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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.
3.
4.
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.
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.
13.
14.
15.
16.
a.
b.
c.
d.
Values
Cash
Accounts receivable
Inventory
Land
Plant assets
Acc. depreciation
Investment in Saturn Co.
Total assets
$ 18,000
108,000
99,000
60,000
525,000
(180,000)
330,000
$960,000
$155,000
20,000
26,000
24,000
225,000
(45,000)
$155,000
$405,000
$565,000
Accounts payable
Capital stock
Retained earnings
Total liabilities & equities
$156,000
600,000
204,000
$960,000
$105,000
225,000
75,000
$405,000
$105,000
Determine below what the consolidated balance would be for each of the requested
accounts on January 2, 2010.
17.
18.
19.
20.
21.
22.
Book Values
Fair
Values
Cash
Accounts receivable
Inventory
Land
Plant assets
Acc. depreciation
Investment in Swimmer Co.
Total assets
Accounts payable
Capital stock
Retained earnings
$ 24,000
144,000
132,000
78,000
700,000
(240,000)
440,000
$1,278,000
$206,000
26,000
38,000
32,000
300,000
(60,000)
$206,000
$542,000
$702,000
$206,000
800,000
272,000
$142,000
300,000
100,000
$142,000
$1,278,000
$542,000
Determine below what the consolidated balance would be for each of the requested
accounts on January 2, 2010.
23.
24.
25.
Problems
5-1
Book Value
$240,000
2,400,000
1,620,000
Fair Value
$300,000
2,700,000
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
Inventory (FIFO)
Equipment (net)
Land
Book Value
$1,300,000
1,500,000
3,000,000
Fair Value
$1,500,000
1,900,000
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
9%, 5 periods
8%, 5 periods
5-4
Present Value
Present value of 1 of Annuity of 1
.64993
3.88965
.68058
3.99271
$ 250,000
740,000
2,400,000
360,000
$3,750,000
$250,000
670,000
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
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
Book Value
$ 50,000
540,000
300,000
Fair Value
$ 85,000
720,000
660,000
5-8
Soto
Corp.
618,000
180,000
36,000
(450,000)
(114,000)
(90,000)
(54,000)
Earn.
Pruitt Retained
90,000
36,000
Earnings 1/1
Soto Retained
72,000
Earnings 1/1
Add: Net Income
Less: Dividends
Retained Earnings
12/31
BALANCE SHEET
Cash
Inventories
90,000
(60,000)
3,000
36,000
(12,000)
102,000
54,000
42,000
63,000
21,000
45,000
Debit
Credit
Consolidated
Balances
Land
Equipment and
Buildings-net
Investment in Soto
Corp.
Total Assets
LIA & EQUITIES
Liabilities
Common Stock
Retained Earnings
Total Equities
33,000
18,000
192,000
165,000
240,000
570,000
249,000
168,000
300,000
102,000
570,000
45,000
150,000
54,000
249,000
5-9 On 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 $450,000.
On the date of acquisition, the assets of Sherlock Company had the following
values:
Book Value
Inventories................................................................$ 90,000
Plant and equipment.....................................................150,000
Fair Market
Value
$165,000
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.
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 dont 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 Dont 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 years 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.
3.
4.
c. 3
d. 1 and 3
5.
6.
7.
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.
b.
c.
d.
e.
$590,625.
$675,000.
$150,000.
Some other account.
10.
11.
12.
13.
14.
a.
b.
c.
d.
15.
92%
87%
80%
100%
16.
17.
18.
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.
21.
22.
23.
Problems
8-1
Piper Company purchased Snead Company common stock through openmarket 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
January 1, 2010
January 1, 2011
December 31, 2011
$ 90,000
30,000
150,000
300,000
cost and book value relates to Sengs land. No dividends were declared in
2010.
Required:
A. Prepare the entry on Patels 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.
8-3 Pratt Company purchased 40,000 shares of Silas Companys 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 Companys income earned and increase in retained earnings
during 2010 and 2011 were:
2010
Income earned
$260,000
Increase in Retained Earnings200,000
2011
$360,000
300,000
Shares
70,000 (70%)
10,000 (10%)
Cost
$1,000,000
160,000
Stockholders equity information for Stark Company for 2010 and 2011
follows:
2010
Common stock, $10 par value $1,000,000
2011
$1,000,000
380,000
140,000
(40,000)
480,000
$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
statements workpaper on December 31, 2011.
C. Compute the amount of noncontrolling interest that would be reported
on the consolidated balance sheet on December 31, 2011.
8-5
8-6
8-7
900,000
262,000
69,000
(30,000)
301,000
$1,201,000
December 31
2010
$ 900,000
302,000
90,000
(38,000)
354,000
$1,254,000
1.
A corporation that is unable to pay its debts as they become due is:
a. bankrupt.
b. overdrawn.
c. insolvent.
d. liquidating.
2.
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.
5.
In a troubled debt restructuring involving a modification of terms, the debtors
gain on restructuring:
a. will equal the creditors gain on restructuring.
b. will equal the creditors loss on restructuring.
c. may not equal the creditors gain on restructuring.
d. may not equal the creditors loss on restructuring.
6.
7.
8.
9.
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 bankrupts 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. Debtors gains and losses on asset transfers and debtors 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.
13.
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.
16.
$450,000
$300,000
$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.
17.
18.
$450,000
$300,000
$330,000
a.
b.
c.
d.
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.
b.
c.
d.
$720,000.
$840,000.
$960,000.
$1,080,000.
20.
21.
22.
$375,000
$250,000
$275,000
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.
23.
$375,000
$250,000
$275,000
Estimated
Current Value
$ 555,000
180,000
480,000
$1,215,000
$ 105,000
390,000
300,000
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.
Problems
10.1
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
Required:
Compute the gain or loss that will be reported by Community Bank.
0.8900
0.8573
1.8334
1.7833
10.5
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
Rent payable
Wages payable
Note payable plus accrued interest
Capital stock
Retained earnings (deficit)
Total liabilities and equity
$ 72,000
21,000
45,000
96,000
180,000
(120,000)
$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
3.
4.
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 nextlower rank is paid. Identify
the five categories of unsecured creditor claims.
2.
3.
1.
2.
5.
6.
7.
8.
9.
10.
11.
Chapter 11
International Financial Reporting Standards
Multiple ChoiceConceptual
1.
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.
4.
5.
6. .
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
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
Frame
Engine
Other
Cost
7,200,000
4,800,000
2,400,000
Useful life
24 years
20 years
10 years
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.
21.
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.
24.
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.
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.
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 upperlevel 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
2.
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.
5.
6.
7.
8.
Per Unit of
Foreign Currency
$0.73
0.71
0.74
365,000
b. Dollars Receivable
365,000
Discount on Forward Contract
FCU Payable
15,000
350,000
c. FCU Receivable
365,000
Discount on Forward Contract
Dollars Payable
15,000
350,000
d. Dollars Receivable
Discount on Forward Contract
FCU Payable
365,000
350,000
15,000
Per Unit of
Foreign Currency
$0.73
0.71
0.74
Gain/Loss Recorded
$9,000 gain
$9,000 loss
$4,500 gain
$18,000 gain
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.
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.
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. Craigers 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 Craigers income statements as foreign exchange (transaction) gain or loss
for the years ended March 31, 2011 and 2012?
a.
b.
c.
d.
2011
$0
$0
$350 loss
$350 loss
2012
$0
$350 loss
$0
$350 loss
16.
17.
18.
19.
September 1, 2011
September 30, 2011 (year-end)
Spot rate
1.46
1.50
Forward Rate
For Dec. 1, 2011
1.47
1.48
Forward Rate
For Dec. 1, 2011
1.47
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.
Per Unit of
Foreign Currency
$0.93
0.91
0.94
232,500
b. Dollars Receivable
232,500
Discount on Forward Contract
FCU Payable
7,500
225,000
c.
FCU Receivable
232,500
Discount on Forward Contract
Dollars Payable
d. Dollars Receivable
Discount on Forward Contract
FCU Payable
22.
7,500
225,000
225,000
7,500
232,500
Per Unit of
Foreign Currency
$0.83
0.81
0.84
Gain/Loss Recorded
$4,000 gain
$4,000 loss
c.
d.
23.
$168,000
$164,000
$2,000 gain
$2,000 loss
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:
April 1, 2011
April 30, 2011 (year-end)
Spot rate
1.16
1.20
Forward Rate
For Aug. 1, 2011
1.17
1.18
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:
April 1, 2011
April 30, 2011 (year-end)
Spot rate
1.16
1.20
Forward Rate
For Aug. 1, 2011
1.17
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
Required:
Compute each of the following:
1.
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.
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.
12-2
Required:
Prepare journal entries necessary for Derrick during 2010 and 2011 to account for the
transactions described above.
12-3
$1.3076
1.2980
1.3060
1.3150
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.
B.
C.
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
1 euro = 1.45
1 euro = 1.43
1 euro = 1.44
Required:
Prepare the journal entries that Bisk would record on November 1, December 31, and
January 31.
12.8
2.
3.
Spot rates and the forward rates for February 1, 2012, settlement were as
follows (dollars per peso):
November 1, 2011
Balance sheet date (12/31/11)
February 1, 2012
Spot Rate
$0.0954
0.0949
0.0947
Forward Rate
for 2/1/12
$0.0948
0.0944
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.
2.
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.
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.
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 importexport
transactions. Briefly explain the accounting for each stage.
4.
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 firms balance sheet?
6.
7.
8.
Explain the effects on income from hedging a foreign currency exposed net asset
position or net liability position.
9.
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.
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?
Chapter 13
Translation of Financial Statements of Foreign Affiliates
Multiple Choice
1.
Notes Payable
Yes
Yes
No
No
Equipment
Yes
No
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.
d. deferred until a subsequent year when a loss occurs and offset against that
loss.
8.
Average exchange rates are used to translate certain items from foreign
financial statements into U.S. dollars. Such averages are used in order to:
a. smooth out large translation gains and losses.
b. eliminate temporary fluctuation in exchange rates that may be reversed in
the next fiscal period.
c. avoid using different exchange rates for some revenue and expense
accounts.
d. approximate the exchange rate in effect when the items were recognized.
9.
When the functional currency is identified as the U.S. dollar, land purchased
by a foreign subsidiary after the controlling interest was acquired by the parent
company should be translated using the:
a. historical rate in effect when the land was purchased.
b. current rate in effect at the balance sheet date.
c. forward rate.
d. average exchange rate for the current period.
10.
The appropriate exchange rate for translating a plant asset in the balance sheet
of a foreign subsidiary in which the functional currency is the U.S. dollar is
the:
a. current exchange rate.
b. average exchange rate for the current year.
c. historical exchange rate in effect when the plant asset was acquired or the
date of acquisition, whichever is later.
d. forward rate.
11.
12.
A foreign subsidiary's functional currency is its local currency which has not
experienced significant inflation. The weighted average exchange rate for the
current year would be the appropriate exchange rate for translating
a.
b.
c.
d.
13.
Wages expense
Yes
Yes
No
No
Sales to customers
Yes
No
No
Yes
$687,500
$625,000
$550,000
$500,000
14.
If the functional currency is determined to be the U.S. dollar and its financial
statements are prepared in the local currency, SFAS 52, requires which of the
following procedures to be followed?
a. Translate the financial statements into U.S. dollars using the current rate
method.
b. Remeasure the financial statements into U.S. dollars using the temporal
method.
c. Translate the financial statements into U.S. dollars using the temporal
method.
d. Remeasure the financial statements into U.S. dollars using the current rate
method.
15.
17.
18.
19.
a.
b.
c.
d.
20.
Problems
13-1
January 1
24,000
1,000
52,500
(11,500)
(19,000)
(30,000)
(17,000)
----------0-
2011
December 31
26,000
500
49,000
(5,500)
(11,000)
(30,000)
(17,000)
3,000
(30,000)
15,000
-0
13-2
Pounds
650,000
310,000
265,000
575,000
285,000
290,000
79,000
155,000
32,000
556,000
Net Income
94,000
Sewart Corporation
Partial Balance Sheet
Current Assets
Cash
Accts. Rec.
Inventories
155,000
171,000
285,000
611,000
Current Liabilities
Notes Payable
Accts. Payable
Other Current Liab.
Long-term Liab.
(issued July 1, 2009)
78,000
165,000
51,000
294,000
250,000
Other Information:
1. Equipment costing 340,000 pounds was acquired July 1, 2009, and 38,000
was acquired June 30, 2011. Depreciation for the period was as follows:
Equipment 2009 acquisitions
66,000
2011 acquisitions
6,000
2. The beginning inventory was acquired when the exchange rate was $1.77.
The inventory is valued on a FIFO basis. Purchases and the ending
inventory were acquired evenly throughout the period.
3. Dividends were paid by the subsidiary on June 30 amounting to 156,000
pounds.
4. Sales were made and all expenses were incurred uniformly throughout the
year.
5. Exchange rates for the pound on various dates were:
July 1, 2009
Jan. 1, 2011
June 30, 2011
Dec. 31, 2011
Average for 2011
$1.79
1.75
1.74
1.71
1.73
13-2 (Continued)
Required:
A.
Prepare a schedule to determine the translation gain or loss for 2010, assuming
the net monetary liability position on January 1, 2011, was 180,000 pounds.
B.
Compute the dollar amount that each of the following would be reported at in
the 2011 financial statements:
1. Cost of Goods Sold.
2. Depreciation Expense.
3. Equipment.
13-3
Accounts are listed below for a foreign subsidiary that maintains its books in
its local currency. The equity interest in the subsidiary was acquired in a
purchase transaction. In the space provided, indicate the exchange rate that
would be used to translate the accounts into dollars assuming the functional
currency was identified (a) as the U.S. dollar and (b) as the foreign entity's
local currency. Use the following letters to identify the exchange rate:
H Historical exchange rate
C Current exchange rate
A Average exchange rate for the current period
Exchange rate if the
functional currency is:
U.S. Dollar
Local currency
Account
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
___________
___________
___________
___________
___________
___________
___________
___________
___________
______________
______________
______________
______________
______________
______________
______________
______________
______________
___________
___________
___________
___________
___________
___________
______________
______________
______________
______________
______________
______________
Jan. 2
15,000
45,000
75,000
45,000
180,000
Dec. 31
33,000
49,500
67,500
45,000
195,000
Accounts payable
Long-term notes payable (issued 6/30/08)
Common stock (issued 6/30/08)
Retained earnings
Total
13,500
31,500
90,000
45,000
180,000
18,000
27,000
90,000
60,000
195,000
Income Statement
Revenues
Operating expenses including depreciation
of 7,500 francs
Net income
Beginning retained earnings
Dividends declared and paid
Ending retained earnings
180,000
135,000
45,000
45,000
90,000
30,000
60,000
Sales were earned and operating expenses were incurred evenly during the
year.
Exchange rates for the franc at various dates are:
January 2, 2011
December 31, 2011
Average for 2011
December 10, 2011, dividend payment date
June 30, 2008
13-4
0.8600
0.8830
0.8715
0.8810
0.8316
Required:
Translate the year-end financial statements of Spot Company, the foreign subsidiary,
using the temporal method. Round numbers to the nearest dollar.
13-5
Required:
Prepare a schedule to compute the translation gain or loss for Spot Company,
assuming the temporal method of translation. Round numbers to the nearest dollar.
13.6
1 pound = 1.81
1 pound = 1.86
1 pound = 1.83
1 pound = 1.82
The subsidiarys adjusted trial balance is presented below for the year ended
December 31, 2011.
Debits
Cash
Accounts receivable
Inventory
Land
Building
Depreciation expense
Cost of goods sold
Other expenses
Total debits
In Pounds
200,000
60,000
80,000
100,000
300,000
3,750
213,750
90,000
1,047,500
Credits
Accumulated depreciation
Accounts payable
Accrued liabilities
Common stock
Retained earnings
Sales revenue
Total credits
3,750
84,000
16,750
500,000
- 0 443,000
1,047,500
Using the information provided in Problem 13-6, use the temporal method
instead of the current rate method.
Required: Prepare the subsidiarys:
A.
Translated workpapers (round to the nearest dollar)
B.
Translated income statement
C.
Translated balance sheet
13-8
On January 1, 2011, Roswell Systems, a U.S.-based company, purchased a controlling
interest in Swiss Management Consultants located in Zurich, Switzerland. The
acquisition was treated as a purchase transaction. The 2011 financial statements stated
in Swiss francs are given below.
SWISS MANAGEMENT CONSULTANTS
Comparative Balance Sheets
January 1 and December 31, 2011
Jan. 1
Dec. 31
Cash and Receivables
Net Property, Plant, and Equipment
Totals
30,000
60,000
90,000
84,000
56,000
140,000
45,000
30,000
15,000
90,000
50,000
30,000
60,000
140,000
112,000
45,000
67,000
22,000
45,000
Required:
A. Translate the year-end balance sheet and income statement of the foreign
subsidiary using the current rate method of translation.
B. Prepare a schedule to verify the translation adjustment.
Short Answer
1.
2.
The translation process can be done using either the current rate method or the
temporal method. Explain under what circumstances each of the methods is
appropriate.
2.
What is meant by an entitys functional currency and what are the economic
indicators identified by the FASB to provide guidance in selecting the
functional currency?
3.
4.
5.
6.
Define remeasurement.
7.
Under the current rate method, how are assets and liabilities that are stated in a
foreign currency translated?
8.
Under the current rate method, describe how the various balance sheet
accounts are translated (including the equity accounts) and how this translation
affects the computation of various ratios (such as debt to equity or the current
ratio). In particular, discuss whether or not the ratios will change when
computed in local currencies and compared to their calculations (after
translation) using the parents currency.
9.
10.
Assuming that the temporal method is used, how are revenue and expense
items in foreign currency financial statements converted?
11.
Chapter 14
Reporting for Segments and for Interim Financial Periods
1.
A component of an enterprise that may earn revenues and incur expenses, and
about which management evaluates separate financial information in deciding
how to allocate resources and assess performance is a(n)
a. identifiable segment.
b. operating segment.
c. reportable segment.
d. industry segment.
2.
3.
4.
c. 3
d. both 1 and 2
5.
6.
7.
8.
9.
10.
An enterprise determines that it must report segment data in annual reports for
the year ended December 31, 2011. Which of the following would not be an
acceptable way of reporting segment information?
a. Within the body of the financial statements, with appropriate explanatory
disclosures in the footnotes
b. Entirely in the footnotes to the financial statements.
c. As a special report issued separately from the financial statements.
d. In a separate schedule that is included as an integral part of the financial
statements.
11.
12.
Long Corporation's revenues for the year ended December 31, 2011, were as
follows
Consolidated revenue per income statement $800,000
Intersegment sales
105,000
Intersegment transfers
35,000
Combined revenues of all operating segments $940,000
Long has a reportable segment if that segment's revenues exceed
a. $80,000.
b. $90,500.
c. $94,000.
d. $14,000.
13.
Revenue test
(dollars in thousands)
Wholesale
Retail
Finance
Segment
Segment
Segment
Sales to unaffiliated customers
$3,600
$1,500
$-0Sales intersegment
400
240
-0Loan interest income intersegment
-0120
900
Loan interest income unaffiliated
-0240
80
Income from equity method investees
-0280
-0Determine the amount of revenue for each of the three segments that would be
used to identify the reportable industry segments in accordance with the
revenues test specified by SFAS 131.
a.
b.
c.
Wholesale Retail
$3,600
$1,500
4,000
1,740
4,000
1,980
Finance
$ -0-0980
d.
4,000
2,380
980
14.
Which of the following is not part of the information about foreign operations
that is required to be disclosed?
a. Revenues from external customers
b. Operating profit or loss, net income, or some other common measure of
profitability
c. Capital expenditures
d. Long-lived assets
15.
$240,000
180,000
Gant Company has four manufacturing divisions, each of which has been
determined to be a reportable segment. Common operating costs are
appropriately allocated on the basis of each division's sales in relation to
Gants aggregate sales. Gants Delta division accounted for 40% of Gant's
total sales in 2011. For the year ended December 31, 2011, Delta had sales of
$5,000,000 and traceable costs of $3,600,000. In 2011, Gant incurred
operating costs of $350,000 that were not directly traceable to any of the
divisions. In addition, Gant incurred interest expense of $360,000 in 2011. In
reporting supplementary segment information, how much should be shown as
Delta's operating profit for 2011?
a. $1,400,000
b. $1,256,000
c. $1,260,000
d. $1,116,000
17.
a.
b.
c.
d.
Interim
Reporting
No
No
Yes
Yes
Annual
Reporting
No
Yes
No
Yes
18.
19.
20.
If a cumulative effect type accounting change is made during the first interim
period of a year
a. no cumulative effect of the change should be included in net income of the
period of change.
b. the cumulative effect of the change on retained earnings at the beginning
of the year should be included in net income of the first interim period.
c. the cumulative effect of the change should be allocated to the current and
remaining interim periods of the year.
d. none of these.
21.
22.
For interim financial reporting, the effective tax rate should reflect
a.
b.
c.
d.
23.
Anticipated Extraordinary
Tax Credits
Items
Yes
Yes
Yes
No
No
Yes
No
No
Companies using the LIFO method may encounter a liquidation of base period
inventories at an interim date that is expected to be replaced by the end of the
year. In these cases, cost of goods sold should be charged with the
a. cost of the most recent purchases.
b. average cost of the liquidated LIFO base.
25.
26.
If annual major repairs made in the first quarter and paid for in the second
quarter clearly benefit the entire year, when should they be expensed?
a. An allocated portion in each of the last three quarters
b. An allocated portion in each quarter of the year
c. In full in the first quarter
d. In full in the second quarter
27.
During the second quarter of 2011, Dodge Company sold a piece of equipment
at a gain of $90,000. What portion of the gain should Dodge report in its
income statement for the second quarter of 2011?
a. $90,000
b. $45,000
c. $30,000
d. $ -0-
28.
In January 2011, Abel Company paid $200,000 in property taxes on its plant
for the calendar year 2011. Also in January 2011, Abel estimated that its yearend bonuses to executives for 2011 would be $800,000. What is the amount of
expenses related to these two items that should be reflected in Abel's quarterly
income statement for the three months ended June 30, 2011 (second quarter)?
a. $ -0b. $250,000
c. $ 50,000
d. $200,000
29.
For interim financial reporting, a company's income tax provision for the
second quarter of 2011 should be determined using the
a. statutory tax rate for 2011.
b. effective tax rate expected to be applicable for the full year of 2011 as
estimated at the end of the first quarter of 2011.
c. effective tax rate expected to be applicable for the full year of 2011 as
estimated at the end of the second quarter of 2011.
d. effective tax rate expected to be applicable for the second quarter of 2011.
30.
31.
32.
33.
Finney, a calendar year company, has the following income before income tax
provision and estimated effective annual income tax rates for the first three
quarters of 2011:
Quarter
First
Second
Third
Finney's income tax provision in its interim income statement for the third
quarter should be
a. $74,000.
b. $60,000.
c. $50,000.
d. $144,000.
34.
An inventory loss from a market price decline occurred in the first quarter. The
loss was not expected to be restored in the fiscal year. However, in the third
quarter the inventory had a market price recovery that exceeded the market
decline that occurred in the first quarter. For interim reporting, the dollar
amount of net inventory should
a. decrease in the first quarter by the amount of the market price decline and
increase in the third quarter by the amount of the market price recovery.
b. decrease in the first quarter by the amount of the market price decline and
increase in the third quarter by the amount of the decrease in the first
quarter.
c. not be affected in the first quarter and increase in the third quarter by the
amount of the market price recovery that exceeded the amount of the
market price decline.
d. not be affected in either the first quarter or the third quarter.
35.
Advertising costs may be accrued or deferred to provide an appropriate
expense in each period for
Interim
Annual
Reporting
Reporting
a.
Yes
No
b.
Yes
Yes
c.
No
No
d.
No
Yes
Problems
14-1
14-2
Y
Z
8,100
(6,300)
Required:
Determine which of the segments are reportable segments.
14-3
Total
$ 24,000
18,000
90,000
168,000
$300,000
Operating
Segment
Intersegment Profit (Loss)
Assets
$4,200
$ 2,700
$ 22,400
2,200
(2,000)
25,200
14,000
3,600
70,000
-023,700
162,400
$28,000
$280,000
Required:
Complete the following schedule to determine which of the above segments
must be treated as reportable segments.
10% Test For
Segment
Revenue
Op. Profit (Loss)
Segment Assets
Reportable?
A
B
C
D
14-4
$3,000,000
150,000
60,000
480,000
40%
Required:
Compute the income tax provision for the first quarter of 2011.
14.5
XYZ Corporation has eight industry segments with sales, operating profit and
loss, and identifiable assets at and for the year ended December 31, 2011, as
follows:
Steel
Auto Parts
Coal Mine
Textiles
Paint
Lumber
Leisure Time
Electronics
Total
Sales to
Sales to
Unaffiliated Affiliated
Customers Customers
$1,350,000
$150,000
1,200,000
600,000
530,000
1,120,000
710,000
690,000
600,000
$6,800,000
--450,000
220,000
380,000
------$1,200,000
Profit or
(Loss)
Segment
Assets
$265,000
$2,250,00
0
1,430,000
1,200,000
750,000
1,050,000
600,000
450,000
670,000
$8,400,00
0
450,000
(300,000)
150,000
300,000
(75,000)
110,000
300,000
$1,200,000
Required:
A. Identify the segments, which are reportable segments under one or
more of the 10 percent revenue, operating profit, or assets tests.
B. After reportable segments are determined under the 10 percent tests,
they must be reevaluated under a 75 percent revenue test before a final
determination of reportable segments can be made. Under this 75
percent test, identify if any other segments may have to be reported.
14.6
Ace Company, which uses the FIFO inventory method, had 508,000 units in
inventory at the beginning of the year at a FIFO cost per unit of $20. No
purchases were made during the year. Quarterly sales information and end-ofquarter replacement cost figures follow:
End-of- Quarter
Quarter
Unit Sales
Replacement Cost
1
200,000
$17
2
60,000
18
3
85,000
13
4
61,000
18
The market decline in the first quarter was expected to be nontemporary.
Declines in other quarters were expected to be permanent.
Required:
Determine cost of goods sold for the four quarters and verify the amounts by
computing cost of goods sold using the lower-of-cost-or-market method
applied on an annual basis.
14-7
Barr Companys actual earnings for the first two quarters of 2011 and its
estimate during each quarter of its annual earnings are:
Actual first-quarter earnings
Actual second-quarter earnings
First-quarter estimate of annual earnings
Second-quarter estimate of annual earnings
$ 800,000
1,020,000
2,700,000
2,830,000
$ 45,000
320,000
These estimates did not change during the second quarter. The combined state
and federal tax rate for Barr Company for 2011 is 40%.
Required:
Prepare journal entries to record Barr Companys provisions for income taxes
for each of the first two quarters of 2011.
Short Answer
1.
In SFAS No. 131, the FASB requires all public companies to report a variety
of information for reportable segments. Define a reportable segment and
identify the information to be reported for each reportable segment.
2.
Publicly owned companies are usually required to file some type of quarterly
(interim) report as part of the agreement with the stock exchanges that list
their stock. Indicate two problems with interim reporting and GAAPs position
on this reporting.
14. How are common costs distinguished from general corporate expenses for
segmental purposes?
15. What is the purpose of interim financial reporting?
16. Some accountants hold the view that each interim period should stand alone as a
basic ac-counting period, whereas others view each interim period as essentially
an integral part of the annual period. Distinguish between these views.
17.Describe the basic procedure for computing in-come tax provisions for interim
financial state-ments.
18.Describe how changes in estimates should be treated in interim financial
statements.
19.What are the minimum disclosure requirements established ASC 270 for interim
financial reports?
20.What is the general rule regarding the treatment of costs and expenses associated
directly with revenues for interim reporting purposes?
Business Ethics Question from Textbook
SMC Inc. operates restaurants based on various themes, such as Mex-delight, Chinese
for the Buffet, and Steak-it and Eat-it. The Steak-it and Eat-it restaurants have not
been performing well recently, but SMC prefers not to disclose these details for fear
that competitors might use the information to the detriment of SMC. The restaurants
are located in various geographical locations, and management currently measures
profits and losses and asset allocation by restaurant concept. How-ever, when
preparing the segmental disclosures under SFAS No. 131 [ASC 280], the company
reports the segment information by geographical location only. The company recently
hired you to review the financial statements.
1.What disclosures should the company report for segment purposes?
2.The companys CEO believed that the rules in SFAS No. 131 [ASC 280] are
vague and that the company could easily support its decision to dis-close the
segment data by geographic regions. What would you recommend to the
CEO and how would you approach the issues?
Chapter 15
Partnerships: Formation, Operation, and Ownership Changes
Multiple Choice
1.
When a partner retires and withdraws assets in excess of his book value, the
remaining partners absorb the excess
a. equally.
b. in their profit-sharing ratio.
c. based on their average capital balances.
d. based on their ending capital balances.
2.
3.
A partnership in which one or more of the partners are general partners and
one or more are not is called a(n)
a. joint venture.
b. general partnership.
c. limited partnership.
d. unlimited partnership.
4.
5.
Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio.
During the first year of operation, the partnership incurs a $20,000 loss. The
partners should share the losses
a. based on their average capital balances.
b. in a 2 to 1 ratio.
c. equally.
d. based on their ending capital balances.
6.
When the goodwill method is used to record the admission of a new partner,
total partnership capital increases by an amount
a. equal to the new partners investment.
b. greater than the new partners investment.
c. less than the new partners investment.
d. that may be more or less than the new partners investment.
7.
The bonus and goodwill methods of recording the admission of a new partner
will produce the same result if the:
1. new partners profit-sharing ratio equals his capital interest
2. old partners profit-sharing ratio in the new partnership is the same
relatively as it was in the old partnership.
a. 1
b. 2
c. both 1 and 2 are met.
d. none of these.
8.
When the goodwill method is used and the book value acquired is less than the
value of the assets invested, total implied capital is computed by
a. multiplying the new partners capital interest by the capital balances of
existing partners.
b. dividing the total capital balances of existing partners by their collective
capital interest.
c. dividing the new partners investment by his (her) capital interest.
d. dividing the new partners investment by the existing partners collective
capital interest.
9.
The partnership of Adams and Baker was formed on February 28, 2011. At
that date the following assets were invested:
Adams
Baker
Cash
$ 120,000
$200,000
Merchandise
-0320,000
Building
-0840,000
Furniture and equipment
200,000
-0The building is subject to a mortgage loan of $280,000, which is to be
assumed by the partnership. The partnership agreement provides that Adams
and Baker share profits or losses 30% and 70%, respectively. Bakers capital
account at February 28, 2011, should be
a. $1,080,000.
b. $1,360,000.
c. $1,176,000.
d. $952,000.
10.
The following balance sheet information is for the partnership of Abel, Ball,
and Catt:
Cash
Other assets
$ 210,000
1,500,000
$1,710,000
Liabilities
$ 510,000
Abel, Capital (40%) 300,000
Ball, Capital (40%)
480,000
Catt, Capital (20%)
420,000
$1,710,000
If the assets are fairly valued on the above balance sheet and the partnership
wishes to admit Dent as a new 1/5 partner without recording goodwill or
bonus, Dent should invest cash or other assets of
a. $427,500.
b. $240,000.
c. $300,000.
d. $342,000.
11.
The following balance sheet information is for the partnership of Abel, Ball,
and Catt:
Cash
Other assets
$ 210,000
1,500,000
$1,710,000
Liabilities
$ 510,000
Abel, Capital (40%) 300,000
Ball, Capital (40%)
480,000
Catt, Capital (20%)
420,000
$1,710,000
Linda desires to purchase a one-fourth capital and profit and loss interest in
the partnership of Hank, Greg, and Jim. The three partners agree to sell Linda
one-fourth of their respective capital and profit and loss interests in exchange
for a total payment of $100,000. The payment is made directly to the
individual partners. The capital accounts and the respective percentage
interests in profits and losses immediately before the sale to Linda follow
Hank
Greg
Jim
Total
Capital
Accounts
$168,000
104,000
48,000
$320,000
Percentage
Interests in
Profits and Losses
50%
35
15
All other assets and liabilities are fairly valued and implied goodwill is to be
recorded prior to the acquisition by Linda. Immediately after Lindas
acquisition, what should be the capital balances of Hank, Greg, and Jim,
respectively?
a. $126,000; $78,000; $36,000
b. $156,000; $99,000; $45,000
c. $178,000; $111,000; $51,000
d. $208,000; $132,000; $60,000
13.
At December 31, 2011, Barb and Kim are partners with capital balances of
$250,000 and $150,000, and they share profits and losses in the ratio of 2:1,
respectively. On this date, Jack invests $125,000 cash for a one-fifth interest in
the capital and profit of the new partnership. The partners agree that the
implied partnership goodwill is to be recorded simultaneously with the
admission of Jack. The total implied goodwill of the firm is
a. $25,000.
b. $20,000.
c. $45,000.
d. $100,000.
14.
Pete, Joe, and Ron are partners with capital balances of $135,000, $90,000,
and $60,000, respectively. The partners share profits and losses equally. For an
investment of $120,000 cash, Jerry is to be admitted as a partner with a onefourth interest in capital and profits. Based on this information, the amount of
Jerrys investment can best be justified by which of the following?
a. Jerry will receive a bonus from the other partners upon his admission to
the partnership.
b. Assets of the partnership were overvalued immediately prior to Jerrys
investment.
c. The book value of the partnerships net assets were less than their fair
value immediately prior to Jerrys investment.
d. Jerry is apparently bringing goodwill into the partnership and his capital
account will be credited for the appropriate amount.
15.
The partnership of Amos, Cole, and Eddy had total capital of $570,000 on
December 31, 2011 as follows:
Amos, Capital (30%)
Cole, Capital (45%)
Eddy, Capital (25%)
Total
$180,000
255,000
135,000
$570,000
The partnership of Amos, Cole, and Eddy had total capital of $570,000 on
December 31, 2011 as follows:
Amos, Capital (30%)
$180,000
255,000
135,000
$570,000
Profit and loss sharing percentages are shown in parentheses. Assume that
Flynn became a partner by investing $150,000 in the Amos, Cole, and Eddy
partnership for a 25 percent interest in capital and profits and that partnership
net assets are not revalued. Flynns capital credit should be
a. $180,000.
b. $142,500.
c. $150,000.
d. $190,000.
17.
The partnership of Amos, Cole, and Eddy had total capital of $570,000 on
December 31, 2011 as follows:
Amos, Capital (30%)
Cole, Capital (45%)
Eddy, Capital (25%)
Total
$180,000
255,000
135,000
$570,000
19.
20.
The partnership agreement of Flynn, Gant, and Hill allows Gant a bonus of
10% of income after the bonus, salaries of $30,000 per partner and interest of
6% on average capital balances of $120,000, $150,000, and $180,000 for
Flynn, Gant, and Hill, respectively. The amount of Gants bonus, assuming
income before bonus, salaries, and interest of $315,000, is
a.
b.
c.
d.
$18,000.
$22,000.
$19,800.
$31,500.
21.
Steve and Robby are partners operating an electronics repair shop. For 2011,
net income was $50,000. Steve and Robby have salary allowances of $90,000
and $60,000, respectively, and remaining profits and losses are shared 4:6.
The division of profits would be:
a. $20,000 and $30,000
b. $50,000 and $-0c. $30,000 and $20,000
d. $25,000 and $25,000
22.
Steve and Robby are partners operating an electronics repair shop. For 2011,
net income was $50,000. Steve and Robby have salary allowances of $90,000
and $60,000, respectively, and remaining profits and losses are shared 4:6.
If their agreement specifies that salaries are allowed only to the extent of
income, based on a prorata share of their salary allowances, the division of
profits would be:
a. $20,000 and $30,000
b. $50,000 and $-0c. $30,000 and $20,000
d. $25,000 and $25,000
23.
Carter, Wynn, and Norton are partners in a janitorial service. The business
reported net income of $54,000 for 2011. The partnership agreement provides
that profits and losses are to be divided equally after Wynn receives a $60,000
salary, Norton receives a $24,000 salary, and each partner receives 10%
interest on his beginning capital balance. Beginning capital balances were
$40,000 for Carter, $48,000 for Wynn, and $32,000 for Norton. Nortons share
of partnership income for 2011 is:
e. $68,800
f. $36,000
g. $31,200
h. $27,200
24.
Bell and Carson are partners who share profits and losses 3:7. The capital
accounts on January 1, 2011, are $120,000 and $160,000, respectively. Elston
is to be admitted as a partner with a one-fourth interest in the capital and
profits and losses by investing $80,000. Goodwill is not to be recorded. The
capital balances after admission should be:
a. Bell, $117,000; Carson, $153,000; Elston, $90,000
b. Bell, $120,000; Carson, $160,000; Elston, $90,000
c. Bell, $123,000; Carson, $160,000; Elston, $80,000
i. Bell, $120,000; Carson, $167,000; Elston, $80,000
25. The balance sheet for the partnership of Nen, Pap, and Sup at January 1, 2011
follows. The partners share profits and losses in the ratio of 3:2:5, respectively.
Assets at cost
$480,000
Liabilities
Nen, capital
Pap, capital
Sup, capital
$135,000
75,000
120,000
150,000
$480,000
Nen is retiring from the partnership. By mutual agreement, the assets are to be
adjusted to their fair value of $540,000 at January 1, 2011. Pap and Sup agree
that the partnership will pay Nen $135,000 cash for his partnership interest.
NO goodwill is to be recorded. What is the balance of Paps capital account
after Nens retirement?
a. $138,000
b. $108,000
c. $120,000
d. $132,000
26.
The following balance sheet information is for the partnership of Axe, Barr, and
Cole:
Cash
Other assets
$ 210,000
1,500,000
Liabilities
Axe, Capital (40%)
Barr, Capital (40%)
Cole, Capital (20%)
510,000
300,000
480,000
420,000
$1,710,000
$1,710,000
Figures shown parenthetically reflect agreed profit and loss sharing percentages.
If the assets are fairly valued on the above balance sheet and the partnership
wishes to admit Dent as a new 1/5 partner without recording goodwill or bonus,
Dent should invest cash or other assets of
a.
$427,500.
b.
$240,000.
c.
$300,000.
d.
$342,000.
27.
Susan desires to purchase a one-fourth capital and profit and loss interest in the
partnership of Tony, Mary, and Ron. The three partners agree to sell Susan onefourth of their respective capital and profit and loss interests in exchange for a
total payment of $125,000. The payment is made directly to the individual
partners. The capital accounts and the respective percentage interests in profits
and losses immediately before the sale to Susan follow
Tony
Mary
Ron
Capital
Accounts
$210,000
130,000
60,000
Percentage
Interests in
Profits and Losses
50%
35
15
Total
$400,000
All other assets and liabilities are fairly valued and implied goodwill is to be
recorded prior to the acquisition by Susan. Immediately after Susans
acquisition, what should be the capital balances of Tony, Mary, and Ron,
respectively?
a.
$157,500; $97,500; $45,000
b.
$195,000; $123,750; $56,250
c.
$222,500; $138,750; $63,750
d.
$260,000; $165,000; $75,000
28.
The partnership of Carr, Eddy, and Howe had total capital of $1,140,000 on
December 31, 2011, as follows:
Carr, Capital (30%)
Eddy, Capital (45%)
Howe, Capital (25%)
Total
$360,000
510,000
270,000
$1,140,000
The partnership of Carr, Eddy, and Howe had total capital of $1,140,000 on
December 31, 2011, as follows:
Carr, Capital (30%)
Eddy, Capital (45%)
Howe, Capital (25%)
Total
$360,000
510,000
270,000
$1,140,000
Newlin, Vick, and Morton are partners in a plumbing service. The business
reported net income of $108,000 for 2011. The partnership agreement
provides that profits and losses are to be divided equally after Vick
receives a $60,000 salary, Morton receives a $24,000 salary, and each
partner receives 10% interest on his beginning capital balance. Beginning
capital balances were $40,000 for Newlin, $48,000 for Vick, and $32,000
for Morton. Vicks share of partnership income for 2011 is:
a. $68,800.
b. $36,000.
c. $31,200.
d. $27,200.
Problems
15-1
Unruh, Grey, and Carter are partners with capital balances of $80,000,
$200,000, and $120,000, respectively. Profits and losses are shared in a 3:2:1
ratio. Grey decided to withdraw and the partnership revalued its assets. The
value of inventory was decreased by $20,000 and the value of land was
increased by $50,000. Unruh and Carter then agreed to pay Grey $230,000 for
his withdrawal from the partnership.
Required:
Prepare the journal entry to record Greys withdrawal under the
A.
bonus method.
B.
full goodwill method.
15-2
Dell and Gore are partners in an automobile repair business. Their respective
capital balances are $425,000 and $275,000, and they share profits in a 3:2
ratio. Because of growth in their repair business, they decide to admit a new
partner. Mann is admitted to the partnership, after which Dell, Gore, and Mann
agree to share profits in a 3:2:1 ratio.
Required:
Prepare the necessary journal entries to record the admission of Mann in each
of the following independent situations:
15-3
A.
Mann invests $300,000 for a one-fourth capital interest, but will not
accept a capital balance of less than his investment.
B.
C.
Mann purchases a 20% capital interest from each partner. Dell receives
$100,000 and Gore receives $50,000 directly from Mann.
Bryant, Milton, and Pine formed a partnership and agreed to share profits in a
3:1:2 ratio after recognition of 5% interest on average capital balances and
monthly salary allowances of $3,750 to Milton and $3,000 to Pine. Average
capital balances were as follows:
Bryant
Milton
300,000
240,000
Pine
180,000
Required:
Compute the net income (loss) allocated to each partner assuming the
partnership incurred a $27,000 net loss.
15-4
15-5
Wynn and Yates are partners whose capital balances are $400,000 and
$300,000 and who share profits 3:2. Due to a shortage of cash, Wynn and
Yates agree to admit Zaun to the firm.
Required:
Prepare the journal entries required to record Zauns admission under each of
the following assumptions:
(a)
Zaun invests $200,000 for a 1/4 interest. The total firm capital is to be
$900,000.
(b)
Zaun invests $300,000 for a 1/4 interest. Goodwill is to be recorded.
(c)
Zaun invests $150,000 for a 1/5 interest. Goodwill is to be recorded.
(d)
Zaun purchases a 1/4 interest in the firm, with 1/4 of the capital of each
old partner transferred to the account of the new partner. Zaun pays the
partners cash of $250,000, which they divide between themselves.
15-6
On this date, C withdraws and the partners agree to pay him $140,000 out of
partnership cash.
Required:
A.
Prepare journal entries to show three acceptable methods of recording
the withdrawal. (Tangible assets are already stated at values
approximating their fair market values.)
B.
15-7
Agler, Bates and Colter are partners who share income in a 5:3:2 ratio. Colter,
whose capital balance is $150,000, retires from the partnership.
Required:
Determine the amount paid to Colter under each of the following cases:
(1) $50,000 is debited to Agler capital account; the bonus approach is used.
(2) Goodwill of $60,000 is recorded; the partial goodwill approach is used.
(3) $66,000 is credited to Bates capital account; the total goodwill approach is
used.
15-8
The partnership agreement of Stone, Miles, and Kiney provides for annual
distribution of profit and loss in the following sequence:
Miles, the managing partner, receives a bonus of 10% of net income.
Each partner receives 5% interest on average capital investment.
Residual profit or loss is to be divided 4:2:4.
Average capital investments for 2011 were:
Stone
Miles
Kiney
$270,000
$180,000
$120,000
Required:
A.
Prepare a schedule to allocate net income, assuming operations for the
year resulted in:
1.
Net income of $75,000.
2.
Net income of $15,000.
3.
Net loss of $30,000.
B.
Prepare the journal entry to close the Income Summary account for
each situation above.
Short Answer
1. The principal types of partnerships are general partnerships, limited partnerships,
and joint ventures. Describe the characteristics of each type of partnership.
2. There are two methods of recording changes in the membership of a partnership
the bonus method and the goodwill method. Describe these two methods of
recording changes in partnership membership.
Short Answer from the Textbook
1. Describe the tax treatment of partnership income.
Chapter 16
Partnership Liquidation
Multiple Choice
1.
2.
3.
4.
5.
6.
Offsetting a partner's loan balance against his debit capital balance is referred
to as the
a. marshaling of assets.
b. right of offset.
c. allocation of assets.
d. liquidation of assets.
7.
If a partner with a debit capital balance during liquidation is personally
solvent, the
a. partner must invest additional assets in the partnership.
b. partner's debit balance will be allocated to the other partners.
c. other partners will give the partner enough cash to absorb the debit
balance.
d. partnership will loan the partner enough cash to absorb the debit balance.
8.
The following condensed balance sheet is presented for the partnership of Jim,
Bill, and Fred who share profits and losses in the ratio of 4:3:3, respectively:
Cash
Other assets
Jim, receivable
$ 180,000
1,940,000
60,000
$ 2,180,000
Accounts payable
Bill, loan
Jim, capital
Bill, capital
Fred, capital
$ 480,000
80,000
720,000
440,000
460,000
$2,180,000
Assume that the assets and liabilities are fairly valued on the balance sheet and
that the partnership decides to admit Tom as a new partner, with a 25%
interest. No goodwill or bonus is to be recorded. How much should Tom
contribute in cash or other assets?
a. $270,000
b. $405,000
c. $540,000
d. $520,000
9.
The partnership of Joe, Al, and Mike shares profits and losses 60%, 30%, and
10%, respectively. On January 1, 2011, the partners voted to dissolve the
partnership, at which time the assets, liabilities, and capital balances were as
follows:
Assets
Cash
Other Assets
Total assets
$1,600,000
400,000
1,200,000
580,000
440,000
380,000
200,000
$1,600,000
Assume that all noncash assets are sold for $840,000 and all available cash is
distributed in final liquidation of the partnership. Cash should be distributed to
the partners as follows
a. Joe, $744,000;
Al, $372,000;
Mike, $124,000.
b. Joe, $440,000;
Al, $380,000;
Mike, $200,000.
c. Joe, $224,000;
Al, $272,000;
Mike, $164,000.
d. Joe, $396,000;
Al, $198,000;
Mike, $66,000.
10.
The partnership of Pratt, Ellis, and Mack share profits and losses in the ratio of
4:4:2, respectively. The partners voted to dissolve the partnership when its
assets, liabilities, and capital were as follows:
Assets
Cash
$ 250,000
Other assets
1,000,000
$1,250,000
Liabilities and Capital
Liabilities
Pratt, Capital
Ellis, Capital
Mack, Capital
$ 200,000
300,000
350,000
400,000
$1,250,000
12.
13.
14.
During the liquidation of the partnership of Karr, Rice, and Long. Karr
accepts, in partial settlement of his interest, a machine with a cost to the
partnership of $150,000, accumulated depreciation of $70,000, and a current
fair value of $110,000. The partners share net income and loss equally. The net
debit to Karr's account (including any gain or loss on disposal of the machine)
is
a. $90,000.
b. $100,000.
c. $110,000.
d. $150,000.
15.
16.
The ABC partnership has the following capital accounts on its books at
December 31, 2011:
Credit
A, Capital
$400,000
B, Capital
240,000
C, Capital
80,000
All liabilities have been liquidated and the cash balance is zero. None of the
partners have personal assets in excess of his personal liabilities. The partners
share profits and losses in the ratio of 3:2:5. If the noncash assets are sold for
$400,000, the partners should receive as a final payment:
a. A, $304,000; B, $176,000; C, $80,000
b. A, $256,000; B, $144,000; C, $-0c. A, $304,000; B, $176,000; C, $-0d. A, $120,000; B, $80,000;
C, $200,000
17.
Assets
Cash
Noncash
$ 15,000
90,000
Total Assets
O, Capital
Total Equities
$105,000
15,000
$105,000
Adamle, Boyer, and Clay are partners with a profit and loss ratio of 4:3:3. The
partnership was liquidated and, prior to the liquidation process, the partnership
balance sheet was as follows:
ADAMLE, BOYER, AND CLAY
Balance Sheet
January 1, 2011
Assets
Cash
Other assets
Total Assets
$ 60,000
540,000
$600,000
$600,000
After the partnership was liquidated and the cash was distributed, Boyer
received $96,000 in cash in full settlement of his interest.
The liquidation loss must have been:
a. $360,000
b. $144,000
c. $504,000
d. $480,000
19.
The partnership of Hall, Jones, and Otto has been dissolved and is in the
process of liquidation. On July 1, 2011, just before the second cash
distribution, the assets and equities of the partnership along with residual
profit sharing ratios were as follows:
Assets
Cash
Receivables-net
$ 200,000
50,000
Inventories
Equipment-net
Total assets
150,000
100,000
$ 500,000
175,000
75,000
500,000
Assume that the available cash is distributed immediately, except for a $25,000
contingency fund that is withheld pending complete liquidation of the partnership.
How much cash should be paid to each of the partners?
Hall
a. $87,500
b. 12,500
c.
-0d.
-0-
20.
Jones
$52,500
7,500
25,000
15,000
Otto
$35,000
10,000
-010,000
The partnership of Hall, Jones, and Otto has been dissolved and is in the
process of liquidation. On July 1, 2011, just before the second cash
distribution, the assets and equities of the partnership along with residual
profit sharing ratios were as follows:
Assets
Cash
Receivables-net
Inventories
Equipment-net
Total assets
$ 200,000
50,000
150,000
100,000
$ 500,000
150,000
100,000
175,000
75,000
500,000
Assume that Hall takes equipment with a fair value of $40,000 and a book value
of $50,000 in partial satisfaction of his equity in the partnership. If all the
$200,000 cash is then distributed, the partners should receive:
Hall
Jones
Otto
a.$100,000 $60,000 $40,000
b. 25,000
15,000
10,000
c.
-0
45,000
5,000
d.
-0
50,000
-0
21.
The partnership of Starr, Foley, and Pele share profits and losses in the ratio of
4:4:2, respectively. The partners voted to dissolve the partnership when its
assets,
liabilities,
and
capital
were
as
follows:
Assets
Cash
Other assets
Total assets
$150,000
600,000
$750,000
23.
The ABC partnership has the following capital accounts on its books at
December 31, 2011:
Credit
$200,000
120,000
40,000
A, Capital
B, Capital
C, Capital
All liabilities have been liquidated and the cash balance is zero. None of the
partners have personal assets in excess of his personal liabilities. The partners
share profits and losses in the ratio of 3:2:5. If the noncash assets are sold for
$150,000, the partners should receive as a final payment:
a. A, $152,000; B, $88,000
C, $40,000
b. A, $128,000; B, $72,000; C, $ - 0 c. A, $152,000; B, $88,000; C, $ - 0 d. A, $60,000; B, $40,000; C, $100,000
24.
30,000
Noncash
90,000
180,000
R, Capital
S, Capital
60,000
T, Capital
30,000
Total Assets
$210,000
$210,000
The partnership of Hill, Kiner, and Polk has been dissolved and is in the
process of liquidation. On July 1, 2011, just before the second cash
distribution, the assets and equities of the partnership along with residual
profit sharing ratios were as follows:
Assets
Liabilities and Equity
Cash
$ 80,000
Liabilities
$ 60,000
Receivables-net
20,000
Hill, Capital 50%
40,000
Inventories
60,000
Kiner, Capital 30%
70,000
Equipment-net
40,000
Polk, Capital 20%
30,000
Total assets
$200,000
Total Lia & Equity
$200,000
Assume that the available cash is distributed immediately, except for a
$10,000 contingency fund that is withheld pending complete liquidation of the
partnership. How much cash should be paid to each of the partners?
Hill
Kiner
Polk
a. $35,000
$21,000
$14,000
b.
$5,000
$3,000
$4,000
c.
$0
$10,000
$0
d.
$0
$6,000
$4,000
Problems
16-1
Total Assets
$240,000
300,000
$540,000
Nen, Ott, and Reese share profits and losses in a 40:40:20 ratio. All partners
are personally insolvent.
Required:
A.
Prepare the journal entries necessary to record the distribution of the
available cash.
B.
16-2
The trial balance for the ABC Partnership is as follows just before liquidation:
OTHER
BALL
CARL
CASH
ASSETS RECEIVABLE = LIABILITIES
CAPITAL
180,000 625,000
90,000
150,000
180,000
ADLER
BALL
CAPITAL
CAPITAL
420,000
270,000
Lewis, Nance, and Otis operate the LNO Partnership. The partnership
agreement provides that the partners share profits in the ratio of 40:40:20,
respectively. Unable to satisfy the firm's debts, the partners decide to liquidate.
Account balances just prior to the start of the liquidation process are as
follows:
Debit
Credit
Cash
$ 90,000
Other Assets
330,000
Liabilities
$165,000
Otis, Loan
36,000
Lewis, Capital
165,000
Nance, Capital
36,000
Otis, Capital
39,000
Otis, Drawing
21,000
_______
Totals
$441,000
$441,000
During the first month of liquidation, other assets with a book value of
$150,000 are sold for $165,000, and creditors are paid. In the following month
unrecorded liabilities of $12,000 are discovered and assets carried on the
books at a cost of $90,000 are sold for $36,000. During the third month the
remaining other assets are sold for $42,000 and all available cash is
distributed.
Required:
Prepare a schedule of partnership realization and liquidation. A safe
distribution of cash is to be made at the end of the second and third months.
The partners agreed to hold $30,000 in cash in reserve to provide for possible
liquidation expenses and/or unrecorded liabilities. All of the partners are
personally insolvent.
16-4
Due to the fact that the partnership had been unprofitable for the past several
years, A, B, C, and D decided to liquidate their partnership. The partners share
$ 100,000
350,000
Total Assets
Liabilities
A, Capital
B, Capital
C, Capital
D, Capital
Total Lia & Equities
$450,000
$250,000
55,000
60,000
50,000
35,000
$450,000
CASH
__D__
$100,000 $350,000
35,000
$250,000
__A__
CAPITAL
__B__
__C__
55,000
60,000
50,000
B. Complete the following schedule to show the total amount that will be paid
to the personal creditors.
From
Personal
_Assets_
A
B
C
D
Distribution
from
_Partnership_
Total Paid
to Personal
_Creditors_
16-5
A trial balance for the DEF partnership just prior to liquidation is given below:
Cash
Noncash Assets
Nonpartner Liabilities
Dugan, Loan
Dugan, Capital
Elston, Capital
Flynn, Capital
Totals
Debit
$ 75,000
750,000
Credit
$825,000
$240,000
75,000
225,000
153,000
132,000
$825,000
David, Paul, and Burt are partners in a CPA firm sharing profits and losses in a
ratio of 2:2:3, respectively. Immediately prior to liquidation, the following
balance sheet was prepared:
Assets
Cash
Noncash assets
$ 100,000
580,000
Total Assets
_______
$680,000
$680,000
Required:
Assuming the noncash assets are sold for $300,000, determine the amount of
cash to be distributed to each partner. Complete the worksheet and clearly
indicate the amount of cash to be distributed to each partner in the spaces
provided. No cash is available from any of the three partners.
A.
Beginning Bal.
Noncash
Burt
Cash
Capital
100,000
80,000
David
Paul
Assets
Liabilities
Capital Capital
580,000
280,000
160,000 160,000
16.7
Using the information from Problem 16-6, assume the noncash assets
are sold for $160,000. Determine the amount of cash to be distributed to each
partner assuming all partners are personally solvent.
16-8
The December 31, 2010, balance sheet of the Deng, Danielson, and Gibson
partnership, along with the partners residual profit and loss sharing ratios, is
summarized as follows:
Assets
Cash
Receivables
Inventories
Other Assets
$ 150,000
300,000
375,000
475,000
375,000
Total Assets
$1,300,000
$1,300,000
The partners agree to liquidate their partnership as soon as possible after
January 1, 2011 and to distribute all cash as it becomes available.
Required:
Prepare an advance cash distribution plan to show how cash will be distributed
as it becomes available.
Short Answer
1.
2.
An advance cash distribution plan specifies the order in which each partner
will receive cash and the dollar amount each will receive as it becomes
available for distribution. Identify the four steps in the preparation of an
advance cash distribution plan.