Acc 401 advanced accounting week 11 quiz – final exam

ACC 401 Week 11 Quiz Final Exam – Strayer
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Quiz (Chapter 15 – 16) Final Exam (Chapter 5, 8, and 10 – 16)
Chapter 5
Allocation and Depreciation of Differences Between Implied and Book Value
Multiple Choice
1. When the implied value exceeds the aggregate fair values of identifiable net
assets, the residual difference is accounted for as
a. excess of implied over fair value.
b. a deferred credit.
c. difference between implied and fair value.
d. goodwill.
2. Long-term debt and other obligations of an acquired company should be
valued for consolidation purposes at their
a. book value.
b. carrying value.
c. fair value.
d. face value.
3. On January 1, 2010, Lester Company purchased 70% of Stork Corporation's
$5 par common stock for $600,000. The book value of Stork net assets was
$640,000 at that time. The fair value of Stork's identifiable net assets were the
same as their book value except for equipment that was $40,000 in excess of
the book value. In the January 1, 2010, consolidated balance sheet, goodwill
would be reported at
a. $152,000.
b. $177,143.
c. $80,000.
d. $0.
4. When the value implied by the purchase price of a subsidiary is in excess of
the fair value of identifiable net assets, the workpaper entry to allocate the
difference between implied and book value includes a
1. debit to Difference Between Implied and Book Value.
2. credit to Excess of Implied over Fair Value.
3. credit to Difference Between Implied and Book Value.
a. 1
b. 2
c. 3
d. Both 1 and 2

5. If the fair value of the subsidiary's identifiable net assets exceeds both the
book value and the value implied by the purchase price, the workpaper entry
to eliminate the investment account
a. debits Excess of Fair Value over Implied Value.
b. debits Difference Between Implied and Fair Value.
c. debits Difference Between Implied and Book Value.
d. credits Difference Between Implied and Book Value.
6. The entry to amortize the amount of difference between implied and book
value allocated to an unspecified intangible is recorded
1. on the subsidiary's books.
2. on the parent's books.
3. on the consolidated statements workpaper.
a. 1
b. 2
c. 3
d. Both 2 and 3
7. The excess of fair value over implied value must be allocated to reduce
proportionally the fair values initially assigned to
a. current assets.
b. noncurrent assets.
c. both current and noncurrent assets.
d. none of the above.
8. The SEC requires the use of push down accounting when the ownership
change is greater than
a. 50%
b. 80%
c. 90%
d. 95%
9. Under push down accounting, the workpaper entry to eliminate the investment
account includes a
a. debit to Goodwill.
b. debit to Revaluation Capital.
c. credit to Revaluation Capital.
d. debit to Revaluation Assets.
10. In a business combination accounted for as an acquisition, how should the
excess of fair value of identifiable net assets acquired over implied value be
treated?
a. Amortized as a credit to income over a period not to exceed forty years.
b. Amortized as a charge to expense over a period not to exceed forty years.
c. Amortized directly to retained earnings over a period not to exceed forty
years.
d. Recognized as an ordinary gain in the year of acquisition.

11. On November 30, 2010, Pulse Incorporated purchased for cash of $25 per
share all 400,000 shares of the outstanding common stock of Surge Company.
Surge 's balance sheet at November 30, 2010, showed a book value of
$8,000,000. Additionally, the fair value of Surge's property, plant, and
equipment on November 30, 2010, was $1,200,000 in excess of its book value.
What amount, if any, will be shown in the balance sheet caption "Goodwill" in
the November 30, 2010, consolidated balance sheet of Pulse Incorporated, and
its wholly owned subsidiary, Surge Company?
a. $0.
b. $800,000.
c. $1,200,000.
d. $2,000,000.
12. Goodwill represents the excess of the implied value of an acquired company
over the
a. aggregate fair values of identifiable assets less liabilities assumed.
b. aggregate fair values of tangible assets less liabilities assumed.
c. aggregate fair values of intangible assets less liabilities assumed.
d. book value of an acquired company.
13. Scooter Company, a 70%-owned subsidiary of Pusher Corporation, reported
net income of $240,000 and paid dividends totaling $90,000 during Year 3.
Year 3 amortization of differences between current fair values and carrying
amounts of Scooter's identifiable net assets at the date of the business
combination was $45,000. The noncontrolling interest in net income of
Scooter for Year 3 was
a. $58,500.
b. $13,500.
c. $27,000.
d. $72,000.
14. Porter Company acquired an 80% interest in Strumble Company on January 1,
2010, for $270,000 cash when Strumble Company had common stock of
$150,000 and retained earnings of $150,000. All excess was attributable to
plant assets with a 10-year life. Strumble Company made $30,000 in 2010 and
paid no dividends. Porter Company’s separate income in 2010 was $375,000.
Controlling interest in consolidated net income for 2010 is:
a. $405,000.
b. $399,000.
c. $396,000.
d. $375,000.
15. In preparing consolidated working papers, beginning retained earnings of the
parent company will be adjusted in years subsequent to acquisition with an
elimination entry whenever:
a. a noncontrolling interest exists.
b. it does not reflect the equity method.
c. the cost method has been used only.
d. the complete equity method is in use.

16. Dividends declared by a subsidiary are eliminated against dividend income
recorded by the parent under the
a. partial equity method.
b. equity method.
c. cost method.
d. equity and partial equity methods.
Use the following information to answer questions 17 through 20.
On January 1, 2010, Pandora Company purchased 75% of the common stock of
Saturn Company. Separate balance sheet data for the companies at the combination
date are given below:
Saturn Co. Saturn Co.
Pandora Co. Book Values Fair Values
Cash $ 18,000 $155,000 $155,000
Accounts receivable 108,000 20,000 20,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Acc. depreciation (180,000) (45,000)
Investment in Saturn Co. 330,000
Total assets $960,000 $405,000 $565,000
Accounts payable $156,000 $105,000 $105,000
Capital stock 600,000 225,000
Retained earnings 204,000 75,000
Total liabilities & equities $960,000 $405,000
Determine below what the consolidated balance would be for each of the requested
accounts on January 2, 2010.
17. What amount of inventory will be reported?
a. $125,000
b. $132,750
c. $139,250
d. $144,000
18. What amount of goodwill will be reported?
a. ($20,000)
b. ($25,000)
c. $25,000
d. $0
19. What is the amount of consolidated retained earnings?
a. $204,000
b. $209,250
c. $260,250
d. $279,000

20. What is the amount of total assets?
a. $921,000
b. $1,185,000
c. $1,525,000
d. $1,195,000
21. Sensible Company, a 70%-owned subsidiary of Proper Corporation, reported
net income of $600,000 and paid dividends totaling $225,000 during Year 3.
Year 3 amortization of differences between current fair values and carrying
amounts of Sensible's identifiable net assets at the date of the business
combination was $112,500. The noncontrolling interest in consolidated net
income of Sensible for Year 3 was
a. $146,250.
b. $33,750.
c. $67,500.
d. $180,000.
22. Primer Company acquired an 80% interest in SealCoat Company on January
1, 2010, for $450,000 cash when SealCoat Company had common stock of
$250,000 and retained earnings of $250,000. All excess was attributable to
plant assets with a 10-year life. SealCoat Company made $50,000 in 2010 and
paid no dividends. Primer Company’s separate income in 2010 was $625,000.
The controlling interest in consolidated net income for 2010 is:
a. $675,000.
b. $665,000.
c. $660,000.
d. $625,000.
Use the following information to answer questions 23 through 25.
On January 1, 2010, Poole Company purchased 75% of the common stock of
Swimmer Company. Separate balance sheet data for the companies at the
combination date are given below:
Swimmer Co. Swimmer Co.
Poole Co. Book Values Fair Values
Cash $ 24,000 $206,000 $206,000
Accounts receivable 144,000 26,000 26,000
Inventory 132,000 38,000 60,000
Land 78,000 32,000 60,000
Plant assets 700,000 300,000 350,000
Acc. depreciation (240,000) (60,000)
Investment in Swimmer Co. 440,000
Total assets $1,278,000 $542,000 $702,000
Accounts payable $206,000 $142,000 $142,000
Capital stock 800,000 300,000
Total liabilities & equities $1,278,000 $542,000

Determine below what the consolidated balance would be for each of the requested
accounts on January 2, 2010.
23. What amount of inventory will be reported?
a. $170,000.
b. $177,000.
c. $186,500.
d. $192,000.
24. What amount of goodwill will be reported?
a. $26,667.
b. $20,000.
c. $42,000.
d. $86,667.
25. What is the amount of total assets?
a. $1,626,667.
b. $1,566,667
c. $1,980,000.
d. $2,006,667.
Problems
5-1 Phillips Company purchased a 90% interest in Standards Corporation for
$2,340,000 on January 1, 2010. Standards Corporation had $1,650,000 of
common stock and $1,050,000 of retained earnings on that date.
The following values were determined for Standards Corporation on the date
of purchase:
Book Value Fair Value
Inventory $240,000 $300,000
Land 2,400,000 2,700,000
Equipment 1,620,000 1,800,000
Required:
A. Prepare a computation and allocation schedule for the difference between
the implied and book value in the consolidated statements workpaper.
B. Prepare the January 1, 2010, workpaper entries to eliminate the investment
account and allocate the difference between implied and book value.
5-2 Pullman Corporation acquired a 90% interest in Sleeper Company for
$6,500,000 on January 1 2010. At that time Sleeper Company had common
stock of $4,500,000 and retained earnings of $1,800,000. The balance sheet
information available for Sleeper Company on January 1, 2010, showed the
following:

Inventory (FIFO) $1,300,000 $1,500,000
Equipment (net) 1,500,000 1,900,000
Land 3,000,000 3,000,000
The equipment had a remaining useful life of ten years. Sleeper Company
reported $240,000 of net income in 2010 and declared $60,000 of dividends
during the year.
Required:
Prepare the workpaper entries assuming the cost method is used, to eliminate
dividends, eliminate the investment account, and to allocate and depreciate the
difference between implied and book value for 2010.
5-3 On January 1, 2010, Preston Corporation acquired an 80% interest in Spiegel
Company for $2,400,000. At that time Spiegel Company had common stock
of $1,800,000 and retained earnings of $800,000. The book values of Spiegel
Company's assets and liabilities were equal to their fair values except for land
and bonds payable. The land's fair value was $120,000 and its book value was
$100,000. The outstanding bonds were issued on January 1, 2005, at 9% and
mature on January 1, 2015. The bond principal is $600,000 and the current
yield rate on similar bonds is 8%.
Required:
Prepare the workpaper entries necessary on December 31, 2010, to allocate,
amortize, and depreciate the difference between implied and book value.

Present Value
Present value of 1 of Annuity of 1
9%, 5 periods .64993 3.88965
8%, 5 periods .68058 3.99271
5-4 Pennington Corporation purchased 80% of the voting common stock of
Stafford Corporation for $3,200,000 cash on January 1, 2010. On this date the
book values and fair values of Stafford Corporation's assets and liabilities
were as follows:
Cash $ 70,000 $ 70,000
Receivables 240,000 240,000
Inventories 600,000 700,000
Other Current Assets 340,000 405,000
Land 600,000 720,000
Buildings – net 1,050,000 1,920,000
Equipment – net 850,000 750,000
$3,750,000 $4,805,000
Accounts Payable $ 250,000 $250,000
Other Liabilities 740,000 670,000
Capital Stock 2,400,000
Retained Earnings 360,000
$3,750,000
Required:
Prepare a schedule showing how the difference between Stafford
Corporation's implied value and the book value of the net assets acquired
should be allocated.
5-5 Perez Corporation acquired a 75% interest in Schmidt Company on January 1,
2010, for $2,000,000. The book value and fair value of the assets and
liabilities of Schmidt Company on that date were as follows:
Current Assets $ 600,000 $ 600,000
Property & Equipment (net)1,400,000 1,800,000
Land 700,000 900,000
Deferred Charge 300,000 300,000
Total Assets $3,000,000 $3,600,000
Less Liabilities 600,000 600,000
Net Assets $2,400,000 $3,000,000
The property and equipment had a remaining life of 6 years on January 1,
2010, and the deferred charge was being amortized over a period of 5 years
from that date. Common stock was $1,500,000 and retained earnings was
$900,000 on January 1, 2010. Perez Company records its investment in
Schmidt Company using the cost method.

Required:
Prepare, in general journal form, the December 31, 2010, workpaper entries
necessary to:
A. Eliminate the investment account.
B. Allocate and amortize the difference between implied and book value.
5-6 On January 1, 2010, Page Company acquired an 80% interest in Schell
Company for $3,600,000. On that date, Schell Company had retained earnings
of $800,000 and common stock of $2,800,000. The book values of assets and
liabilities were equal to fair values except for the following:
Inventory $ 50,000 $ 85,000
Equipment (net) 540,000 720,000
Land 300,000 660,000
The equipment had an estimated remaining useful life of 8 years. One-half of
the inventory was sold in 2010 and the remaining half was sold in 2011. Schell
Company reported net income of $240,000 in 2010 and $300,000 in 2011. No
dividends were declared or paid in either year. Page Company uses the cost
method to record its investment in Schell Company.
Required:
Prepare, in general journal form, the workpaper eliminating entries necessary
in the consolidated statements workpaper for the year ending December 31,
2011.
5-7 Paddock Company acquired 90% of the stock of Spector Company for
$6,300,000 on January 1, 2010. On this date, the fair value of the assets and
liabilities of Spector Company was equal to their book value except for the
inventory and equipment accounts. The inventory had a fair value of
$2,300,000 and a book value of $1,900,000. The equipment had a fair value of
$3,300,000 and a book value of $2,800,000.
The balances in Spector Company's capital stock and retained earnings
accounts on the date of acquisition were $3,700,000 and $1,900,000,
respectively.
Required:
In general journal form, prepare the entries on Spector Company's books to
record the effect of the pushed down values implied by the acquisition of its
stock by Paddock Company assuming that:
A values are allocated on the basis of the fair value of Spector Company as a
whole imputed from the transaction.
B values are allocated on the basis of the proportional interest acquired by
Paddock Company.

5-8 Pruitt Corporation acquired all of the voting stock of Soto Corporation on
January 1, 2010, for $210,000 when Soto had common stock of $150,000 and
retained earnings of $24,000. The excess of implied over book value was
allocated $9,000 to inventories that were sold in 2010, $12,000 to equipment
with a 4-year remaining useful life under the straight-line method, and the
remainder to goodwill.
Financial statements for Pruitt and Soto Corporations at the end of the fiscal
year ended December 31, 2011 (two years after acquisition), appear in the first
two columns of the partially completed consolidated statements workpaper.
Pruitt Corp. has accounted for its investment in Soto using the partial equity
method of accounting.
Required:
Complete the consolidated statements workpaper for Pruitt Corporation and
Soto Corporation for December 31, 2011.
Pruitt Corporation and Soto Corporation
Consolidated Statements Workpaper
at December 31, 2011
Eliminations
Pruitt
Corp.
Soto
Corp.
Debit Credit
Consolidated
Balances
INCOME
STATEME
NT
Sales 618,000 180,000
Equity from
Subsidiary
Income 36,000
Cost of Sales
(450,000) (90,000)
Other Expenses
(114,000) (54,000)
Net Income to
Ret. Earn.
90,000 36,000
Pruitt Retained
Earnings 1/1
72,000
Soto Retained
Earnings 1/1
3,000
Add: Net Income
90,000 36,000
Less: Dividends
(60,000) (12,000)

Retained Earnings
12/31
102,000 54,000
BALANCE
SHEET
Cash
42,000 21,000
Inventories
63,000 45,000
Land
33,000 18,000
Equipment and
Buildings-
net 192,000 165,000
Investment in
Soto Corp. 240,000
Total Assets
570,000 249,000
LIA &
EQUITIES
Liabilities
168,000 45,000
Common Stock
300,000 150,000
Retained Earnings
102,000 54,000
Total Equities
570,000 249,000
5-9On January 1, 2010, Prescott Company acquired 80% of the outstanding capital
stock of Sherlock Company for $570,000. On that date, the capital stock of
Sherlock Company was $150,000 and its retained earnings were $450,000.
On the date of acquisition, the assets of Sherlock Company had the following
values:
Fair Market
Book Value Value
Inventories................................................................$ 90,000 $165,000
Plant and equipment.....................................................150,000 180,000
All other assets and liabilities had book values approximately equal to their respective
fair market values. The plant and equipment had a remaining useful life of 10
years from January 1, 2010, and Sherlock Company uses the FIFO inventory
cost flow assumption.
Sherlock Company earned $180,000 in 2010 and paid dividends in that year of
$90,000.
Prescott Company uses the complete equity method to account for its
investment in S Company.
Required:

A. Prepare a computation and allocation schedule.
B. Prepare the balance sheet elimination entries as of December 31, 2010.
C. Compute the amount of equity in subsidiary income recorded on the books
of Prescott Company on December 31, 2010.
D. Compute the balance in the investment account on December 31, 2010.
Short Answer
1. When the value implied by the acquisition price is below the fair value of the
identifiable net assets the residual amount will be negative (bargain
acquisition). Explain the difference in accounting for bargain acquisition
between past accounting and proposed accounting requirements.
2. Push down accounting is an accounting method required for the subsidiary in
some instances such as the banking industry. Briefly explain the concept of
push down accounting.
Questions from the Textbook
1. Distinguish among the following concepts:(a)Difference between book value
and the value implied by the purchase price.(b)Excess of implied value over
fair value.(c)Excess of fair value over implied value.(d)Excess of book value
over fair value.
2. In what account is the difference between book value and the value implied by
the purchase
price recorded on the books of the investor? In what account is the “excess of
implied over fair value” recorded?
3. How do you determine the amount of “the difference between book value and
the value implied by the purchase price” to be allocated to a specific asset of a
less than wholly owned subsidiary?
4. The parent company’s share of the fair value of the net assets of a subsidiary
may exceed acquisition cost. How must this excess be treated in the
preparation of consolidated financial statements?
5. What are the arguments for and against the alternatives for the handling of
bargain acquisitions? Why are such acquisitions unlikely to occur with great
frequency?
6. P Company acquired a 100% interest in S Company. On the date of
acquisition the fair value of the assets and liabilities of S Company was equal
to their book value except for land that had a fair value of $1,500,000 and a
book value of $300,000.
At what amount should the land of S Company be included in the consolidated
balance sheet?

At what amount should the land of S Company be included in the consolidated
balance sheet if P Company acquired an80% interest in S Company rather
than a 100%interest?
Business Ethics Question from the Textbook
Consider the following: Many years ago, a student in a consolidated financial
statements class came to me and said that Grand Central (a multi-store grocery and
variety chain in Salt Lake City and surrounding towns and cities) was going to be
acquired and that I should try to buy the stock and make lots of money. I asked him
how he knew and he told me that he worked part-time for Grand Central and heard
that Fred Meyer was going to acquire it. I did not know whether the student worked in
the accounting department at Grand Central or was a custodian at one of the stores. I
thanked him for the information but did not buy the stock. Within a few weeks, the
announcement was made that Fred Meyer was acquiring Grand Central and the stock
price shot up, almost doubling. It was clear that I had missed an opportunity to make a
lot of money ... I don’t know to this day whether or not that would have been insider
trading. How-ever, I have never gone home at night and asked my wife if the SEC
called. From “Don’t go to jail and other good advice for accountants,” by Ron Mano,
Accounting Today, October 25, 1999.
Question: Do you think this individual would have been guilty of insider trading if he
had purchased the stock in Grand Central based on this advice? Why or why not? Are
there ever instances where you think it would be wise to miss out on an opportunity to
reap benefits simply because the behavior necessitated would have been in a gray
ethical area, though not strictly illegal? Defend your position.
Chapter 8
Changes in Ownership Interest
Multiple Choice
1. When the parent company sells a portion of its investment in a subsidiary, the
workpaper entry to adjust for the current year’s income sold to noncontrolling
stockholders includes a
a. debit to Subsidiary Income Sold.
b. debit to Equity in Subsidiary Income.
c. credit to Equity in Subsidiary Income.
d. credit to Subsidiary Income Sold.
2. A parent company may increase its ownership interest in a subsidiary by
a. buying additional subsidiary shares from third parties.
b. buying additional subsidiary shares from the subsidiary.
c. having the subsidiary purchase its shares from third parties.
d. all of these.
3. If a portion of an investment is sold, the value of the shares sold is determined
by using the:
1. first-in, first-out method.

2. average cost method.
3. specific identification method.
a. 1
b. 2
c. 3
d. 1 and 3
4. If a parent company acquires additional shares of its subsidiary’s stock
directly from the subsidiary for a price less than their book value:
1. total noncontrolling book value interest increases.
2. the controlling book value interest increases.
3. the controlling book value interest decreases.
a. 1
b. 2
c. 3
d. 1 and 3
5. If a subsidiary issues new shares of its stock to noncontrolling stockholders,
the book value of the parent’s interest in the subsidiary may
a. increase.
b. decrease.
c. remain the same.
d. increase, decrease, or remain the same.
6. The purchase by a subsidiary of some of its shares from noncontrolling
stockholders results in the parent company’s share of the subsidiary’s net
assets
a. increasing.
b. decreasing.
c. remaining unchanged.
d. increasing, decreasing, or remaining unchanged.
7. The computation of noncontrolling interest in net assets is made by
multiplying the noncontrolling interest percentage at the
a. beginning of the year times subsidiary stockholders’ equity amounts.
b. beginning of the year times consolidated stockholders’ equity amounts.
c. end of the year times subsidiary stockholders’ equity amounts.
d. end of the year times consolidated stockholders’ equity amounts.
8. Under the partial equity method, the workpaper entry that reverses the effect
of subsidiary income for the year includes a:
1. credit to Equity in Subsidiary Income.
2. debit to Subsidiary Income Sold.
3. debit to Equity in Subsidiary Income.
a. 1
b. 2
c. 3
d. both 1 and 2

9. Polk Company owned 24,000 of the 30,000 outstanding common shares of
Sloan Company on January 1, 2010. Polk’s shares were purchased at book
value when the fair values of Sloan’s assets and liabilities were equal to their
book values. The stockholders’ equity of Sloan Company on January 1, 2010,
consisted of the following:
Common stock, $15 par value$ 450,000
Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000
Sloan Company sold 7,500 additional shares of common stock for $90 per
share on January 2, 2010. If Polk Company purchased all 7,500 shares, the
book entry to record the purchase should increase the Investment in Sloan
Company account by
a. $562,500.
b. $590,625.
c. $675,000.
d. $150,000.
e. Some other account.
10. Polk Company owned 24,000 of the 30,000 outstanding common shares of
Sloan Company on January 1, 2010. Polk’s shares were purchased at book
value when the fair values of Sloan’s assets and liabilities were equal to their
book values. The stockholders’ equity of Sloan Company on January 1, 2010,
consisted of the following:
Common stock, $15 par value$ 450,000
Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000
Sloan Company sold 7,500 additional shares of common stock for $90 per
share on January 2, 2010. If all 7,500 shares were sold to noncontrolling
stockholders, the workpaper adjustment needed each time a workpaper is
prepared should increase (decrease) the Investment in Sloan Company by
a. ($140,625).
b. $140,625.
c. ($112,500).
d. $192,000.
e. None of these.
11. On January 1, 2006, Parent Company purchased 32,000 of the 40,000
outstanding common shares of Sims Company for $1,520,000. On January 1,
2010, Parent Company sold 4,000 of its shares of Sims Company on the open
market for $90 per share. Sims Company’s stockholders’ equity on January 1,
2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $400,000 $ 400,000
Other contributed capital 400,000 400,000
Retained earnings 800,000 1,400,000
$1,600,000 $2,200,000

The difference between implied and book value is assigned to Sims
Company’s land. The amount of the gain on sale of the 4,000 shares that
should be recorded on the books of Parent Company is
a. $68,000.
b. $170,000.
c. $96,000.
d. $200,000.
e. None of these.

12. On January 1, 2006, Patterson Corporation purchased 24,000 of the 30,000
outstanding common shares of Stewart Company for $1,140,000. On January
1, 2010, Patterson Corporation sold 3,000 of its shares of Stewart Company on
the open market for $90 per share. Stewart Company’s stockholders’ equity on
January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $ 300,000 $ 300,000
Retained earnings 600,000 1,050,000
$1,200,000 $1,650,000
The difference between implied and book value is assigned to Stewart
Company’s land. As a result of the sale, Patterson Corporation’s Investment in
Stewart account should be credited for
a. $165,000.
b. $206,250.
c. $120,000.
d. $142,500.
e. None of these.
13. On January 1, 2006, Peterson Company purchased 16,000 of the 20,000
outstanding common shares of Swift Company for $760,000. On January 1,
2010, Peterson Company sold 2,000 of its shares of Swift Company on the
open market for $90 per share. Swift Company’s stockholders’ equity on
January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $200,000 $ 200,000
$800,000 $1,100,000
The difference between implied and book value is assigned to Swift
Company’s land. Assuming no other equity transactions, the amount of the
difference between implied and book value that would be added to land on a
workpaper for the preparation of consolidated statements on December 31,
2010, would be
a. $120,000.
b. $115,000.
c. $105,000.
d. $84,000.
e. None of these.
14. On January 1 2010, Paulson Company purchased 75% of Shields Corporation
for $500,000. Shields’ stockholders’ equity on that date was equal to $600,000
and Shields had 60,000 shares issued and outstanding on that date. Shields
Corporation sold an additional 15,000 shares of previously unissued stock on
December 31, 2010.
Assume that Paulson Company purchased the additional shares what would be
their current percentage ownership on December 31, 2010?

a. 92%
b. 87%
c. 80%
d. 100%
15. On January 1 2010, Powder Mill Company purchased 75% of Selfine
Company for $500,000. Selfine Company’s stockholders’ equity on that date
was equal to $600,000 and Selfine Company had 60,000 shares issued and
outstanding on that date. Selfine Company Corporation sold an additional
15,000 shares of previously unissued stock on December 31, 2010.
Assume Selfine Company sold the 15,000 shares to outside interests, Powder
Mill Company’s percent ownership would be:
a. 33 1/3%
b. 60%
c. 75%
d. 80%
16. P Corporation purchased an 80% interest in S Corporation on January 1, 2010,
at book value for $300,000. S’s net income for 2010 was $90,000 and no
dividends were declared. On May 1, 2010, P reduced its interest in S by
selling a 20% interest, or one-fourth of its investment for $90,000. What will
be the Consolidated Gain on Sale and Subsidiary Income Sold for 2010?
Consolidated Gain on Sale Subsidiary Income Sold
a. $9,000 $6,000
b. $9,000 $15,000
c. $15,000 $6,000
d. $15,000 $15,000
17. P Corporation purchased an 80% interest in S Corporation on January 1, 2010,
at book value for $300,000. S’s net income for 2010 was $90,000 and no
dividends were declared. On May 1, 2010, P reduced its interest in S by
selling a 20% interest, or one-fourth of its investment for $90,000. What
would be the balance in the Investment of S Corporation account on
December 31, 2010?
a. $300,000.
b. $225,000.
c. $279,000.
d. $261,000.
18. The purchase by a subsidiary of some of its shares from the noncontrolling
stockholders results in an increase in the parent’s percentage interest in the
subsidiary. The parent company’s share of the subsidiary’s net assets will
increase if the shares are purchased:
a. at a price equal to book value.
b. at a price below book value.
c. at a price above book value.
d. will not show an increase.
Use the following information for Questions 19-21.

On January 1, 2006, Perk Company purchased 16,000 of the 20,000 outstanding
common shares of Self Company for $760,000. On January 1, 2010, Perk Company
sold 2,000 of its shares of Self Company on the open market for $90 per share. Self
Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as
follows:
1/1/06 1/1/10
Common stock, $10 par value $ 200,000 $ 200,000
$800,000 $1,100,000
The difference between implied and book value is assigned to Self Company’s land.
19. The amount of the gain on sale of the 2,000 shares that should be recorded on
the books of Perk Company is
a. $34,000.
b. $85,000.
c. $48,000.
d. $100,000.
e. None of these.
20. As a result of the sale, Perk Company’s Investment in Self account should be
credited for
a. $110,000.
b. $137,500.
c. $80,000.
d. $95,000.
e. None of these.
21. Assuming no other equity transactions, the amount of the difference between
implied and book value that would be added to land on a work paper for the
preparation of consolidated statements on December 31, 2010 would be
a. $120,000.
b. $115,000.
c. $105,000.
d. $84,000.
22. On January 1, 2010, P Corporation purchased 75% of S Corporation for
$500,000. S’s stockholders’ equity on that date was equal to $600,000 and S
had 40,000 shares issued and outstanding on that date. S Corporation sold an
additional 8,000 shares of previously unissued stock on December 31, 2010.
Assume that P Corporation purchased the additional shares what would be
their current percentage ownership on December 31, 2010?
a. 62 1/2%.
b. 75%
c. 79 1/6%
d. 100%

23. On January 1, 2010, P Corporation purchased 75% of S Corporation for
$500,000. S’s stockholders’ equity on that date was equal to $600,000 and S
had 40,000 shares issued and outstanding on that date. S Corporation sold an
additional 8,000 shares of previously unissued stock on December 31, 2010.
Assume S sold the 8,000 shares to outside interests, P’s percent ownership
would be:
a. 56 1/4%
b. 62 1/2%
c. 75%
d. 79 1/6%
Problems
8-1 Piper Company purchased Snead Company common stock through open-
market purchases as follows:
Acquired
Date Shares Cost
1/1/09 1,500 $ 50,000
1/1/10 3,300 $ 90,000
1/1/11 6,600 $250,000
Snead Company had 12,000 shares of $20 par value common stock
outstanding during the entire period. Snead had the following retained
earnings balances on the relevant dates:
January 1, 2009 $ 90,000
January 1, 2010 30,000
January 1, 2011 150,000
December 31, 2011 300,000
Snead Company declared no dividends in 2009 or 2010 but did declare
$60,000 of dividends in 2011. Any difference between cost and book value is
assigned to subsidiary land. Piper uses the equity method to account for its
investment in Snead.
Required:
A. Prepare the journal entries Piper Company will make during 2010 and
2011 to account for its investment in Snead Company.
B. Prepare workpaper eliminating entries necessary to prepare a consolidated
statements workpaper on December 31, 2011.
8-2 On January 1, 2008, Patel Company acquired 90% of the common stock of
Seng Company for $650,000. At that time, Seng had common stock ($5 par)
of $500,000 and retained earnings of $200,000.
On January 1, 2010, Seng issued 20,000 shares of its unissued common stock,
with a market value of $7 per share, to noncontrolling stockholders. Seng’s
retained earnings balance on this date was $300,000. Any difference between

cost and book value relates to Seng’s land. No dividends were declared in
2010.
Required:
A. Prepare the entry on Patel’s books to record the effect of the issuance
assuming the cost method.
B. Prepare the elimination entries for the preparation of a consolidated
statements workpaper on December 31, 2010 assuming the cost method.
8-3Pratt Company purchased 40,000 shares of Silas Company’s common
stock for $860,000 on January 1, 2010. At that time Silas Company had
$500,000 of $10 par value common stock and $300,000 of retained
earnings. Silas Company’s income earned and increase in retained
earnings during 2010 and 2011 were:
2010 2011
Income earned $260,000 $360,000
Increase in Retained Earnings200,000 300,000
Silas Company income is earned evenly throughout the year.
On September 1, 2011, Pratt Company sold on the open market, 12,000 shares
of its Silas Company stock for $460,000. Any difference between cost and
book value relates to Silas Company land. Pratt Company uses the cost
method to account for its investment in Silas Company.
Required:
A. Compute Pratt Company’s reported gain (loss) on the sale.
B. Prepare all consolidated statements workpaper eliminating entries for a
workpaper on December 31, 2011.
8-4 Pelky made the following purchases of Stark Company common stock:
Date Shares Cost
1/1/10 70,000 (70%) $1,000,000
1/1/11 10,000 (10%) 160,000
Stockholders’ equity information for Stark Company for 2010 and 2011
follows:
2010 2011
Common stock, $10 par value $1,000,000 $1,000,000
1/1 Retained earnings 300,000 380,000
Net income 110,000 140,000
Dividends declared, 12/15 (30,000) (40,000)
Retained earnings, 12/31 380,000 480,000
Total stockholders’ equity, 12/31$1,380,000 $1,480,000

On July 1, 2011, Pelky sold 14,000 shares of Stark Company common stock
on the open market for $22 per share. The shares sold were purchased on
January 1, 2010. Stark notified Pelky that its net income for the first six
months was $70,000. Any difference between cost and book value relates to
subsidiary land. Pelky uses the cost method to account for its investment in
Stark Company.
Required:
A. Prepare the journal entry made by Pelky to record the sale of the 14,000
shares on July 1, 2011.
B. Prepare the workpaper eliminating entries needed for a consolidated
C. Compute the amount of noncontrolling interest that would be reported
on the consolidated balance sheet on December 31, 2011.
8-5 P Company purchased 96,000 shares of the common stock of S Company for
$1,200,000 on January 1, 2007, when S’s stockholders’ equity consisted of $5
par value, Common Stock at $600,000 and Retained Earnings of $800,000.
The difference between cost and book value relates to goodwill.
On January 2, 2010, S Company purchased 20,000 of its own shares from
noncontrolling interests for cash of $300,000 to be held as treasury stock. S
Company’s retained earnings had increased to $1,000,000 by January 2, 2010.
S Company uses the cost method in regards to its treasury stock and P
Company uses the equity method to account for its investment in S Company.
Required:
Prepare all determinable workpaper entries for the preparation of consolidated
statements on December 31, 2010.
8-6 Penner Company acquired 80% of the outstanding common stock of Solk
Company on January 1, 2008, for $396,000. At the date of purchase, Solk
Company had a balance in its $2 par value common stock account of $360,000
and retained earnings of $90,000. On January 1, 2010, Solk Company issued
45,000 shares of its previously unissued stock to noncontrolling stockholders
for $3 per share. On this date, Solk Company had a retained earnings balance
of $152,000. The difference between cost and book value relates to subsidiary
land. No dividends were paid in 2010. Solk Company reported income of
$30,000 in 2010.
Required:
A. Prepare the journal entry on Penner’s books to record the effect of the
issuance assuming the equity method.
B. Prepare the eliminating entries needed for the preparation of a
consolidated statements workpaper on December 31, 2010, assuming the
equity method.

8-7 Petty Company acquired 85% of the common stock of Selmon Company in
two separate cash transactions. The first purchase of 108,000 shares (60%) on
January 1, 2009, cost $735,000. The second purchase, one year later, of
45,000 shares (25%) cost $330,000. Selmon Company’s stockholders’ equity
was as follows:
December 31 December 31
2009 2010
Common Stock, $5 par $ 900,000 $ 900,000
Retained Earnings, 1/1 262,000 302,000
Net Income 69,000 90,000
Dividends Declared, 9/30 (30,000) (38,000)
Retained Earnings, 12/31 301,000 354,000
Total Stockholders’ Equity, 12/31 $1,201,000 $1,254,000
On April 1, 2010, after a significant rise in the market price of Selmon
Company’s stock, Petty Company sold 32,400 of its Selmon Company shares
for $390,000. Selmon Company notified Petty Company that its net income
for the first three months was $22,000. The shares sold were identified as
those obtained in the first purchase. Any difference between cost and book
value relates to goodwill. Petty uses the partial equity method to account for
its investment in Selmon Company.
Required:
A. Prepare the journal entries Petty Company will make on its books during
2009 and 2010 to account for its investment in Selmon Company.
B. Prepare the workpaper eliminating entries needed for a consolidated
Short Answer
1. A parent’s ownership percentage in a subsidiary may change for several
reasons. Identify three reasons the ownership percentage may change.
2. A parent company’s equity interest in a subsidiary may change as the
result of the issuance of additional shares of stock by the subsidiary.
Describe the affect on the parent’s investment account when the new
shares are (a) purchased ratably by the parent and noncontrolling
shareholders or (b) entirely by the noncontrolling shareholders.
Short Answer Question from the Textbook
1. Identify three types of transactions that result in a change in a parent company’s
ownership interest in its subsidiary.
2. Why is the date of acquisition of subsidiary stock important under the purchase
method?

3. When a parent company has obtained control of a subsidiary through several
purchases and subsequently sells a portion of its shares in the subsidiary, how is
the carrying value of the shares sold determined?
4. When a parent company that records its investment using the cost method during a
fiscal year sells a portion of its investment, explain the correct accounting for any
differences between selling price and recorded values.
5. ABC Corporation purchased 10,000 shares(80%) of EZ Company at $35 per share
and sold them several years later for $35 per share. The consolidated income
statement reports a loss on the sale of this investment. Explain.
6. Explain how a parent company that owns less than100% of a subsidiary can
purchase an entire new is-sue of common stock directly from the subsidiary.
7. When a subsidiary issues additional shares of stock to noncontrolling stockholders
and such issuance results in an increase in the book value of the parent’s share of
the subsidiary’s equity, how should the increase be reflected in the financial
statements? What if it results in a decrease?
8. P Company holds an 80% interest in S Company. Determine the effect (that is,
increase, decrease, no change, not determinable) on both the total book value of
the noncontrolling interest and the noncontrolling interest’s percentage of
ownership in the net assets of S Company for each of the following situations:
a. P Company acquires additional shares directly from S Company at a price
equal to the book value per share of the S Company stock immediately
prior to the issuance.
b. S Company acquires its own shares on the open market. The cost of these
shares is less than their book value.
c. Assume the same situation as in (b) except that the cost of the shares is
greater than their book value.
d. P Company and a noncontrolling stockholder each acquire 100 shares
directly from S Com-pany at a price below the book value per share.
Business Ethics Question from Textbook
During a recent review of the quarterly financial statements and supporting ledgers,
you noticed several un-usual journal entries. While the dollar amounts of the journal
entries were not large, there did not appear to be supporting documentation. You
decide to bring the matter to the attention of your immediate supervisor. After you
mentioned the issue, the supervisor calmly stated that the matter would be looked into
and that you should not worry about it.1.You feel a bit uncomfortable about the
situation. What is your responsibility and what action, if any, should you take?
Chapter 10
Insolvency – Liquidation and Reorganization
Multiple Choice

1. A corporation that is unable to pay its debts as they become due is:
a. bankrupt.
b. overdrawn.
c. insolvent.
d. liquidating.
2. When a business becomes insolvent, it generally has three possible courses of
action. Which of the following is not one of the three possible courses of
action?
a. The debtor and its creditors may enter into a contractual agreement,
outside of formal bankruptcy proceedings.
b. The debtor continues operating the business in the normal course of the
day-to-day operations.
c. The debtor or its creditors may file a bankruptcy petition, after which the
debtor is liquidated under Chapter 7.
d. The debtor or its creditors may file a petition for reorganization under
Chapter 11.
3. Assets transferred by the debtor to a creditor to settle a debt are transferred at:
a. book value of the debt.
b. book value of the transferred assets.
c. fair market value of the debt.
d. fair market value of the transferred assets.
4. A composition agreement is an agreement between the debtor and its creditors
whereby the creditors agree to:
a. accept less than the full amount of their claims.
b. delay settlement of the claim until a latter date.
c. force the debtor into a liquidation.
d. accrue interest at a higher rate.
5. In a troubled debt restructuring involving a modification of terms, the debtor’s
gain on restructuring:
a. will equal the creditor’s gain on restructuring.
b. will equal the creditor’s loss on restructuring.
c. may not equal the creditor’s gain on restructuring.
d. may not equal the creditor’s loss on restructuring.
6. A bankruptcy petition filed by a firm is a:
a. chapter petition.
b. involuntary petition.
c. voluntary petition.
d. chapter 11 petition.
7. When a bankruptcy court enters an “order for relief” it has:
a. accepted the petition.
b. dismissed the petition.
c. appointed a trustee.
d. started legal action against the debtor by its creditors.

8. An involuntary petition filed by a firm’s creditors whereby there are twelve or
more creditors must be signed by at least:
a. two creditors.
b. three creditors.
c. five creditors.
d. six creditors.
9. The duties of the trustee include:
a. appointing creditors’ committees in liquidation cases.
b. approving all payments for debts incurred before the bankruptcy filing.
c. examining claims and disallowing any that are improper.
d. calling a meeting of the debtor’s creditors.
10. Which of the following items is not a specified priority for unsecured creditors
in a bankruptcy petition?
a. Administration fees incurred in administering the bankrupt’s estate.
b. Unsecured claims for wages earned within 90 days and are less than
$4,650 per employee.
c. Unsecured claims of governmental units for unpaid taxes.
d. Unsecured claims on credit card charges that do not exceed $3,000.
11. Which statement with respect to gains and losses on troubled debt
restructuring is correct?
a. Creditors losses on restructuring are extraordinary.
b. Debtor’s gains and losses on asset transfers and debtor’s gains on
restructuring are combined and treated as extraordinary.
c. Debtor gains and creditor losses on restructuring are extraordinary, if
material in amount.
d. Debtor losses on asset transfers and debtor gains on restructuring are
reported as a component of net income.
12. When fresh-start reporting is used according to Statement of Position (SOP)
90-7, the implication is that a new firm exists. Which of the following
statements is not correct about fresh-start accounting?
a. Assets are reported at fair values.
b. Beginning retained earnings is reported at zero.
c. The fair value of the assets must be less than the post liabilities and
allowed claims.
d. The original owners must own less than 50% of the voting stock after
reorganization.
13. A Statement of Affairs is a report designed to show:
a. an estimated amount that would be received by each class of creditor’s
claims in the event of liquidation.
b. a balance sheet prepared on the going-concern assumption.
c. assets and liabilities classified as current and noncurrent.
d. assets and liabilities reported at their current book values.

14. When a secured claim is not fully settled by the selling of the underlying
collateral, the remaining portion:
a. of the claim cannot be collected by the creditor.
b. remains as a secured claim.
c. is classified as an unsecured priority claim.
d. is classified as an unsecured nonpriority claim.
15. Layne Corporation entered into a troubled debt restructuring agreement with
their local bank. The bank agreed to accept land with a carrying amount of
$360,000 and a fair value of $540,000 in exchange for a note with a carrying
amount of $765,000. Ignoring income taxes, what amount should Layne report
as a gain on its income statement?
a. $0.
b. $180,000.
c. $225,000.
d. $405,000.
16. The following information pertains to the transfer of real estate in regards to a
troubled debt restructuring by Nen Co. to Baker Co. in full settlement of Nen’s
liability to Baker:
Carrying amount of liability settled $450,000
Carrying amount of real estate transferred $300,000
Fair value of real estate transferred $330,000
What amount should Nen report as ordinary gain (loss) on transfer of real
estate?
a. $(30,000).
b. $30,000.
c. $120,000.
d. $150,000.
troubled debt restructuring by Nen Co. to Baker Co. in full settlement of Nen’s
liability to Baker:
What amount should Baker report as a gain or (loss) on restructuring?
a. $120,000 ordinary loss.
b. $120,000 extraordinary loss.
c. $150,000 ordinary loss.
d. $150,000 extraordinary loss.
18. Dobler Corporation was forced into bankruptcy and is in the process of
liquidating assets and paying claims. Unsecured claims will be paid at the rate
of thirty cents on the dollar. Carson holds a note receivable from Dobler for
$75,000 collateralized by an asset with a book value of $50,000 and a

liquidation value of $25,000. The amount to be realized by Carson on this note
is:
a. $25,000.
b. $40,000.
c. $50,000.
d. $75,000.
19. Bad Company filed a voluntary bankruptcy petition, and the statement of
affairs reflected the following amounts:
Estimated
Assets Book Value Current Value
Assets pledged with fully secured creditors $ 900,000 $ 1,110,000
Assets pledged partially secured creditors 540,000 360,000
Free assets 1,260,000 960,000
$2,700,000 $2,430,000
Liabilities
Liabilities with priority $ 210,000
Fully secured creditors 780,000
Partially secured creditors 600,000
Unsecured creditors 1,620,000
$3,210,000
Assume the assets are converted to cash at their estimated current values.
What amount of cash will be available to pay unsecured nonpriority claims?
a. $720,000.
b. $840,000.
c. $960,000.
d. $1,080,000.
20. The final settlement with unsecured creditors is computed by dividing:
a. total net realizable value by total unsecured creditor claims.
b. net free assets by total secured creditor claims.
c. total net realizable value by total secured creditor claims.
d. net free assets by total unsecured creditor claims.
21. Dodge Corporation entered into a troubled debt restructuring agreement with
their local bank. The bank agreed to accept land with a carrying value of
$200,000 and a fair value of $300,000 in exchange for a note with a carrying
amount of $425,000. Ignoring income taxes, what amount should Dodge
report as a gain on its income statement?
a. $0.
b. $100,000.
c. $125,000.
d. $225,000.
troubled debt restructuring by Drier Co. to Cole Co. in full settlement of
Drier’s liability to Cole:

What amount should Drier report as ordinary gain (loss) on transfer of real
estate?
a. $(25,000).
b. $25,000.
c. $100,000.
d. $125,000.
troubled debt restructuring by Drier Co. to Cole Co. in full settlement of
Drier’s liability to Cole:
What amount should Cole report as a gain or (loss) on restructuring?
a. $100,000 ordinary loss.
b. $100,000 extraordinary loss.
c. $125,000 ordinary loss.
d. $125,000 extraordinary loss.
24. Poor Company filed a voluntary bankruptcy petition, and the settlement of
affairs reflected the following amounts:
Estimated
Assets Book Value Current Value
Assets pledged with fully secured creditors $ 450,000 $ 555,000
Assets pledged partially secured creditors 270,000 180,000
Free assets 630,000 480,000
$1,350,000 $1,215,000
Liabilities
Liabilities with priority $ 105,000
Fully secured creditors 390,000
Partially secured creditors 300,000
Unsecured creditors 810,000
$1,605,000
Assume the assets are converted to cash to their estimated current values.
What amount of cash will be available to pay unsecured nonpriority claims?
a. $360,000.
b. $420,000.
c. $480,000.
d. $540,000.

25. Dooley Corporation was forced into bankruptcy and is in the process of
liquidating assets and paying claims. Unsecured claims will be paid at the rate
of thirty cents on the dollar. Cerner holds a note receivable from Dooley for
$90,000 collateralized by an asset with a book value of $60,000 and a
liquidation value of $30,000. The amount to be realized by Cerner on this note
is:
a. $30,000.
b. $48,000.
c. $60,000.
d. $90,000.
Problems
10-1 On January 1, 2011, Bargain Mart owed City Bank $1,600,000, under an 8%
note with three years remaining to maturity. Due to financial difficulties,
Bargain Mart was unable to pay the previous year’s interest. City Bank agreed
to settle Bargain Mart’s debt in exchange for land having a fair market value
of $1,310,000. Bargain Mart purchased the land in 2003 for $1,000,000.
Required:
Prepare the journal entries to record the restructuring of the debt by Bargain Mart.
10-2 On January 1, 2010, Gannon, Inc. owed BancCorp $12 million on a 10% note
due December 31, 2011. Interest was last paid on December 31, 2008. Gannon
was experiencing severe financial difficulties and asked BancCorp to modify
the terms of the debt agreement. After negotiation BancCorp agreed to:
- Forgive the interest accrued for the year just ended,
- Reduce the remaining two years interest payments to $900,000 each and
delay the first payment until December 31, 2011, and
- Reduce the unpaid principal amount to $9,600,000.
Required:
Prepare the journal entries for Gannon, Inc. necessitated by the restructuring of the
debt at (1) January 1, 2010, (2) December 31, 2011, and (3) December 31, 2012.
10-3 On January 2, 2011 Stevens, Inc. was indebted to First Bank under a $12
million, 10% unsecured note. The note was signed January 2, 2005, and was
due December 31, 2014. Annual interest was last paid on December 31, 2009.
Stevens negotiated a restructuring of the terms of the debt agreement due to
financial difficulties.
Required:
Prepare all journal entries for Stevens, Inc. to record the restructuring and any
remaining transactions relating to the debt under each independent assumption.
A. First Bank agreed to settle the debt in exchange for land which cost Stevens
$8,500,000 and has a fair market value of $10,000,000.
B. First Bank agreed to (1) forgive the accrued interest from last year (2) reduce
the remaining four interest payments to $600,000 each, and (3) reduce the
principal to $9,000,000.

10-4 On December 31, 2011, Community Bank agreed to restructure a $900,000,
8% loan receivable from Neer Corporation because of Neer’s financial
problems. At December 31 there was $36,000 of accrued interest for a six-
month period. Terms of the restructuring agreement are as follows:
- Reduce the loan from $900,000 to $600,000;
- Extend the maturity date by 2 years from December 31, 2011 to
December 31, 2013;
- Reduce the interest rate on the loan from 8% to 6%.
Present value assumptions:
Present value of $1 for 2 years at 6% = 0.8900
Present value of $1 for 2 years at 8% = 0.8573
Present value of an ordinary annuity of $1 for 2 years at 6% = 1.8334
Present value of an ordinary annuity of $1 for 2 years at 8% = 1.7833
Required:
Compute the gain or loss that will be reported by Community Bank.

10-5 Donnelly Corporation incurred major losses in 2010 and entered into
voluntary Chapter 7 bankruptcy in the early part of 2011. By June 1, all assets
were converted into cash, the secured creditors were paid, and $150,000 in
cash was left to pay the remaining claims as follows.
Accounts payable $ 48,000
Claims prior to the trustee’s appointment 21,000
Property taxes payable 18,000
Wages payable (all under $4,650 per employee) 54,000
Unsecured note payable 60,000
Accrued interest on the note payable 6,000
Administrative expenses of the trustee 30,000
Total $237,000
Required:
Classify the claims by their Chapter 7 priority ranking, and analyze which amounts
will be paid and which amounts will be written off.
10-6 Davis Corporation filed a petition under Chapter 7 of the U.S. Bankruptcy Act
on June 30, 2011. Data relevant to its financial position as of this date are:
Estimated Net
Book Value Realizable Values
Cash $ 3,000 $ 3,000
Accounts receivable-net 72,000 48,000
Inventories 60,000 72,000
Equipment-net 165,000 87,000
Total assets $300,000 $210,000
Accounts payable $ 72,000
Rent payable 21,000
Wages payable 45,000
Note payable plus accrued interest 96,000
Capital stock 180,000
Retained earnings (deficit) (120,000)
Total liabilities and equity $300,000
Required:
A. Prepare a statement of affairs assuming that the note payable and interest are
secured by
a mortgage on the equipment and that wages are less than $4,650 per
employee.
B. Estimate the amount that will be paid to each class of claims if priority
liquidation expenses including trustee fees are $24,000 and estimated net
realizable values are actually realized.

10-7 The following data are taken from the statement of affairs of Mitchell
Company.
Assets pledged with fully secured creditors
(Realizable value, $635,000) $800,000
Assets pledged with partially secured creditors
(realizable value, $300,000) 365,000
Free assets (Realizable value, $340,000) 535,000
Fully secured creditor claims 316,000
Partially secured creditor claims 400,000
Unsecured creditor claims with priority 100,000
General unsecured creditor claims 1,165,000
Required:
Compute the amount that will be paid to each class of creditor.
10-8 On February 1, 2011, Hilton Company filed a petition for reorganization under
the bankruptcy statutes. The court approved the plan on September 1, 2011,
including the following provisions:
1. Accrued expenses of $21,930, representing priority items, are to be
paid in full.
2. Hilton Company is to exchange accounts receivable in the face amount
of $138,000 and an allowance for uncollectible accounts of $29,200
for the full settlement of $198,600 owed on open account to one of its
major unsecured creditors. The estimated fair value of the receivables
is $104,000.
3. Unsecured creditors of open accounts amounting to $91,600 and paid
40 cents on the dollar in full settlement.
4. Hilton Company’s only other major unsecured creditor agreed to a
five-year extension of the $500,000 principal owed him on a 10% note
payable. Accrued interest on the note on September 1, 2011, amounts
to $45,000, one-third of which is to be paid in cash and the remainder
canceled. In addition, no interest is to be charged during the remaining
five years to maturity of the note.
Required:
Prepare journal entries on the books of Hilton Company to give effect to the
preceding provisions.
Short Answer
1. The Bankruptcy Reform Act assigns priorities to certain unsecured claims, and
each rank must be satisfied in full before the next–lower rank is paid. Identify
the five categories of unsecured creditor claims.
2. Creditors are classified by law as either secured or unsecured. Distinguish
among fully secured, partially secured, and unsecured creditors.

Short Answer Questions from the Textbook
1. List the primary types of contractual agreements between a debtor company
and its creditors and briefly explain what is involved in each of them.
2. Distinguish between a voluntary and involuntary bankruptcy petition.
3. Distinguish among fully secured, partially se-cured, and unsecured claims
of creditors.
4. Five priority categories of unsecured claims must be paid before general
unsecured creditors are paid. Briefly describe what makes up each category.
5. What are “dividends” in a bankruptcy proceeding?
6. For each of the following debt restructurings, indicate whether a gain is
recognized and, if so, how the gain is measured and reported. (a)Transfer of
assets by the debtor to the creditor.(b)Grant of an equity interest by the debtor
to the creditor.(c)Modification of the terms of the payable.
7. What is the purpose of a Statement of Affairs?
8. One of the officers of a corporation that had just received a discharge in
bankruptcy said, “Good, now we don’t owe anyone.” Is he correct?
9. What are the duties of a trustee in a liquidation proceeding?
10. What is the purpose of a combining work paper prepared by a trustee?
11. What is the purpose of a realization and liquidation account?
From an ethical perspective, some believe that it is never justifiable for an individual
or business to declare bankruptcy. Others believe that some actions are appropriate
only in extreme circumstances. Without question, as stated in the Journal of
Accountancy, November 2005,page 51, “the ease with which debtors have been able
to walk away from debt has frustrated creditors for years.”
1. Describe the differences between Chapter 7 (liquidations) and Chapter 11
(reorganizations)from an ethical standpoint. Who is most likely to be hurt by a
Chapter 7 bankruptcy?
2. Discuss the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005. Do you believe the changes wrought by this act will serve to protect
creditors?
3. The Protection Act of 2005 requires individuals, but not businesses, to
undergo a “means” test before they can seek Chapter 7 relief. Do you believe
this change should be applied to businesses as well? Why or why not?
4. Do you think that you would ever resort to filing for bankruptcy relief
yourself? Why or why not?

Chapter 11
International Financial Reporting Standards
Multiple Choice—Conceptual
1. The goals of the International Accounting Standards Committee include all of
the following except
a. To improve international accounting.
b. To formulate a single set of auditing standards to be applied in all
countries.
c. To promote global acceptance of its standards.
d. To harmonize accounting practices between countries.
2. Which of the following is true about the FASB after the mandatory adoption
of IFRS by US companies?
a. The FASB will serve in an advisory capacity to the IASB.
b. The FASB will remain the designated standard-setter for US companies,
but incorporate IFRS into US GAAP.
c. The role of the FASB post-IFRS adoption has not been determined.
d. The FASB will cease to exist.
3. Milestones in the transition plan for mandatory adoption of IFRS by US
companies include all of the following except:
a. Improvements in accounting standards.
b. Limited early adoption of IFRS in an effort to enhance comparability for
US investors
c. Mandatory use of IFRS by US entities.
d. All of the above are milestones in the transition plan for mandatory
adoption of IFRS by US companies.
4. The roles of the IASC Foundation include
a. establishing global standards for financial reporting.
b. coordinating the filing requirements of stock exchange regulatory
agencies.
c. financing IASB operations.
d. all of the above are roles of the IASC Foundation.
5. Which of the following statements is true regarding the IASC?
a. The IASC is a public-sector, not-for-profit organization.
b. The IASC is accountable to an international securities regulator.
c. The IASC is a stand-alone, private-sector organization.
d. The IASC funds the operations of the IASB through filing fees paid to
national securities regulators.
6. . Concerns of the SEC with regard to the mandatory adoption of IFRS by US
entities include all of the following except:
a. the extent to which the standard-setting process addresses emerging issues
in a timely manner.
b. the security and stability of IASC funding.

c. the enhancement of IASB independence through a system of voluntary
contributions from firms in the accounting profession.
d. the degree to which due process is integrated into the standard-setting
process .
7. . Under the staged transition to mandatory adoption of IFRS being considered
by the SEC,
a. large, accelerated filers would begin IFRS filings for fiscal years
beginning on or after December 31, 2011.
b. non-accelerated filers would begin IFRS filings for fiscal years beginning
on or after December 31, 2015.
c. large non-accelerated filers would have until fiscal years beginning on or
after December 15, 2017 to adopt IFRS.
d. smaller reporting companies would begin IFRS filings for fiscal years
beginning on or after December 15, 2016.
.
8. In order to complete its first IFRS filing, including three years of audited
financial statements, according to the staged transition to mandatory adoption
of IFRS considered by the SEC, a large accelerated filer would need to adopt
IFRS beginning in fiscal year
a. 2011.
b. 2012.
c. 2013.
d. 2014.
9. Benefits of the FASB Accounting Standards Codification (ASC) include all of
the following except
a. increases the independence of the FASB.
b. aids in the convergence of US GAAP with IFRS.
c. reduces time and effort required to research accounting issues.
d. clearly distinguishes between authoritative and non-authoritative guidance.
10. SFAS No.162, the Accounting Standards Codification, is directed to
a. auditors.
b. Boards of Directors.
c. securities regulators.
d. entities.
11. IFRS and US GAAP differ with regard to financial statement presentation in
all of the following except
a. IFRS generally requires that assets be listed in order of increasing liquidity
while US GAAP requires that assets be listed in order of decreasing
liquidity.
b. US GAAP requires expenses to be listed by function while IFRS requires
expenses to be listed by nature.
c. IFRS prohibits extraordinary items which are allowed by US GAAP.
d. IFRS requires two years of comparative income statements while under
US GAAP, three years of income statements are required.

12. The major difference between IFRS and US GAAP in accounting for
inventories is that
a. US GAAP prohibits the use of specific identification.
b. IFRS requires the use of the LIFO cost flow assumption.
c. US GAAP prohibits the use of the LIFO cost flow assumption
d. US GAAP allows the use of the LIFO cost flow assumption.
13. One difference between IFRS and GAAP in valuing inventories is that
a. IFRS, but not GAAP, allows reversals so that inventories written down
under lower-of-cost-or-market can be written back up to the original cost .
b. GAAP defines market value as replacement cost where IFRS defines
market as the selling price.
c. GAAP strictly adheres to the historical cost concept and does not allow for
write-downs of inventory values while IFRS embraces fair value.
d. IFRS, but not GAAP, requires that inventories be valued at the lower of
cost or market.
14. In accounting for research and development costs.
a. the general rule under both US GAAP and IFRS is that research and
development costs should be expensed as incurred .
b. IFRS generally expenses all research and development costs while US
GAAP expenses research costs as incurred but capitalizes development
costs once technological and economic feasibility has been demonstrated.
c. US GAAP generally expenses all research and development costs while
IFRS expenses research costs as incurred but capitalizes development
costs once technological and economic feasibility has been demonstrated.
d. both US GAAP and IFRS expense research costs as incurred but capitalize
development costs once technological and economic feasibility has been
demonstrated.
.
15. Property, plant and equipment are valued at
a. historical cost under both IFRS and US GAAP.
b. historical cost or revalued amounts under both IFRS and US GAAP.
c. revalued amounts under IFRS.
d. historical cost under US GAAP while IFRS allows the assets to be valued
at either historical cost or revalued amounts.
16. The amount of a long-lived asset impairment loss is generally determined by
comparing
a. the asset’s carrying amount and its fair value under US GAAP.
b. the asset’s carrying amount and its discounted future cash flows less cost
to sell under IFRS.
c. the asset’s carrying amount and its undiscounted future cash flows under
US GAAP.
d. the asset’s carrying amount and its undiscounted future cash flows less
disposal cost under IFRS.

17. In accounting for liabilities, IFRS interprets “probable” as
a. likely.
b. more likely than not.
c. somewhat possible.
d. possible and not remote.
18. Accounting under IFRS and US GAAP is similar for all of the following
topics except
a. changes in estimates.
b. related party transactions.
c. research and development costs.
d. changes in methods.
Use the following information to answer the next three questions.
On January 1, 2010, AirFrance purchases an airplane for €14,400,000. The
components of the airplane and their useful lives are as follows:
Component Cost Useful life
Frame €7,200,000 24 years
Engine 4,800,000 20 years
Other 2,400,000 10 years
AirFrance uses the straight-line method of depreciation. The asset is assumed
to have no salvage value.
19. Under IFRS, the entry to record the acquisition of the airplane would include
a. a debit to Asset/ Airplane of €14,400,000.
b. a debit to Asset/ Airplane frame of €14,400,000.
c. a debit to Asset/ Airplane engine of €4,800,000.
d. cannot be determined from the information given.
20. Under US GAAP, the entry to record depreciation expense on the asset at
December 31, 2011 will include
a. a credit to accumulated depreciation of €1,200,000.
b. a debit to depreciation expense of €1,440,000
c. a debit to depreciation expense of €800,000.
d. a credit to accumulated depreciation of €600,000.
21. Under IFRS, the entry to record depreciation expense on the asset at
December 31, 2011 will include a credit to accumulated depreciation of
a. €1,440,000.
b. €1,200,000
c. €800,000.
d. €600,000.
22. Accounting terminology that differs between IFRS and US GAAP include all
of the following except
a. the use by IFRS of “turnover” for revenue.

b. the use by IFRS of “share premium” for additional paid-in-capital.
c. the use by IFRS of “other capital reserves” for retained earnings.
d. the use by IFRS of “issued capital” for common stock.
23. New terminology introduced under the joint IFRS- US GAAP Customer
Consideration (Allocation) Model includes all of the following except
a. revenue recognition voids.
b. contract rights.
c. net contract asset/ liability.
d. performance obligations.
24. Under IFRS, the criteria to determine whether a lease should be capitalized
include
a. the present value of the minimum lease payments is 90% or more of the
fair value of the asset at the inception of the lease.
b. the term of the lease is 75% or more of the economic life of the asset.
c. the term of the lease is equal to substantially all of the economic life of the
asset.
d. the present value of the minimum lease payments is equal to substantially
all of the fair value of the asset at the inception of the lease.
Use the following information to answer the next three questions.
Bellingham Electronics Inc. offers one model of laptop computer for £1000
and a two-year warranty for £250. The retailer, as part of a Boxing Day
promotion, offers a limited-time offer for the laptop, including delivery and
the two-year warranty for £1,180. The cost of the computer to Bellingham is
£700. Any warranty repairs are assumed to be done ratably over time.
Bellingham accounts for transactions using the customer consideration model.
In the first twelve months following the sale, Bellingham incurred £980 of
costs servicing the computers under warranty.
25. Bellingham sells ten laptops to Bertram Inc. under the limited-time promotion.
Upon delivery of the laptops to Bertram, Bellingham will recognize revenue
of
a. £9,300.
b. £9,440
c. £10,000.
d. £11,800.
26. In the first twelve months following the sale, Bellingham would reduce the
Contract liability – warranty account by
a. £784.
b. £980
c. £1,180.

d. £1,380.
27. In the first twelve months, Bellingham would record warranty expense of
a. £784.
b. £980
c. £1,180.
d. £1,380.
28. Significant differences between IFRS and Chinese GAAP include all of the
following except
a. Chinese GAAP allows the use of LIFO while IFRS prohibits it.
b. Chinese GAAP has different related party disclosure requirements.
c. Chinese GAAP follows the cost principle while IFRS allows for
revaluations and recoveries of impairment losses.
d. Chinese GAAP uses the equity method of accounting for jointly controlled
entities while IFRS also allows proportionate consolidation.
29. All of the following are options for non-US companies who wish to list
securities on a US exchange except
a. The company can use either IFRS or their local GAAP.
b. If a company uses their local GAAP they must reconcile net income and
shareholders’ equity or fully disclose all financial information required of
US companies.
c. If a company uses their local GAAP they must reconcile net income and
shareholders’ equity and fully disclose all financial information required of
US companies
d. The company must file a form 20-F with the SEC.
30. All of the following are true regarding American Depository Receipts (ADRs)
except
a. Most ADRs are unsponsored, meaning that the DR bank creates a DR
program without a formal agreement with the issuing non-US company.
b. An ADR is a derivative instrument traded in the US that usually represents
a fixed number of publicly traded shares of a non-US company.
c. ADRs are denominated in US dollars.
d. A Level 1 sponsored ADR is the easiest way for a non-US company to
access US markets.
Exercise from the Textbook
Exercise 11-1
Component Depreciation SMC Company purchases a building for $100,000.
Included in this cost are $12,000 for electrical systems and $15,000 for the roof. The
building is expected to have a 40 year useful life, but the electrical system will last
for 20 years and the roof will last 15 years.
Required: Part A: Assuming that straight-line depreciation is used, compute
depreciation expense assuming that U.S. GAAP is used.

Part B: Assuming that straight line depreciation is used, compute depreciation
expense for year one assuming IFRS is used (assume component depreciation).
Problem from the Textbook
Problem 11-4
Prepare a statement of financial position using the proposed new format as described
in the chapter.
Questions from the Textbook
1. As mentioned in Chapter 1, the project on business combinations was the first
of several joint projects undertaken by the FASB and the IASB in their move
to converge standards globally. Nonetheless, complete convergence has not

yet occurred, and there are those who believe it to be a poor idea. Discuss the
reasons for and against global convergence.
2. In recent months, virtually every topic that has come to the attention of the
standard setters has been undertaken as a joint effort of the FASB and the
IASB rather than as an individual effort by one of the two boards. List and
discuss some of the joint projects that fall into this category.
3. What is the rationale for the harmonization of international accounting
standards?
4. Why is the SEC, once so reluctant to accept IAS, now very willing to allow
firms using IFRS to is-sue securities in the U.S. stock market without
reconciling to U.S. GAAP?
5. Discuss the types of ADRs that non-U.S. companies might use to access the
U.S. markets.
6. Describe the attitude of the FASB toward the IASB (International Accounting
Standards Board).
7. How does the FASB view its role in the development of an international
accounting system? Currently, two members of the IASB board were affiliated
with the FASB. Comment on what effect this might have on the likelihood
that the U.S. standard setters will accept the new IASB statements, if any?
8. List some of the major differences in accounting between IFRS and U.S.
GAAP.
Business Ethics Question from the Textbook
A vice president of marketing for your company has been charged with
embezzling nearly $100,000 from the company. The vice president allegedly
submitted fraudulent vendor invoices in order to receive payments. As the vice
president of marketing for the company, the vice president is authorized to
approve the payment of invoices submitted by third-party vendors who did work
for the company. After the activities were uncovered, the company responded by
stating: “All employees are accountable to our ethics guidelines and procedures.
We do not tolerate violations of our ethics policy and will consistently enforce
these policies and procedures.”
1. How would you evaluate the internal controls of the company?
2. Do you think there are companies that develop comprehensive ethics and
compliance pro-grams for mid- and lower-level employees and ignore upper-
level executives and managers?
3. Is it an ethical issue if companies are not forth-coming concerning fraudulent
activities of top executives in an effort to minimize negative publicity?

Chapter 12
Accounting for Foreign Currency Transactions And Hedging Foreign Exchange
Risk
Multiple Choice
1. A discount or premium on a forward contract is deferred and included in the
measurement of the related foreign currency transaction if the contract is
classified as a:
a. hedge of a net investment in a foreign entity.
b. hedge of an exposed asset or liability position.
c. hedge of an identifiable foreign currency commitment.
d. contract acquired to speculate in the movement of exchange rates.
2. The discount or premium on a forward contract entered into as a hedge of an
exposed asset or liability position should be:
a. included as a separate component of stockholders’ equity.
b. amortized over the life of the forward contract.
c. deferred and included in the measurement of related foreign currency
transaction.
d. none of these.
3. An indirect exchange rate quotation is one in which the exchange rate is
quoted:
a. in terms of how many units of the domestic currency can be converted into
one unit of foreign currency.
b. for the immediate delivery of currencies exchanged.
c. in terms of how many units of the foreign currency can be converted into
one unit of domestic currency.
d. for the future delivery of currencies exchanged.
4. A transaction gain is recorded when there is an:
a. importing transaction and the exchange rate increases.
b. exporting transaction and the exchange rate increases.
c. exporting transaction and the exchange rate decreases.
d. none of these.
5. During 2011, a U.S. company purchased inventory from a foreign supplier.
The transaction was denominated in the local currency of the seller. The direct
exchange rate increased from the date of the transaction to the balance sheet
date. The exchange rate decreased from the balance sheet date to the
settlement date in 2012. For the years 2011 and 2012, transaction gains or
losses should be recognized as:
2011 2012
a. gain gain
b. gain loss
c. loss loss
d. loss gain

6. A transaction gain or loss is reported currently in the determination of income
if the purpose of the forward contract is to:
a. hedge a net investment in a foreign entity.
b. hedge an identifiable foreign currency commitment.
c. speculate in foreign currency.
d. none of these.
7. On November 1, 2011, American Company sold inventory to a foreign
customer. The account will be settled on March 1 with the receipt of $500,000
foreign currency units (FCU). On November 1, American also entered into a
forward contract to hedge the exposed asset. The forward rate is $0.70 per unit
of foreign currency. American has a December 31 fiscal year-end. Spot rates
on relevant dates were:
Per Unit of
Date Foreign Currency
November 1 $0.73
December 31 0.71
March 1 0.74
The entry to record the forward contract is
a. FCU Receivable 350,000
Premium on Forward Contract 15,000
Dollars Payable 365,000
b. Dollars Receivable 365,000
Discount on Forward Contract 15,000
FCU Payable 350,000
c. FCU Receivable 365,000
d. Dollars Receivable 350,000
FCU Payable 365,000
8. On November 1, 2011, American Company sold inventory to a foreign
customer. The account will be settled on March 1 with the receipt of $450,000
foreign currency units (FCU). On November 1, American also entered into a
of foreign currency. American has a December 31 fiscal year-end. Spot rates
on relevant dates were:
Per Unit of
November 1 $0.73
December 31 0.71
March 1 0.74

What will be the adjusted balance in the Accounts Receivable account on
December 31, and how much gain or loss was recorded as a result of the
adjustment?
Receivable Balance Gain/Loss Recorded
a. $319,500 $9,000 gain
b. $319,500 $9,000 loss
c. $333,000 $4,500 gain
d. $333,000 $18,000 gain
9. A transaction gain or loss at the settlement date is:
a. a change in the exchange rate quoted by a foreign exchange trader.
b. synonymous with the translation of foreign currency financial statements
into dollars.
c. the difference between the recorded dollar amount of an account
receivable denominated in a foreign currency and the amount of dollars
received.
d. the difference between the buying and selling rate quoted by a foreign
exchange trader at the settlement date.
10. From the viewpoint of a U.S. company, a foreign currency transaction is a
transaction:
a. measured in a foreign currency.
b. denominated in a foreign currency.
c. measured in U.S. currency.
d. denominated in U.S. currency.
11. The exchange rate quoted for future delivery of foreign currency is the
definition of a(n):
a. direct exchange rate.
b. indirect exchange rate.
c. spot rate.
d. forward exchange rate.
12. A transaction loss would result from:
a. an increase in the exchange rate applicable to an asset denominated in a
foreign currency.
b. a decrease in the exchange rate applicable to a liability denominated in a
foreign currency.
c. the import of merchandise when the transaction is denominated in a
foreign currency.
d. a decrease in the exchange rate applicable to an asset denominated in a
foreign currency.
13. The forward exchange rate quoted for the remaining term of a forward
contract is used to account for the contract when the forward contract:
a. extends beyond one year or the current operating cycle.
b. is a hedge of an identifiable foreign currency commitment.
c. is a hedge of an exposed net liability position.
d. was acquired to speculate in foreign currency.

14. A transaction gain or loss on a forward contract entered into as a hedge of an
identifiable foreign currency commitment may be:
a. included as a separate item in the stockholders’ equity section of the
balance sheet.
b. recognized currently in the determination of net income.
c. deferred and included in the measurement of the related foreign currency
transaction.
d. none of these.
15. Craiger, Inc. a U.S. corporation, bought machine parts from Reinsch Company
of Germany on March 1, 2011, for 70,000 marks, when the spot rate for marks
was $0.5395. Craiger’s year-end was March 31, 2011, when the spot rate for
marks was $0.5445. Craiger bought 70,000 marks and paid the invoice on
April 20, 2011, when the spot rate was $0.5495. How much should be shown
in Craiger’s income statements as foreign exchange (transaction) gain or loss
for the years ended March 31, 2011 and 2012?
2011 2012
a. $0 $0
b. $0 $350 loss
c. $350 loss $0
d. $350 loss $350 loss
16. A forward exchange contract is transacted at a discount if the current forward
rate is:
a. less than the expected spot rate.
b. more than the expected spot rate.
c. less than the current spot rate.
d. more than the current spot rate.
17. Stuart Corporation a U.S. company, contracted to purchase foreign goods.
Payment in foreign currency was due one month after delivery. Between the
delivery date and the time of payment, the exchange rate changed in Stuart’s
favor. The resulting gain should be reported in the financial statements as a(n):
a. component of other comprehensive income.
b. component of income from continuing operations.
c. extraordinary income.
d. deferred income.

18. Jackson Paving Company purchased equipment for 350,000 British pounds
from a supplier in London on July 7, 2011. Payment in British pounds is due
on Sept. 7, 2011. The exchange rates to purchase one pound is as follows:
July 7 August 31, (year end)
September 7
Spot-rate 2.08 2.05 2.04
30-day rate 2.07 2.03 --
60-day rate 2.06 1.99 --
On its August 31, 2011 income statement, what amount should Jackson
Paving report as a foreign exchange transaction gain:
a. $14,000.
b. $7,000.
c. $10,500.
d. $0.
19. On September 1, 2011, Swash Plating Company entered into two forward
exchange contracts to purchase 250,000 euros each in 90 days. The relevant
exchange rates are as follows:
Forward Rate
Spot rate For Dec. 1, 2011
September 1, 2011 1.46 1.47
September 30, 2011 (year-end) 1.50 1.48
The first forward contract was to hedge a purchase of inventory on September
1, payable on December 1. On September 30, what amount of foreign
currency transaction loss should Swash Plating report in income?
a. $0.
b. $2,500.
c. $5,000.
d. $10,000.
20. On September 1, 2011, Swash Plating Company entered into two forward
exchange contracts to purchase 250,000 euros each in 90 days. The relevant
exchange rates are as follows:
Forward Rate
Spot rate For Dec. 1, 2011
September 1, 2011 1.46 1.47
September 30, 2011 (year-end) 1.50 1.48
The second forward contract was strictly for speculation. On September 30,
2011, what amount of foreign currency transaction gain should Swash Plating
report in income?
a. $0.
b. $2,500.
c. $5,000.
d. $10,000.

21. On November 1, 2011, Prism Company sold inventory to a foreign customer.
The account will be settled on March 1 with the receipt of 250,000 foreign
currency units (FCU). On November 1, Prism also entered into a forward
contract to hedge the exposed asset. The forward rate is $0.90 per unit of
foreign currency. Prism has a December 31 fiscal year-end. Spot rates on
relevant dates were:
Per Unit of
November 1 $0.93
December 31 0.91
March 1 0.94
The entry to record the forward contract is
a. FCU Receivable 225,000
Premium on Forward Contract 7,500
b. Dollars Receivable 232,500
FCU Payable 225,000
c. FCU Receivable 232,500
d. Dollars Receivable 225,000
FCU Payable 232,500
22. On November 1, 2011, National Company sold inventory to a foreign
customer. The account will be settled on March 1 with the receipt of 200,000
foreign currency units (FCU). On November 1, National also entered into a
of foreign currency. National has a December 31 fiscal year-end. Spot rates on
relevant dates were:
Per Unit of
November 1 $0.83
December 31 0.81
March 1 0.84
What will be the adjusted balance in the Accounts Receivable account on
December 31, and how much gain or loss was recorded as a result of the
adjustment?
Receivable Balance Gain/Loss Recorded
a. $170,000 $4,000 gain
b. $162,000 $4,000 loss

c. $168,000 $2,000 gain
d. $164,000 $2,000 loss
23. Caldron Company purchased equipment for 375,000 British pounds from a
supplier in London on July 3, 2011. Payment in British pounds is due on Sept.
3, 2011. The exchange rates to purchase one pound is as follows:
July 3 August 31, (year end) September 3
Spot-rate 1.58 1.55 1.54
30-day rate 1.57 1.53 --
60-day rate 1.56 1.49 --
On its August 31, 2011, income statement, what amount should Caldron report
as a foreign exchange transaction gain:
a. $18,750.
b. $3,750.
c. $11,250.
d. $0.
24. On April 1, 2011, Trent Company entered into two forward exchange
contracts to purchase 300,000 euros each in 90 days. The relevant exchange
rates are as follows:
Forward Rate
Spot rate For Aug. 1, 2011
April 1, 2011 1.16 1.17
April 30, 2011 (year-end) 1.20 1.18
The first forward contract was to hedge a purchase of inventory on April 1,
payable on December 1. On April 30, what amount of foreign currency
transaction loss should Trent report in income?
a. $0.
b. $3,000.
c. $9,000.
d. $12,000.
25. On April 1, 2011, Trent Company entered into two forward exchange
contracts to purchase 300,000 euros each in 90 days. The relevant exchange
rates are as follows:
Forward Rate
Spot rate For Aug. 1, 2011
April 1, 2011 1.16 1.17
April 30, 2011 (year-end) 1.20 1.18
The second forward contract was strictly for speculation. On April 30, 2011,
what amount of foreign currency transaction gain should Trent report in
income.
a. $0.
b. $3,000.
c. $9,000.

d. $12,000.
Problems
12-1 On November 1, 2010, Dorsey Company sold inventory to a company in
England. The sale was for 600,000 British pounds and payment will be
received on February 1, 2011. On November 1, Dorsey entered into a forward
contract to sell 600,000 British pounds on February 1 at the forward rate of
$1.65. Spot rates for the British pound are as follows:
November 1 $1.61
December 31 1.67
February 1 1.62
Dorsey has a December 31 fiscal year-end.
Required:
Compute each of the following:
1. The dollars to be received on February 1, 2011, from selling the 600,000
pounds to the exchange dealer.
2. The dollars that would have been received from the account receivable if
Dorsey had not hedged the sale contract with the forward contract.
3. The discount or premium on the forward contract.
4. The transaction gain or loss on the exposed asset related to the sale in 2010
and 2011.
5. The transaction gain or loss on the forward contract in 2010 and 2011.
6. The amount of the discount or premium on the forward contract amortized in
2010 and 2011.
12-2 On December 1, 2010, Derrick Corporation agreed to purchase a machine to
be manufactured by a company in Brazil. The purchase price is 1,150,000
Brazilian reals. To hedge against fluctuations in the exchange rate, Derrick
entered into a forward contract on December 1 to buy 1,150,000 reals on April
1, the agreed date of machine delivery, for $0.375 per real. The following
exchange rates were quoted:
Forward Rate
Date Spot Rate (Delivery on 4/1)
December 1 0.390 0.375
December 31 0.370 0.373
April 1 0.385 --
Required:
Prepare journal entries necessary for Derrick during 2010 and 2011 to account for the
transactions described above.

12-3 Colony Corp., a U.S. corporation, entered into a contract on November 1,
2010, to sell two machines to Crown Company, for 95,000 foreign currency
units (FCU). The machines were to be delivered and the amount collected on
March 1, 2011.
In order to hedge its commitment, Colony entered into a forward contract for
95,000 FCU delivery on March 1, 2011. The forward contract met all
conditions for hedging an identifiable foreign currency commitment.
Selected exchange rates for FCU at various dates were as follows:
November 1, 2010 – Spot rate $1.3076
Forward rate for delivery on March 1, 2011 1.2980
December 31, 2010 – Spot rate 1.3060
Forward rate for delivery on March 1, 2011 1.3150
March 1, 2011 – Spot rate 1.2972
Required:
Prepare all journal entries relative to the above on the books of Colony Corp. on the
following dates:
1. November 1, 2010.
2. Year-end adjustments on December 31, 2010.
3. March 1, 2011. (Include all adjustments related to the forward contract.)
12-4 On October 1, 2010, Nance Company purchased inventory from a foreign
customer for 750,000 units of foreign currency (FCU) due on January 31, 2011.
Simultaneously, Nance entered into a forward contract for 750,000 units of FC
for delivery on January 31, 2011, at the forward rate of $0.75. Payment was
made to the foreign customer on January 31, 2011. Spot rates on October 1,
December 31, and January 31, were $0.72, $0.73, and $0.76, respectively.
Nance amortizes all premiums and discounts on forward contracts and closes
its books on December 31.
Required:
A. Prepare all journal entries relative to the above to be made by Nance on
October 1, 2010.
B. Prepare all journal entries relative to the above to be made by Nance on
December 31, 2010.
C. Compute the transaction gain or loss on the forward contract that would be
recorded in 2011. Indicate clearly whether the amount is a gain or loss.
12-5 On October 1, 2010, Kline Company shipped equipment to a foreign customer
for a foreign currency (FC) price of FC 3,000,000 due on January 31, 2011. All
revenue realization criteria were satisfied and accordingly the sale was
recorded by Kline Company on October 1. Simultaneously, Kline entered into
a forward contract to sell 3,000,000 FCU on January 31, 2011 for $1,200,000.
Payment was received from the foreign customer on January 31, 2011. Spot

rates on October 1, December 31, and January 31 were $0.42, $0.425, and
$0.435, respectively. Kline amortizes all premiums and discounts on forward
contracts and closes its books on December 31.
Required:
Prepare all journal entries relative to the above to be made by Kline during 2010 and
2011.
12-6 On July 15, Worth, Inc. purchased 88,500,000 yen worth of parts from a
Tokyo company paying 20% down, and the balance is due in 90 days. Interest
is payable at a rate of 8% on the unpaid balance. The exchange rate on July
15, was $1.00 = 118 Japanese yen. On October 13, the exchange rate was
$1.00 = 114 Japanese yen.
Required:
Prepare journal entries to record the purchase and payment of this foreign currency
transaction in U.S. dollars.
12-7 On November 1, 2010, Bisk Corporation, a calendar-year U.S. Corporation,
invested in a speculative contract to purchase 700,000 euros on January 31,
2011, from a German brokerage firm. Bisk agreed to buy 700,000 euros at a
fixed price of $1.46 per euro. The brokerage firm agreed to send 700,000
euros to Bisk on January 31, 2011. The spot rates for euros are:
November 1, 2010 1 euro = 1.45
December 31, 2010 1 euro = 1.43
January 31, 2011 1 euro = 1.44
Required:
Prepare the journal entries that Bisk would record on November 1, December 31, and
January 31.
12-8 Consider the following information:
1. On November 1, 2011, a U.S. firm contracts to sell equipment (with an
asking price of 500,000 pesos) in Mexico. The firm will take delivery and
will pay for the equipment on February 1, 2012.
2. On November 1, 2011, the company enters into a forward contract to sell
500,000 pesos for $0.0948 on February 1, 2012.
3. Spot rates and the forward rates for February 1, 2012, settlement were as
follows (dollars per peso):
Forward Rate
Spot Rate for 2/1/12
November 1, 2011 $0.0954 $0.0948
Balance sheet date (12/31/11) 0.0949 0.0944
February 1, 2012 0.0947

4. On February 1, the equipment was sold for 500,000 pesos. The cost of the
equipment was $20,000.
Required:
Prepare all journal entries needed on November 1, December 31, and February 1 to
account for the forward contract, the firm commitment, and the transaction to sell the
equipment.
Short Answer
1. Accounting for a foreign currency transaction involves the terms measured and
denominated. Describe a foreign currency transaction and distinguish between
the terms measured and denominated.
2. There are a number of business situations in which a firm may acquire a forward
exchange contract. Identify three common situations in which a forward
exchange contract can be used as a hedge.
Short Answer Questions from the Textbook
1. Define currency exchange rates and distinguish between “direct” and
“indirect” quotations.
2. Explain why a firm is exposed to an added risk when it enters into a
transaction that is to be settled in a foreign currency.
3. Name the three stages of concern to the accountant in accounting for import–
export transactions. Briefly explain the accounting for each stage.
4. How should a transaction gain or loss be reported that is related to an unsettled
receivable recorded when the firm’s inventory was exported?
5. A U.S. firm carried a receivable for 100,000 yen. Assuming that the direct
exchange rate declined from $.009 at the date of the transaction to $.006at the
balance sheet date, compute the transaction gain or loss. What balance would
be reported for the receivable in the firm’s balance sheet?
6. Explain what is meant by the “two-transaction method” in recording exporting
or importing trans-actions. What support is given for this method?
7. Describe a forward exchange contract.
8. Explain the effects on income from hedging a foreign currency exposed net
asset position or net liability position.
9. What criteria must be satisfied for a foreign currency transaction to be
considered a hedge of an identifiable foreign currency commitment?

10. The FASB classifies forward contracts as those acquired for the purpose of
hedging and those acquired for the purpose of speculation. What main
differences are there in accounting for these two classifications?
11. How are foreign currency exchange gains and losses from hedging a
forecasted transaction handled?
12. What is a put option, and how might it be used to hedge a forecasted
transaction?
13. Define a derivative instrument, and describe the keystones identified by the
FASB for the ac-counting for such instruments.
14. Differentiate between forward-based derivatives and option-based derivatives.
15. List some of the criteria laid out by the FASB that are required for a gain or
loss on forecasted trans-actions (a cash flow hedge) to be excluded from the
income statement. If these criteria are satisfied, where are the gains or losses
reported, and when (if ever) are they shown in the income statement? What is
the rationale for this treatment?
Executive stock options (ESOs) are used to provide incentives for executives to
improve company performance. ESOs are usually granted “at-the-money,” meaning
that the exercise price of the options is set to equal the market price of the underlying
stock on the grant date. Clearly, executives would prefer to be granted options when
the stock price (and thus the exercise price) is at its lowest. Backdating options is the
practice of choosing a past date when the market price was particularly low.
Backdating has not, in the past, been illegal if no documents are forged, if
communicated to the shareholders, and if properly reflected in earnings and in taxes.
1. Since backdating gives the executive an “instant” profit, why wouldn’t the
firm simply grant an option with the exercise price lower than the cur-rent
market price?
2. Suppose the executive was not involved in back-dating the ESOs. Does the
executive face any ethical issues?
Chapter 13
Translation of Financial Statements of Foreign Affiliates
Multiple Choice

1. When translating foreign currency financial statements for a company whose
functional currency is the U.S. dollar, which of the following accounts is
translated using historical exchange rates?
Notes Payable Equipment
a. Yes Yes
b. Yes No
c. No No
d. No Yes
2. Under the temporal method, monetary assets and liabilities are translated by
using the exchange rate existing at the:
a. beginning of the current year.
b. date the transaction occurred.
c. balance sheet date.
d. None of these.
3. The process of translating the accounts of a foreign entity into its functional
currency when they are stated in another currency is called:
a. verification.
b. translation.
c. remeasurement.
d. None of these.
4. Which of the following would be restated using the average exchange rate
under the temporal method?
a. cost of goods sold
b. depreciation expense
c. amortization expense
d. None of these
5. Paid-in capital accounts are translated using the historical exchange rate
under:
a. the current rate method only.
b. the temporal method only.
c. both the current rate and temporal methods.
d. neither the current rate nor temporal methods.
6. Which of the following would be restated using the current exchange rate
under the temporal method?
a. Marketable securities carried at cost.
b. Inventory carried at market.
c. Common stock.
d. None of these.
7. The translation adjustment that results from translating the financial
statements of a foreign subsidiary using the current rate method should be:
a. included as a separate item in the stockholders' equity section of the
balance sheet.
b. included in the determination of net income for the period it occurs.

Acc 401 advanced accounting week 11 quiz – final exam

Acc 401 advanced accounting week 11 quiz – final exam

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