxi mat el y t wo- t hi r ds of t he const r uct i on was
compl et ed. A payment of $1, 200, 000 was made t o t he cont r act or .

f . Tuckpoi nt i ng and ot her r epai r s t o uni ver si t y bui l di ngs
amount i ng t o $35, 000 wer e pai d f r omr esour ces pr evi ousl y
pr ovi ded speci f i cal l y f or t hat pur pose by a r et i r ed f acul t y
member .

g. The l i br ar y wi ng was compl et ed. The r emai ni ng cont r act pr i ce
i s pai d, and t he bui l di ng cost and bond payabl e ar e
t r ansf er r ed t o t he pr oper f und.

h. Payment s of t he second si x mont hs' i nt er est on bonds
( $100, 000) and t he f i r st bond ser i al ( $200, 000) wer e made.

i . A donat i on made l ast year by a publ i c account i ng f i r mwas
expanded t o acqui r e a speci f i ed col l ect i on of books on
account i ng, dat i ng back t o t he 16t h and 17t h cent ur i es, at a
cost of $85, 000.

Requi r ed:

Pr epar e j our nal ent r i es t o r ecor d t he event s.

ANS:

a. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000, 000
Bonds Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000, 000
To r ecor d bond sal e.

b. Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
Revenues- - Unr est r i ct ed Cont r i but i ons. . . 30, 000
To r ecor d donat i on of l and.

c. Const r uct i on i n Pr ogr ess. . . . . . . . . . . . . . . . . 20, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
To r ecor d payment t o ar chi t ect .
( Not e: I f encumbr ance account i ng i s used
by t he uni ver si t y, an ent r y i s made f or
si gni ng t he cont r act . )

d. Expenses- - I nst i t ut i onal Suppor t . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
To r ecor d i nt er est payment .

e. Const r uct i on i n Pr ogr ess. . . . . . . . . . . . . . . . . 1, 200, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 200, 000
To r ecor d payment t o cont r act or .

f . Expenses- - Oper at i ons and Mai nt enance
of Pl ant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 000
Rest r i ct ed Sat i sf act i on of Pr ogr am
Rest r i ct i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 000
Recl assi f i cat i on I n- Unr est r i ct ed- -
Sat i sf act i on of Pr ogr amRest r i ct i ons. . . 35, 000
Chapt er 19
19- 21
To r ecor d payment f or bui l di ng r epai r s.

g. Const r uct i on i n Pr ogr ess
( $1, 900, 000 - $1, 200, 000) . . . . . . . . . . . . . . . . 700, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700, 000
To r ecor d payment t o cont r act or .

Bui l di ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 920, 000
Const r uct i on i n Pr ogr ess. . . . . . . . . . . . . . . 1, 920, 000
To r ecor d compl et ed wi ng.

h. Bonds Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Expenses- - I nst i t ut i onal Suppor t . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
To r educe l i abi l i t i es pai d,
i ncr easi ng net i nvest ment i n pl ant .

i . Li br ar y Books. . . . . . . . . . . . . . . . . . . . . . . . . . . . 85, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85, 000
Recl assi f i cat i on Out - - Tempor ar i l y Rest r i ct ed,
Sat i sf act i on of Donor Rest r i ct i ons. . . 85, 000
Sat i sf act i on of Donor Rest r i ct i ons. 85, 000
To r ecor d acqui si t i on of speci al
book col l ect i on and r el ease of donor
r est r i ct i ons.

DI F: D OBJ : 4

13. Consi der t he f ol l owi ng event s f or Chase Pr i vat e Uni ver si t y:

a. Unr est r i ct ed cont r i but i ons ar e pl edged i n t he amount of
$500, 000.

b. Pur chase of mat er i al and suppl i es t ot al i ng $100, 000 of whi ch
$25, 000 i s not yet pai d.

c. Endowment i ncome of $8, 000 i s r est r i ct ed t o st udent ai d
act i vi t i es.

d. A f eder al gr ant f or $200, 000 was awar ded f or r esear ch.

e. Mat er i al s and suppl i es used wer e as f ol l ows: St udent ser vi ces
$10, 000, Auxi l i ar y ent er pr i se $25, 000

f . Feder al gover nment moni es of $50, 000 r est r i ct ed f or st udent
l oans ar e r ecei ved.

g. Expenses f or t he r esear ch pr oj ect i n d. t ot al ed $100, 000 t o
dat e.

h. Ter mendowment s expi r e, maki ng $10, 000 cash avai l abl e.

i . Cash of $10, 000 f r omLi f e I ncome Fund I nvest ment s i s r ecei ved.

j . St ock wi t h a mar ket val ue of $45, 000 i s r ecei ved f r oman ar t
pat r on t o f i nance ar t gal l er y i mpr ovement s.

k. Feder al gr ant s f or st udent awar ds t hr ough t he Pel l Gr ant
Chapt er 19
19- 22
pr ogr amar e r ecei ved i n t he amount of $175, 000.

l . Bi l l s went out f or dor mi t or y f ees of whi ch $250, 000 i s pai d
and $50, 000 i s st i l l not r ecei ved.

m. Payment of $100, 000 i s made on t he mor t gage.

n. Depr eci at i on on al l asset s t ot al $125, 000. Of t hi s
depr eci at i on char ge, $25, 000 r epr esent s depr eci at i on on asset s
cl assi f i ed as donor r est r i ct ed. Chase Pr i vat e Uni ver si t y
el ect s t o r el ease donor r est r i ct i ons when asset s ar e pl aced i n
ser vi ce.

o. Ar t gal l er y i mpr ovement s of $25, 000 wer e made wi t h donor -
r est r i ct ed cont r i but i ons.

Requi r ed:

Assumi ng t hat f und account i ng i s used, r ecor d t he event s. I dent i f y t he
appr opr i at e f und f or each t r ansact i on.

ANS:

a. Cur r ent Unr est r i ct ed Fund- -
Cont r i but i ons Recei vabl e . . . . . . . . . . . . . . 500, 000
Revenue- - Unr est r i ct ed Cont r i but i ons. . . . . . 500, 000

b. Cur r ent Unr est r i ct ed Fund- - I nvent or y of
Suppl i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000

c. Cur r ent Rest r i ct ed Fund- - Cash. . . . . . . . . . . . . . 8, 000
Revenues- - Tempor ar i l y Rest r i ct ed, Endowment
I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000

d. Cur r ent Rest r i ct ed Fund- - Cash. . . . . . . . . . . . . . 200, 000
U. S. Gover nment Gr ant Ref undabl e. . . . . . . . . 200, 000

e. Cur r ent Unr est r i ct ed Fund- -
Expenses- St udent Ser vi ces. . . . . . . . . . . . . . 10, 000
Expenses- - Auxi l i ar i es. . . . . . . . . . . . . . . . . . . . . . 25, 000
I nvent or y of Suppl i es. . . . . . . . . . . . . . . . . . . . 35, 000

f . Loan Fund- - Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
U. S. Gover nment Gr ant s Ref undabl e. . . . . . . . 50, 000

g. Cur r ent Rest r i ct ed Fund- - Expenses- - Resear ch 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000

U. S. Gover nment Gr ant s Ref undabl e. . . . . . . . . . 100, 000
Revenue- Gover nment Gr ant s. . . . . . . . . . . . . . . . 100, 000

h. Endowment Fund- - Recl assi f i cat i on Out -
Tempor ar i l y Rest r i ct ed- - Expi r at i on of Ti me
Rest r i ct i on. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Expi r at i on of Ti me Rest r i ct i on. . . . . . . . . . . 10, 000
Chapt er 19
19- 23

Chapt er 19
19- 24
i . Li f e I ncome Fund- - Cash. . . . . . . . . . . . . . . . . . . . . 10, 000
Revenues- - Tempor ar i l y Rest r i ct ed- -
I ncome on I nvest ment s. . . . . . . . . . . . . . . . . . . . 10, 000

j . Pl ant - I nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . 45, 000
Revenue- Tempor ar i l y Rest r i ct ed
Cont r i but i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 000

k. Agency- - Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175, 000
Amount Hel d on Behal f of Ot her s. . . . . . . . . . 175, 000

l . Cur r ent Unr est r i ct ed Fund- - Cash. . . . . . . . . . . . 250, 000
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Revenues- - Sal es and Ser vi ces of Auxi l i ar y
Ent er pr i ses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000

m. Pl ant - - Bonds Payabl e. . . . . . . . . . . . . . . . . . . . . . . 100, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000

n. Pl ant - - Depr eci at i on Expense. . . . . . . . . . . . . . . . 125, 000
Al l owance f or Depr eci at i on. . . . . . . . . . . . . . . 125, 000

o. Pl ant - - Bui l di ngs. . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 000

Rest r i ct ed, Sat i sf act i on of Pl ant
Acqui si t i on Rest r i ct i ons. . . . . . . . . . . . . . . . . . . 25, 000
Recl assi f i cat i on I n- - - Unr est r ai ned
Rest r i ct i ons. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 000

DI F: D OBJ : 4

14. The f ol l owi ng event s ar e f or Tubac Cent er , a not - f or - pr of i t hospi t al .
The hospi t al r ecor ds expense dat a based on t he nat ur e of t he expense,
such as wages, sal ar i es, and benef i t s.

a. Pat i ent ser vi ces amount i ng t o $300, 000 wer e bi l l ed. A 5%
al l owance f or uncol l ect i bl es i s t o be r ecor ded.

b. Of $70, 000 gr oss bi l l i ngs i n par t ( a) , t hi r d- par t y payer s
r emi t t ed $62, 000 i n f ul l set t l ement . The r emai ni ng $8, 000 i s a
cont r act ual adj ust ment .

c. The boar d of t r ust ees aut hor i zed $90, 000 t o i ncr ease t he
mal pr act i ce f und hel d by a t r ust ee.

d. Suppl i es cost i ng $77, 000 wer e r equi si t i oned f r omi nvent or y
mai nt ai ned on a per pet ual basi s. These suppl i es wer e used by
pr of essi onal ser vi ces.

e. Nur ses' sal ar i es of $110, 000 wer e i ncur r ed. Of t hi s amount ,
$8, 000 of accr ued benef i t s wer e unpai d. I gnor e payr ol l
deduct i ons.

f . $200, 000 of t he t empor ar i l y r est r i ct ed net asset s ar e
r ecl assi f i ed t o cover speci f i ed, cur r ent oper at i ons.

Chapt er 19
19- 25

Requi r ed:

Pr epar e t he necessar y j our nal ent r i es.

ANS:

a. Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . . 300, 000
Pat i ent Ser vi ce Revenue. . . . . . . . . . . . . . . 300, 000
To r ecor d bi l l i ngs.

Pr ovi si on f or Uncol l ect i bl es. . . . . . . . . . . . 15, 000
Al l owance f or Uncol l ect i bl es. . . . . . . . . . 15, 000
To r ecor d 5%al l owance.

b. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62, 000
Cont r act ual Adj ust ment s. . . . . . . . . . . . . . . . . 8, 000
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . 70, 000
To r ecor d set t l ement f r omt hi r d-
par t y payer s.

c. Cash- - Li mi t ed i n Use under Mal pr act i ce
Fundi ng Ar r angement . . . . . . . . . . . . . . . . . 90, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 000
To r ecor d i ncr ease i n mal pr act i ce
f und.

d. Pr of essi onal Ser vi ces Expense
( Dr ugs and Suppl i es Used) . . . . . . . . . . . 77, 000
I nvent or i es. . . . . . . . . . . . . . . . . . . . . . . . . . . 77, 000
To r ecor d suppl i es r equi si t i oned.

e. Nur si ng Ser vi ces Expense
( Wages, Sal ar i es, and Benef i t s) . . . . . 110, 000
Accr ued Expenses. . . . . . . . . . . . . . . . . . . . . . 8, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102, 000
To r ecor d sal ar y and benef i t
payment and accr ual .

f . Recl assi f i cat i on Out - - Tempor ar i l y
Unr est r i ct ed
Sat i sf act i on of Pr ogr am
Rest r i ct i ons. . . . . . . . . . . . . . . . . . . . . . 200, 000
Rest r i ct i ons. . . . . . . . . . . . . . . . . . . . . . 200, 000
To r ecor d amount r ecei ved f r om
Speci f i c- Pur pose Funds.

DI F: M OBJ : 10

Chapt er 19
19- 26
15. A not - f or - pr of i t hospi t al uses t hr ee r evenue- cont r ol l i ng account s:
Pat i ent Ser vi ce Revenue, Ot her Oper at i ng Revenue, and Nonoper at i ng
Revenue.

Requi r ed:

I ndi cat e whi ch of t he t hr ee r evenue account s woul d be cr edi t ed t o
r ecor d t he f ol l owi ng t r ansact i ons, or None i f none of t he account s i s
appr opr i at e.

a. Snack bar sal es. . . . . . . . . . . . . . . . . . . . . . . . . . _______________________

b. Di vi dends f r omunr est r i ct ed i nvest ment s. . _______________________

c. Oper at i ng r oomf ees. . . . . . . . . . . . . . . . . . . . . . _______________________

d. Phar macy sal es t o pat i ent s. . . . . . . . . . . . . . . _______________________

e. Fees f or educat i onal pr ogr am
of f er ed t o nur ses. . . . . . . . . . . . . . . . . . . . . . . . _______________________

f . Pr oceeds f r ombond sal e. . . . . . . . . . . . . . . . . . _______________________

g. Gai ns on sal e of unr est r i ct ed
i nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _______________________

h. Cont r i but i ons f or a t er mendowment . . . . . . . _______________________

i . Cash t r ansf er s f r ommat ur ed t er m
endowment s f or use i n oper at i ons. . . . . . . . . _______________________

j . Caf et er i a sal es t o vi si t or s. . . . . . . . . . . . . . _______________________

ANS:

a. Ot her Oper at i ng Revenue, unr est r i ct ed
b. Nonoper at i ng Revenue, unr est r i ct ed
c. Pat i ent Ser vi ces Revenue, unr est r i ct ed
d. Ot her Oper at i ng Revenue, unr est r i ct ed
e. Ot her Oper at i ng Revenue, unr est r i ct ed
f . None
g. Nonoper at i ng Revenue, unr est r i ct ed
h. Nonoper at i ng Revenues, t empor ar i l y r est r i ct ed
i . Recl assi f i cat i on I n, unr est r i ct ed expi r at i on of t i me
r est r i ct i ons
j . Ot her Oper at i ng Revenue, unr est r i ct ed

DI F: M OBJ : 7, 8

16. Consi der t he f ol l owi ng unr est r i ct ed donat i ons t o a not - f or - pr of i t
heal t h car e f aci l i t y:

a. Donat i on of pr oper t y and equi pment .

b. Donat i on of subst ant i al amount of medi cal suppl i es.

c. Donat i on of r esour ces t o endow a f und.
Chapt er 19
19- 27

d. Donat i on of cash t o be used t o conduct cancer r esear ch.

e. Vol unt eer pr ovi si on of ser vi ces by l ocal hi gh school st udent s
i nvol vi ng vi si t i ng and r eadi ng t o pat i ent s.

Requi r ed:

Usi ng t he f ol l owi ng f or mat , i ndi cat e what ent r i es woul d be r ecor ded:

Event J our nal Ent r y

ANS:


a. Pr oper t y and Equi pment
Nonoper at i ng Revenue- - Tempor ar i l y Rest r i ct ed Cont r i but i ons

b. Suppl i es I nvent or y ( or Suppl i es Expense)
Oper at i ng Revenue, Unr est r i ct ed Cont r i but i ons

c. Cash ( or ot her asset donat ed)
Nonoper at i ng Revenue- - Per manent l y Rest r i ct ed Cont r i but i ons

d. Cash
Nonoper at i ng Revenue- - Tempor ar i l y Rest r i ct ed Cont r i but i ons

e. Not r ecor ded because i t i s not a ski l l ed ser vi ce t he
or gani zat i on woul d ot her wi se pur chase

DI F: E OBJ : 10

17. El der Car e Ser vi ces i s a not - f or - pr of i t pr ovi der of heal t h car e
ser vi ces.

a. The condensed i ncome st at ement f or t he year ended August 31,
20X5 shows t he f ol l owi ng:

Net pat i ent ser vi ce r evenue. . . . . . . . . . . . . . . . . . . . . . . $9, 164, 600
Ot her oper at i ng r evenue. . . . . . . . . . . . . . . . . . . . . . . . . . . 568, 000
Tot al oper at i ng r evenues. . . . . . . . . . . . . . . . . . . . . . . . $9, 732, 600
Oper at i ng expenses ( i ncl udes $478, 200 i n
depr eci at i on; $6, 600 of amor t i zat i on of
def er r ed f i nanci ng cost s; and an i ncr ease i n
l i abi l i t y f or est i mat ed mal pr act i ce cost s of
$112, 500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 671, 500
I ncome f r omoper at i ons. . . . . . . . . . . . . . . . . . . . . . . . . . $ 61, 100
Nonoper at i ng r evenue ( net ) ( i ncl udes
l oss on sal e of equi pment of $5, 300; gai n
on sal e of i nvest ment s of $39, 800) . . . . . . . . . . . . 388, 900
Excess of r evenues over expenses. . . . . . . . . . . . . . . . $ 450, 000
==========

Chapt er 19
19- 28

b. Compar at i ve bal ance sheet s f or August 31 show t he f ol l owi ng:

20X5 20X4
Cl i ent account s r ecei vabl e. . . . . . . . . . . . $432, 200 $341, 600
Suppl i es i nvent or y. . . . . . . . . . . . . . . . . . . . 153, 500 172, 800
Account s payabl e. . . . . . . . . . . . . . . . . . . . . . 318, 760 288, 460
Accr ued expenses. . . . . . . . . . . . . . . . . . . . . . 60, 100 75, 200

Requi r ed:

Pr epar e a schedul e showi ng net cash pr ovi ded by oper at i ng act i vi t i es
and nonoper at i ng act i vi t i es and nonoper at i ng r evenue t hat i s pr esent ed
under t he i ndi r ect met hod of pr epar i ng a st at ement of cash f l ows.

ANS:

El der Car e Ser vi ces
Reconci l i at i on of Excess of Revenues over Expenses
To Net Cash Pr ovi ded by Oper at i ng Act i vi t i es and
Nonoper at i ng Revenue
For t he Year Ended August 31, 20X5

Excess of r evenues over expenses. . . . . . . . . . . . . . . . . . . . . $450, 000
Adj ust ment s t o r econci l e excess of r evenues
over expenses t o net cash pr ovi ded by
oper at i ng act i vi t i es:
Depr eci at i on. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478, 200
Amor t i zat i on of def er r ed f i nanci ng cost s. . . . . . . . . 6, 600
I ncr ease i n l i abi l i t y f or est i mat ed
mal pr act i ce cost s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112, 500
Loss on sal e of equi pment . . . . . . . . . . . . . . . . . . . . . . . . 5, 300
Gai n on sal e of i nvest ment s. . . . . . . . . . . . . . . . . . . . . . ( 39, 800)
I ncr ease i n cl i ent account s r ecei vabl e. . . . . . . . . . . ( 90, 600)
Decr ease i n suppl i es i nvent or y. . . . . . . . . . . . . . . . . . . . . 19, 300
I ncr ease i n account s payabl e. . . . . . . . . . . . . . . . . . . . . . . 30, 300
Decr ease i n accr ued expenses. . . . . . . . . . . . . . . . . . . . . . . ( 15, 100)
Net cash pr ovi ded by oper at i ng act i vi t i es. . . . . . . . . . . . $956, 700

DI F: D OBJ : 10, 11

Chapt er 19
19- 29
18. The post - cl osi ng t r i al bal ance f or Bl akel y Hospi t al as of J anuar y 1,
20X5, i s as f ol l ows:

Debi t Cr edi t
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79, 800
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . . 37, 000
Al l owance f or Adj ust ment s and
Uncol l ect i bl es. . . . . . . . . . . . . . . . . . . . . . . . . 7, 000
I nvent or y of Suppl i es. . . . . . . . . . . . . . . . . . 14, 000
Long- Ter mI nvest ment s. . . . . . . . . . . . . . . . . . 146, 200
Pr oper t y, Pl ant , and Equi pment . . . . . . . . . 2, 830, 000
Endowment I nvest ment s. . . . . . . . . . . . . . . . . . 260, 000
Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . . . . 16, 000
Accr ued Expenses. . . . . . . . . . . . . . . . . . . . . . . 6, 000
Mor t gage Bonds Payabl e. . . . . . . . . . . . . . . . . 150, 000
Unr est r i ct ed Net Asset s. . . . . . . . . . . . . . . . 1, 158, 000
Tempor ar i l y Rest r i ct ed Net Asset s. . . . . . 1, 250, 000
Per manent l y Rest r i ct ed Net Asset s. . . . . . 216, 000
3, 367, 000 3, 367, 000
========= =========

The f ol l owi ng event s occur r ed dur i ng 20X5:

a. Gr oss char ges f or hospi t al ser vi ce, al l char ged t o account s
r ecei vabl e, wer e as f ol l ows:
Roomand boar d char ges. . . . . . . . . . . . . . . . . . . . . . . . . . . . $780, 000
Char ges f or ot her pr of essi onal ser vi ces. . . . . . . . . . . 321, 000

b. Deduct i ons f r omgr oss r evenues wer e as f ol l ows:
Pr ovi si on f or uncol l ect i bl e r ecei vabl es. . . . . . . . . . . $30, 000
Char i t y ser vi ce. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000

c. The hospi t al pai d $18, 000 t o r et i r e mor t gage bonds payabl e
wi t h an equi val ent book val ue.

d. Dur i ng t he year , Bl akel y Hospi t al r ecei ved gener al
cont r i but i ons of $50, 000 and i ncome of $6, 500 f r omendowment
i nvest ment s. I ncome r ecei ved on endowment i nvest ment s i s
unr est r i ct ed.

e. Pat i ent s wer e bi l l ed $3, 000 f or t el evi si on r ent al .

f . $26, 000 of donor speci f i ed cont r i but i ons wer e used t o acqui r e
new equi pment . The hospi t al pol i cy i s t o r el ease donor
r est r i ct i ons when asset i s pl aced i n ser vi ce.

g. A st er i l i zer t hat or i gi nal l y cost $24, 000 and had a book val ue
of $2, 400 was sol d f or $3, 500.

h. Voucher s t ot al i ng $1, 191, 000 wer e i ssued f or t he f ol l owi ng
i t ems:
Admi ni st r at i ve ser vi ces expense. . . . . . . . . . . . . . . . . . . . . $120, 000
Fi scal ser vi ces expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95, 000
Gener al ser vi ces expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 225, 000
Nur si ng ser vi ces expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 520, 000
Ot her pr of essi onal ser vi ces expense. . . . . . . . . . . . . . . . . 165, 000
Suppl i es ( use a per pet ual i nvent or y syst em) . . . . . . . . . 60, 000
Expenses accr ued on December 31, 20X4. . . . . . . . . . . . . . . 6, 000

Chapt er 19
19- 30

i . Col l ect i ons on account s r ecei vabl e t ot al ed $985, 000. Account s
wr i t t en of f as uncol l ect i bl e amount ed t o $11, 000. Col l ect i ons
f r omt hi r d- par t y payer s i ncl uded $70, 000 t hat i s r est r i ct ed t o
pl ant r epl acement .

j . Cash payment s on voucher s payabl e dur i ng t he year wer e
$825, 000.

k. Suppl i es of $37, 000 wer e i ssued t o nur si ng ser vi ces.

l . Dur i ng t he year , $12, 000 of cash i ncome on t empor ar i l y
r est r i ct ed i nvest ment s was r ecei ved. On December 31, 20X5,
t her e was $800 of accr ued i nt er est i ncome on t hese
i nvest ment s. Ear ni ngs ar e r est r i ct ed t o pl ant and expansi on.

m. Depr eci at i on of bui l di ngs and equi pment f or t he year was
$117, 000.

n. On December 31, 20X5, an accr ual of $6, 100 was made f or
i nt er est on mor t gage bonds payabl e. I nt er est i s consi der ed an
Admi ni st r at i ve Ser vi ces Expense.

o. A gr at ef ul pat i ent cont r i but ed $100, 000 i n cash. Ear ni ngs must
accumul at e dur i ng t he pat i ent ' s l i f et i me. Upon deat h, t he
pr i nci pal and accumul at ed ear ni ngs ar e t o be used f or pl ant
expansi on.

Requi r ed:

Usi ng t he f ol l owi ng f or mat , pr epar e j our nal ent r i es f or t he event s.
Expense dat a ar e r ecor ded based on t ypes of ser vi ces pr ovi ded.


ANS:


a. Account s Recei vabl e. . . . . . . . . . . . . . . . . . 1, 101, 000
Pat i ent Ser vi ce Revenue- -
Unr est r i ct ed. . . . . . . . . . . . . . . . . . . . . . . 1, 101, 000
To r ecor d pat i ent bi l l i ngs.

b. Pr ovi si on f or Uncol l ect i bl e. . . . . . . . . . 30, 000
Cont r act ual Adj ust ment s. . . . . . . . . . . . . . 15, 000
Uncol l ect i bl es. . . . . . . . . . . . . . . . . . . 45, 000
To r ecor d deduct i ons f r omgr oss
ear ni ngs f or est i mat ed
uncol l ect i bl es ( $30, 000) and
char i t y ser vi ce ( $15, 000) .

c. Mor t gage Bonds Payabl e. . . . . . . . . . . . . . . 18, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 000
To r ecor d mor t gage payment .

Chapt er 19
19- 31
d. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56, 500
Nonoper at i ng Revenue- - Unr est r i ct ed
Cont r i but i ons. . . . . . . . . . . . . . . . . . . . . 50, 000
Nonoper at i ng Unr est r i ct ed Endowment
I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 500
To r ecor d gener al cont r i but i on of
$50, 000 and unr est r i ct ed Endowment
i ncome of $6, 500.

e. Account s Recei vabl e. . . . . . . . . . . . . . . . . . 3, 000
Ot her Oper at i ng Revenue- - Unr est r i ct ed 3, 000
To r ecor d t el evi si on bi l l i ngs.

f . Pr oper t y, Pl ant , and Equi pment . . . . . . . 26, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 000
To r ecor d pur chase of equi pment .

Rest r i ct ed- - Sat i sf act i on of Pl ant
Acqui si t i on. . . . . . . . . . . . . . . . . . . . . . . . . 26, 000
Sat i sf act i on of Pl ant Acqui si t i on. 26, 000
To r ecor d pur chase of equi pment .

g. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 500
Accumul at ed Depr eci at i on. . . . . . . . . . . . . 21, 600
Pr oper t y, Pl ant , and Equi pment . . . . . 24, 000
Nonoper at i ng Revenue- - Unr est r i ct ed
Gai n on Sal e. . . . . . . . . . . . . . . . . . . . . . . 1, 100
To r ecor d sal e of st er i l i zer at a
gai n.

h. Admi ni st r at i ve Ser vi ces Expense. . . . . . 120, 000
Fi scal Ser vi ces Expense. . . . . . . . . . . . . . 95, 000
Gener al Ser vi ces Expense. . . . . . . . . . . . . 225, 000
Nur si ng Ser vi ces Expense. . . . . . . . . . . . . 520, 000
Ot her Pr of essi onal Ser vi ces Expenses. 165, 000
I nvent or y of Suppl i es. . . . . . . . . . . . . . . . 60, 000
Ot her Expenses. . . . . . . . . . . . . . . . . . . . . . . 6, 000
Voucher s Payabl e. . . . . . . . . . . . . . . . . . . 1, 191, 000
To r ecor d voucher s i ssued.

i . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 985, 000
Uncol l ect i bl es. . . . . . . . . . . . . . . . . . . . . 11, 000
Account s Recei vabl e. . . . . . . . . . . . . . . . 996, 000
To r ecor d col l ect i on or wr i t e- of f
of account s r ecei vabl e.

Cash- - l i mi t ed t o Pl ant Repl acement
and Expansi on. . . . . . . . . . . . . . . . . . . . . . 70, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70, 000
To r ecor d t hi r d- par t y payer
col l ect i ons desi gnat ed f or pl ant
r epl acement .

j . Voucher s Payabl e. . . . . . . . . . . . . . . . . . . . . 825, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825, 000
To r ecor d payment of voucher s.

Chapt er 19
19- 32
k. Nur si ng Ser vi ces Expense. . . . . . . . . . . . . 37, 000
I nvent or y of Suppl i es. . . . . . . . . . . . . . 37, 000
To r ecor d suppl i es i ssued.

l . Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, 000
Accr ued I nt er est I ncome. . . . . . . . . . . . . . 800
Nonoper at i ng Revenue- - Tempor ar i l y
Rest r i ct ed I nvest ment I ncome. . . . . . 12, 800
To r ecor d i nvest ment ear ni ngs
r ecei ved or accr ued.

m. Pr ovi si on f or Depr eci at i on
( or Depr eci at i on Expense) . . . . . . . . . . 117, 000
Accumul at ed Depr eci at i on. . . . . . . . . . 117, 000
To r ecor d annual depr eci at i on.

n. Admi ni st r at i ve Ser vi ces Expense. . . . . . 6, 100
I nt er est Payabl e. . . . . . . . . . . . . . . . . . 6, 100
To r ecor d accr ual of i nt er est
expense on bonds payabl e.

o. Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Nonoper at i ng Revenue- - Tempor ar i l y
Rest r i ct ed Cont r i but i on. . . . . . . . . 100, 000
To r ecor d pat i ent ' s cont r i but i on.

DI F: D OBJ : 10, 11

Chapt er 19
19- 33
19. The f ol l owi ng i s an adj ust ed pr ecl osi ng t r i al bal ance of t he Gener al
Funds of Bar nes Nur si ng Home ( non- pr of i t ) .

Bar nes Nur si ng Home
Adj ust ed Cur r ent Funds Tr i al Bal ance
December 31, 20X5

Unr est r i ct ed Rest r i ct ed
Cash. . . . . . . . . . . . . . . . . . . . . . . . 300, 000 107, 000
Pl edges Recei vabl e. . . . . . . . . . 12, 000 206, 000
Accr ued I nt er est Recei vabl e. 1, 000
I nvent or y of Suppl i es. . . . . . . 120, 000
Voucher s Payabl e. . . . . . . . . . . . 50, 000 10, 000
Accr ued Expenses. . . . . . . . . . . . 25, 000
Ref undabl e Deposi t s. . . . . . . . . 2, 000
Pl edges. . . . . . . . . . . . . . . . . . . . 3, 000
Net Asset s, J anuar y 1, 20X5
Desi gnat ed- - Unr est r i ct ed. . 12, 000
Undesi gnat ed- - Unr est r i ct ed 26, 000
Tempor ar i l y Rest r i ct ed. . . . 3, 000
Per manent l y Rest r i ct ed. . . . 250, 000
Cont r i but i ons. . . . . . . . . . . . . . . 200, 000 50, 000
Resi dent Ser vi ce Revenue. . . . 415, 000
Ot her Oper at i ng Revenue. . . . . 20, 000 5, 000
Out r each Expenses. . . . . . . . . . . 20, 000
Nur si ng Ser vi ces Expenses. . . 100, 000
Di et ar y Ser vi ce Expense. . . . . 100, 000
Gener al Ser vi ce Expense. . . . . 45, 000
Fi nanci al Ser vi ce Expense. . . 60, 000
Recl assi f i cat i on I n- -
Rest r i ct i on. . . . . . . . . . . . . . . . 5, 000
Rest r i ct i ons. . . . . . . . . . . . . . . 5, 000
758, 000 758, 000 318, 000 318, 000
======= ======= ======= =======

Requi r ed:

Pr epar e a st at ement of act i vi t i es and a st at ement of f i nanci al posi t i on
as of December 31, 20X5.

Chapt er 19
19- 34
ANS:

St at ement of Act i vi t i es

Tempor ar i l y Per manent l y
Unr est r i ct ed Rest r i ct ed Rest r i ct ed Tot al
Publ i c suppor t r evenue:
Publ i c suppor t . . . . . .
Cont r i but i ons. . . . . . . 200, 000 50, 000 - - 250, 000

Revenue
Resi dent ser vi ce. . . . 415, 000 - - - - 415, 000
Ot her oper at i ng. . . . . 20, 000 5, 000 - - 25, 000

Net Asset s r el eased
f r omr est r i ct i ons:
Sat i sf act i on of
pr ogr amr est r i ct i ons 5, 000 ( 5, 000) - - 0
Tot al publ i c suppor t ,
r evenue, and ot her . . 640, 000 50, 000 - - 690, 000
Expenses:
Out r each. . . . . . . . . . . . 20, 000 - - - - - -
Nur si ng ser vi ces. . . . 100, 000 - - - - - -
Di et ar y ser vi ces. . . . 100, 000 - - - - - -
Gener al ser vi ces. . . . 45, 000 - - - - - -
Fi nanci al ser vi ces. . 60, 000 - - - - - -
Tot al expenses. . . . 325, 000 - - - - 325, 000

Changes i n net asset s. 315, 000 50, 000 - - 365, 000
Net asset s,
J anuar y 1, 20X5. . . . . . 38, 000 3, 000 250, 000 291, 000
Net asset s,
December 31, 20X5. . . . 353, 000 53, 000 250, 000 656, 000
======= ====== ======= =======

St at ement of Fi nanci al Posi t i on
Ended December 31, 20X5

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407, 000
Pl edges r ecei ved ( net of al l owances) . . . . . . . . . . . . . . . . . . . 215, 000
Accr ued I nt er est Recei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000
I nvent or y of Suppl i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000
Tot al Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 743, 000

Voucher s payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
Accr ued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 000
Ref undabl e deposi t s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000
Tot al l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87, 000

Net Asset s
Unr est r i ct ed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353, 000
Tempor ar i l y r est r i ct ed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53, 000
Per manent l y r est r i ct ed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250, 000
Tot al Net Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 656, 000
Tot al l i abi l i t i es and net asset s. . . . . . . . . . . . . . . . . . . . . . . 743, 000
=======

Chapt er 19
19- 35

DI F: D OBJ : 10, 11

20. The f ol l owi ng dat a appl y t o Ri ver si de Hospi t al , a not - f or - pr of i t
or gani zat i on.

a. Summar i zed cash r ecei pt s showed cash r ecei ved f r omt he
f ol l owi ng:

Pat i ent s and t hi r d- par t y payer s. . . . . . . . . . . . . . . . . . . $903, 420
Ot her oper at i onal act i vi t i es. . . . . . . . . . . . . . . . . . . . . . 57, 120
Donor r est r i ct ed gi f t s f or pr ogr ams. . . . . . . . . . . . . . . 11, 220
Unr est r i ct ed i nt er est f r omi nvest ment s. . . . . . . . . . . . 25, 100

b. Summar i zed cash payment s showed cash pai d t o t he f ol l owi ng:

Suppl i er s and empl oyees. . . . . . . . . . . . . . . . . . . . . . . . . . . $892, 140
The bank t o cover i nt er est char ges. . . . . . . . . . . . . . . . 14, 500
For t he pur chase of equi pment . . . . . . . . . . . . . . . . . . . . . 45, 450

c. Donat i on of $100, 000 cash r ecei ved wi t h donor r est r i ct i on t hat
i t be per manent l y r est r i ct ed. I ncome may be used f or
r epl acement of equi pment .

d. Bonds payabl e t hat woul d have mat ur ed i n t wo year s wer e
r et i r ed on an i nt er est dat e at a f ace val ue of $18, 000.

e. The cash bal ance on J anuar y 1, 20X1, was $168, 020. On December
31, 20X1, t he cash bal ance was $145, 300.

Requi r ed:

Usi ng t he di r ect met hod, pr epar e a st at ement of cash f l ows f or t he year
ended December 31, 20X1.

Chapt er 19
19- 36
ANS:

Ri ver si de Hospi t al
St at ement of Cash Fl ows of Gener al Funds

Cash f l ows f r omoper at i ng act i vi t i es and
nonoper at i ng r evenue:
Cash r ecei ved f r ompat i ent s and
t hi r d- par t y payer s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 903, 420
Cash r ecei ved f r omot her oper at i onal
act i vi t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57, 120
Cash r ecei ved f r omr est r i ct ed gi f t s. . . . . . . . . . . . . . . 11, 220
Cash r ecei ved f r omunr est r i ct ed i nt er est . . . . . . . . . . 25, 100
Cash pai d t o suppl i er s and empl oyees. . . . . . . . . . . . . . ( 892, 140)
Cash pai d t o bank f or i nt er est char ges. . . . . . . . . . . . ( 14, 500)
Net cash pr ovi ded by oper at i ng
act i vi t i es and nonoper at i ng r evenue. . . . . . . . . . . . . $ 90, 220
Cash f l ows f r omi nvest i ng act i vi t i es:
Pur chase of equi pment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ( 45, 450)
Net cash used by i nf ant r y act i vi t i es. . . . . . $ ( 45, 450)
Repayment of l ong- t er mbonds payabl e. . . . . . . . . . . . . . $ ( 18, 000)
Cont r i but i ons r ecei ved r est r i ct ed f or l ong-
t er mi nvest ment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Net cash pr ovi ded by i nvest i ng act i vi t i es. . . . . . . $ 82, 000
Net decr ease i n cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 126, 770
Cash bal ance at begi nni ng of year . . . . . . . . . . . . . . . . . 168, 020
Cash bal ance at end of year . . . . . . . . . . . . . . . . . . . . . . . $ 294, 790
=========

DI F: M OBJ : 10

ESSAY

1. Ar e not - f or - pr of i t uni ver si t i es r equi r ed t o use f und account i ng?

ANS:

Many col l eges and uni ver si t i es cont i nue t o use t he under l yi ng f und
st r uct ur e f or t hei r account i ng syst em. However , t hey ar e no l onger
r equi r ed under FASB St at ement No. 117 t o di scl ose or di spl ay t hi s
under l yi ng f und st r uct ur e i n t hei r f i nanci al r epor t s. Ther ef or e, day-
t o- day economi c event s may be r ecor ded i n f unds but t he f i nal year - end
f i nanci al r epor t wi l l not di spl ay any f und st r uct ur e or det ai l .

DI F: E OBJ : 1

Chapt er 19
19- 37
2. How has t he adopt i on of GASB St at ement No. 35 changed t he r epor t i ng
st andar ds f or col l eges and uni ver si t i es.

ANS:

The Gover nment al Account i ng St andar ds Boar d ( GASB) has j ur i sdi ct i on
over al l gover nment - owned ent i t i es such as publ i c col l eges and
uni ver si t i es. The Fi nanci al Account i ng St andar ds Boar d ( FASB) has
j ur i sdi ct i on over pr i vat e col l ege and uni ver si t y f i nanci al r epor t i ng
st andar ds. The i ssuance of GASB St at ement No. 35 r equi r es publ i c
col l eges and uni ver si t i es t o us t he gui dance of speci al pur pose
gover nment s engaged i n busi ness t ype act i vi t i es, t ypi cal l y i n
Ent er pr i se Funds. The f i nanci al st at ement s of publ i c col l eges and
uni ver si t i es ar e desi gned t o emphasi ze t he or gani zat i on as a whol e.

DI F: E OBJ : 2

3. I n account i ng f or not - f or - pr of i t publ i c uni ver si t i es, Endowment and
Si mi l ar Funds ar e commonl y used.

Requi r ed:

a. Li st and br i ef l y def i ne t he t hr ee t ypes of endowment s of t en f ound i n
t he uni ver si t y envi r onment .

b. Descr i be t he account i ng pr ocedur es f or i ncome ear ned on endowment
f unds.

c. Expl ai n t he use of i nvest ment pool s.

ANS:

a. Regul ar or pur e endowment s ar e f unds whose pr i nci pal has been
speci f i ed by t he donor as nonexpendabl e. Ter mendowment s ar e f unds
whose pr i nci pal i s expendabl e af t er a speci f i ed t i me per i od or af t er
a desi gnat ed event . Quasi - endowment s ar e f unds set asi de by t he
boar d or cont r ol l i ng body, usual l y f r omUnr est r i ct ed Cur r ent Funds.

b. I ncome on r est r i ct ed endowment f unds shoul d be t r ansf er r ed and
r ecor ded i n di r ect l y i n t he r est r i ct ed cur r ent f und st i pul at ed by
t he donor . I f no st i pul at i on exi st s, t he i ncome can be t r ansf er r ed
and r ecor ded i n t he unr est r i ct ed gener al f und, wher e i t i s cr edi t ed
t o Endowment I ncome.

c. The r esour ces f or endowment f unds of t en ar e pool ed f or i nvest ment
pur pose t o achi eve bet t er yi el ds and t i ght er management . The var i ous
f und bal ances t hen shar e pr opor t i onat el y i n t he out come of t he f und
per f or mance based on t he f ai r val ue of t he i nvest ment s. The cost s of
managi ng t he f unds shoul d be bor ne by t he uni ver si t y' s unr est r i ct ed
cur r ent f und. Al l i nvest ment s shoul d be r epor t ed at t hei r f ai r
mar ket val ue on t he St at ement of Net Asset s.

DI F: E OBJ : 3

Chapt er 19
19- 38
4. Expl ai n how cer t ai n t r ansact i ons t hat t r adi t i onal l y wer e r epor t ed as
r est r i ct ed by pr i vat e uni ver si t i es wi l l now be cat egor i zed as
unr est r i ct ed exchange t r ansact i on. Descr i be how t hey wi l l be account ed
f or per FASB 116.

ANS:

Exchange t r ansact i ons, i . e. , r eci pr ocal t r ansf er i n whi ch each par t y
r ecei ves and sacr i f i ces appr oxi mat el y equal val ue, ar e not consi der ed
r est r i ct ed. Many t r ansact i ons whi ch have been account ed f or i n much t he
same way as cont r i but i ons, e. g. , gr ant s, awar ds, sponsor shi ps and
appr opr i at i ons wi l l be cat egor i zed as exchange t r ansact i ons r at her t han
cont r i but i ons and account ed f or as i ncr eases i n unr est r i ct ed net
asset s. Gover nment gr ant s whi ch r equi r e per f or mance by t he not - f or -
pr of i t or gani zat i on wi l l be account ed f or as r ef undabl e deposi t s
( l i abi l i t i es) unt i l ear ned. Unr est r i ct ed r evenue wi l l be ear ned when
expenses ar e made i n conj unct i on wi t h t he pr ovi si ons of t he gr ant .
Ot her gover nment gr ant s whi ch ar e essent i al l y pass- t hr ough f i nanci al
ai d t o st udent s wi l l now be account ed f or as agency t r ansact i ons.

DI F: M OBJ : 3

5. I n account i ng f or heal t h car e ser vi ces, sever al met hods ar e ut i l i zed.

Requi r ed:

a. Li st and br i ef l y def i ne t he t hr ee t ypes of cl assi f i cat i ons of heal t h
car e f aci l i t i es

b. Descr i be t he ef f ect s of t hi r d par t y payer ar r angement s on r evenue
r ecogni t i on pr ocedur es f or heal t h car e or gani zat i ons.

c. Descr i be t he cl assi f i cat i on of expenses i n a heal t h car e
envi r onment .

ANS:

a. I nvest or Owned - pr i vat el y owned and oper at ed f or a pr of i t
Gover nment al Heal t h Car e Ent i t i es - oper at ed by a gover nment al
uni t and account ed f or as an ent er pr i se f und
Vol unt ar y Not f or Pr of i t Heal t h Car e Ent i t i es - ent i t i es
or gani zed and sust ai ned by member of a gr oup
or communi t y, such as a r el i gi ous af f i l i at i on

Chapt er 19
19- 39
b. Al most al l f ees char ged by heal t h car e ent i t i es ar e subj ect t o a
t hi r d par t y payment cont r act , such as Medi car e, Medi cai d, HMO, or
pr i vat e i nsur ance compani es. The r ei mbur sement f r omt he t hi r d par t y
payer s i s det er mi ned not by what i s char ged by t he heal t h car e
ent i t y. The r ei mbur sement i s cal cul at ed based on t he cost s of
pr ovi di ng ser vi ces and t hat cost i s def i ned by t he t hi r d par t y
payer . I t i s subj ect t o negot i at i on by t he pr ovi der of t he ser vi ce
at cont r act r enewal t i me. Hospi t al payment syst ems and some l ar ger
cl i ni cal set t i ngs may ut i l i ze capi t at i on cont r act s wher e t he
pr ovi der s ar e r ei mbur sed on per pat i ent pr ocedur es, not on t he
act ual cost or l i st pr i ce of t he ser vi ce pr ovi ded. Manager s of t hese
or gani zat i ons must ensur e t hei r act ual cost s do not exceed capi t at ed
l evel s f or ser vi ces pr ovi ded i f t hey ar e t o achi eve pr of i t abi l i t y.

c. Expenses ar e cl assi f i ed i n t he f i nanci al st at ement s by f unct i onal
expense cat egor i es. The f unct i ons ar e dependent on what t ype of
heal t h car e ent i t y i s pr epar i ng t he r epor t . For exampl e, Nur si ng
Ser vi ces expense r epr esent s al l t he var i ous expenses i ncur r ed i n t he
car e of pat i ent s or r esi dent s. The f unct i onal expense l i ne does not
pr ovi de det ai l s of t he nat ur al cl assi f i cat i ons l i ke sal ar i es f or
nur ses, suppl i es, et c. Thi s i nf or mat i on i s pr ovi ded i n t he
f oot not es.

DI F: E OBJ : 7

Chapter 20 Estates and Trusts: Their Nature and the
Accountant's Role

MULTIPLE CHOICE

1. Whi ch of t he f ol l owi ng i s NOT an advant age of f or mi ng an i nt er vi vos
t r ust ?
a. i t i s a popul ar way t o t r ansf er pr oper t y t o one' s hei r s wi t hout a
wi l l , t her eby avoi di ng pr obat e
b. i t i s f or med dur i ng t he decedent s l i f et i me
c. any t r ust i s not r ecogni zed as a t axabl e ent i t y
d. t he decedent i s t he t r ust ee unt i l deat h, t hen a successor t r ust ee
i s appoi nt ed


2. When det er mi ni ng a decedent ' s gr oss est at e f or f eder al t ax pur poses,
whi ch of t he f ol l owi ng i t ems woul d not be i ncl uded?
a. f ai r mar ket val ue of r eal pr oper t y
b. f ai r mar ket val ue of i nt angi bl e pr oper t y
c. f ai r mar ket val ue of pr oper t y l ef t t o a sur vi vi ng spouse
d. al l of t he above i t ems woul d be i ncl uded i n t he gr oss est at e


3. The gr oss est at e of a decedent :
a. i s t he same as t he pr obat e est at e
b. i ncl udes al l asset s owned by a decedent at t he moment of deat h,
r egar dl ess of whet her t hey pass t o ot her s by means of wi l l , j oi nt
t enancy, or communi t y pr oper t y l aws
c. i ncl udes asset s measur ed onl y at hi st or i cal cost
d. does not i ncl ude t r ansf er s made t hr ough gi f t s


4. Whi ch of t he f ol l owi ng st at ement s i s t r ue concer ni ng t he maxi mumgi f t
t hat coul d be gi ven wi t hi n a year , pr i or t o 1999, wi t hout i ncur r i ng any
gi f t t ax or usi ng any of t he uni f i ed cr edi t ?
a. A si ngl e i ndi vi dual i s l i mi t ed t o gi f t s of $10, 000 i n cash or
pr oper t y wi t h a f ai r mar ket val ue of $3, 000 t o an unr el at ed
i ndi vi dual .
b. Consent i ng spouses can gi ve each ot her a maxi mumof $10, 000.
c. Consent i ng spouses t oget her can gi ve an unr el at ed i ndi vi dual
$20, 000.
d. A si ngl e i ndi vi dual i s l i mi t ed t o a gi f t of $10, 000 t o a qual i f i ed
char i t y.


Chapt er 20
20- 2
5. Whi ch of t he f ol l owi ng woul d NOT be i ncl uded i n t he cor pus or pr i nci pal
of an est at e?
a. accr ued i nt er est and decl ar ed di vi dends on i nvest ment s hel d by
decedent
b. per sonal val uabl es
c. l i f e i nsur ance pr oceeds wher e desi gnat ed benef i ci ar y i s t he est at e
d. al l of t he above ar e i ncl uded


6. The st ar t i ng poi nt f or t he comput at i on of f eder al est at e t ax i s t he
gr oss est at e. Whi ch of t he f ol l owi ng st at ement s i s not t r ue r egar di ng
t he comput at i on of t he gr oss est at e?
a. The gr oss est at e f or t ax pur poses i s of t en gr eat er t han t he est at e
f or pr obat e pur poses
b. The t axabl e est at e does not i ncl ude t r ansf er s of pr oper t y made
dur i ng decedent ' s l i f et i me
c. The gr oss est at e f or t ax pur poses al so i ncl udes cer t ai n t r ansf er s
by t he deceased dur i ng l i f e i n whi ch cer t ai n r i ght s ar e r et ai ned
by t he decedent
d. The t axabl e est at e can be r educed by cer t ai n al l owabl e deduct i ons


7. The uni f i ed t ax cr edi t equal s:
a. t he excl usi on amount i n any gi ven year
b. a f l at r at e appl i ed agai nst t he t axabl e est at e
c. t he t ent at i ve t ax t hat woul d be cal cul at ed on t he excl usi on amount
d. gi f t t ax cal cul at ed on pr e 1981 gi f t s


8. The ef f ect of t he mar i t al deduct i on i s:
a. t ot al el i mi nat i on of est at e t axes f or bot h t he decedent and t hei r
spouse
b. t o r educe t he t axabl e est at e of t he decedent ' s spouse
c. def er r al of est at e t axes unt i l t he deat h of t he decedent ' s spouse
d. i ncr ease t he avai l abl e uni f i ed t ax cr edi t


9. Whi ch of t he f ol l owi ng st at ement s i s t r ue concer ni ng t he el ect i on of
t he al t er nat e val uat i on dat e?
a. Onl y t he pr oper t i es t hat have decr eased i n val ue ar e val ued on t he
al t er nat e dat e.
b. Al l of t he est at e pr oper t y i s r eval ued on t he al t er nat i ve dat e,
whet her sol d, di st r i but ed or r emai ni ng i n t he est at e.
c. Pr oper t y di st r i but ed i s r eval ued whi l e pr oper t y sol d i s not .
d. The al t er nat e dat e can onl y be used i f t he r eval uat i on r esul t s i n
a l ower t ot al gr oss est at e and l ower est at e t axes.


Chapt er 20
20- 3
10. The al t er nat e val uat i on dat e i s how many mont hs af t er t he decedent ' s
deat h?
a. 3
b. 6
c. 9
d. 12


11. J ane Ramos owned st ock wi t h a cost of $200, 000. The st ock has a mar ket
val ue on J ane' s dat e of deat h of $375, 000. The st ock was wi l l ed t o
J ane' s ni ece J enny. Whi ch of t he f ol l owi ng i s t r ue?
a. J enny' s basi s i s $200, 000; t he st ock' s val ue i n t he gr oss est at e
i s $100, 000.
b. J enny' s basi s i s $375, 000; t he st ock' s val ue i n t he gr oss est at e
i s $100, 000.
c. J enny' s basi s i s $200, 000; t he st ock' s val ue i n t he gr oss est at e
i s $375, 000.
d. J enny' s basi s i s $375, 000; t he st ock' s val ue i n t he gr oss est at e
i s $375, 000.


12. Whi ch of t he f ol l owi ng st at ement s i s t r ue concer ni ng f eder al i ncome t ax
l aws and est at es?
a. Est at es ar e subj ect t o est at e t axes and, t her ef or e, exempt f r om
i ncome t ax.
b. The i ncome t ax on t he ear ni ngs f r oman est at e i s l evi ed onl y on
t he benef i ci ar y.
c. The i ncome t ax on t he ear ni ngs f r oman est at e i s l evi ed onl y on
t he est at e.
d. The i ncome t ax on t he ear ni ngs f r oman est at e i s l evi ed ei t her on
t he est at e or t he benef i ci ar y.


13. Accor di ng t o t he Uni f or mPr obat e Code, i n an i nt est at e di st r i but i on,
per sonal pr oper t y i s di st r i but ed
a. under t he l aws of t he st at e wher e t he pr oper t y i s l ocat ed.
b. under t he l aws of t he st at e i n whi ch t he decedent was domi ci l ed.
c. di r ect l y t o t he devi see.
d. di r ect l y t o t he l egat ee.


14. An admi ni st r at or di f f er s f r oman execut or of a wi l l i n t hat an
admi ni st r at or
a. has f i duci ar y r esponsi bi l i t y f or r eal pr oper t y.
b. has f i duci ar y r esponsi bi l i t y f or per sonal pr oper t y.
c. has f i duci ar y r esponsi bi l i t y i n a t est at e di st r i but i on.
d. i s appoi nt ed by t he cour t .


Chapt er 20
20- 4
15. I n a t est at e di st r i but i on, a gi f t of pr oper t y l ef t af t er al l ot her
l egaci es have been assi gned i s r ef er r ed t o as a
a. gener al l egacy.
b. demonst r at i ve l egacy.
c. r esi duar y l egacy.
d. speci f i c l egacy.


16. Whi ch of t he f ol l owi ng i s not a l egacy?
a. a t r act of l and bequeat hed t o t he l ocal humane soci et y
b. a di amond and pear l neckl ace t o a f ami l y member
c. $20, 000 l ef t t o a nephew
d. a For d Expl or er l ef t t o a ni ece


17. The pr i mar y pur pose of account i ng f or est at es i s t o f aci l i t at e
r epor t i ng t o t he cour t dur i ng t he f i duci ar y' s t er m. Ther ef or e, whi ch of
t he f ol l owi ng concept s i s l east i mpor t ant ?
a. GAAP f or r evenue r ecogni t i on
b. I nf l ows and out f l ows of asset s
c. Di st i nct i on bet ween pr i nci pal and i ncome
d. Al l ar e i mpor t ant i n account i ng f or est at es.


18. Whi ch of t he f ol l owi ng i t ems i s not i ncl uded i n t he est at e pr i nci pal
subsequent t o t he dat e of deat h?
a. Asset s di scover ed af t er t he dat e of deat h
b. Gai ns on t he sal e of pr i nci pal asset s
c. Losses on t he sal e of pr i nci pal
d. Al l af f ect t he est at e pr i nci pal .


19. Whi ch of t he f ol l owi ng i t ems i s not char ged agai nst t he i ncome of an
est at e?
a. Or di nar y r epai r s t o i ncome- pr oduci ng pr oper t y
b. Expenses i ncur r ed t o pr ot ect i ncome f l ow
c. Loss on t he sal e of an est at e asset
d. Al l of t he above ar e char ged agai nst t he i ncome


20. Whi ch of t he f ol l owi ng i t ems ar e char geabl e agai nst t he i ncome of an
est at e?
a. Cost s i ncur r ed i n pr obat i ng t he wi l l
b. A l oss on t he sal e of est at e asset s
c. Legal f ees i ncur r ed t o pr ot ect i ncome f l ow


Chapt er 20
20- 5
21. The par t y r ecei vi ng t he pr i nci pal of an est at e may be r ef er r ed t o as
t he
a. i ncome benef i ci ar y.
b. r emai nder man.
c. devi see.
d. b and c.


22. Whi ch of t he f ol l owi ng st at ement s i s t r ue concer ni ng t he handl i ng of
di scount s and pr emi ums f or bonds t hat ar e par t of an est at e at t he t i me
of deat h?
a. St r ai ght - l i ne amor t i zat i on i s nor mal l y used t o amor t i ze di scount s
and pr emi ums.
b. Ef f ect i ve amor t i zat i on i s t he pr ef er r ed met hod.
c. Ei t her st r ai ght - l i ne or ef f ect i ve amor t i zat i on can be used.
d. Di scount s and pr emi ums ar e not amor t i zed.


23. Whi ch of t he f ol l owi ng best descr i bes t he account i ng f or di scount s and
pr emi ums f or bonds pur chased by a f i duci ar y f or an est at e?
a. Pr emi ums ar e amor t i zed, but di scount s ar e not .
b. Di scount s ar e amor t i zed, but pr emi ums ar e not .
c. GAAP gui del i nes f or amor t i zat i on ar e f ol l owed, i . e. , bot h ar e
amor t i zed.
d. Li ke bonds pur chased pr i or t o t he deat h, nei t her di scount s nor
pr emi ums ar e amor t i zed.


24. Whi ch of t he f ol l owi ng st at ement s concer ni ng account i ng f or
depr eci at i on and depl et i on i n an est at e i s not t r ue?
a. For any depr eci at i on t aken, an equal amount of i ncome i s
t r ansf er r ed t o pr i nci pal .
b. Depr eci at i on i s a common char ge agai nst i ncome.
c. Depl et i on i s gener al l y t aken f or wast i ng asset s.
d. Al l of t he above.


25. The pr i mar y pur pose of an est at e' s char ge and di schar ge st at ement i s t o
det ai l
a. cash f l ow as t o pr i nci pal and as t o i ncome.
b. i ncome and expenses of t he est at e.
c. t r ansact i ons af f ect i ng pr i nci pal and i ncome.
d. t he pr of i t or l oss dur i ng t he per i od of st ewar dshi p.


Chapt er 20
20- 6
26. Whi ch of t he f ol l owi ng st at ement s i s not t r ue?
a. Medi cal payment s made on someone el se' s behal f ar e consi der ed
t axabl e gi f t s.
b. An i nt er vi vos t r ust al l ows a per son t o pass pr oper t y t o hei r s
wi t hout havi ng a wi l l .
c. The cor pus of an est at e i s made up of asset s.
d. Est at e t ax r at es ar e pr ogr essi ve.


27. A char i t abl e r emai nder t r ust
a. spl i t s asset s bet ween a sur vi vi ng spouse and a t r ust
b. di st r i but es i ncome on a t r ust t o a char i t abl e or gani zat i on f or a
per i od of t i me, af t er whi ch, t he pr i nci pal asset s ar e t r ansf er r ed
t o a benef i ci ar y
c. i s t he same as a Q- TI P t r ust
d. di st r i but es i ncome f r omt r ust asset s t o i ndi vi dual benef i ci ar i es
f or a per i od of t i me, af t er whi ch, t he pr i nci pal asset s ar e
t r ansf er r ed t o a r emai nder man, whi ch must be a char i t abl e
or gani zat i on


28. The doubl e t r i al bal ance f or est at e and t r ust account i ng i ndi cat es t he
need t o segr egat e
a. r eal pr oper t y f r omper sonal pr oper t y.
b. devi ces f r oml egaci es.
c. pr i nci pal i t ems f r omi ncome i t ems.
d. asset s of t he est at e f r omcl ai ms agai nst t he est at e.


29. I n t he i ni t i al j our nal ent r y r ecor di ng t he i nvent or y of t he est at e,
l i abi l i t i es i ncur r ed by t he decedent ar e
a. not r ecor ded.
b. cr edi t ed t o speci f i c l i abi l i t y account s.
c. cr edi t ed t o t he account Cl ai ms Agai nst Est at e Pr i nci pal .
d. cr edi t ed t o t he account Cl ai ms Agai nst Est at e I ncome.


30. A t r ust cr eat ed t hr ough a wi l l i s cal l ed a( n)
a. i nt er vi vos t r ust .
b. l i vi ng t r ust .
c. t est ament ar y t r ust .
d. devi see t r ust .


Chapt er 20
20- 7
31. The par t y t o whi ch l egal t i t l e and management r esponsi bi l i t i es ar e
i ni t i al l y gi ven i n a t r ust agr eement i s r ef er r ed t o as t he
a. t r ust ee.
b. r emai nder man.
c. gr ant or .
d. benef i ci ar y.


32. Begi nni ng i n 1999
a. onl y gi f t s t o U. S. ci t i zens may be consi der ed as nont axabl e.
b. est at es ar e t axed at a hi gher r at e t han i ncome.
c. t he annual al l owabl e maxi mumexcl usi on f or t axabl e gi f t s i s
adj ust ed f or i nf l at i on.
d. t he mar i t al deduct i on i s l ower ed f or f eder al t ax pur poses.


PROBLEM

1. Adequat e est at e pl anni ng i s cr i t i cal f or an i ndi vi dual or f ami l y wi t h a
si zabl e net wor t h. Li st t he goal s of est at e pl anni ng f or l ar ge, mor e
compl ex est at es.

ANS:

a. Di scover and cl ear l y communi cat e t he desi r es and wi shes of t he
decedent .

b. I nsur e t hat t he est at e i s pr oper l y admi ni st er ed or managed i n
or der t o sat i sf y t he desi r es and wi shes of t he decedent .

c. Maxi mi ze t he economi c val ue of t he est at e' s net asset s.

d. Mi ni mi ze t he t axes t hat may be assessed agai nst t he asset s and
i ncome of t he est at e.

e. Def i ne t he necessar y l i qui di t y of t he est at e' s asset s so t hat
desi r ed conveyances and di st r i but i ons may be achi eved.

f . Pr ovi de pr oper and t i mel y account i ng of t he act i vi t i es of t he
est at e and i t s f i duci ar y.

DI F: M OBJ : 1

2. Est at e pl anni ng can be a compl ex pr ocess because of t he many f act or s
and obj ect i ves t hat must be consi der ed. Not t he l east of t hese f act or s
ar e t he t ax consequences of est at e pl anni ng act i vi t i es. Fr oman est at e
t ax per spect i ve, l i st t he maj or consi der at i ons r el evant t o pr oper
pl anni ng.

Chapt er 20
20- 8
ANS:

a. Maxi mi zi ng benef i t s of t he mar i t al deduct i on.

b. Maki ng gi f t s dur i ng one' s l i f et i me.

c. Taki ng act i ons t o accompl i sh a st ep- up i n pr oper t y basi s.

d. Taki ng act i ons t o benef i t f r oma l oss i n pr oper t y val ues.

e. Maxi mi zi ng char i t abl e deduct i ons.

f . Pl anni ng est at e l i qui di t y.

DI F: M OBJ : 1

3. Def i ne what makes up t he cor pus or pr i nci pal of an est at e and l i st
sever al exampl es. Al so, l i st t he pot ent i al cl ai ms or deduct i ons f r om
t he pr i nci pal .

ANS:

The asset s of an est at e ar e r ef er r ed t o as t he cor pus or pr i nci pal of
t he est at e. These asset s var y i n nat ur e and ar e i ncl uded at t hei r f ai r
mar ket val ue. Asset s t hat ar e t he l egal pr oper t y of t he decedent on t he
dat e of deat h must be i nvent or i ed. These coul d i ncl ude:
I nvest ment s such as st ocks and bonds
Accr ued I nt er est or decl ar ed di vi dends on t hose i nvest ment s
Capi t al i nt er est s i n busi nesses
Li f e I nsur ance pr oceeds t hat ar e r ecei vabl e by t he est at e
I nvest ment i n r eal est at e, i ncl udi ng accr ued r ent s
I nt angi bl e asset s such as pat ent s or copyr i ght s
Loans or not es r ecei vabl e, i ncl udi ng accr ued i nt er est
Unpai d wages and any ot her ear ned i ncome
Per sonal val uabl es

Not al l asset s can be i dent i f i ed by t he f i duci ar y at t he t i me of t he
i ni t i al i nvent or y. Asset s i dent i f i ed at a l at er dat e ar e st i l l i ncl uded
i n t he pr i nci pal of t he est at e.

The pr i nci pal i s not r educed by t he l i abi l i t i es of t he decedent .
Li abi l i t i es ar e sat i sf i ed t hr ough t he di st r i but i on of est at e pr i nci pal .
However , t her e ar e some al l owabl e cl ai ms agai nst t he est at e i ncl udi ng
t he f ol l owi ng:
Cl ai ms havi ng a speci al l i en, not t o exceed t he val ue of t he pr oper t y
Funer al and Admi ni st r at i ve expenses
Taxes: i ncome, i nher i t ance, and est at e
Debt s due t o t he US Gover nment and var i ous st at es
J udgement s of any cour t of compet ent j ur i sdi ct i on
Wages due domest i c ser vant s
Medi cal Cl ai ms

DI F: M OBJ : 2

Chapt er 20
20- 9
4. For est at e pl anni ng pur poses, Al ber t began di st r i but i ng gi f t s i n 2005.
Al r eady, i n 2005, Al ber t has gi ven hi s daught er st ocks cost i ng $5, 000,
wi t h a cur r ent mar ket val ue of $10, 000.

Requi r ed:

What i s t he maxi mumaddi t i onal gi f t Al ber t can gi ve i n 2005 t o hi s
daught er i n cash wi t hout i ncur r i ng any gi f t t ax l i abi l i t y assumi ng
t hat :

a. Al ber t i s si ngl e.

b. Al ber t i s mar r i ed and hi s wi f e i s wi l l i ng t o gi ve t he maxi mum
amount t he coupl e i s al l owed.

ANS:

a. $1, 000, 000 + 11, 000 - 10, 000 = $1, 001, 000

b. $2, 000, 000 + 22, 000 - 10, 000 = $2, 012, 000

DI F: M OBJ : 3, 4

5. Mr . Ri ekof f di ed and l ef t t he f ol l owi ng st ocks t o hi s t wo sons:

Tom Ted
Al pha Co. Bet a Co.
Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50, 000 $60, 000
Val ue at dat e of deat h. . . . . . . . . . . . . . . . . . . . $20, 000 $98, 000

Requi r ed:

a. I f bot h sons sol d t hei r st ocks t en mont hs af t er t hei r f at her ' s
deat h f or $50, 000 and t he al t er nat e val uat i on was not used,
what woul d t hei r r espect i ve capi t al gai ns/ l osses be?

b. Assumi ng t hat t he pr i ce of t he st ock r emai ned const ant i n t he
year pr i or t o Mr . Ri ekof f ' s deat h, what mi ght have been a
bet t er met hod of handl i ng t he st ocks f r oma t ax pl anni ng
per spect i ve? Expl ai n why.

ANS:

a. Tom' s gai n = $50, 000 - 20, 000 = $30, 000
Ted' s l oss = $50, 000 - 98, 000 = $48, 000 capi t al l oss

b. Mr . Ri ekof f coul d have consi der ed sel l i ng Tom' s st ocks i n t he
year bef or e hi s deat h and t aken advant age of a $30, 000 capi t al
l oss. As i t was handl ed, Tomhad a t axabl e gai n of $30, 000 and
no one was abl e t o use t he $30, 000 capi t al l oss. However , f or
Ted, he i s abl e t o r ecogni ze a l ar ge capi t al l oss due t o t he
st ep up i n val ue of t he Bet a st ock t r ansf er r ed t o hi m. The
$38, 000 i ncr ease i n val ue f r omcost t o val ue at dat e of deat h
def er r ed any r ecogni t i on of capi t al gai n.

Chapt er 20
20- 10

DI F: M OBJ : 3, 4

6. Angel a Bur ke di ed i n 20X3 l eavi ng a gr oss est at e t hat consi st s of t he
f ol l owi ng asset s: ( val ues gi ven ar e mar ket val ues on dat e of deat h or
val uat i on)

House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $550, 000
I nvest ment i n Hogan St ock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Di vi dends decl ar ed, not pai d on Hogan St ock. . . . . . . . . . . . 10, 000
Aut omobi l e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
J ewel r y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Ot her Per sonal Pr oper t y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000

Her unpai d bi l l s i ncl uded t he f ol l owi ng:

Funer al expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000
Admi ni st r at i ve expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 500
Fi nal i ncome t ax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 500
Mor t gage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120, 000

Si nce 1976, Angel a has made t axabl e gi f t s of $200, 000 t o her chi l dr en,
t o whomshe al so l eaves her est at e.

Requi r ed:

Det er mi ne, i n good f or m, t he t ax base f or t he est at e.

ANS:

Gr oss est at e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 850, 000
Deduct i ons al l owed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 170, 000)
Taxabl e est at e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 680, 000
Pl us post - 1976 t axabl e gi f t s. . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
$ 880, 000
=========

DI F: M OBJ : 4

7. I f t he f unds i n an est at e ar e i nsuf f i ci ent t o sat i sf y al l val i d cl ai ms
agai nst i t , st at e l aws pr ovi de a pr i or i t y f or set t l ement .

Chapt er 20
20- 11
Requi r ed:

a. Reor der t he l i st of cl ai ms bel ow i n t he most common or der of
pr i or i t y:

( 1) Wages due domest i c ser vant s f or a per i od of not mor e t han
one year pr i or t o dat e of deat h and medi cal cl ai ms f or t he
same per i od.
( 2) Taxes: i ncome, est at e, and i nher i t ance.
( 3) Cl ai ms havi ng a speci al l i en agai nst pr oper t y, but not t o
exceed t he val ue of t he pr oper t y.
( 4) Debt s due t he Uni t ed St at es and var i ous st at es.
( 5) Al l ot her cl ai ms.
( 6) Funer al and admi ni st r at i ve expenses.
( 7) J udgment s of any cour t of compet ent j ur i sdi ct i on.

b. I f f unds ar e i nsuf f i ci ent t o sat i sf y al l of t he cl ai ms wi t hi n
a cl ass, expl ai n how cl ai ms ar e pai d.

ANS:

a. ( 1) Cl ai ms havi ng a speci al l i en agai nst pr oper t y, but not t o
exceed t he val ue of t he pr oper t y.
( 2) Funer al and admi ni st r at i ve expenses.
( 3) Taxes: i ncome, est at e, and i nher i t ance.
( 4) Debt s due t he Uni t ed St at es and var i ous st at es.
( 5) J udgment s of any cour t of compet ent j ur i sdi ct i on.
( 6) Wages due domest i c ser vant s f or a per i od of not mor e t han
one year pr i or t o dat e of deat h and medi cal cl ai ms f or t he
same per i od.
( 7) Al l ot her cl ai ms.

b. Wi t hi n a cl ass, each cl ai mi s sat i sf i ed on a pr o r at a basi s i f
f unds ar e i nadequat e t o accompl i sh t ot al payment f or t hat
cl ass.

DI F: M OBJ : 5

Chapt er 20
20- 12
8. Assumi ng t hat no st i pul at i on i s made i n t he wi l l , i ndi cat e by pl aci ng a
check mar k i n t he appr opr i at e col umn whet her t he t ypi cal account i ng
t r eat ment of each of t he f ol l owi ng i t ems woul d af f ect pr i nci pal onl y,
i ncome onl y, or bot h pr i nci pal and i ncome account s of an est at e.

Woul d Af f ect Onl y Woul d
I t em Pr i nci pal I ncome Af f ect Bot h
( 1) Gai n on sal e of an est at e asset _________ ______ ___________

( 2) Loss on sal e of an est at e asset _________ ______ ___________

( 3) Redempt i on of a bond f our
mont hs af t er deat h on whi ch
t her e was accr ued i nt er est on
dat e of deat h _________ ______ ___________

( 4) Di st r i but i on t o an i ncome
benef i ci ar y _________ ______ ___________

( 5) I ncome t axes due on decedent ' s
t axabl e i ncome t o dat e of deat h _________ ______ ___________

( 6) Locat i on of an asset af t er
f i l i ng t he i nvent or y of est at e
asset s _________ ______ ___________

( 7) Fee pai d f or pr of essi onal
management of bot h pr i nci pal
and i ncome pr oper t y _________ ______ ___________

( 8) Cost s i ncur r ed i n pr obat i ng
t he wi l l _________ ______ ___________

( 9) Rent al i ncome ear ned af t er
dat e of deat h _________ ______ ___________

( 10) Di vi dends decl ar ed af t er dat e
of deat h _________ ______ ___________

Chapt er 20
20- 13
ANS:

Woul d Af f ect Onl y Woul d
I t em Pr i nci pal I ncome Af f ect Bot h
( 1) Gai n on sal e of an est at e asset X ___________

( 2) Loss on sal e of an est at e asset X ___________

( 3) Redempt i on of a bond f our
mont hs af t er deat h on whi ch
t her e was accr ued i nt er est on
dat e of deat h ____ X_____

( 4) Di st r i but i on t o an i ncome
benef i ci ar y X ___________

( 5) I ncome t axes due on decedent ' s
t axabl e i ncome t o dat e of deat h X ___________

( 6) Locat i on of an asset af t er
f i l i ng t he i nvent or y of est at e
asset s X ___________

( 7) Fee pai d f or pr of essi onal
management of bot h pr i nci pal
and i ncome pr oper t y ____ X_____

( 8) Cost s i ncur r ed i n pr obat i ng
t he wi l l X ___________

( 9) Rent al i ncome ear ned af t er
dat e of deat h X ___________

( 10) Di vi dends decl ar ed af t er dat e
of deat h X ___________

DI F: M OBJ : 6

Chapt er 20
20- 14
9. On Febr uar y 1, 20X2, Shar on Kane di ed. Shar on l ef t a val i d wi l l . Event s
i n 20X2 r el at ed t o t he est at e ar e as f ol l ows:

( 1) The i nvent or y of t he est at e on Febr uar y 1, 20X2 i ncl uded
t he f ol l owi ng:

Cash i n t he bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
Baysi de Co. common st ock:
10, 000 shar es pur chased at a cost of $5 per shar e
Baysi de i s a publ i cl y t r aded company and has a mar ket
val ue on 2/ 1/ 02 of $23. 50 per shar e
Coe Cor p. bonds, f ace val ue $480, 000, mar ket val ue,
excl udi ng accr ued i nt er est , $510, 000. ( I nt er est accr ues at a
r at e of $4, 000/ mont h. As of 2/ 1/ X2, $4, 000 has accr ued. )
Di vi dends on Baysi de st ock decl ar ed J anuar y 15,
payabl e Mar ch 15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 000

( 2) The Baysi de di vi dend i s r ecei ved on Mar ch 15.

( 3) On Apr i l 1, 20X2 you di scover t hat Shar on owns a
t r act of l and on a l ake t hat or i gi nal l y cost $25, 000
and now has a mar ket val ue of $110, 000.

( 4) Fr omFebr uar y 1 t hr ough J une 30, t he f ol l owi ng i t ems
wer e pai d f or :
Funer al expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10, 000
Legal f ees ( $500 r el at ed t o i ncome) . . . . . . . . . . . . . . . . 5, 500
Fi nal i ncome t ax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 000
Mi scel l aneous debt s i ncur r ed pr i or t o deat h. . . . . . . . 12, 000
=======

( 5) The Baysi de st ock i s sol d f or $250, 000.

( 6) On J une 1, t he Coe Cor p. bonds ar e sol d f or 107 pl us accr ued
i nt er est .

( 7) The f ol l owi ng asset s ar e di st r i but ed on J une 30, 20X2:

Cash - pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200, 000
Cash t o i ncome benef i ci ar i es. . . . . . . . . . . . . . . . . . . . . . . 10, 000
Land t o benef i ci ar y . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?

Requi r ed:

a. As t he execut or of t he est at e, r ecor d t he 20X2 event s i n
gener al j our nal f or m.

b. Pr epar e a Char ge and Di schar ge St at ement f or t he per i od
Febr uar y 1, 20X2 t o J une 30, 20X2.

Chapt er 20
20- 15
ANS:

a.
( 1) Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Baysi de St ock. . . . . . . . . . . . . . . . . . . . . . . . . . . 235, 000
Di vi dends Recei vabl e. . . . . . . . . . . . . . . . . . . . 9, 000
Accr ued I nt er est - - Coe. . . . . . . . . . . . . . . . . . . 4, 000
Coe Cor p. Bonds. . . . . . . . . . . . . . . . . . . . . . . . . 510, 000
Est at e Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . 858, 000

( 2) Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . 9, 000
Di vi dends Recei vabl e. . . . . . . . . . . . . . . . . . 9, 000

( 3) Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110, 000
Asset s Subsequent l y Di scover ed. . . . . . . . 110, 000

( 4) Funer al and Admi ni st r at i ve Expenses. . . . . 15, 000
Debt s of Decedent Pai d. . . . . . . . . . . . . . . . . . 37, 000
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . 52, 000

Expenses Char geabl e Agai nst I ncome . . . . . 500
Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . 500

( 5) Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . 250, 000
Gai n on Real i zat i on of Pr i nci pal Asset s. 15, 000
Baysi de St ocks. . . . . . . . . . . . . . . . . . . . . . . . 235, 000

( 6) Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 000
Est at e I ncome( i nt er est on bonds) . . . . . . 16, 000

Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . 517, 600*
Accr ued I nt er est - - Coe. . . . . . . . . . . . . . . . . 4, 000
Coe Cor p. Bonds. . . . . . . . . . . . . . . . . . . . . . . 510, 000
Gai n on Real i zat i on of Pr i nci pal
Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 600
*( $480, 000 x 1. 07 = $513, 600) + $4, 000 = $517, 600

( 7) Legaci es Di st r i but ed. . . . . . . . . . . . . . . . . . . . 310, 000
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110, 000

Di st r i but i on t o I ncome Benef i ci ar i es. . . . 10, 000
Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000

Chapt er 20
20- 16
b.
Est at e of Shar on Kane
Char ge and Di schar ge St at ement
For t he Per i od Febr uar y 1 t hr ough J une 30, 20X2

As t o Pr i nci pal
I char ge mysel f wi t h:
Asset s per or i gi nal i nvent or y. . . . . . . . . . . $858, 000
Asset s subsequent l y di scover ed. . . . . . . . . . 110, 000
Gai n on r eal i zat i on of pr i nci pal asset s 18, 600
Tot al char ges. . . . . . . . . . . . . . . . . . . . . . . . . $986, 600

I cr edi t mysel f wi t h:
Funer al and admi ni st r at i ve expenses. . . . . 15, 000
Debt s of decedent pai d. . . . . . . . . . . . . . . . . . 37, 000
Legaci es di st r i but ed. . . . . . . . . . . . . . . . . . . . 310, 000
Tot al cr edi t s. . . . . . . . . . . . . . . . . . . . . . . . . 362, 000

Bal ances as t o est at e pr i nci pal
consi st i ng of :
Cash- - pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . $624, 600
========

As t o I ncome
Est at e i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16, 000

Expenses char geabl e agai nst i ncome. . . . . . $ 500
Di st r i but i on t o i ncome benef i ci ar i es. . . . 10, 000
Tot al cr edi t s. . . . . . . . . . . . . . . . . . . . . . . . . 10, 500

Bal ance as t o est at e i ncome
consi st i ng of :
Cash- - i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . $ 5, 500
========

DI F: D OBJ : 6

Chapt er 20
20- 17
10. Bet t y Bl oome di ed on Febr uar y 28, 20X5. The f ol l owi ng t r i al bal ance was
pr epar ed by t he execut or of Bet t y s est at e as of Oct ober 31, 20X5:

As t o Pr i nci pal As t o I ncome
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . $ 75, 000
Cash- - I ncome. . . . . . . . . . . . . . . . . . . $30, 000
Cor por at i on St ock. . . . . . . . . . . . . . 150, 000
Asset s Subsequent l y Di scover ed. $ 17, 000
Loss on Real i zat i on of
Pr i nci pal Asset s. . . . . . . . . . . . . . 3, 000
Funer al and Admi ni st r at i ve
Expense. . . . . . . . . . . . . . . . . . . . . . . 9, 000
Debt s of Decedent Pai d. . . . . . . . . 14, 000
Legaci es Di st r i but ed. . . . . . . . . . . 20, 000
Devi ses Di st r i but ed. . . . . . . . . . . . 10, 000
Est at e Pr i nci pal . . . . . . . . . . . . . . . 264, 000
Expenses Char geabl e Agai nst
I ncome. . . . . . . . . . . . . . . . . . . . . . . . $ 2, 000
Di st r i but i ons t o I ncome
Benef i ci ar i es 7, 000
Est at e I ncome. . . . . . . . . . . . . . . . . . 21, 000
$281, 000 $281, 000 $30, 000 $30, 000
======== ======== ======= =======

Requi r ed:

Pr epar e a char ge and di schar ge st at ement as of December 31, 20X5.

ANS:

Est at e of Bet t y Bl oome
For t he Per i od Oct ober 31, 20X5 t hr ough December 31, 20X5

As t o Pr i nci pal
Asset s per or i gi nal i nvent or y. . . . . . . . . . . . $264, 000
Asset s subsequent l y di scover ed. . . . . . . . . . . 17, 000
Tot al char ges. . . . . . . . . . . . . . . . . . . . . . . . . . $281, 000

Loss on r eal i zat i on of pr i nci pal asset s. . $ 3, 000
Funer al and admi ni st r at i ve expenses. . . . . . 9, 000
Debt s of decedent pai d. . . . . . . . . . . . . . . . . . . 14, 000
Legaci es di st r i but ed. . . . . . . . . . . . . . . . . . . . . 20, 000
Devi ses di st r i but ed. . . . . . . . . . . . . . . . . . . . . . 10, 000
Tot al cr edi t s. . . . . . . . . . . . . . . . . . . . . . . . . . 56, 000

Bal ance as t o est at e pr i nci pal , consi st i ng of :
Cash- - pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75, 000
Cor por at i on St ock. . . . . . . . . . . . . . . . . . . . . . . . 150, 000 $225, 000
========
Chapt er 20
20- 18

As t o I ncome
Est at e i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30, 000

Expenses char geabl e agai nst i ncome. . . . . . . $ 2, 000
Di st r i but i ons t o i ncome benef i ci ar i es. . . . 7, 000
Tot al cr edi t s. . . . . . . . . . . . . . . . . . . . . . . . . . 9, 000

Bal ance as t o est at e i ncome, consi st i ng of :
Cash- - i ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21, 000
========

DI F: M OBJ : 6

11. Compl et e t he f ol l owi ng st at ement s by f i l l i ng i n t he bl anks:

a. Real pr oper t y di sposed of under a val i d wi l l i s cal l ed a( n)
______________.

b. A per son who di es wi t hout a val i d wi l l i s sai d t o di e
______________.

c. The per sonal r epr esent at i ve of t he decedent under a val i d wi l l
i s cal l ed t he ______________.

d. For an unmar r i ed per son, t he amount of pr oper t y exempt ed f r om
t he f eder al est at e t ax i s r ef er r ed t o as t he ______________.

e. Si nce est at e r at es i ncr ease as t he t ax base i ncr eases, t he
r at es ar e sai d t o be ______________.

f . Wi t h spousal consent , nont axabl e gi f t s per i ndi vi dual per year
amount t o ______________.

g. Under appr opr i at e condi t i ons, t he f i duci ar y of an est at e may
val ue asset s at a dat e si x mont hs af t er deat h. The dat e i s
cal l ed t he ____________________________.

h. A val i d wi l l says, " My nephew shal l r ecei ve t he gol d Canadi an
mapl e l eaf coi ns i n my Gr eenwood Tr ust saf et y deposi t box. "
Thi s i s an exampl e of a( n) ______________ l egacy.

i . I ncome f r oman asset may be assi gned t o one par t y cal l ed t he
_____________________. Af t er a st i pul at ed per i od of t i me, t he
asset i t sel f may be di st r i but ed t o anot her par t y cal l ed t he
_______________________.

ANS:

a. devi se f . $20, 000
b. i nt est at e g. al t er nat e val uat i on dat e
c. execut or or execut r i x h. speci f i c
d. uni f i ed cr edi t i . i ncome benef i ci ar y;
e. pr ogr essi ve r emai nder man

Chapt er 20
20- 19
DI F: E OBJ : 1, 2, 3

12. I n hi s wi l l , Andr ew Baker pr ovi ded f or t he est abl i shment of a t r ust
t hat wi l l i ncl ude t he bul k of hi s est at e asset s. At t he t i me of hi s
deat h, hi s net asset s had a mar ket val ue of $430, 000 consi st i ng of
$75, 000 i n cash, $125, 000 of U. S. Tr easur y bonds i ncl udi ng accr ued
i nt er est , and t he r emai nder i n var i ous secur i t i es. I ncome benef i ci ar i es
of t he t r ust wi l l be t he same as t he i ncome benef i ci ar i es of t he
est at e. Fi duci ar y Bank wi l l act as t r ust ee.

Requi r ed:

a. I dent i f y t he t er mt hat descr i bes t hi s ki nd of t r ust .

b. Pr epar e j our nal ent r i es on t he bank' s books f or t he f ol l owi ng
t r ansact i ons:

( 1) The asset s ar e accept ed by t he bank as t r ust ee.

( 2) Bond i nt er est of $35, 000 i s r ecei ved, of whi ch $10, 000
was accr ued t o t he dat e of t r ansf er t o t he t r ust ee.
Di vi dends of $20, 000 ar e al so r ecei ved.

( 3) The f ol l owi ng cash di st r i but i ons wer e made by t he
t r ust ee:

To i ncome benef i ci ar i es. . . . . . . . . . . . . . . . $25, 000
To t r ust ee t o cover admi ni st r at i ve f ees
( of whi ch 2/ 3 i s char geabl e agai nst
pr i nci pal and 1/ 3 agai nst i ncome) . . . . . . 12, 000
Tot al di st r i but i ons. . . . . . . . . . . . . . . . . . . . $37, 000
=======

ANS:

a. Test ament ar y t r ust

b. ( 1) Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . 75, 000
U. S. Tr easur y Bonds. . . . . . . . . . . . . . . . . . 125, 000
I nvest ment Secur i t i es. . . . . . . . . . . . . . . . 230, 000
Tr ust Pr i nci pal . . . . . . . . . . . . . . . . . . . . 430, 000

( 2) Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . 10, 000
Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . . . . 45, 000
Tr ust I ncome. . . . . . . . . . . . . . . . . . . . . . . 45, 000
U. S. Tr easur y Bonds. . . . . . . . . . . . . . . . 10, 000

( 3) Di st r i but i ons t o I ncome Benef i ci ar i es 25, 000
Expenses Char geabl e Agai nst Tr ust
I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000
Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . . 29, 000

Expenses Char geabl e Agai nst Tr ust
Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . 8, 000

DI F: M OBJ : 7
Chapt er 20
20- 20

13. Mr . Ar nol d Schwar t z di ed on J anuar y 23, 20X5. He owned t he f ol l owi ng
i t ems on t he dat e of hi s deat h:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
St ocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000
Per sonal r esi dence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Rent al pr oper t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700, 000

He al so had t he f ol l owi ng l i abi l i t i es:

Mor t gage on t he home. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000
Medi cal expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25, 000

Hi s f uner al and admi ni st r at i ve expenses wer e $10, 000. He al so had a
l i f e i nsur ance pol i cy wi t h no cash val ue f or $150, 000 payabl e t o hi s
son.

Ar nol d s wi l l speci f i ed t he f ol l owi ng:

( 1) Mer cy Hospi ce was t o r ecei ve $15, 000 i n cash.
( 2) Hi s son was t o r ecei ve t he r ent al pr oper t y and one- f our t h of
t he st ocks.
( 3) Hi s wi f e was t o r ecei ve t he r emai nder of t he asset s.

Requi r ed:

Assumi ng Ar nol d made $100, 000 i n t axabl e gi f t s si nce 1976, comput e hi s
t ax base f or est at e t ax pur poses.

ANS:

Gr oss est at e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 350, 000
Mor t gage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75, 000
Medi cal expenses. . . . . . . . . . . . . . . . . . . . . . . . 25, 000
Funer al and admi ni st r at i ve expense. . . . . . 10, 000
Mer cy Hospi ce gi f t . . . . . . . . . . . . . . . . . . . . . . 15, 000
Mar i t al deduct i on. . . . . . . . . . . . . . . . . . . . . . . 425, 000* 550, 000
Taxabl e est at e. . . . . . . . . . . . . . . . . . . . . . . . . . $ 800, 000
Post - 1976 gi f t s. . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Tax base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 900, 000
==========

* $1, 350, 000 - ( $75, 000 + $25, 000 + $10, 000 +
$15, 000 + $700, 000 + ( $400, 000/ 4) ) = $425, 000

DI F: M OBJ : 4

Chapt er 20
20- 21
14. Al Sooner di ed on J anuar y 15, 20X5. Recor ds di scl ose t he f ol l owi ng
est at e:

Cash i n t he bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7, 500
5%not e r ecei vabl e, i ncl udi ng $50 accr ued i nt er est . . . . . 3, 050
St ocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70, 000
Di vi dends decl ar ed on st ocks. . . . . . . . . . . . . . . . . . . . . . . . . . . 250
8%mor t gage r ecei vabl e, i ncl udi ng $150 accr ued i nt er est 30, 150
Real est at e - apar t ment house. . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000
Househol d ef f ect s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 250
Di vi dends r ecei vabl e f r omt he Peg Sooner Tr ust Fund. . . . 250, 000
Tot al i nvent or y of asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . $788, 200
========

Cash r ecei pt s:
J an. 20 Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1, 500
25 5%not e r ecei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . 3, 000
I nt er est on 5%not e r ecei vabl e. . . . . . . . . . . . . 53
St ocks sol d, i nvent or i ed at $22, 500. . . . . . . . 20, 000
8%mor t gage sol d. . . . . . . . . . . . . . . . . . . . . . . . . . . 33, 000
I nt er est accr ued on mor t gage. . . . . . . . . . . . . . . 207
28 Sal e of asset s not i nvent or i ed. . . . . . . . . . . . . 250
29 Sal e of apar t ment house. . . . . . . . . . . . . . . . . . . . 395, 000
Tot al cash r ecei pt s. . . . . . . . . . . . . . . . . . . . . . $453, 010
========

Cash Di sbur sement s:
J an. 20 Funer al expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2, 750
23 Decedent ' s debt s. . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
Decedent ' s bequest s. . . . . . . . . . . . . . . . . . . . . . . . 10, 000
31 Payment t o son, i ncl udi ng al l est at e i ncome 20, 000
Tot al cash di sbur sement s $40, 750
=======

Requi r ed:

Pr epar e j our nal ent r i es t o r ecor d t he event s f or t he per i od J anuar y 15
t hr ough J anuar y 31, 20X5.

ANS:

J our nal Ent r i es
20X5
J an. 15 Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . 7, 500
5%Not e Recei vabl e. . . . . . . . . . . . . . . . 3, 000
Accr ued I nt er est on 5%Not e. . . . . . . 50
St ocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . 70, 000
Di vi dends Recei vabl e on St ocks. . . . 250
8%Mor t gage Recei vabl e. . . . . . . . . . . . 30, 000
Accr ued I nt er est on 8%Mor t gage. . . 150
Real Est at e- - Apar t ment House. . . . . . 400, 000
Househol d Ef f ect s. . . . . . . . . . . . . . . . . 27, 250
Di vi dends Recei vabl e f r omSooner
Tr ust . . . . . . . . . . . . . . . . . . . . . . . . . 250, 000
Est at e Pr i nci pal . . . . . . . . . . . . . . . . 788, 200
To r ecor d i ni t i al i nvent or y of
est at e asset s.

Chapt er 20
20- 22
Cash r ecei pt s:
J an. 20 Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . 250
Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . 1, 250
Di vi dends Recei vabl e on St ocks. . 250
Est at e I ncome. . . . . . . . . . . . . . . . . . . 1, 250
To r ecor d di vi dends r ecei ved.

25 Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . 3, 050
Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . 3
5%Not e Recei vabl e. . . . . . . . . . . . . . 3, 000
Accr ued I nt er est on 5%Not e. . . . . 50
Est at e I ncome. . . . . . . . . . . . . . . . . . . 3
To r ecor d col l ect i on of not e
and i nt er est .

25 Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . 20, 000
Loss on Real i zat i on of Pr i nci pal
Asset s. . . . . . . . . . . . . . . . . . . . . . . . 2, 500
St ocks. . . . . . . . . . . . . . . . . . . . . . . . . . 22, 500
To r ecor d sal e of st ocks at a
l oss.

25 Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . 33, 150
Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . 57
Gai n on Real i zat i on of Pr i nci pal
Asset s. . . . . . . . . . . . . . . . . . . . . . . . 3, 000
8%Mor t gage Recei vabl e. . . . . . . . . . 30, 000
Accr ued I nt er est on 8%Mor t gage. 150
Est at e I ncome. . . . . . . . . . . . . . . . . . . 57
To r ecor d sal e of mor t gage at
a gai n.

28 Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . 250
Asset s Subsequent l y Di scover ed. . 250
To r ecor d sal e of asset s not i n
or i gi nal i nvent or y. ( St udent s may
cr edi t " Est at e Pr i nci pal . " Such
pr ocedur es shoul d be di scour aged,
so t hat t he account bal ance i n
Est at e Pr i nci pal i s equal t o t he
i nvent or y val uat i on f i l ed wi t h
t he pr obat e cour t . )

29 Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . 395, 000
Loss on Real i zat i on of Pr i nci pal
Asset s. . . . . . . . . . . . . . . . . . . . . . . . 5, 000
Real Est at e- - Apar t ment House. . . . 400, 000
To r ecor d sal e of apar t ment
house at a l oss.

Chapt er 20
20- 23
J an. 20 Funer al and Admi ni st r at i ve Expenses 2, 750
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . 2, 750
To r ecor d payment of f uner al
expenses.

23 Debt s of Decedent Pai d. . . . . . . . . . . . 8, 000
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . 8, 000
To r ecor d payment of
decedent ' s debt s.

25 Bequest s Di st r i but ed ( or mor e
commonl y, Legaci es
Di st r i but ed) . . . . . . . . . . . . . . . . . . 10, 000
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . 10, 000
To r ecor d payment of cash
bequest s.

31 Bequest s Di st r i but ed. . . . . . . . . . . . . . 18, 690
Di st r i but i ons t o I ncome Benef i ci ar y 1, 310
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . 18, 690
Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . 1, 310
To r ecor d payment s t o son,
i ncl udi ng al l est at e i ncome:

Tot al payment . . . . . . . . . . . . . . . . $20, 000
Est at e i ncome. . . . . . . . . . . . . . . . ( 1, 310)
Pai d f r omPr i nci pal . . . . . . . . . . $18, 690
=======

DI F: D OBJ : 6

15. Tr ent Tyl er di ed on J anuar y 15, 20X0. Recor ds di scl ose t he f ol l owi ng
est at e:

Cash i n t he bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15, 000
8%not e r ecei vabl e, i ncl udi ng $100 accr ued i nt er est . . . . . 8, 100
St ocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Di vi dends decl ar ed on st ocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
10%mor t gage r ecei vabl e, i ncl udi ng $200 accr ued i nt er est 40, 200
Real est at e - apar t ment house. . . . . . . . . . . . . . . . . . . . . . . . . . . 220, 000
Househol d ef f ect s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 500
Di vi dends r ecei vabl e f r omTer r y Tyl er Tr ust Fund. . . . . . . . 100, 000
Tot al i nvent or y of asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $485, 400
========

Cash r ecei pt s:
J an. 20 Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4, 500
25 8%not e r ecei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . 8, 000
I nt er est on 8%not e r ecei vabl e. . . . . . . . . . . . . . 120
St ocks sol d, i nvent or i ed at $62, 000. . . . . . . . . 55, 000
10%mor t gage sol d. . . . . . . . . . . . . . . . . . . . . . . . . . . 46, 000
I nt er est accr ued on mor t gage. . . . . . . . . . . . . . . . 300
28 Sal e of asset s not i nvent or i ed. . . . . . . . . . . . . . 450
29 Sal e of apar t ment house. . . . . . . . . . . . . . . . . . . . . 210, 000
Tot al cash r ecei pt s. . . . . . . . . . . . . . . . . . . . . . . $324, 370
========

Chapt er 20
20- 24
J an. 20 Funer al Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6, 500
23 Decedent ' s debt s. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 000
Decedent ' s bequest s di st r i but ed t o wi dow. . . . 18, 000
31 Payment t o son, i ncl udi ng al l est at e i ncome. 35, 000
Tot al cash di sbur sement s. . . . . . . . . . . . . . . . . . $ 64, 500
========

Requi r ed:

Pr epar e a char ge and di schar ge st at ement f or t he per i od J anuar y 15
t hr ough J anuar y 31, 20X0.

ANS:

Est at e of Tr ent Tyl er
For t he Per i od J anuar y 15 t hr ough J anuar y 31, 20X0

As t o Pr i nci pal
Asset s per or i gi nal i nvent or y. . . $485, 400
Asset s subsequent l y di scover ed. . 450
Gai n of di sposal of mor t gage. . . . 6, 000 $491, 850

Loss on r eal i zat i on of pr i nci pal
asset s:
St ocks. . . . . . . . . . . . . . . . . . . . . . . . $ 7, 000
Apar t ment House. . . . . . . . . . . . . . . 10, 000 $ 17, 000
Funer al and admi ni st r at i ve
expenses. . . . . . . . . . . . . . . . . . . . . . 6, 500
Debt s of decedent pai d. . . . . . . . . . 5, 000
Bequest s di st r i but ed t o wi dow
and son. . . . . . . . . . . . . . . . . . . . . . . 48, 980
1
77, 480

Bal ance as t o pr i nci pal ,
consi st i ng of :
Cash- - pr i nci pal . . . . . . . . . . . . . . . . . $274, 870
2
St ocks. . . . . . . . . . . . . . . . . . . . . . . . . . 18, 000
3
Househol d ef f ect s. . . . . . . . . . . . . . . 21, 500
Di vi dends r ecei vabl e f r om
Locke Tr ust . . . . . . . . . . . . . . . . . . . 100, 000 $414, 370
========

As t o I ncome
I char ge mysel f wi t h est at e i ncome:
Di vi dends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3, 900
I nt er est on 8%not e r ecei vabl e. . . . . . . . . . . 20
I nt er est on 10%mor t gage. . . . . . . . . . . . . . . . . 100 $ 4, 020

I cr edi t mysel f wi t h di st r i but i on
t o i ncome benef i ci ar y. . . . . . . . . . . . . . . . . . . . 4, 020

Bal ance as t o i ncome. . . . . . . . . . . . . . . . . . . . . . . $ 0
========

Chapt er 20
20- 25
1
$18, 000 + $35, 000 - ( $4, 500 - $600 + $120 -
$100 + $300 - $200) = $48. 980

2
$15, 000 + $600 + $8, 100 + $55, 000 + $46, 200 +
$450 + $210, 000 - $6, 500 - $5, 000 - $48, 980 = $274, 870

3
$80, 000 - $62, 000 = $18, 000

DI F: D OBJ : 6

16. Wi l l i e Wal ker , a wi dower , di ed on Febr uar y 1, 20X1. He had no l i vi ng
r el at i ves. The f ol l owi ng sel ect ed event s occur r ed af t er Wal ker ' s deat h:

( 1) Mar y Paxt on, t he execut r i x named i n t he wi l l , f i l ed an i nvent or y
of t he est at e asset s consi st i ng of :
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20, 000
Owl Cor por at i on 12%bonds, payi ng i nt er est
semi annual l y on December 1 and J une 1 ( mar ket
val ue excl udi ng i nt er est , at dat e of deat h,
$91, 000) - - f ace val ue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70, 000
Eagl e Cor por at i on common st ock. . . . . . . . . . . . . . . . . . . . . 38, 000
Eagl e Cor por at i on cash di vi dend decl ar ed J anuar y 2,
20X1, payabl e Febr uar y 15, 20X1, t o hol der s of
r ecor d as of J anuar y 25, 20X1 ( st at e l aw
st i pul at es t hat t he dat e of r ecor d i s t he
gover ni ng dat e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000
A pai r of snowmobi l es wi t h t r ai l er . . . . . . . . . . . . . . . . . 5, 000
Li f e i nsur ance pol i cy- - f ace val ue. . . . . . . . . . . . . . . . . . 60, 000
The benef i ci ar y named i n t he pol i cy i s dead.
Si nce Wal ker di d not desi gnat e a new
benef i ci ar y, t he pr oceeds now go t o t he est at e.

( 2) I t ems char ged by Wal ker ( pr i or t o hi s deat h) t o hi s Di ner s Cl ub
car d t ot al ed $390. These i t ems wer e pai d.

( 3) The execut r i x pr epar ed t he f i nal i ncome t ax r et ur n of t he
decedent , payi ng t he i ncome t ax due of $12, 000.

( 4) The snowmobi l es and t r ai l er wer e sol d f or $4, 200.

( 5) The f ol l owi ng payment s wer e made:

Legal f ees f or assi st ance i n pr obat i ng t he wi l l . . 3, 000
Funer al expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 710

( 6) The di vi dend on Eagl e Cor por at i on common st ock was r ecei ved.

( 7) On J une 1, a check f or t he semi annual i nt er est on Owl Cor por at i on
bonds was r ecei ved.

( 8) A check f or $68, 000 was r ecei ved f r omt he l i f e i nsur ance agency.
The addi t i onal $8, 000 r epr esent s anot her pol i cy not i dent i f i ed at
t he t i me of deat h.

( 9) On December 1, a check f or t he semi annual i nt er est on Owl
Cor por at i on bonds was r ecei ved.

Chapt er 20
20- 26
( 10) The execut r i x' s f ee of $8, 000 was appr oved f or payment by t he
cour t . Payment was made, wi t h $500 char geabl e t o i ncome and t he
bal ance char geabl e t o pr i nci pal .

( 11) Wal ker ' s wi l l st i pul at ed t hat $40, 000 be gi ven t o Car ey J ackson,
hi s housekeeper . The l egacy was di st r i but ed on December 30, 20X1.

Requi r ed:

Pr epar e j our nal ent r i es t o r ecor d t he above event s. Upon compl et i on of
t he j our nal ent r i es, pr epar e a doubl e t r i al bal ance f or t he est at e of
Wi l l i e Wal ker as of December 31, 20X1.

ANS:

( 1) Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Owl Cor por at i on 12%Bonds. . . . . . . . . . . . . . . . . 91, 000
Accr ued I nt er est Recei vabl e
( $70, 000 x 12%x 2 mont hs) . . . . . . . . . . . . . 1, 400
Eagl e Cor por at i on Common St ock. . . . . . . . . . . . 38, 000
Di vi dends Recei vabl e on Eagl e
Cor por at i on St ocks. . . . . . . . . . . . . . . . . . . . . 2, 000
Snowmobi l es and Tr ai l er . . . . . . . . . . . . . . . . . . . 5, 000
Li f e I nsur ance Pol i cy. . . . . . . . . . . . . . . . . . . . . 60, 000
Est at e Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . 217, 400
To r ecor d i nvent or y of est at e asset s.

( 2) Debt s of Decedent Pai d. . . . . . . . . . . . . . . . . . . . 390
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . 390
To r ecor d Di ner ' s Cl ub payment .

( 3) Debt s of Decedent Pai d. . . . . . . . . . . . . . . . . . . . 12, 000
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . 12, 000
To r ecor d payment of f i nal i ncome t ax.

( 4) Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 200
Loss on Real i zat i on of Pr i nci pal Asset s. . . 800
Snowmobi l es and Tr ai l er . . . . . . . . . . . . . . . . . 5, 000
To r ecor d sal e of pr i nci pal asset s.

( 5) Funer al and Admi ni st r at i ve Expenses. . . . . . . 7, 710
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . 7, 710
To r ecor d payment of l egal f ees
( $3, 000) and f uner al expenses ( $4, 710) .

( 6) Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 000
Di vi dends Recei vabl e on Eagl e
Cor por at i on St ock. . . . . . . . . . . . . . . . . . . . . . 2, 000
To r ecor d di vi dend r ecei ved.

( 7) Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 400
Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 800
Accr ued I nt er est Recei vabl e. . . . . . . . . . . . . 1, 400
Est at e I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 800
To r ecor d i nt er est r ecei ved, 6%x
$70, 000, or $4, 200, of whi ch 2/ 6 i s
pr i nci pal and 4/ 6 i s i ncome.

Chapt er 20
20- 27
( 8) Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . . . 68, 000
Li f e I nsur ance Pol i cy. . . . . . . . . . . . . . . . . . . . 60, 000
Asset s Subsequent l y Di scover ed. . . . . . . . . . . 8, 000
To r ecor d amount r ecei ved f r omi nsur ance
company.

( 9) Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 200
Est at e I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 200
To r ecor d semi annual i nt er est r ecei ved
on Owl Cor por at i on bonds ( 6%x $70, 000) .

10) Funer al and Admi ni st r at i ve Expenses. . . . . . . 7, 500
Expenses Char geabl e Agai nst I ncome. . . . . . . . 500
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . 7, 500
Cash- - I ncome. . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
To r ecor d payment of execut r i x' s f ee.

( 11) Legaci es Di st r i but ed. . . . . . . . . . . . . . . . . . . . . . 40, 000
Cash- - Pr i nci pal . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000
To r ecor d cash l egacy di st r i but ed t o
J ackson.

Est at e of Wi l l i e Wal ker
Mar y Paxt on, Execut r i x
Tr i al Bal ance
December 31, 20X1

As t o Pr i nci pal As t o I ncome
Cash- - pr i nci pal . . . . . . . . . . . . . . . . $ 28, 000
Cash- - i ncome. . . . . . . . . . . . . . . . . . . $6, 500
Owl Cor por at i on 12%Bonds. . . . . . 91, 000
Eagl e Cor por at i on common st ock. 38, 000
Asset s subsequent l y di scover ed. $ 8, 000
Est at e pr i nci pal . . . . . . . . . . . . . . . 217, 400
Debt s of decedent pai d. . . . . . . . . 12, 390
Funer al and admi ni st r at i ve
expenses. . . . . . . . . . . . . . . . . . . . . 15, 210
Loss on r eal i zat i on of
pr i nci pal asset s. . . . . . . . . . . . . . 800
Legaci es di st r i but ed. . . . . . . . . . . 40, 000
Expenses char geabl e agai nst
i ncome. . . . . . . . . . . . . . . . . . . . . . . 500
Est at e i ncome. . . . . . . . . . . . . . . . . . $7, 000
$225, 400 $225, 400 $7, 000 $7, 000
======== ======== ====== ======

DI F: D OBJ : 6

Chapt er 20
20- 28
ESSAY

1. What ar e some of t he t ax pl anni ng st r at egi es whi ch may be empl oyed t o
r educe t he t ax on t he decedent ' s gr oss est at e?

ANS:

A cr i t i cal t i me f or est abl i shi ng t ax pl anni ng st r at egi es t o mi ni mi ze
est at e t ax i s wel l bef or e deat h. Var i ous di vest i t ur es and t r ust s can be
used t o manage one' s t axabl e est at e. I n addi t i on, one shoul d be
pl anni ng t he f ol l owi ng:

Maxi mi zi ng t he benef i t s of t he mar i t al deduct i on: t hi s does not al ways
mean t r ansf er r i ng al l asset s t o one' s spouse upon deat h. Because of t he
pr ogr essi ve t ax r at e, t hi s coul d have t he r esul t of over al l hi gher
t axes pai d on t he coupl e.

Maki ng gi f t s dur i ng one' s l i f et i me: al t hough gi f t s ar e now i ncl uded i n
t he est at e of t he decedent , t her e i s st i l l a benef i t of t he annual gi f t
al l owance.

Taki ng act i ons t o accompl i sh a st ep up i n pr oper t y val ue: Si nce asset s
ar e i ncl uded i n t he est at e at t hei r mar ket val ue, and t hey al so
t r ansf er t o t he benef i ci ar y at mar ket val ue, t he new t ax basi s becomes
t he mar ket val ue. When t hat val ue has si gni f i cant l y appr eci at ed, t her e
i s an el i mi nat i on of a capi t al gai ns t ax t hat woul d have been i ncur r ed
had t he pr oper t y been sol d f or a gai n.

Taki ng act i ons t o benef i t f r oma l oss i n pr oper t y val ues: t he opposi t e
of st ep up, si nce t he r educed val ue i s t he new t ax basi s, i n or der t o
t ake advant age of a capi t al l oss, t her e shoul d be an at t empt t o sel l
asset s t hat have l ost val ue i n or der t o obt ai n t he benef i t of capi t al
l osses.

Maneuver i ng wi t h char i t abl e deduct i ons

Pl anni ng l i qui di t y

DI F: M OBJ : 3
Chapter 21 Debt Restructuring, Corporate Reorganizations, and
Liquidations

MULTIPLE CHOICE

1. Whi ch of t he f ol l owi ng i s an i l l ust r at i on of an act i on t hat can be
t aken t o hel p a t r oubl ed f i r mwi t hout usi ng t he cour t syst em?
a. asset t r ansf er s t o set t l e debt
b. equi t y i nt er est gr ant ed i n exchange f or debt
c. modi f i cat i ons of i nt er est r at es mor e f avor abl e t o t he f i r m
d. Al l or a combi nat i on can be used.


2. I n a t r oubl ed debt r est r uct ur i ng wher e t he debt or el ect s t o t r ansf er an
equi t y i nt er est t o a cr edi t or i n exchange f or t he sat i sf act i on of an
out st andi ng debt :
a. t he debt or may r ecogni ze a gai n on r est r uct ur e when t he mar ket
val ue of t he equi t y i nt er est i s gr eat er t han t he book val ue of t he
debt pl us any accr ued i nt er est
b. t he debt or may r ecogni ze a gai n on r est r uct ur e when t he mar ket
val ue of t he equi t y i nt er est i s l ess t han t he book val ue of t he
debt pl us any accr ued i nt er est
c. any di f f er ence bet ween mar ket val ue of equi t y i nt er est and book
val ue of t he debt pl us accr ued i nt er est must be r ecor ded i n
Ret ai ned Ear ni ngs.
d. any di f f er ence bet ween mar ket val ue of equi t y i nt er est and book
val ue of t he debt pl us accr ued i nt er est must be r ecor ded i n
Addi t i onal Pai d i n Capi t al i n Excess of Par .


Chapt er 21
21- 2
3. Equi pment wi t h a f ai r val ue of $65, 000 and a cost basi s of $60, 000 i s
t r ansf er r ed t o a cr edi t or i n par t i al set t l ement of a debt of $150, 000
pl us accr ued i nt er est of $7, 500. The bal ance of t he debt wi l l be
sat i sf i ed by 3 equal payment s of $30, 000 over t he next t hr ee year s.
Whi ch of t he f ol l owi ng j our nal ent r i es best r ecor ds t he r est r uct ur e?
a. Loan Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
I nt er est Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . 7, 500
Equi pment . . . . . . . . . . . . . . . . . . . . 60, 000
Rest r uct ur ed Debt . . . . . . . . . . . . . . 90, 000
Gai n on Rest r uct ur e . . . . . . . . . . 7, 500
b. Loan Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Loss on Rest r uct ur e . . . . . . . . . . . . . . . . . . . . . . . 5, 000
Equi pment . . . . . . . . . . . . . . . . . . . . 60, 000
Gai n on Tr ansf er of Equi pment . . 5, 000
c. Loan Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Equi pment . . . . . . . . . . . . . . . . . . . . 60, 000
Gai n on Tr ansf er of Equi pment . . 5, 000
Gai n on Rest r uct ur e . . . . . . . . . . 2, 500

d.

Loan Payabl e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000
Equi pment . . . . . . . . . . . . . . . . . . . . 65, 000
Rest r uct ur ed Debt . . . . . . . . . . . . . . . 90, 000
Gai n on Rest r uct ur e . . . . . . . . . . . 2, 500


4. I n a quasi - r eor gani zat i on, whi ch of t he f ol l owi ng may occur ?
a. Excess pl ant capaci t y may be sol d
b. Asset s may be r eval ued t o r ef l ect i mpai r ed val ues
c. Ret ai ned Ear ni ngs def i ci t s ar e el i mi nat ed by changes made t o t he
capi t al st r uct ur e
d. Al l of t he above may occur


5. I n a quasi - r eor gani zat i on, a debi t bal ance i n Ret ai ned Ear ni ngs ( a
def i ci t ) i s el i mi nat ed by
a. r educi ng pai d- i n capi t al or r eor gani zat i on capi t al .
b. r educi ng f ut ur e depr eci at i on char ges.
c. i ssui ng mor e capi t al st ock.
d. wr i t i ng down asset s t o l ower , but f ai r , val ues.


Chapt er 21
21- 3
6. Whi ch of t he f ol l owi ng i s NOT a gener al obj ect i ve of bankr upt cy
pr ocedur es?
a. assur ance t hat al l obl i gat i ons of t he debt or wi l l be sat i sf i ed
compl et el y
b. at t empt t o gi ve t he debt or a f r esh st ar t
c. assur ance of an equi t abl e di st r i but i on of t he debt or ' s pr oper t y
among cr edi t or s
d. None of t he above i s a gener al obj ect i ve.


7. A vol unt ar y bankr upt cy pet i t i on can be f i l ed under
a. Chapt er 7.
b. Chapt er 11.
c. Chapt er 13.
d. Al l of t he above chapt er s.


8. A pl an of r eor gani zat i on may i ncl ude al l EXCEPT whi ch of t he f ol l owi ng?
a. ar r angement s i nvol vi ng el i mi nat i on of some debt
b. i dent i f i cat i on of var i ous cl asses of cl ai ms
c. i dent i f i cat i on of a t r ust ee i n l i qui dat i ons
d. di f f er ent i at i on of i mpai r ed ver sus non- i mpai r ed i nt er est s


9. Lakesi de Bank hol ds a $100, 000 not e secur ed by a bui l di ng owned by Fl y-
By- Ni ght Manuf act ur i ng, whi ch has f i l ed f or bankr upt cy under Chapt er 7
of t he Bankr upt cy Code. I f t he pr oper t y has a book val ue of $120, 000
and a f ai r mar ket val ue of $90, 000, what i s t he best way t o descr i be
t he not e hel d by Second Ci t y Bank? The bank has a( n)
a. secur ed cl ai mof $100, 000.
b. unsecur ed cl ai mof $100, 000.
c. secur ed cl ai mof $90, 000 and an unsecur ed cl ai mof $10, 000.
d. secur ed cl ai mof $100, 000 and an unsecur ed cl ai mof $20, 000.


10. To assi st t he t r ust ee, a debt or must
a. col l ect and r educe t o money any non- exempt pr oper t y
b. f i l e pr ogr ess r epor t s wi t h t he cour t
c. f i l e a st at ement of af f ai r s, consi st i ng of answer s t o a ser i es of
quest i ons r egar di ng debt or ' s f i nanci al condi t i on
d. pay di vi dends t o cr edi t or s wi t h r egar ds t o pr i or i t i es


Chapt er 21
21- 4
11. Put t he f ol l owi ng cl asses i n t he or der al l owed by t he Bankr upt cy Act ,
st ar t i ng wi t h t he hi ghest pr i or i t y t o t he l owest :
1) Expenses t o admi ni st er est at e
2) Tax cl ai ms of gover nment al uni t s
3) Wages ( i ncl udi ng sal ar i es and commi ssi ons) up t o $4, 000
ear ned wi t hi n 90 days
4) deposi t s up t o $1, 800 each f or goods or ser vi ces never
r ecei ved f r omt he debt or
a. 1, 3, 4, 2
b. 3, 1, 2, 4
c. 4, 2, 1, 3
d. 2, 1, 3, 4


a. Cer t ai n debt s ar e not di schar geabl e.
b. The goal of l i qui dat i on i s t o gi ve t he company a new st ar t .
c. Al l secur ed cl ai ms ar e pai d i n f ul l .
d. The expenses t o admi ni st er t he est at e ar e pai d l ast because t hey
ar e unsecur ed.


13. Whi ch of t he f ol l owi ng does not descr i be t he account i ng st at ement of
af f ai r s?
a. t he emphasi s i s on asset net r eal i zabl e val ue, not hi st or i cal
cost
b. t he st at ement of af f ai r s i s concer ned onl y wi t h t he asset s of t he
debt or or gani zat i on, not t he cl ai ms
c. t he st at ement can al so be used i n a r eor gani zat i on
d. t he st at ement of af f ai r s i s based on est i mat ed val ues; act ual
r eal i zed val ues may be di f f er ent


14. The document used t o est i mat e amount s avai l abl e t o each cl ass of cl ai ms
i s cal l ed a( n)
a. St at ement of Asset s and Li abi l i t i es.
b. Legal St at ement of Af f ai r s.
c. Account i ng St at ement of Af f ai r s.
d. St at ement of Real i zat i on and Li qui dat i on.


15. The document used by a t r ust ee t o r epor t per i odi cal l y on t he st at us of
f i duci ar y act i vi t i es i s cal l ed a( n)
a. St at ement of Asset s and Li abi l i t i es.
b. Legal St at ement of Af f ai r s.
c. Account i ng St at ement of Af f ai r s.
d. St at ement of Real i zat i on and Li qui dat i on.


Chapt er 21
21- 5
16. Af t er el i mi nat i ng t he def i ci t i n a r eor gani zat i on pl an, a bal ance may
r emai n i n Reor gani zat i on Capi t al . On t he bal ance sheet , wher e woul d
t hi s account appear ?
a. par t of t he Pai d- I n Capi t al
b. par t of t he dat ed bal ance i n Ret ai ned Ear ni ngs
c. an I nt angi bl e Asset i f t he bal ance i s a debi t
d. a def er r ed cr edi t amor t i zed over a per i od not t o exceed 40 year s


17. Whi ch of t he f ol l owi ng st at ement s i s t r ue about Chapt er 7 of t he
Bankr upt cy Code?
a. Onl y vol unt ar y pet i t i ons ar e al l owed.
b. A debt or wi t h at l east 12 cr edi t or s may be subj ect t o i nvol unt ar y
pr oceedi ngs i f 3 or mor e of t hose cr edi t or s hol d noncont i ngent ,
unsecur ed cl ai ms of $12, 000 or mor e.
c. A debt or wi t h f ewer t han 12 cr edi t or s may be subj ect t o
i nvol unt ar y pr oceedi ngs i f 1 or mor e of t hose cr edi t or s hol ds
noncont i ngent , unsecur ed cl ai ms of $10, 000 or mor e.
d. The r equi r ement s f or i nvol unt ar y pr oceedi ngs ar e i dent i cal t o
t hose f or Chapt er 13.


18. The r at i o cal l ed " di vi dend t o gener al unsecur ed cr edi t or s" i s
cal cul at ed by whi ch of t he f ol l owi ng f or mul as?
a. Est i mat ed amount avai l abl e f or unsecur ed cr edi t or s wi t h/ wi t hout
pr i or i t y Tot al cl ai ms of al l unsecur ed cr edi t or s wi t h/ wi t hout
pr i or i t y
b. Est i mat ed r eal i zabl e val ue of al l debt or asset s Book val ue of
debt or asset s
c. Est i mat ed gai n/ l oss on l i qui dat i on Tot al est i mat ed net
r eal i zabl e val ue of debt or asset s
d. Net est i mat ed pr oceeds avai l abl e t o cl ass 7 unsecur ed cr edi t or s
Tot al cl ai ms of unsecur ed cr edi t or s


19. I n t he account i ng st at ement of af f ai r s, t he gai ns or l osses upon
l i qui dat i on woul d equal
a. net book val ue of asset s mi nus book val ue of l i abi l i t i es.
b. t he book val ue of asset s mi nus t hei r r eal i zabl e val ue.
c. t ot al est i mat ed r eal i zabl e val ue of asset s mi nus t he amount
assi gned t o secur ed cr edi t or s.
d. t ot al est i mat ed r eal i zabl e val ue of asset s mi nus t he amount
r emai ni ng f or Cl ass 7 unsecur ed cr edi t or s.


Chapt er 21
21- 6
20. A cor por at i on' s account i ng st at ement of af f ai r s shows a di vi dend of
40%. The di vi dend means t hat
a. al l cr edi t or s and st ockhol der s wi l l r ecei ve appr oxi mat el y 40%of
t he book val ue of t hei r r espect i ve i nt er est s.
b. al l cr edi t or s wi l l r ecei ve an amount appr oxi mat el y equal t o 40%of
t he book val ue of t hei r cl ai ms, but st ockhol der s wi l l r ecei ve
not hi ng.
c. Cl ass 1- 6 unsecur ed cl ai ms wi l l r ecei ve 40%of t he book val ue of
t hei r r espect i ve cl ai ms.
d. Cl ass 7 unsecur ed cl ai ms wi l l r ecei ve 40%of t he book val ue of
t hei r r espect i ve cl ai ms.


21. A cor por at i on' s account i ng st at ement of af f ai r s shows a di vi dend of
115%. The di vi dend means t hat
a. secur ed cr edi t or s wi l l r ecei ve an amount i n excess of t he book
val ue of t hei r cl ai ms.
b. unsecur ed cr edi t or s wi l l r ecei ve an amount i n excess of t he book
val ue of t hei r cl ai ms.
c. st ockhol der s may expect some r et ur n on t hei r i nt er est s.
d. an er r or was made i n t he pr epar at i on of t he st at ement .


22. Por t Cor por at i on i s a par ent , havi ng pur chased 80%of Sand Company' s
common st ock at par val ue f or $800, 000. Sand Company i s i n f i nanci al
di f f i cul t y. The par ent gr ant ed an unsecur ed l oan of $400, 000 t o t he
subsi di ar y. An account i ng st at ement of af f ai r s f or Sand Company shows a
di vi dend of 40%. Por t Cor por at i on can expect t o r ecei ve payment f or i t s
i nvest ment i n Sand Company of appr oxi mat el y _________.
a. $640, 000
b. $320, 000
c. $160, 000
d. $0


23. The St at ement of Real i zat i on and Li qui dat i on di f f er s f r omt he St at ement
of Af f ai r s because
a. The St at ement of Real i zat i on and Af f ai r s r epor t s est i mat ed
r eal i zabl e val ues r at her t han act ual l i qui dat i on r esul t s
b. The St at ement of Real i zat i on and Af f ai r s i s a summar y of secur ed
debt act i vi t y onl y
c. The St at ement of Real i zat i on and Af f ai r s i s pr epar ed onl y at f i nal
compl et i on of t he l i qui dat i on pr ocess
d. The St at ement of Real i zat i on and Af f ai r s r epor t s act ual
l i qui dat i on r esul t s r at her t han est i mat ed r eal i zabl e val ues


Chapt er 21
21- 7
24. Equi pment wi t h a book val ues of $120, 000 i s sol d i n a l i qui dat i on
pr ocess f or cash of $110, 000. Thi s equi pment was secur i t y f or a
$150, 000 bank l oan. Any r emai nder i s consi der unsecur ed, cl ass 7. How
woul d t hi s t r ansact i on be r epor t ed on t he St at ement of Real i zat i on and
Li qui dat i on?
a. A r educt i on i n noncash asset s of $120, 000
b. A l oss r epor t ed t o owner ' s equi t y of $10, 000
c. A di sbur sement of cash t o t he bank of $110, 000, a r educt i on i n
par t i al l y secur ed l i abi l i t y of $150, 000, and an i ncr ease i n
unsecur ed wi t hout pr i or i t y l i abi l i t y of $40, 000
d. al l of t he above woul d occur


25. Tonya Fox has been appoi nt ed t r ust ee under a Chapt er 11 r eor gani zat i on
of Hen Cor por at i on. The t r ust ee has deci ded t o open a new set of
r ecor ds f or t he per i od of t r ust eeshi p. Whi ch of t he f ol l owi ng i s t r ue?
a. Fox wi l l t r ansf er al l asset s and al l l i abi l i t i es at mar ket val ues
b. Fox wi l l t r ansf er al l asset s and al l l i abi l i t i es at book val ues
c. Fox wi l l t r ansf er al l asset s at mar ket val ues, but al l l i abi l i t i es
at book val ues.
d. Fox wi l l t r ansf er onl y t hose asset s accept ed at t hei r book val ues,
but wi l l t r ansf er no l i abi l i t i es.


26. J ohn Shar k has been appoi nt ed t r ust ee under a Chapt er 11 r eor gani zat i on
of Fi she Cor por at i on. The t r ust ee has deci ded t o open a new set of
r ecor ds f or t he per i od of t r ust eeshi p. Whi ch of t he f ol l owi ng account s
woul d Shar k cr edi t when t he asset s t r ansf er r ed ar e r ecor ded on t he
t r ust ee' s books?
a. Fi she Cor por at i on i n Tr ust eeshi p
b. Asset s Tr ansf er r ed f or Lyon Cor por at i on
c. Asset s t o Be Real i zed
d. J ohn Shar k, Tr ust ee


27. T. P. Var numhas been appoi nt ed t r ust ee under a Chapt er 11
r eor gani zat i on of Lyon Cor por at i on. The t r ust ee has deci ded t o open a
new set of r ecor ds f or t he per i od of t r ust eeshi p. The t r ust ee pays t he
bal ance of an account payabl e t hat was r ecor ded pr i or t o t he dat e of
st ewar dshi p. When payment i s r ecor ded on t he t r ust ee' s books, t he
account debi t ed i s
a. Account s Payabl e.
b. Account s Payabl e- Lyon Cor por at i on.
c. Ret ai ned Ear ni ngs.
d. an appr opr i at e expense account .


Chapt er 21
21- 8
28. A. B. Case has been appoi nt ed t r ust ee under a Chapt er 11 r eor gani zat i on
of Dee Cor por at i on. The t r ust ee has deci ded t o open a new set of
r ecor ds f or t he per i od of t r ust eeshi p. The t r ust ee pays t he bal ance of
an account payabl e t hat was r ecor ded pr i or t o t he dat e of st ewar dshi p.
Whi ch of t he f ol l owi ng account s woul d be cr edi t ed on t he cor por at i on' s
books t o r ecor d payment of t he account payabl e ment i oned?
a. Cash
b. Li abi l i t i es Li qui dat ed
c. A. B. Case, Tr ust ee
d. Ret ai ned Ear ni ngs


PROBLEM

1. Hogan, I nc. i s a t el ecommuni cat i ons company. Cur r ent l y, Hogan i s
exper i enci ng di f f i cul t y i n ser vi ci ng i t s l ong- t er mdebt . The
cor por at i on has obt ai ned per mi ssi on f r omi t s cr edi t or s t o r est r uct ur e
out si de of t he cour t syst emwi t h t he f ol l owi ng t r ansact i ons:

a. A pi ece of equi pment t hat had cost Hogan $95, 000 and had
$19, 000 of accumul at ed depr eci at i on was t r ansf er r ed t o a
cr edi t or i n f ul l set t l ement of a $45, 000 not e wi t h $2, 250 of
accr ued i nt er est .

b. 2, 000 shar es of $2 par val ue common st ock wer e i ssued t o a
cr edi t or i n f ul l payment of a $80, 000 l oan, pl us accr ued
i nt er est of $800. The st ock was sel l i ng f or $30 per shar e on
t he dat e of exchange.

c. A l oan wi t h a book val ue of $50, 000 and accr ued i nt er est of
$1, 000 was r est r uct ur ed so t hat t hr ee annual i nst al l ment s of
$12, 000 wi l l sat i sf y bot h t he pr i nci pal and i nt er est i n f ul l .

Requi r ed:

Pr epar e t he necessar y j our nal ent r i es t o r ecor d t hese t r ansact i ons i n
t he j our nal of Hogan.

ANS:

a. Loss on Tr ansf er . . . . . . . . . . . . . . . . . . . . . . . . 28, 750
Not es Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . 45, 000
Accr ued I nt er est Payabl e. . . . . . . . . . . . . . . . 2, 250
Comput er . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95, 000

b. Loan Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
Accr ued I nt er est Payabl e. . . . . . . . . . . . . . . . 800
Common St ock. . . . . . . . . . . . . . . . . . . . . . . . . . 4, 000
Pai d- I n Capi t al i n Excess of Par . . . . . . 56, 000
Gai n on Rest r uct ur i ng. . . . . . . . . . . . . . . . . 20, 800

Chapt er 21
21- 9
c. Loan Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Accr ued I nt er est Payabl e. . . . . . . . . . . . . . . . 1, 000
Rest r uct ur ed Loan Payabl e. . . . . . . . . . . . . 36, 000
Gai n on Rest r uct ur i ng. . . . . . . . . . . . . . . . . 15, 000

DI F: M OBJ : 1

2. Zenat o' s Cor por at i on i s a chai n of sandwi ch shops t hat has r ecent l y had
di f f i cul t y meet i ng i t s l ong- t er mdebt r equi r ement s. I n or der t o avoi d
cour t pr oceedi ngs, t he f i r m' s cr edi t or s agr eed t o t he f ol l owi ng debt
r est r uct ur i ng i n December , 20X1:

a. A $50, 000 not e woul d be f ul l y sat i sf i ed wi t h a si ngl e $40, 000
payment on Mar ch 1, 20X2. The not e had accr ued i nt er est of
$2, 000 on December 1, 20X1.

b. A $75, 000 not e wi t h accr ued i nt er est of $3, 000 wi l l be f ul l y
sat i sf i ed wi t h $35, 000 payment s on December 1, 20X2 and
December 1, 20X3. The or i gi nal i nt er est r at e on t he not e was
12%.

c. A $40, 000 not e wi t h no accr ued i nt er est wi l l be sat i sf i ed wi t h
payment s of $23, 048 on December 1, 20X2 and December 1, 20X3.
The ol d not e car r i ed a 15%i nt er est r at e. The ef f ect i ve r at e
on t he r est r uct ur ed not e i s 10%.

Requi r ed:

Pr epar e t he j our nal ent r i es t o r ecor d t he r est r uct ur i ng and payment s of
t he not es.

ANS:

a. December 1, 20X1
Not es Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Accr ued I nt er est Payabl e. . . . . . . . . . . . . . 2, 000
Rest r uct ur ed Not e Payabl e. . . . . . . . . . . 40, 000
Gai n on Rest r uct ur i ng. . . . . . . . . . . . . . . 12, 000

Mar ch 1, 20X2
Rest r uct ur ed Not e Payabl e. . . . . . . . . . . . . 40, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000

b. December 1, 20X1
Not es Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . 75, 000
Accr ued I nt er est Payabl e. . . . . . . . . . . . . . 3, 000
Rest r uct ur ed Not e Payabl e. . . . . . . . . . . 70, 000
Gai n on Rest r uct ur i ng. . . . . . . . . . . . . . . 8, 000

December 1, 20X2
Rest r uct ur ed Not es Payabl e. . . . . . . . . . . . 35, 000
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 000

December 1, 20X3
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35, 000

Chapt er 21
21- 10
c. December 1, 20X1
Not es Payabl e. . . . . . . . . . . . . . . . . . . . . . . . . 40, 000
Rest r uct ur ed Not es Payabl e. . . . . . . . . . 40, 000

December 1, 20X2
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 048

December 1, 20X3
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 048

DI F: M OBJ : 1

3. Fol l owi ng i s t he bal ance sheet of Tont oe Cor por at i on on J ul y 1, 20X5,
j ust pr i or t o obt ai ni ng t he r equi r ed st ockhol der appr oval t o under go a
quasi - r eor gani zat i on:

Tont oe Cor p.
Bal ance Sheet
J ul y 1, 20X5

Asset s

Cur r ent Asset s:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5, 000
Account s r ecei vabl e. . . . . . . . . . . . 110, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . 105, 000
$220, 000
Pr oper t y, pl ant , and equi pment :
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Pl ant and equi pment . . . . . . . . . . . . $ 200, 000
Less accumul at ed depr eci at i on. . ( 120, 000) 80, 000 130, 000
Tot al asset s. . . . . . . . . . . . . . . . . . . . . $350, 000
========


Cur r ent Li abi l i t i es:
Account s payabl e. . . . . . . . . . . . . . . . . . . . . . . . . $100, 000
Long- t er mLi abi l i t i es:
Not es payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . 190, 000
Common st ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . . $ 50, 000
Pai d i n excess of par . . . . . . . . . . . . . . . . . . . . . . 25, 000
Ret ai ned ear ni ngs ( def i ci t ) . . . . . . . . . . . . . . . . ( 15, 000) 60, 000
Tot al l i abi l i t i es and st ockhol der s' equi t y. $350, 000
========

Chapt er 21
21- 11
Requi r ed:

Pr epar e t he j our nal ent r i es necessar y t o r ecor d t he f ol l owi ng i t ems
t hat wer e par t of t he quasi - r eor gani zat i on:

a. I nvent or y i s t o be r educed t o i t s f ai r mar ket val ue of
$90, 000.

b. The pl ant and equi pment i s t o be r eval ued t o $70, 000 t hr ough
t he Accumul at ed Depr eci at i on account .

c. Par val ue of t he st ock i s r educed t o $1 per shar e and t he
def i ci t i s el i mi nat ed.

ANS:

a. Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . 15, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000

b. Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . 10, 000

c. Common St ock ( $10 par ) . . . . . . . . . . . . . . . . . . 50, 000
Common St ock ( $1 par ) . . . . . . . . . . . . . . . . . 5, 000
Reor gani zat i on Capi t al . . . . . . . . . . . . . . . . 45, 000

Reor gani zat i on Capi t al . . . . . . . . . . . . . . . . . . 40, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . 40, 000

DI F: M OBJ : 2

4. Bel ow i s a l i st of unsecur ed i t ems t hat may ar i se dur i ng a Chapt er 7
l i qui dat i on.

a. Wages up t o $4, 000 ear ned wi t hi n 90 days bef or e t he f i l i ng.

b. Tax cl ai ms of a gover nment uni t .

c. Debt s i ncur r ed af t er commencement of i nvol unt ar y bankr upt cy
but bef or e t he or der f or r el i ef .

d. Cl ai ms of gener al cr edi t or s not gr ant ed pr i or i t y.

e. Deposi t s up t o $1, 800 each f or goods or ser vi ces never
r ecei ved f r omt he debt or .

f . Expenses t o admi ni st er t he est at e.

g. Unpai d cont r i but i ons t o empl oyee benef i t pl ans ar i si ng f r om
ser vi ce per f or med up t o 180 days bef or e f i l i ng, up t o $4, 000
per empl oyee cover ed.

Requi r ed:

Reor der t he l i st of unsecur ed i t ems by t he pr i or i t y t hey wi l l r ecei ve
t o meet unsecur ed cl ai ms f r omamount s avai l abl e.

Chapt er 21
21- 12

ANS:

1. f . Expenses t o admi ni st er t he est at e.

2. c. Debt s i ncur r ed af t er commencement of i nvol unt ar y bankr upt cy
but bef or e t he or der f or r el i ef .

3. a. Wages up t o $4, 000 ear ned 90 days bef or e t he f i l i ng.

4. g. Unpai d cont r i but i ons t o empl oyee benef i t pl ans.

5. e. Deposi t s up t o $1, 800.

6. b. Tax cl ai ms of a gover nment uni t .

7. d. Cl ai ms of gener al cr edi t or s not gr ant ed pr i or i t y.

DI F: M OBJ : 3

5. Mor t on Cor por at i on has r ecei ved per mi ssi on t o r eor gani ze under Chapt er
11. J ust pr i or t o r ecor di ng t he r eor gani zat i on, t he bal ance sheet
appear s as f ol l ows:

Asset s
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75, 000
Account s r ecei vabl e ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
I nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175, 000
Pl ant asset s ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900, 000
Tot al asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 575, 000
==========

Li abi l i t i es
Account s payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600, 000
I nt er est payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 000
Mor t gage not es payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700, 000
Tot al l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 375, 000
==========

St ockhol der s' Equi t y
Common st ock ( $5 par ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 400, 000
Def i ci t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 200, 000)
Tot al equi t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200, 000
Tot al equi t y and l i abi l i t y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 575, 000
==========

Chapt er 21
21- 13
Requi r ed:

Recor d i n j our nal f or mt he f ol l owi ng el ement s of t he r eor gani zat i on
agr eement . Assume t hat t he adj ust ment s t o t he asset s and l i abi l i t i es
i mpact di r ect l y on r eor gani zat i on capi t al .

a. The asset s ar e t o r ef l ect t hei r cur r ent val ues:

Account s Recei vabl e. . . . . . . . . . $200, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . wor t hl ess
I nvest ment s. . . . . . . . . . . . . . . . . . $185, 000
Pl ant Asset s. . . . . . . . . . . . . . . . . $750, 000

b. The hol der s of unsecur ed account s payabl e agr ee t o accept $0. 5
on t he dol l ar .

c. The par val ue of t he common st ock i s r educed t o $1. 00.

d. The def i ci t i s el i mi nat ed.

ANS:

a. Reor gani zat i on Capi t al . . . . . . . . . . . . . . . . . . 365, 000
I nvest ment s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Account s Recei vabl e. . . . . . . . . . . . . . . . . . . 25, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Pl ant Asset s. . . . . . . . . . . . . . . . . . . . . . . . . . 150, 000

b. Account s Payabl e. . . . . . . . . . . . . . . . . . . . . . . . 300, 000

c. Common St ock ( $5 par ) . . . . . . . . . . . . . . . . . . . 400, 000
Common St ock ( $1 par ) . . . . . . . . . . . . . . . . . 80, 000

d. Reor gani zat i on Capi t al . . . . . . . . . . . . . . . . . . 200, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . 200, 000

DI F: D OBJ : 2

6. Rockee Cor por at i on, a bi o- t ech f i r m, has f ound i t sel f i n f i nanci al
di f f i cul t y and may f i l e f or bankr upt cy. Rockee' s St at ement of Af f ai r s
r ef l ect s t he f ol l owi ng summar y i nf or mat i on:

Book val ue of asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700, 000
Net r eal i zabl e val ue of asset s. . . . . . . . . . . . . . . . . . . . . . . . . 370, 000
Tot al l i abi l i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000
Secur ed cl ai ms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250, 000
Unsecur ed cl ai ms ( Cl ass 1- 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000

Chapt er 21
21- 14
Requi r ed:

Comput e t he f ol l owi ng:

a. The def i ci ency t r aceabl e t o unsecur ed cr edi t or s i n Cl ass 7.

b. The di vi dend t o gener al unsecur ed cr edi t or s.

c. Rockee owes Fl i nt Cor por at i on $9, 000 secur ed by i nvent or y t hat
i s expect ed t o r eal i ze $7, 000. How much can Fl i nt expect t o
r ecei ve on t hi s cl ai m?

ANS:

a. Book val ue of asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700, 000
Net r eal i zabl e of asset s. . . . . . . . . . . . . . . . . . . . . . . . . . . . 370, 000
$330, 000
Less st ockhol der s' equi t y
( $700, 000 - $400, 000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300, 000
Def i ci ency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30, 000
========

b. Di vi dend = $370, 000 - $250, 000 - $30, 000
$400, 000 - $250, 000 - $30, 000

= $ 90, 000 = $. 75 on $1. 00
$120, 000

c. $7, 000 + [ ( $9, 000 - $7, 000) x . 75] = $8, 500

DI F: D OBJ : 3

7. On J une 1, 20X5, t he books of Hal l ow Cor por at i on show asset s wi t h book
val ues and r eal i zabl e val ues as f ol l ows:

Asset s
Book Val ue Real i zabl e Val ue
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000 $ 10, 000
Recei vabl es ( net ) . . . . . . . . . . . . . . . . . . . . . . . 100, 000 50, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140, 000 100, 000
Land and bui l di ng ( net ) . . . . . . . . . . . . . . . . . 600, 000 650, 000
Equi pment ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . 400, 000 100, 000
Tot al s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 250, 000 $910, 000
========== ========

Hal l ow s books show t he f ol l owi ng l i abi l i t i es:

Li abi l i t i es
Book Val ue
Account s payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 260, 000
Wages payabl e ( el i gi bl e f or pr i or i t y) . . . . . . . . . . . . 10, 000
Taxes payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Accr ued i nt er est on not es payabl e. . . . . . . . . . . . . . . . 30, 000
Accr ued i nt er est on mor t gage payabl e. . . . . . . . . . . . . 20, 000
Not es payabl e ( secur ed by r ecei vabl es and
i nvent or y) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500, 000
Mor t gage payabl e ( secur ed by l and and bui l di ng) . . 300, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 140, 000
Chapt er 21
21- 15
==========

Requi r ed:

a. Pr epar e a schedul e t o det er mi ne t he amount avai l abl e f or Cl ass
7 unsecur ed cl ai ms.

b. Det er mi ne t he di vi dend t o Cl ass 7 unsecur ed cl ai ms.

c. What amount ar e t he not e hol der s l i kel y t o r ecei ve? What i s
t hei r di vi dend?

ANS:

a. Tot al est i mat ed pr oceeds. . . . . . . . . . . . . . . . . . . $910, 000
Less asset pr oceeds cl ai med by secur ed
cr edi t or s:
Not es payabl e and i nt er est ( f r om
pr oceeds of r ecei vabl es and i nvent or y) . . $150, 000
Mor t gage payabl e and i nt er est ( f r om
pr oceeds of l and and bui l di ng) . . . . . . . . . . 320, 000 470, 000
Tot al avai l abl e t o unsecur ed cl ai mant s. $440, 000

Less di st r i but i ons t o unsecur ed cl ai ms
wi t h pr i or i t y:
Wages payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000
Taxes payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000 30, 000

Amount avai l abl e f or Cl ass 7 unsecur ed
cl ai ms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $410, 000
========

b. Unsecur ed por t i on of not es payabl e and
i nt er est ( $500, 000 + $30, 000 - $150, 000) . . $380, 000

Tot al cl ai ms of Cl ass 7 unsecur ed cr edi t or s $640, 000
========
Di vi dend t o Cl ass 7:
$410, 000/ $640, 000 = 64. 1%

c. Unsecur ed por t i on of not es payabl e and
i nt er est . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $380, 000
Di vi dend on unsecur ed amount . . . . . . . . . . . . . x 64. 1%
Amount r ecei ved on unsecur ed por t i on. . . . . $243, 580
Pr oceeds f r omr ecei vabl es and i nvent or y. . 150, 000
Tot al Recei ved. . . . . . . . . . . . . . . . . . . . . . . . . . . $393, 580
========
Di vi dend t o not e hol der s: $393, 580 $530, 000 = 74. 3%

DI F: D OBJ : 3

Chapt er 21
21- 16
8. On J une 1, 20X5, t he books of Dr emer Cor por at i on show asset s wi t h book
val ues and r eal i zabl e val ues as f ol l ows:

Asset s
Real i zabl e
Book Val ue Val ue
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1, 850 $ 1, 850
Account s Recei vabl e ( net ) . . . . . . . . . . . . . . . . . . 21, 200 17, 000
Not e Recei vabl e . . . . . . . . . . . . . . . . . . . . . . . . . . . 15, 000 15, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41, 000 20, 000
I nvest ment i n Cal andi r St ock . . . . . . . . . . . . . . 5, 800 15, 000
Land and Bui l di ng ( net ) . . . . . . . . . . . . . . . . . . . . 98, 500 92, 800
Equi pment ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43, 000 8, 000
Tot al s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $226, 350 $169, 650
======== ========

Dr emer s books show t he f ol l owi ng l i abi l i t i es:

Li abi l i t i es
Book Val ue
Account s payabl e ( 50, 000 secur ed by i nvent or y
and equi pment ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90, 625
Wages payabl e ( el i gi bl e f or pr i or i t y) . . . . . . . . . . 3, 775
Ot her Accr ued Li abi l i t i es . . . . . . . . . . . . . . . . . . . . 10, 000
Accr ued i nt er est on not es payabl e. . . . . . . . . . . . . . 375
Accr ued i nt er est on mor t gage payabl e. . . . . . . . . . . 600
Not es payabl e ( secur ed by I nvest ment i n Cal andi r
St ock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Mor t gage payabl e ( secur ed by l and and bui l di ng) 70, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $185, 375
========

Requi r ed:

Pr epar e an account i ng St at ement of Af f ai r s i ncl udi ng t he comput at i on of
t he di vi dend t o Cl ass 7 unsecur ed cr edi t or s.

Chapt er 21
21- 17
ANS:

Dr emer Cor por at i on
St at ement of Af f ai r s
6- 1- 20X5

Est i mat ed Est i mat ed Est i mat ed
Net Amt Avai l Gai n or
Book Real i zabl e f or Unsecur ed ( Loss) on
Val ue Asset s Val ue Cr edi t or s Li qui dat i on
Asset s pl edged wi t h
f ul l y secur ed
cr edi t or s:
$ 98, 500 Land and Bl dg $92, 800 $22, 200 ( 5, 700)
5, 800 I nv i n Cal andi r 15, 000 4, 625 9, 200

Asset s pl edged wi t h
par t i al l y secur ed
cr edi t or s:
$ 41, 000 I nvent or y $20, 000 ( 21, 000)
43, 000 Equi pment 8, 000 ( 35, 000)

Fr ee Asset s:
$ 1, 850 Cash $ 1, 850 $ 1, 850 0
21, 200 Account s Rec 17, 000 17, 000 ( 4, 200)
15, 000 Not e Rec 15, 000 15, 000 0

Est i mat ed Amount Avai l f or
unsecur ed cr edi t or s wi t h and
wi t hout pr i or i t y $60, 675
Less unsecur ed cr edi t or s wi t h
pr i or i t y ( 3, 775)
Est i mat ed amount s f or unsecur ed
cr edi t or s wi t hout pr i or i t y:
Net Real i zabl e Amount Avai l $56, 900
Def i ci ency 15, 725
________ _______ ________
$226, 350 $169, 650 $72, 625 $( 56, 700)

Chapt er 21
21- 18
Est i mat ed Wi t h Wi t hout
Book Li abi l i t i es Secur ed Pr i or i t y Pr i or i t y
Val ue and Owner s Equi t y Amount Est i mat ed Unsecur ed Amount
Ful l y Secur ed Cr edi t or s:
$ 600 Accr ued Mt g I nt er est $ 600
70, 000 Mor t gage Payabl e 70, 000
375 Accr ued N/ P I nt er est 375
10, 000 Not e Payabl e 10, 000
Tot al $ 80, 975

Par t i al l y Secur ed
Cr edi t or s:
50, 000 Account s Payabl e $ 28, 000 $22, 000

Unsecur ed Cr edi t or s wi t h
Pr i or i t y:
3, 775 Accr ued Payr ol l $3, 775

Unsecur ed cr edi t or s wi t hout
Pr i or i t y:
40, 625 Account s Payabl e $40, 625
10, 000 Ot her Accr ued Li abi l i t i es $10, 000
$185, 375 Tot al s. . . . . . . . . . . . . . $108, 975 $3, 775 $72, 625
$ 40, 975 Owner Equi t y
$226, 350

Di vi dend = 56, 900 = $. 78
72, 625

DI F: D OBJ : 4

9. Usi ng t he i nf or mat i on f r omPr obl em#8 and t he f ol l owi ng i nf or mat i on,
pr epar e a St at ement of Real i zat i on and Li qui dat i on f or Dr emer I nc. f or
t he per i od of 6/ 1/ X5 t o 6/ 30/ X5.

No subsequent di scover i es
Sal e of Cal andi r Secur i t i es at a mar ket val ue of $16, 000
Col l ect i on of Not e Recei vabl e i nt o cash $15, 000
Sal e of Equi pment at $7, 000
Sal e of I nvent or y at $22, 000
Par t i al Payment of Account s Payabl e $29, 000
Payment of Not e Payabl e $10, 375

Chapt er 21
21- 19
ANS:

Dr emer Cor por at i on
St at ement of Real i zat i on and Li qui dat i on
For t he per i od 6/ 1/ X5 t o 6/ 30/ X5

Unsecur ed
Ful l y Par t i al Wi t h Wi t hout Owner s
Cash Noncash Secur e Secur e Pr i or i t y Pr i or i t y Equi t y
6/ 1/ X5 Bal ances:
1, 850 224, 500 80, 975 50, 000 3, 775 50, 625 40, 975

Cash Recei pt s:
Secur i t i es Sal e 16, 000 ( 5, 800) 10, 200
N/ R Col l ect ed 15, 000 ( 15, 000) 0
Equi pment Sal e 7, 000 ( 43, 000) ( 36, 000)
I nvent or y Sal e 22, 000 ( 41, 000) ( 19, 000)

Bank Loan ( 10, 375) ( 10, 375)
Par t Pyt - A/ P ( 29, 000) ( 50, 000) 21, 000
6/ 30 Bal ance 22, 475 119, 700 70, 600 0 3, 775 71, 625 ( 3, 825)

DI F: D OBJ : 5

10. The f ol l owi ng post - cl osi ng t r i al bal ance has been pr epar ed f or Har per
Cor por at i on as of Sept ember 30, 20X4:

Cash- over dr af t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 000
Not es r ecei vabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 000
Accr ued i nt er est r ecei vabl e. . . . . . . . . . . . . . . . 900
Account s r ecei vabl e. . . . . . . . . . . . . . . . . . . . . . . . 66, 000
Al l owance f or uncol l ect i bl e account s. . . . . . . 9, 000
I nvent or i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54, 000
Pl ant and equi pment . . . . . . . . . . . . . . . . . . . . . . . . 321, 000
Accumul at ed depr eci at i on. . . . . . . . . . . . . . . . . . . 201, 000
Not es payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105, 000
Accr ued i nt er est payabl e. . . . . . . . . . . . . . . . . . . 6, 000
Accr ued sal ar i es payabl e. . . . . . . . . . . . . . . . . . . 24, 900
Common st ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . . 240, 000
Pr emi umon common st ock. . . . . . . . . . . . . . . . . . . . 27, 000
Ret ai ned ear ni ngs ( def i ci t ) . . . . . . . . . . . . . . . . 219, 000
756, 900 756, 900
======= =======

Not es r ecei vabl e and accr ued i nt er est on t hese not es ar e expect ed t o
r eal i ze t hei r book val ues.

Account s r ecei vabl e ar e expect ed t o r eal i ze $45, 000. The account s
r ecei vabl e have been pl edged t o secur e a not e payabl e f or $30, 000 and
accr ued i nt er est expense of $2, 400.

I nvent or i es wi l l r eal i ze appr oxi mat el y 60%of t hei r book val ue.

A r eal est at e agent bel i eves t hat t he l and and bui l di ng and equi pment
coul d be sol d f or $150, 000. The hol der of a not e payabl e of $69, 000,
wi t h accr ued i nt er est t her eon of $3, 600, has a l i en agai nst t he
pr oper t y f or t he f ul l amount due.
Chapt er 21
21- 20

Al l sal ar i es qual i f y f or pr i or i t y.

Requi r ed:

a. Pr epar e an account i ng st at ement of af f ai r s, f or whi ch t he
account ant ' s f ee wi l l be $2, 000.

b. Comput e t he di vi dend f or t he Cl ass 7 unsecur ed cr edi t or s.

ANS:


b.

Di vi ded t o Cl ass 7 unsecur ed cr edi t or s: $124, 000 $150, 000 =
83%.

DI F: D OBJ : 4

11. Wayne Cor por at i on, a manuf act ur er of f ar mmachi ner y, had poor f i nanci al
r esul t s l ast year because of a dr ought . Back or der s i ndi cat e compl et e
r ecover y t hi s year . To el i mi nat e a def i ci t t hat i ncr eased when t he
books wer e cl osed at t he end of l ast year , t he cor por at i on has r ecei ved
st ockhol der s' and st at e appr oval t o conduct a quasi - r eor gani zat i on on
J anuar y 2.

Requi r ed:

Pr epar e j our nal ent r i es as of J anuar y 2 t o r ecor d t he quasi -
r eor gani zat i on and t he st ockhol der s' equi t y sect i on of i t s bal ance
sheet i mmedi at el y t her eaf t er . The f ol l owi ng dat a ar e per t i nent :

a. I nvent or y at year - end i s shown at FI FO cost of $280, 000.
I nvent or y i s t o be val ued at r epl acement cost of $250, 000.

b. Pr oper t y, pl ant , and equi pment ar e shown i n t he r ecor ds at
$4, 000, 000, net of accumul at ed depr eci at i on. They ar e t o be
wr i t t en down t o f ai r val ue of $3, 100, 000.

c. St ockhol der s' equi t y consi st s of :
Common st ock ( $10 par ) 400, 000 shar es i ssued
and out st andi ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4, 000, 000
Addi t i onal pai d- i n capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Ret ai ned ear ni ngs ( def i ci t ) . . . . . . . . . . . . . . . . . . . . . . . . . ( 2, 600, 000)
Tot al st ockhol der s' equi t y. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1, 500, 000
===========

Par val ue of st ock i s t o be r educed f r om$10 t o $1 per shar e.
Pai d- i n capi t al r el at ed t o t he f or mer st ock i s t o be cancel ed.

d. The def i ci t i s t o be el i mi nat ed.

Chapt er 21
21- 21
ANS:

a. Reor gani zat i on Capi t al . . . . . . . . . . . . . . . . . . . . 30, 000
I nvent or y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
To r educe i nvent or y f r omFI FO cost t o
mar ket .

b. Reor gani zat i on Capi t al . . . . . . . . . . . . . . . . . . . . 900, 000
Accumul at ed Depr eci at i on ( or Pr oper t y,
pl ant , and equi pment ) . . . . . . . . . . . . . . . 900, 000
To r educe f i xed asset s t o f ai r val ue.

c. Common St ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . 4, 000, 000
Addi t i onal Pai d- i n Capi t al . . . . . . . . . . . . . . . . 100, 000
Common St ock ( $1 par ) . . . . . . . . . . . . . . . . . . . 400, 000
Reor gani zat i on Capi t al . . . . . . . . . . . . . . . . . . 3, 700, 000
To r ecor d i ssuance of $1 par t o
r epl ace $10 par and i t s addi t i onal
pai d- i n capi t al

d. Reor gani zat i on Capi t al . . . . . . . . . . . . . . . . . . . . 2, 600, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . 2, 600, 000
To el i mi nat e t he def i ci t .

DI F: D OBJ : 2

12. Kent ucky Bl ue, I nc. , a l awn car e ser vi ce cor por at i on, i s i n ser i ous
f i nanci al di f f i cul t y wi t h a def i ci t of $2, 100, 000. The company' s pl ant
and equi pment wer e desi gned f or hi ghl y speci al i zed pr oduct s and
act i vi t i es. Ther ef or e, t hey woul d yi el d onl y a smal l f r act i on of t hei r
book val ue upon sal e. Cr edi t or s r eal i ze t hat t hey wi l l r ecei ve l i t t l e
i f t he cor por at i on i s di ssol ved. I n vi ew of t he r enewed i nt er est i n
pr of essi onal l awn car e, a pl an of r eor gani zat i on under Chapt er 11 was
adopt ed and r ecei ved t he necessar y appr oval s.

Requi r ed:

Pr epar e j our nal ent r i es t o r ecor d t he f ol l owi ng st i pul at i ons of t he
pl an:

a. Repl ace t he 14%f i r st mor t gage bonds wi t h f ace val ue of
$300, 000, on whi ch t her e i s $13, 000 of unamor t i zed pr emi um,
wi t h 10%i nt er est bonds, wi t h a f ace val ue of $250, 000. To
cover t he accr ued i nt er est of $42, 000 on t he 14%bonds,
bondhol der s wi l l r ecei ve 20, 000 shar es of new $1 par common
st ock.

b. Unsecur ed account s and not es payabl e t ot al $200, 000. Cr edi t or s
have agr eed t o accept $0. 55 on t he dol l ar .

c. Repl ace t he 10%, $100 par , cumul at i ve par t i ci pat i ng pr ef er r ed
st ock ( of whi ch 10, 000 shar es ar e out st andi ng, havi ng a
r el at ed pai d- i n capi t al i n excess of par of $170, 000) wi t h an
equal number of shar es of 8%, $40 par , noncumul at i ve
nonpar t i ci pat i ng pr ef er r ed st ock. The cor por at i on wi l l no
l onger be l i abl e f or t he $100, 000 of undecl ar ed di vi dends i n
ar r ear s on t he 10%pr ef er r ed st ock.

Chapt er 21
21- 22

d. Repl ace t he 200, 000 shar es of $10 par common st ock, havi ng a
di scount of $80, 000, wi t h an equal number of $1 par common
shar es.

e. El i mi nat e t he def i ci t .

ANS:

a. Fi r st Mor t gage 14%Bonds Payabl e. . . . . . . . . . 300, 000
Unamor t i zed Pr emi umon 14%Bonds. . . . . . . . . . 13, 000
10%Bonds Payabl e. . . . . . . . . . . . . . . . . . . . . . . 250, 000
To r epl ace 14%bonds wi t h 10%bonds.

Accr ued i nt er est on 14%Bonds Payabl e. . . . . 42, 000
Common St ock ( $1 par ) . . . . . . . . . . . . . . . . . . . 20, 000
To subst i t ut e 20, 000 shar es of common
f or accr ued i nt er est .

b. Account s and Not es Payabl e. . . . . . . . . . . . . . . . 90, 000
Cr edi t or s accept ed pl an t o pay $. 55 on
t he Dol l ar .

c. 10%Cumul at i ve Par t i ci pat i ng Pr ef er r ed
St ock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 000, 000
Pai d- i n Capi t al i n Excess of Par on
Pr ef er r ed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170, 000
8%Noncumul at i ve Nonpar t i ci pat i ng
Pr ef er r ed St ock. . . . . . . . . . . . . . . . . . . . . . . 400, 000
To r epl ace $100 par pr ef er r ed wi t h
$40 par pr ef er r ed st ock.

d. Common St ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . 2, 000, 000
Di scount on Common St ock. . . . . . . . . . . . . . . . 80, 000
Common St ock ( $1 par ) . . . . . . . . . . . . . . . . . . . 200, 000
Reor gani zat i on Capi t al . . . . . . . . . . . . . . . . . . 1, 720, 000
To r ecor d r epl acement of common st ock.

e. Reor gani zat i on Capi t al . . . . . . . . . . . . . . . . . . . . 2, 100, 000
Ret ai ned Ear ni ngs. . . . . . . . . . . . . . . . . . . . . . . 2, 100, 000
To el i mi nat e t he def i ci t .

DI F: D OBJ : 3

Chapt er 21
21- 23
13. As of J une 30, 20X4, t he Li l l i e Cor por at i on has t he f ol l owi ng asset s,
l i abi l i t i es, and owner s' equi t y:

Asset s Book Val ue
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10, 000
Mar ket abl e secur i t i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
Account s r ecei vabl e ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000
I nvent or i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 000
Bui l di ngs ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140, 000
Machi ner y ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105, 000
Goodwi l l . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40, 000
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $515, 000
========

Li abi l i t i es and Owner s' Equi t y Book Val ue
Account s payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100, 000
Accr ued i ncome t ax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 000
Accr ued mor t gage i nt er est . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Accr ued sal ar i es expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30, 000
Mor t gage payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Common st ock ( $10 par ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Addi t i onal Pai d- i n capi t al . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201, 000
Def i ci t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 246, 000)
Tot al . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 515, 000
=========

The f ol l owi ng i s pr ovi ded:

Mar ket abl e secur i t i es have a mar ket val ue of $24, 000. Account s
r ecei vabl e ar e est i mat ed t o pr oduce $30, 000. The sal e of i nvent or i es
shoul d yi el d $120, 000, $20, 000 of whi ch must be assi gned t o a cr edi t or
( account payabl e) who i s owed $24, 000. The l and and bui l di ngs can be
sol d f or $2, 000 wi t h t he buyer assumi ng t he mor t gage and i t s unpai d
i nt er est . The machi ner y wi l l r eal i ze $50, 000. Al l sal ar i es qual i f y f or
pr i or i t y.

Requi r ed:

Pr epar e a st at ement of af f ai r s i ncl udi ng t he cal cul at i on of t he
di vi dend t o Cl ass 7 unsecur ed cl ai ms.

ANS:


DI F: D OBJ : 4

Chapt er 21
21- 24
14. Mal l or y Cor por at i on i s bei ng l i qui dat ed under Chapt er 7 of t he
Bankr upt cy Act . On May 1, 20X5, you ar e appoi nt ed t he cour t ' s t r ust ee
f or t he l i qui dat i on. The Acme book val ues f or asset s and l i abi l i t i es,
on May 1, 20X5, wer e as f ol l ows:

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4, 000
Account s r ecei vabl e ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80, 000
I nvent or i es. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200, 000
Land and bui l di ng ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340, 000
Machi ner y ( net ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100, 000
Account s payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180, 000
Sal ar i es payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60, 000
I ncome t ax payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 000
Tr ust ee' s f ee payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 000
Mor t gage payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240, 000
Bank l oan payabl e. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90, 000

Dur i ng May t hr ough J ul y of 20X5, t he f ol l owi ng occur r ed:

The mor t gage i s secur ed by t he l and and bui l di ng and t he bank l oan i s
secur ed by t he machi ner y. The account s payabl e ar e secur ed by t he
i nvent or i es.

Thr ee- f our t hs of t he account s r ecei vabl e wer e col l ect ed. Of t he
r emai ni ng account s, $10, 000 ar e bel i eved t o be uncol l ect i bl e.

The i nvent or i es wer e sol d f or $170, 000.

The l and and bui l di ng wer e sol d f or $20, 000 and assumpt i on of t he
mor t gage. The machi ner y sol d f or $70, 000 and t he pr oceeds wer e r emi t t ed
t o t he bank.

Sal ar i es payabl e and $170, 000 of t he account s payabl e wer e pai d.

Requi r ed:

Compl et e t he Fi gur e 21- A St at ement of Real i zat i on and Li qui dat i on f or
May, J une, and J ul y of 20X5.

ANS:


DI F: D OBJ : 5

Chapt er 21
21- 25
ESSAY

1. Descr i be t he opt i ons t hat ar e avai l abl e t o a cor por at i on t hat i s unabl e
t o ser vi ce i t s debt s on a t i mel y basi s but t hat does NOT r equi r e cour t
act i on.

ANS:

Sever al r emedi es ar e avai l abl e t o a cor por at i on who want s t o avoi d
cour t act i on. One such way i s a t r oubl ed debt r est r uct ur i ng. Thi s i s a
pr ocess wher e cr edi t or s gr ant speci al concessi ons t o t he debt or . The
most common f or ms of r est r uct ur i ng ar e:
Tr ansf er of Asset s t o set t l e a debt
Gr ant i ng an equi t y i nt er est i n set t l ement of a debt
Modi f i cat i on of t er ms, ei t her payment s, i nt er est , pr i nci pal , or
a combi nat i on

A cor por at i on can al so combi ne t he met hods l i st ed above. Gai ns or
l osses can be r ecogni zed on t he t r ansf er of asset s and gai ns can al so
be r ecogni zed on t he r est r uct ur e pr ocess i t sel f .

DI F: M OBJ : 1, 2

2. Descr i be t he dut i es of t he t r ust ee i n a Chapt er 7 l i qui dat i on.

ANS:

Chapt er 7 r equi r es t hat a cour t appoi nt a t r ust ee whi ch can be changed
by t he cr edi t or s. The t r ust ee' s dut i es ar e ext ensi ve i ncl udi ng:

a. Sel l t he non- exempt pr oper t y of t he est at e t o conver t t o cash
b. Account f or al l cash r ecei ved and di sbur sed; account f or any
pr oper t y r ecei ved.
c. I nvest i gat e t he f i nanci al af f ai r s of t he debt or , i ncl udi ng any
f or ms f i l ed by t he debt or
d. Exami ne pr oof s of cl ai mand di sal l ow any i mpr oper cl ai m
e. Fur ni sh i nf or mat i on r equest ed by a par t y of i nt er est , wher e
r easonabl e
f . Oper at e t he busi ness of t he debt or i f aut hor i zed t o do so by
t he cour t .
g. Pay di vi dends t o cr edi t or s as pr ompt l y as possi bl e, wi t h r egar d
f or pr i or i t i es
h. Fi l e pr ogr ess r epor t s on l i qui dat i on and a f i nal r epor t wi t h
det ai l ed st at ement of r ecei pt s and di sbur sement s

DI F: E OBJ : 3

Chapt er 21
21- 26
3. Di f f er ent i at e by f unct i on t he Account i ng St at ement of Af f ai r s and t he
St at ement of Real i zat i on and Li qui dat i on.

ANS:

The Account i ng St at ement of Af f ai r s i s used pr i mar i l y t o r epor t t he
est i mat ed amount s avai l abl e t o each cl ass of cr edi t or dur i ng a
l i qui dat i on or r eor gani zat i on.

The St at ement of Real i zat i on and Li qui dat i on i s a l egal f or mf i l ed by a
t r ust ee t o i nf or mt he cour t of t he f i duci ar y' s act i vi t i es dur i ng a
speci f i ed per i od.

DI F: E OBJ : 5
Chapt er 21
21- 27
[[Insert FIGURE 21-A from Excel spreadsheet]]
Chapt er 21
21- 28
Chapt er 21
21- 29
Chapt er 21
21- 30

TB Fisch AA9 WM

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