FAR Unit 5

Information regarding Stone Co.'s available-for-sale portfolio of marketable debt securities is as follows:

Aggregate cost as of 12/31/Yr 2	170,000
Market value as of 12/31/Yr 2	148,000

At December 31, Year 1, Stone reported an unrealized loss of $1,500 to reduce investments to market value. This was the first such adjustment made by Stone on these types of securities. There is no expected credit loss on this investment. In its Year 2 statement of comprehensive income, what amount of unrealized loss should Stone report?

a. $20,500

b. $30,000

c. $0

d. $22,000

a. $20,500

Entities should report marketable debt securities classified as trading at:

a. fair value, with holding gains and losses included in earnings

b. fair value, with holding gains included in earnings only to the extent of previously recognized holding losses

c. lower of cost or market, with holding gains and losses included in earnings

d. lower of cost or market, with holding gains included in earnings only to the extent of previously recognized holding losses

a. fair value, with holding gains and losses included in earnings

An investor uses fair value through net income to account for an investment in common stock. Dividends received this year exceeded the investor's share of investee's undistributed earnings since the date of investment. The amount of dividend revenue that should be reported in the investor's income statement for this year would be:

a. zero

b. the total amounts of dividends received this year

c. the portion of the dividends received this year that were not in excess of the investor’s share of investee’s undistributed earnings since the date of investment

d. the portion of the dividends received this year that were in excess of the investor’s share of investee’s undistributed earnings since the date of investment

c. the portion of the dividends received this year that were not in excess of the investor’s share of investee’s undistributed earnings since the date of investment

A company leases trucks and properly classifies the leases as finance leases. The leases have a 10-year term, and the lease calculations were done three years ago when interest rates were lower. Which of the following is the appropriate accounting treatment, if any, for the application of the fair value option to lease transactions?

a. recognize the change to fair value accounting with an unrealized loss in the income statement

b. recognize the change to fair value accounting with a cumulative adjustment to beginning retained earnings

c. leases are not eligible for the fair value option

d. recognize the change to fair value accounting with an unrealized loss in accumulated other comprehensive income

c. leases are not eligible for the fair value option

Which of the following statements is correct regarding the decision to elect the fair value option for valuing financial assets and liabilities?

a. it must be applied to all assets of similar characteristics

b. it can be applied to obligations for postretirement benefits other than pensions

c. it can be applied to financial assets and financial liabilities recognized under leases

d. it must be applied to an entire instrument, and not to specific risks

d. it must be applied to an entire instrument, and not to specific risks

During Year 3, Gilman Co. purchased 5,000 shares of the 500,000 outstanding shares of Meteor Corp.'s common stock for $35,000. During Year 3, Gilman received $1,800 of dividends from its investment in Meteor's stock. The fair value of Gilman's investment on December 31, Year 3, is $32,000. Gilman has elected the fair value option for this investment. What amount of income or loss that is attributable to the Meteor stock investment should be reflected in Gilman's earnings for Year 3?

a. loss of $1,200

b. income of $4,800

c. income $1,800

d. loss of $3,000

a. loss of $1,200

Jones Corporation purchased $1,000,000 of 10-year term-to-maturity IBM bonds at par value. Jones intends to hold the bonds for approximately five years and then sell the bonds. The bonds are appropriately classified in which of the following categories?

a. held-to-maturity securities

b. available-for-sale securities

c. trading securities

d. trading securities for the first year, the re-classified to held-to-maturity securities

b. available-for-sale securities

In Year 1, Lee Co. acquired, at a premium, Enfield, Inc. 10-year bonds classified as a held-to-maturity investment. At December 31, Year 2, Enfield's bonds were quoted at a small discount. Which of the following situations is the most likely cause of the decline in the bonds' market value?

a. interest rates have declined since Lee purchased the bonds

b. enfield issued a stock dividend

c. enfield is expected to call the bonds at a premium, which is less than Lee’s carrying amount

d. interest rates have increased since Lee purchased the bonds

d. interest rates have increased since Lee purchased the bonds

Long Co. invested in marketable securities. At year-end, fair-value changes in this investment were included in Long's other comprehensive income. How would Long classify this investment?

a. held-to-maturity securities

b. trading debt securities

c. available-for-sale debt securities

d. equity securities

c. available-for-sale debt securities

Kale Co. purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Kale should account for these bonds at:

a. cost

b. amortized cost

c. fair value

d. lower of cost or market

b. amortized cost

On July 1, Year 1, York Co. purchased as a held-to-maturity investment $1,000,000 of Park, Inc.'s 8% bonds for $946,000, including accrued interest of $40,000. The bonds were purchased to yield 10% interest. The bonds mature on January 1, Year 8, and pay interest annually on January 1. York uses the effective interest method of amortization. In its December 31, Year 1, balance sheet, what amount should York report as investment in bonds?

a. $960,600

b. $911,300

c. $916,600

d. $953,300

b. $911,300

At the end of Year 1, Lane Co. held trading debt securities that cost $86,000 and which had a year-end market value of $92,000. During Year 2, all of these securities were sold for $104,500. At the end of Year 2, Lane had acquired additional trading debt securities that cost $73,000 and which had a year-end market value of $71,000. What is the impact of these transactions on Lane's Year 2 income statement?

a. gain of $18,500

b. loss of $2,000

c. gain of $16,500

d. gain of $10,500

d. gain of $10,500

On January 1 of the current year, Barton Co. paid $900,000 to purchase two-year, 8%, $1,000,000 face value bonds that were issued by another publicly-traded corporation. Barton plans to sell the bonds in the first quarter of the following year. The fair value of the bonds at the end of the current year was $1,020,000. At what amount should Barton report the bonds in its balance sheet at the end of the current year?

a. $1,020,000

b. $900,000

c. $1,000,000

d. $950,000

a. $1,020,000

During the current year, Cooley Co. had an unrealized gain of $100,000 on a debt investment classified as available-for-sale. Cooley's corporate tax rate is 25 percent. What amount of the gain should be included in Cooley's net income and other comprehensive income at the end of the current year?

		Net income	Other comprehensive income
	A.	$25,000	$75,000
	B.	$100,000	$0
	C.	$0	$75,000
	D.	$75,000	$25,000

c. $0, $75,000

Dodd Co.'s debt securities at December 31 included available-for-sale securities with a cost basis of $24,000 and a fair value of $30,000. Dodd's income tax rate was 20 percent. What amount of unrealized gain or loss should Dodd recognize in its income statement at December 31?

a. $6,000 loss

b. $0

c. $6,000 gain

d. $4,800 gain

b. $0

At the beginning of the current year, a company held trading debt securities with a fair value of $250,000. During the year, the company received interest income of $25,000 from the securities and purchased an additional $50,000 of trading debt securities. At the end of the current year, the company recognized an unrealized loss of $20,000 on the trading debt securities held as of the end of the year. What amount should the company report for the trading debt securities in its statement of financial position at the end of the current year?

a. $300,000

b. $305,000

c. $280,000

d. $325,000

c. $280,000

For an available-for-sale security transferred into the trading category, the portion of the unrealized holding gain or loss at the date of the transfer that has not been previously recognized in earnings shall be:

a. deferred and recognized when the security is sold

b. recognized in earnings immediately

c. amortized over the period to date of sale

d. transferred to other comprehensive earnings

b. recognized in earnings immediately

Unrealized holding gains/losses would be included in earnings for which of the following debt securities?

		Trading	Held-to-maturity
	A.	No	Yes
	B.	No	No
	C.	Yes	No
	D.	Yes	Yes

c. yes, no

Based on an evaluation of current conditions and future expectations, Beach Co. determined that the decline in the fair value (FV) of a debt investment was below the amortized cost but above the present value of the principal and interest expected to be collected. The investment was classified as available-for-sale on Beach's books. The controller would properly record the credit loss based on the CECL model under U.S. GAAP by including it in which of the following?

a. other comprehensive income section of the income statement only

b. earnings section of the income statement, net of tax, and writing down the cost basis to FV

c. other comprehensive income section of the income statement, and writing down the cost basis to FV

d. earnings section of the income statement and writing down the cost basis to FV

d. earnings section of the income statement and writing down the cost basis to FV

The following data pertains to Tyne Co.'s investments in marketable debt securities:

		Market value
	Cost	12/31/Year 2	12/31/Year 1
Trading	150,000	155,000	100,000
Available-for-sale	150,000	130,000	120,000

Note: The available-for-sale security is not deemed to be impaired.

 

What amount should Tyne report as unrealized gain (loss) in its Year 2 income statement?

a. $60,000

b. $55,000

c. $50,000

d. $65,000

b. $55,000

The investment manager for Draxler Co. pays $988,472 to purchase a $1,000,000 face-value bond maturing in five years and paying interest semiannually at an annual rate of 2.75 percent. The annual market rate for comparable bonds at the time of issuance is 3.00 percent. With two years remaining, the manager determines that the bond will pay the full $1,000,000 at maturity but will pay $3,000 less in interest than planned every six months for the remainder of the bond's life. The relevant present value factors for $1 and a $1 ordinary annuity are 0.9422 and 3.8544, respectively.

If the bond's current fair value with two years remaining is $994,800 and the amortized cost of the bond is $995,182, the current expected credit loss, assuming that the bond is classified as held-to-maturity, is closest to:

a. $4,835

b. $11,165

c. $11,545

d. $6,710

c. $11,545

The treasurer of a public company is reviewing the company's current investment portfolio. All debt investments in the portfolio are classified as held-to-maturity. For the Rangar County bond investment, the fair value is higher than the present value based on expected future cash flows. The amortized cost is between the fair and present values, and all values are higher than the bond's original cost to the company. On the year-end financial statements, the treasurer will:

a. not record a loss because fair value is above the amortized cost

b. not record a los because fair value is above the present value

c. record a loss because amortized cost is above the original cost

d. record a loss because amortized cost is above the present value

d. record a loss because amortized cost is above the present value

On January 1 of the current year, a company paid $92,000 to purchase $100,000 of 5% bonds and classified the investment as a trading security. The company elected to use the straight-line method of amortizing the discount on the bond investment. The bonds mature in 10 years and pay interest on December 31. If the fair value of the bond was $98,000 at the end of the current year, what amount should be reported as interest income?

a. $5,800

b. $5,400

c. $5,000

d. $4,600

a. $5,800

During the current year, a company purchased a debt investment that it intends to hold to maturity. At year-end, the company assessed that the investment had experienced a significant deterioration in credit quality. The face value of the investment is $600,000, its amortized cost at year-end is $620,000, and the company now expects the net amount collected to be $555,000. Which of the following journal entries is required to properly report the investment?

a. dr. credit loss expense $45,000; cr. allowance for credit losses $45,000

b. dr. credit loss expense $65,000; cr. held-to-maturity debit investment $65,000

c. dr. credit loss expense $65,000; cr. allowance for credit losses $65,000

d. dr. credit loss expense $45,000; cr. held-to-maturity debt investment $45,000

c. dr. credit loss expense $65,000; cr. allowance for credit losses $65,000

Diamond Inc. purchased the following available-for-sale debt securities at par during Year 1:

	Values as of 12/31/Year 1
	Purchase price	Fair value
ABC Corp.	$50,000	$55,000
XYZ Corp.	$35,000	$30,000

On December 31, Year 1, Diamond determined that the present value of the principal and interest expected to be received on the investment in XYZ Corp. is $33,000. What will Diamond report as unrealized gain or loss on available-for-sale securities on its Year 1 statement of comprehensive income?

a. $3,000 loss

b. $0

c. $5,000 gain

d. $2,000 gain

d. $2,000 gain

An available-for-sale security purchased at par for $1,000,000 has a current fair value of $1,015,000 due to an overall decline in market interest rates. Due to cash flow concerns, the investor anticipates a reduction in interest payments from the issuer. The present value of expected cash flows from the bond is equal to $978,000. The investor will record a(n):

a. unrealized loss in other comprehensive income of $15,000

b. credit loss on the income statement of $22,000

c. credit loss on the income statement of $0

d. unrealized gain in other comprehensive of $37,000

c. credit loss on the income statement of $0

Based on the current expected credit loss model, a company records the following journal entry at year-end related to a five-year bond issued by Jenins Corp.

Debit	Credit loss	$23,000
Debit	Unrealized loss – AFS	9,000
Credit	Allowance for credit losses		$23,000
Credit	Valuation allowance		9,000

The security is classified as available-for-sale and has an amortized cost of $250,000 and current fair value of $218,000. Based on the journal entry above, the present value of expected future cash flows must be closest to:

a. $259,000

b. $273,000

c. $227,000

d. $241,000

c. $227,000

Mary Reid is a senior accountant reviewing the year-end journal entries prepared by her staff accountant. Reid sees one journal entry that has a debit to unrealized loss for XYZ debt hitting other comprehensive income (OCI), with the notes to the journal stating that this relates to an impairment/credit loss situation. Reid reverses the entry, believing it to be incorrect. Which of the following situations on its own is not a valid reason for Reid reversing the entry?

a. the fair value of XYZ debt is above the present value of expected cash flows

b. the fair value of XYZ debt is above amortized cost

c. XYZ debt is properly classified as available-for-sale

d. XYZ debt is properly classified as held-to-maturity

c. XYZ debt is properly classified as available-for-sale

During Year 1, Scott Corp. purchased marketable equity securities. Pertinent data follow:

	Market Value
Security	Cost	at 12/31/Year 1
D	$ 36,000	$ 40,000
E	80,000	60,000
F	180,000	186,000
	$296,000	$286,000

Scott appropriately carries these securities at market value. The amount of unrealized loss on these securities in Scott's Year 1 income statement should be:

a. $14,000

b. $0

c. $10,000

d. $20,000

c. $10,000

Data regarding Ball Corp.'s marketable equity securities follow:

	Cost	Market value
December 31, Year 1	150,000	130,000
December 31, Year 2	150,000	160,000

Differences between cost and market values are considered temporary. The decline in market value was considered temporary and was properly accounted for at December 31, Year 1. Ball's Year 2 statement of changes in stockholders' equity would report an increase of:

a. $30,000

b. $20,000

c. $0

d. $10,000

a. $30,000

Janson traded stock in Flax Co. during Year 1 as follows:

	Number of shares purchased (sold)	Price per share
February 3, Year 1	1,100	$11
April 15, Year 1	2,500	9
May 28, Year 1	(750)	13
July 5, Year 1	1,400	12
September 30, Year 1	(4,000)	15

No other transactions took place for Flax during the remainder of the year. At December 31, Year 1, Flax is trading at $10 per share. Janson trades securities on a last in, first out basis. What amount is the net value of the investment in Flax at year-end?

a. $3,750

b. $2,750

c. $2,500

d. ($250)

c. $2,500

XYZ, Inc. owns 1,500 of the 10,000 outstanding shares of the common stock of ABC Corporation. The stock was originally purchased on January 1, Year 1 for $5 per share. During the year, ABC stock paid dividends in the amount of $10,000. At December 31, Year 1, the stock is valued at $3 per share. Which of the below entries would you not expect to see on the Year 1 financial statements of XYZ, Inc.?

a. a debit to unrealized holding loss on investment in ABC in the amount of $3,000

b. a credit to dividend revenue in the amount of $1,500

c. a credit to investment in ABC corporation in the amount of $1,500

d. a credit to investment in ABC corporation in the amount of $3,000

c. a credit to investment in ABC corporation in the amount of $1,500

Plack Co. purchased 10,000 shares (2 percent ownership) of Ty Corp. on February 14, Year 1. Plack received a stock dividend of 2,000 shares on April 30, Year 1, when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15, Year 1. In its Year 1 income statement, what amount should Plack report as dividend income?

a. $20,000

b. $94,000

c. $90,000

d. $24,000

d. $24,000

On January 2, Year 1, Ray's Radios, Inc. purchases 1% of the outstanding shares of Bill's Electronics, Corp. for $25,000. During Year 1, Bill's earns $140,000 and Ray's receives a dividend of $800 from Bill's. On December, 30, Year 1 Bill's stock has a 2-for-1 split. What amount is shown in Ray's balance sheet at the end of Year 1 as investment in Bill's Electronics Corp.?

a. $25,800

b. $25,000

c. $25,600

d. $50,000

b. $25,000

On January 1, Year 1, a nonpublic company acquired an equity security investment for $5,000. On December 31, Year 1, the fair value of the security was $5,200. On June 30, Year 2, when the fair value of the security was $5,750, the company's management planned to sell the security, and on December 31, Year 2, the company did sell it for $5,800. What amount should the company recognize in Year 2 net income related to the investment?

a. $800

b. $600

c. $200

d. $50

b. $600

During the year, a company purchased two equity securities. The company purchased Equity Security A for $4,000 and intends to keep it for an indefinite period. The company purchased Equity Security B for $2,000 and intends to sell it in the near term. At the end of the year, Security A's and Security B's fair values were $4,200 and $1,500, respectively. What journal entry should the company prepare to record the aggregate change in the equity securities' values as of the end of the year?

a.

Debit unrealized losses—other comprehensive income	$500
Credit investments		$300
Credit unrealized gains		$200

b.

Debit unrealized losses	$300
Credit investments		$300

c.

Debit unrealized losses	$500
Credit investments		$300
Credit unrealized gains—other comprehensive income		$200

d.

Debit unrealized losses—other comprehensive income	$300
Credit investments		$300

d.

Debit unrealized losses—other comprehensive income	$300
Credit investments		$300

During Year 1, Wall Co. purchased 2,000 shares of Hemp Corp. common stock for $31,500. The market value of this investment was $29,500 at December 31, Year 1. Wall sold all of the Hemp common stock for $14 per share on December 15, Year 2, incurring $1,400 in brokerage commissions and taxes. On the sale, Wall should report a realized loss in its income statement of:

a. $4,900

b. $2,900

c. $3,500

d. $1,500

b. $2,900

Disclosures about the following kinds of risks are required for most financial instruments.

		Concentration of credit risk	Market risk
	A.	Yes	No
	B.	Yes	Yes
	C.	No	No
	D.	No	Yes

a. yes, no

Disclosure of information about significant concentrations of credit risk is required for:

a. all financial instruments

b. financial instruments with off-balance-sheet credit risk only

c. financial instruments with off-balance-sheet market risk only

d. financial instruments with off-balance-sheet risk of accounting loss only

a. all financial instruments

Where in its financial statements should a company disclose information about its concentration of credit risks?

a. supplementary information to the financial statements

b. no disclosure is required

c. the notes to the financial statements

d. management’s report to shareholders

c. the notes to the financial statements

The following data pertain to Tyne Co.'s investments in marketable debt securities:

		Market Value
	Cost	12/31/Y2	12/31/Y1
Trading	150,000	155,000	100,000
Available-for-sale	150,000	130,000	120,000

There are no expected credit losses. What amount should Tyne report as unrealized gain (loss) in its Year 2 income statement?

a. $50,000

b. $65,000

c. $55,000

d. $60,000

c. $55,000

Money for Nothing Enterprises ("MNE") held the following available-for-sale debt securities during Year 2:

	Cost	Market Value 12/31/Y1	Sales Price	Market Value 12/31/Y2
Alpha Corp.	$50,000	$53,000	$57,000	--
Beta Corp.	$35,000	$30,000		$38,000
Omega Corp.	$21,000	$27,000		$24,000

There are no expected credit losses. What will MNE report as unrealized gain on available-for-sale securities on its Year 2 statement of comprehensive income (ignore taxes)?

a. $3,000

b. $2,000

c. $8,000

d. $6,000

b. $2,000

Park Co. uses the equity method to account for its January 1, Year 1, purchase of Tun, Inc.'s common stock. On January 1, Year 1, the fair values of Tun's FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park's reported equity in Tun's Year 1 earnings?

		Inventory excess	Land excess
	A.	Decrease	Decrease
	B.	Increase	No effect
	C.	Increase	Increase
	D.	Decrease	No effect

d. decrease, no effect

Birk Co. purchased 30 percent of Sled Co.'s outstanding common stock on December 31 for $200,000. On that date, Sled's stockholders' equity was $500,000, and the fair value of its identifiable net assets was $600,000. On December 31, what amount of goodwill should Birk attribute to this acquisition?

a. $50,000

b. $0

c. $30,000

d. $20,000

d. $20,000

Puff Co. acquired 40 percent of Straw Inc.'s voting common stock on January 2, Year 1 for $400,000. The carrying amount of Straw's net assets at the purchase date totaled $900,000. Fair values equaled carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by $100,000. The equipment has a five-year life. During Year 1, Straw reported net income of $150,000. What amount of income from this investment should Puff report in its Year 1 income statement?

a. $60,000

b. $40,000

c. $56,000

d. $52,000

d. $52,000

Goll Co. has a 25 percent interest in the common stock of Rose Co. and an 18 percent interest in the common stock of Jave Co. Neither investment gives Goll the ability to exercise significant influence over either company's operating and financial policies. Which of the two investments should Goll account for using the equity method?

a. both rose and jave

b. rose only

c. jave only

d. neither rose nor jave

d. neither rose nor jave

The equity method of accounting would be used if a company owned what percentage of its investee company's common stock?

a. 25% and significant influence

b. 5% and no significant influence

c. 15% and no significant influence

d. 75% and significant influence

a. 25% and significant influence

The equity method of accounting for investments should be used when an investor owns:

a. 20% to 50% of the voting common stock of a corporation and does not exercise significant influence over the corporation

b. 1% to 9% of the voting common stock of a corporation and does not exercise significant influence over the corporation

c. more than 50% of the voting common stock of a corporation and exercises significant influence over the corporation

d. 10% to 19% of the voting common stock of a corporation and exercises significant influence over the corporation

d. 10% to 19% of the voting common stock of a corporation and exercises significant influence over the corporation

An investor discontinued application of the equity method because the carrying amount of the investment was reduced to zero as a result of recording the investor's share of the investee's losses. At what point, if any, should the investor resume applying the equity method to the investment after the investee returns to profitability?

a. at no point should the investor resume application of the equity method

b. when the investor’s share of net income equals its share of net losses that were not recognized during the equity-method suspension period

c. when the investor has recorded its share of net losses that were not recognized during the equity-method suspension period

d. immediately, by reporting the resumption as a change in accounting principle

b. when the investor’s share of net income equals its share of net losses that were not recognized during the equity-method suspension period

On November 1, Year 1, Jaxon Co. purchased 200 shares of Abbot Co.'s common stock at fair value. This investment represents a 25 percent ownership interest in Abbot and Jaxon exercises significant influence over the affairs of Abbot. Jaxon has elected not to use the fair value option. Fair values per share at relevant dates are as follows:

Date	Fair Value
November 1, Year 1	$150
December 31, Year 1	$135
December 31, Year 2	$172

Abbot incurred an $18,000 net loss in Year 1, earned at a constant rate throughout the year, incurred a $2,000 net loss in Year 2, and declared and paid a dividend on December 31, Year 2, in the amount of $1.20 per share. What is the balance in the investment account as of December 31, Year 2?

a. $28,750

b. $24,760

c. $30,000

d. $28,510

d. $28,510

Band Co. uses the equity method to account for its investment in Guard, Inc. common stock. How should Band record a 2% stock dividend received from Guard?

a. as dividend revenue at the market value of the stock

b. as dividend revenue at Guard’s carrying value of the stock

c. as a reduction in the total cost of Guard stock owned

d. as a memorandum entry reducing the unit cost of all Guard stock owned

d. as a memorandum entry reducing the unit cost of all Guard stock owned

Moss Corp. owns 20 percent of Dubro Corp.'s preferred stock and 40 percent of its common stock. Moss exercises significant influence over the business affairs of Dubro. Dubro's stock outstanding at December 31, Year 1, is as follows:

10% cumulative preferred stock	100,000
Common stock	700,000

Dubro reported net income of $60,000 and paid dividends of $10,000 to its preferred shareholders for the year ended December 31, Year 1. How much income should Moss record due to its investments in Dubro in its year ended December 31, Year 1, income statement??

a. $70,000

b. $20,000

c. $22,000

d. $50,000

c. $22,000

On January 2, Year 3, Well Co. purchased 10 percent of Rea Inc.'s outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors. Rea reported net income of $500,000 for Year 3 and paid dividends of $150,000. In its December 31, Year 3, balance sheet, what amount should Well report as investment in Rea?

a. $400,000

b. $435,000

c. $385,000

d. $450,000

b. $435,000

Information pertaining to dividends from Wray Corp.'s common stock investments for the year ended December 31, Year 1, follows:

• On September 8, Year 1, Wray received a $50,000 cash dividend from Seco Inc., in which Wray owns a 30 percent interest. A majority of Wray's directors are also directors of Seco.

• On October 15, Year 1, Wray received a $6,000 liquidating dividend from King Co. Wray owns a 5 percent interest in King Co.

• Wray owns a 2 percent interest in Bow Corp., which declared a $200,000 cash dividend on November 27, Year 1, to stockholders of record on December 15, Year 1, payable on January 5, Year 2.

What amount should Wray report as dividend income in its income statement for the year ended December 31, Year 1?

a. $56,000

b. $4,000

c. $10,000

d. $60,000

b. $4,000

Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years, and has the ability to exercise significant influence over Devon. The following information relates to Larkin's investment in Devon during the most recent year:

Carrying amount of Larkin's investment in Devon at the beginning of the year	200,000
Net income of Devon for the year	600,000
Total dividends paid to Devon's stockholders during the year	$ 400,000

What is the carrying amount of Larkin's investment in Devon at year end?

a. $100,000

b. $250,000

c. $350,000

d. $200,000

b. $250,000

Chatham Co. owned 25 percent of the voting stock of Boyrum Co. Chatham applied the equity method to account for this investment. Boyrum reported income of $100,000 and paid $30,000 in cash dividends during the period. What amount should Chatham report as investment income?

a. $25,000

b. $0

c. $7,500

d. $17,500

a. $25,000

Anchor Co. owns 40% of Main Co.'s common stock outstanding and 75% of Main's noncumulative preferred stock outstanding. Anchor exercises significant influence over Main's operations. During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its noncumulative preferred stock. What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main?

a. $225,000

b. $75,000

c. $80,000

d. $120,000

b. $75,000

In a business combination, the valuation of goodwill is a calculation:

a. of all of the unlimited-life intangible assets

b. of all of the increases in market valuation of the intangible assets acquired

c. of the residual paid above the fair value of the identifiable net assets

d. to offset the bargain purchase cost

c. of the residual paid above the fair value of the identifiable net assets

Palmetto Inc. is currently using the equity method to account for its 30% investment in Royal Company. In the acquisition last year of Royal Co. common stock, Palmetto calculated $1,000,000 of goodwill. The correct accounting for this goodwill on a quarterly basis during the current year is:

a. test for impairment at year-end

b. amortization over the anticipated holding period of the Royal Company stock

c. amortization over 40 years

d. no accounting necessary

d. no accounting necessary

On January 1, Year 2, Point Inc. purchased 10% of Iona Co.'s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona's common stock outstanding on August 1, Year 2. During October, Year 2, Iona declared and paid a cash dividend on all of its outstanding common stock for all stockholders of record as of October 1, Year 2. How much income from the Iona investment should Point's Year 2 income statement report?

a. 10% of Iona’s dividends for January 1 to July 31, Year 2, plus 40% of Iona’s income for August 1 to December 31, Year 2

b. amount equal to dividends received from Iona

c. 40% of Iona’s Year 2 income

d. 40% of Iona’s income for August 1 to December 31, Year 2 only

d. 40% of Iona’s income for August 1 to December 31, Year 2 only

Wright Corp. has several subsidiaries that are included in its consolidated financial statements. In its December 31, Year 2, trial balance, Wright had the following intercompany balances before eliminations:

	Debit (Dr)	Credit (Cr)
Current receivable due from Main Co.	32,000
Non-current receivable from Main	114,000
Cash advance to Corn Corp.	6,000
Cash advance from King Co.		15,000
Intercompany payable to King		101,000

In its December 31, Year 2, consolidated balance sheet, what amount should Wright report as intercompany receivables?

a. $152,000

b. $0

c. $146,000

d. $36,000

b. $0

Perez Inc. owns 80 percent of Senior Inc. During Year 1, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in Year 1. For Year 1 consolidated financial statements, how should the summation of Perez and Senior's income statement items be adjusted?

a. sales and cost of goods sold should be reduced by the intercompany sales

b. sales and cost of goods sold should be reduced by 80% of the intercompany sales

c. net income should be reduced by 80% of the gross profit on intercompany sales

d. no adjustment is necessary

a. sales and cost of goods sold should be reduced by the intercompany sales

On January 1, Year 10, Poe Corp. sold a machine for $900,000 to Saxe Corp., its wholly owned subsidiary. Poe paid $1,100,000 for this machine, which had accumulated depreciation of $250,000. Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years, a policy that Saxe continued. In Poe's December 31, Year 10, consolidated balance sheet, this machine should be included in cost and accumulated depreciation as:

		Cost	Accumulated depreciation
	A.	$1,100,000	$290,000
	B.	$900,000	$40,000
	C.	$850,000	$42,500
	D.	$1,100,000	$300,000

d. $1,100,000, $300,000

On January 1, Year 1, Dallas Inc. acquired 80 percent of Style Inc.'s outstanding common stock for $120,000. On that date, the carrying amounts of Style's assets and liabilities approximated their fair values. During Year 1, Style paid $5,000 cash dividends to its stockholders. Summarized balance sheet information for the two companies follows:

	Dallas	Style
	12/31/Year 1	12/31/Year 1	1/1/Year 1
Investment in Style (equity method)	$132,000
Other assets	138,000	$115,000	$100,000
	$270,000	$115,000	$100,000
Common stock	$50,000	$20,000	$20,000
Additional paid-in capital	80,250	44,000	44,000
Retained earnings	139,750	51,000	36,000
	$270,000	$115,000	$100,000

What amount of total stockholders' equity should be reported in Dallas' December 31, Year 1, consolidated balance sheet?

a. $385,000

b. $303,000

c. $286,000

d. $270,000

b. $303,000

On September 1, Year 1, Phillips Inc. issued common stock in exchange for 20 percent of Sago Inc.'s outstanding common stock. On July 1, Year 3, Phillips issued common stock for an additional 75 percent of Sago's outstanding common stock. Sago continues in existence as Phillips' subsidiary. How much of Sago's Year 3 net income should be reported as accruing to Phillips?

a. 20% of Sago’s net income to June 30 and 95% of Sago’s net income from July 1 to December 31

b. 20% of Sago’s net income to June 30 and all of Sago’s net income from July 1 to December 31

c. all of Sago’s net income

d. 95% of Sago’s net income

a. 20% of Sago’s net income to June 30 and 95% of Sago’s net income from July 1 to December 31

On January 2 of the current year, Peace Co. paid $310,000 to purchase 75 percent of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will the parent company report as dividends declared and paid in its current year's statement of cash flows in the consolidated financial statements?

a. $23,000

b. $17,000

c. $15,000

d. $8,000

b. $17,000

Quality Corp. owns 90 percent of the outstanding common stock of Excellence Co. The remaining 10 percent ownership interest in Excellence is held by other owners. The noncontrolling interest in Excellence should be:

a. classified and equity and presented separately from the equity of Quality

b. presented as a long-term liability of Quality as a separate line item

c. eliminated from Quality’s consolidated financial statements

d. presented as a part of the equity of Quality

a. classified and equity and presented separately from the equity of Quality

On January 1, Pine Co. acquired 75% of the outstanding common stock of Spruce Co. The remaining 25% of Spruce's common stock remains owned by unrelated parties. Pine determined that all criteria for consolidation of Spruce have been met. On January 1, Spruce has retained earnings of $400,000. How much, if any, of Spruce's retained earnings on January 1 should be included in Pine's consolidated retained earnings on January 1?

a. $100,000

b. $400,000

c. $300,000

d. $0

d. $0

At December 31, Year 1, Grey, Inc. owned 90% of Winn Corp., a consolidated subsidiary, and 20% of Carr Corp., an investee in which Grey cannot exercise significant influence. On the same date, Grey had receivables of $300,000 from Winn and $200,000 from Carr. In its December 31, Year 1 consolidated balance sheet, Grey should report accounts receivable from affiliates of:

a. $500,000

b. $340,000

c. $230,000

d. $200,000

d. $200,000

Rowe Inc. owns 80% of Cowan Co.'s outstanding capital stock. On November 1, Rowe advanced $100,000 in cash to Cowan. What amount should be reported related to the advance in Rowe's consolidated balance sheet as of December 31?

a. $20,000

b. $100,000

c. $80,000

d. $0

d. $0

Strut Co. has a payable to its parent, Plane Co. In which of the following balance sheets should this payable be reported separately?

		Strut's balance sheet	Plane's consolidated balance sheet
	A.	No	No
	B.	No	Yes
	C.	Yes	No
	D.	Yes	Yes

c. yes, no

Sun, Inc. is a wholly-owned subsidiary of Patton, Inc. On June 1, Year 1, Patton declared and paid a $1 per share cash dividend to stockholders of record on May 15, Year 1. On May 1, Year 1, Sun bought 10,000 shares of Patton's common stock for $700,000 on the open market, when the book value per share was $30. What amount of gain should Patton report from this transaction in its consolidated income statement for the year ended December 31, Year 1?

a. $0

b. $400,000

c. $390,000

d. $410,000

a. $0

Selected information from the separate and consolidated balance sheets and income statements of Pare, Inc. and its subsidiary, Shel Co., as of December 31, Year 1, and for the year then ended is as follows:

	Pare	Shel	Consolidated
Balance sheet accounts
Accounts receivable	52,000	38,000	78,000
Inventory	60,000	50,000	104,000
Income statement accounts
Revenues	400,000	280,000	616,000
Cost of goods sold	300,000	220,000	462,000
Gross profit	100,000	60,000	154,000

Additional information: During Year 1, Pare sold goods to Shel at the same markup on cost that Pare uses for all sales.

At December 31, Year 1, what was the amount of Shel's payable to Pare for intercompany sales?

a. $6,000

b. $12,000

c. $58,000

d. $64,000

b. $12,000

Selected information from the separate and consolidated balance sheets and income statements of Pard, Inc. and its subsidiary, Spin Co., as of December 31, Year 1, and for the year then ended is as follows:

	Pard	Spin	Consolidated
Balance sheet accounts
Accounts receivable	26,000	19,000	39,000
Inventory	30,000	25,000	52,000
Investment in Spin	67,000	-	-
Goodwill	-	-	30,000
Noncontrolling interest	-	-	10,000
Stockholders, equity	154,000	50,000	154,000
Income statement accounts
Revenues	$200,000	$140,000	$308,000
Cost of goods sold	150,000	110,000	231,000
Gross profit	50,000	30,000	77,000
Equity in earnings of Spin	11,000	-	-
Net income	36,000	20,000	40,000

Additional information: During Year 1, Pard sold goods to Spin at the same markup on cost that Pard uses for all sales. At December 31, Year 1, Spin had not paid for all of these goods and still held 37.5% of them in inventory.

What was the amount of intercompany sales from Pard to Spin during Year 1?

a. $6,000

b. $3,000

c. $29,000

d. $32,000

d. $32,000

During Year 1, Abaco Co., the 100% owned subsidiary of Walker Inc., sold merchandise to Walker at a 25% markup over its cost. Intercompany sales to Walker totaled $800,000 during Year 1. On December 31, Year 1, Walker held $200,000 of the inventory purchased from Abaco in its ending inventory. In Walker's December 31, Year 1 elimination of the intercompany sales transaction, the intercompany profit that must be eliminated from ending inventory is:

a. $120,000

b. $160,000

c. $200,000

d. $40,000

d. $40,000

Jane Co. owns 90% of the common stock of Dun Corp. and 100% of the common stock of Beech Corp. On December 30, Dun and Beech each declared a cash dividend of $100,000 for the current year. What is the total amount of dividends paid that should be reported in the December 31 consolidated financial statements of Jane and its subsidiaries, Dun and Beech?

a. $100,000

b. $190,000

c. $200,000

d. $10,000

d. $10,000

King Inc. owns 70% of Simmon Co.'s outstanding common stock. King's liabilities total $450,000, and Simmon's liabilities total $200,000. Included in Simmon's financial statements is a $100,000 note payable to King. What amount of total liabilities should be reported in the consolidated financial statements?

a. $550,000

b. $650,000

c. $590,000

d. $520,000

a. $550,000

During consolidation, Parent Company discovers that its 80 percent-owned Subsidiary's ending inventory includes $100,000 of goods purchased from Parent at a 40 percent markup. What journal entry is needed to correct this error in the consolidated statements?

a. debit sales $100,000; credit cost of goods sold $60,000; credit inventory $40,000

b. debit cost of goods sold $40,000; credit inventory of $40,000

c. debit cost of goods sold $28,571; credit inventory of $28,571

d. debit sales $100,000; credit cost of goods sold $71,429; credit inventory $28,571

d. debit sales $100,000; credit cost of goods sold $71,429; credit inventory $28,571

On December 31, Year 1, Parent Co declared dividends payable of $120,000, of which $30,000 was owed to Sub Co. Sub Co recorded dividends receivable of $30,000. The consolidation omitted this elimination. What is the correcting impact on consolidated current assets and current liabilities?

a. no adjustment

b. decrease current assets by $30,000 and increase current liabilities by $30,000

c. increase current assets by $30,000 and increase current liabilities by $30,000

d. decrease current liabilities by $30,000 and decrease current assets by $30,000

d. decrease current liabilities by $30,000 and decrease current assets by $30,000

During Year 1, Parent Co sold inventory to Sub Co for $750,000, which had a cost of $600,000. Sub Co’s ending inventory includes $300,000 of these goods at the transfer price. The consolidation team failed to eliminate the intercompany profit. To correct consolidated amounts, what adjustments should be made to cost of goods sold and ending inventory?

a. decrease cost of goods sold by $150,000 and decrease ending inventory by $0

b. decrease cost of goods sold by $90,000 and decrease ending inventory by $60,000

c. decrease cost of goods sold by $60,000 and decrease ending inventory by $90,000

d. increase cost of goods sold by $60,000 and decrease ending inventory by $90,000

b. decrease cost of goods sold by $90,000 and decrease ending inventory by $60,000

On December 31, Year 1, Parent Co issued bonds with a face value $500,000 and a premium of $20,000 (with a carrying value of $520,000). That same day, Sub Co purchased all of the bonds from outside investors for $540,000. The consolidation failed to adjust for this intercompany bond transaction. What amount of gain or loss should be recognized in the consolidated income statement to correct the error?

a. $40,000 loss

b. $0

c. $20,000 gain

d. $20,000 loss

d. $20,000 loss

Zest Co. owns 100% of Cinn, Inc. On January 2, Year 1, Zest sold equipment with an original cost of $80,000 and a carrying amount of $48,000 to Cinn for $72,000. Zest had been depreciating the equipment over a five-year period using straight-line depreciation with no residual value. Cinn is using straight-line depreciation over three years with no residual value. In Zest's December 31, Year 1, consolidating worksheet, by what amount should depreciation expense be decreased?

a. $16,000

b. $0

c. $24,000

d. $8,000

d. $8,000

Jones Corporation owns 100% of Smith Corporation. On July 1, Year 1, Jones Corporation sold land to Smith Corporation for $400,000. The initial cost of the land to Jones was $330,000. On December 31, Year 1, Smith sold the land to IBM Corporation for $425,000. Jones does not own any portion of IBM Corporation. How should Jones account for the gain on sale of land for the two land sales transactions in its consolidated working papers?

a. record no entry for the intercompany land sale on July 1, Year 1 to Smith. recognize a gain on sale of $95,000 for the sale of land to IBM on December 31, Year 1

b. recognize the $70,000 intercomapny gain on sale of land on July 1, Year 1 to Smith. recognize a gain on sale of $25,000 for the sale of land to IBM on December 31, Year 1

c. eliminate the $70,000 intercompany gain on sale of land on July 1, Year 1 to Smith. eliminate the $25,000 gain on the sale of land to IBM on December 31, Year 1

d. eliminate the $70,000 intercompany gain on sale of land on July 1, Year 1 to Smith. recognize a gain on sale of $95,000 for the sale of land to IBM on December 31, Year 1

d. eliminate the $70,000 intercompany gain on sale of land on July 1, Year 1 to Smith. recognize a gain on sale of $95,000 for the sale of land to IBM on December 31, Year 1

Subsidiary sold land to Parent for $300,000 in Year 1, and the land’s original cost to Subsidiary was $240,000. The consolidation mistakenly included a $60,000 gain from this intercompany sale. Which correcting entry best fixes the consolidated financial statements for Year 1?

a. debit land $60,000; credit retained earnings $60,000

b. debit intercomapny gain on sale of land $60,000; credit retained earnings $60,000

c. debit retained earnings $60,000; credit land $60,000

d. debit intercompany gain on sale of land $60,000; credit land $60,000

d. debit intercompany gain on sale of land $60,000; credit land $60,000

Effective October 1, Year 1, Page Co. acquired 80 percent of subsidiary Ensista Co.'s common stock outstanding. At the date of acquisition, Ensista had retained earnings of $2,000,000 and current-year net income of $500,000. At the end of Year 1, prior to consolidation, Page has retained earnings of $6,000,000 and current-year net income of $1,000,000, and Ensista has retained earnings of $2,800,000 and a current-year net income of $800,000. What are the consolidated retained earnings and net income for Year 1?

a. retained earnings, $8,240,000; current-year net income, $1,640,000

b. retained earnings, $6,240,000; current-year net income, $1,300,000

c. retained earnings, $8,800,000; current-year net income, $1,800,000

d. retained earnings, $6,300,000; current-year net income $1,300,000

b. retained earnings, $6,240,000; current-year net income, $1,300,000

Beni Corp. purchased 100% of Carr Corp.'s outstanding capital stock for $430,000 cash. Immediately before the acquisition, the balance sheets of both corporations reported the following:

	Beni	Carr
Assets	2,000,000	750,000
Liabilities	750,000	400,000
Common stock	1,000,000	310,000
Retained earnings	250,000	40,000
Liabilities and stockholders' equity	2,000,000	750,000

At the date of purchase, the fair value of Carr's assets was $50,000 more than the aggregate carrying amounts. In the consolidated balance sheet prepared immediately after the acquisition, the consolidated stockholders' equity should amount to:

a. $1,650,000

b. $1,250,000

c. $1,600,000

d. $1,680,000

b. $1,250,000

On January 2, Year 1, Pare Co. purchased 75% of Kidd Co.'s outstanding common stock. Selected balance sheet data at December 31, Year 1, is as follows:

	Pare	Kidd
Total assets	420,000	180,000
Liabilities	120,000	60,000
Common stock	100,000	50,000
Retained earnings	200,000	70,000
	420,000	180,000

During Year 1, Pare and Kidd paid cash dividends of $25,000 and $5,000, respectively, to their shareholders. There were no other intercompany transactions.

In its December 31, Year 1, consolidated balance sheet, what amount should Pare report as common stock?

a. $150,000

b. $100,000

c. $50,000

d. $137,500

b. $100,000

Jones International, Inc. has acquired 75% of the stock of Montana Game Corp. and properly uses the acquisition method of reporting in its consolidated financial statements. At the time of acquisition, Montana has common stock and retained earnings of $800,000 and $240,000, respectively. What amount will be reported for common stock and retained earnings of Montana on the consolidated financial statements of Jones?

		Common Stock	Retained Earnings
	A.	$0	$0
	B.	$200,000	$60,000
	C.	$600,000	$180,000
	D.	$800,000	$240,000

a. $0, $0

The separate condensed balance sheets and income statements of Purl Corp. and its wholly-owned subsidiary, Scott Corp., are as follows:

	Purl	Scott
Assets
Current assets
Cash	$80,000	$60,000
Accounts receivable (net)	140,000	25,000
Inventories	90,000	50,000
Total current assets	310,000	135,000
Property, plant, and equipment (net)	625,000	280,000
Investment in Scott (equity method)	400,000	−
Total assets	1,335,000	415,000
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$160,000	$95,000
Accrued liabilities	110,000	30,000
Total current liabilities	270,000	125,000
Stockholders' equity
Common stock ($10 par)	300,000	50,000
Additional paid-in capital	−	10,000
Retained earnings	765,000	230,000
Total stockholders' equity	1,065,000	290,000
Total liabilities and stockholders' equity	1,335,000	415,000

Balance Sheets
December 31,Year 1

	Purl	Scott
Sales	2,000,000	750,000
Cost of goods sold	1,540,000	500,000
Gross margin	460,000	250,000
Operating expenses	260,000	150,000
Operating income	200,000	100,000
Equity in earnings of Scott	70,000	−
Income before income taxes	270,000	100,000
Provision for income taxes	60,000	30,000
Net income	210,000	70,000

Income Statements 
Year Ended December 31, Year 1

Additional information:

• On January 1, Year 1, Purl purchased for $360,000 all of Scott's $10 par, voting common stock.

• On January 1, Year 1, the fair value of Scott's assets and liabilities equaled their carrying amount of $395,000 and $145,000, respectively, except that the fair values of certain items identifiable in Scott's inventory were $10,000 more than their carrying amounts. These items were still on hand at December 31, Year 1.

• During Year 1, Purl and Scott paid cash dividends of $100,000 and $30,000, respectively. For tax purposes, Purl receives the 100% exclusion for dividends received from Scott.

• There were no intercompany transactions, except for Purl's receipt of dividends from Scott and Purl's recording of its share of Scott's earnings.

• Both Purl and Scott paid income taxes at the rate of 30%.

• During Year 1, there was no impairment of goodwill.

In the December 31, Year 1 consolidated financial statements of Purl and its subsidiary, total retained earnings should be:

a. $765,000

b. $985,000

c. $795,000

d. $825,000

a. $765,000

On 12/31/Year 1, Passey Co. acquired a 100% interest in Solomon Co. by exchanging 10,000 shares of its common stock for 100,000 shares of Solomon's common stock. The fair market value of Passey's common stock on December 31, Year 1, was $9 per share, and the fair value of Solomon's was $3.50 per share.

Additional information as of December 31, Year 1, is as follows:

	Solomon Co.
	Book Values	Fair Values
Current assets	$115,000	$115,000
Plant assets	200,000	255,000
Liabilities	10,000	10,000
	Passey Co.
Plant assets	$1,700,000	$1,800,000

Passey's consolidated financial statements as of December 31, Year 1, would report plant assets at:

a. $1,800,000

b. $2,055,000

c. $1,955,000

d. $1,700,000

c. $1,955,000

Thyme Inc. owns 16,000 of Sage Co.'s 20,000 outstanding common shares. The carrying value of Sage's equity is $500,000. Sage subsequently issues an additional 5,000 previously unissued shares for $200,000 to an outside party that is unrelated to either Thyme or Sage. What is the total noncontrolling interest after the additional shares are issued?

a. $140,000

b. $172,000

c. $252,000

d. $300,000

c. $252,000

Bard Co. owned several subsidiaries at December 31. The following table shows each subsidiary's total liabilities, excluding intercompany transactions, and the percentage of common stock owned by Bard:

Subsidiary	Total liabilities	% owned
Brock Co.	$4,000,000	70
Harlson Co.	2,000,000	48
Porter Co.	7,000,000	80
Nortin Co.	5,000,000	100

What amount should Bard include as liabilities for the above subsidiaries in its consolidated balance sheet at December 31?

a. $12,000,000

b. $16,000,000

c. $18,000,000

d. $5,000,000

b. $16,000,000

On January 1, Year 1, Dallas, Inc. acquired 80% of Style, Inc.'s outstanding common stock for $120,000. On that date, the carrying amounts of Style's assets and liabilities approximated their fair values. During Year 1, Style paid $5,000 cash dividends to its stockholders. Summarized balance sheet information for the two companies prior to any consolidation entries is as follows:

	Dallas	Style
	12/31/Year 1	12/31/Year 1	1/1/Year 1
Investment in Style (equity method)	$132,000
Other assets	138,000	$115,000	$100,000
	$270,000	$115,000	$100,000
Common stock	$50,000	$20,000	$20,000
Additional paid-in capital	80,250	44,000	44,000
Retained earnings	139,750	51,000	36,000
	$270,000	$115,000	$100,000

What is the amount of net income Dallas will recognize in its Year 1 consolidated financial statements after accounting for net income attributable to the noncontrolling interest (NCI)?

a. $16,000

b. $12,000

c. $15,000

d. $20,000

a. $16,000

When a consolidated statement of cash flows is presented, which of the following statements is true?

I. in the reconciliation of net income to net cash provided by operations, total net income including any noncontrolling interest should be used

II. dividends paid by a subsidiary to both the parent company and noncontrolling shareholders are reported as a use of cash

a. neither I nor II

b. both I and II

c. I only

d. II only

c. I only

On January 2, Year 1, Pare Co. acquired 75% of Kidd Co.'s outstanding common stock. Selected balance sheet data at December 31, Year 1, is as follows:

	Pare	Kidd
Total assets	420,000	180,000
Liabilities	120,000	60,000
Common stock	100,000	50,000
Retained earnings	200,000	70,000
	420,000	180,000

During Year 1, Pare and Kidd paid cash dividends of $25,000 and $5,000, respectively, to their shareholders. There were no other intercompany transactions.

In the retained earnings section of its December 31, Year 1, consolidated financial statements, what amount should Pare report as dividends paid?

a. $26,250

b. $25,000

c. $30,000

d. $5,000

b. $25,000

Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have a 25 percent interest in capital and profits, for an investment of $30,000. What amount should be recorded as a bonus to the original partners?

a. $20,000

b. $7,500

c. $0

d. $5,000

d. $5,000

Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have a 25 percent interest in capital and profits, for an investment of $30,000. What amount should be recorded as goodwill to the original partners?

a. $7,500

b. $0

c. $20,000

d. $5,000

c. $20,000

The condensed balance sheet of Adams & Gray, a partnership, at December 31, Year 1, follows:

Current assets	250,000
Equipment (net)	30,000
Total assets	280,000
Liabilities	20,000
Adams, capital	160,000
Gray, capital	100,000
Total liabilities and capital	280,000

On December 31, Year 1, the fair values of the assets and liabilities were appraised at $240,000 and $20,000, respectively, by an independent appraiser. On January 2, Year 2, the partnership was incorporated and 1,000 shares of $5 par value common stock were issued. Immediately after the incorporation, what amount should the new corporation report as additional paid-in capital?

a. $215,000

b. $275,000

c. $0

d. $260,000

a. $215,000

On April 30, Algee, Belger, and Ceda formed a partnership by combining their separate business proprietorships. Algee contributed cash of $50,000. Belger contributed property with a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The partnership accepted responsibility for the $35,000 mortgage attached to the property. Ceda contributed equipment with a $30,000 carrying amount, a $75,000 original cost, and $55,000 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest April 30 capital account balance?

a. algee

b. belger

c. ceda

d. all capital account balances are equal

c. ceda

When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner's capital account?

a. contributing partner’s original cost

b. contributing partner’s tax basis

c. assessed valuation for property tax purposes

d. fair value at the date of contribution

d. fair value at the date of contribution