Q&A Hero

Q: Which of the following criteria is applicable with respect to determining when a variable interest entity (VIE) must be consolidated into the sponsoring firm's financial statements? A. A consolidation must occur if the firm has a controlling financial interest and is the VIE's primary beneficiary. B. A consolidation must occur if the firm is entitled to receive all of the VIE's residual returns. C. A consolidation must occur regardless of the risk of loss exposure. D. A consolidation must occur if the sponsoring firm owns more than 50% of the VIE's equity.

Q: The disclosure rules pertaining to GAAP accounting for business combinations complicates financial analysis for which of the following reasons? A. Comparative financial statements are not retroactively adjusted to include data for the acquired company for periods prior to the acquisition. B. The inclusion of noncontrolling interest in the retroactively adjusted financial statements complicates the analysis. C. The inclusion of acquired goodwill in the retroactively adjusted financial statements complicates the analysis. D. The inclusion of the acquired firm's equity within the retroactively adjusted financial statements complicates the analysis.

Q: Which of the following statements does not accurately describe the current accounting standards for goodwill? A. If the fair value of the reporting unit is greater than its book value there is not a goodwill impairment. B. Goodwill should not be amortized. C. If the fair value of the reporting unit is less than its book value there will always be a goodwill impairment. D. Goodwill should be tested for impairment on at least an annual basis and in certain conditions between annual dates.

Q: Hill Company entered into the following inventory transactions with its investees during 2012: Sold inventory to Grant Inc. for $150,000. The inventory originally cost Hill $120,000. Grant sold 75% of the inventory during 2012. Hill owns 15% of the voting stock of Grant and does not use the equity method to account for the Grant investment. Sold inventory to Thornton Inc. for $400,000. The inventory originally cost Hill $320,000. Thornton sold 60% of the inventory during 2012. Hill owns 100% of the voting stock of Thornton. Which of the following adjustments is not correct with respect to preparing Hill's 2012 consolidated financial statements? A. Sales will be decreased $400,000. B. Cost of goods sold will be decreased $368,000. C. Inventory will be decreased $32,000. D. Gross profit will be decreased $110,000.

Q: What is the amount of goodwill to be reported on the January 1, 2012 consolidated balance sheet? A. $495,000 B. $202,500 C. $550,000 D. $225,000

Q: What is total stockholders' equity on the January 1, 2012 consolidated balance sheet? A. $9,300,000 B. $6,850,000 C. $7,150,000 D. $7,120,000

Q: On January 1, 2012, the Knight Corporation purchased 80% of the Red Company's voting stock for $1,500,000. Red's net assets had a book value of $1,350,000; the fair value of Red's land was $325,000 greater than its book value. The book value of Knight's assets immediately after the acquisition of Red totaled $6,850,000 while Red's assets had a book value of $3,350,000. Assuming that Knight used the acquisition method to prepare its consolidated balance sheet, how much goodwill was reported on the January 1, 2012 consolidated balance sheet? A. $525,000 B. $200,000 C. $160,000 D. $42,000

Q: On January 1, 2012, the Shaw Corporation purchased 70% of the Ward Company's voting stock for $1,050,000. Ward's net assets had a book value of $1,200,000; the fair value of Ward's equipment was $200,000 greater than its book value. The book value of Shaw's assets immediately after the acquisition of Ward totaled $3,750,000 while Ward's assets had a book value of $2,150,000. Assuming that Shaw used the acquisition method to prepare its consolidated balance sheet, what was total consolidated assets as of January 1, 2012? A. $5,150,000 B. $6,200,000 C. $5,050,000 D. $4,850,000

Q: The Parent Company purchased 80% of the Sub Corporation's voting stock on January 1, 2012. The Parent Company used the acquisition method to prepare the consolidated balance sheet. Which of the following is not an accurate description of the consolidated balance sheet on January 1, 2012? A. Consolidated stockholders' equity does not include the stockholders' equity of the Sub Corporation. B. Consolidated assets does not include the Investment in Sub account. C. The fair value of both Parent's and Sub's assets are included within the consolidated balance sheet. D. Consolidated assets will include goodwill if the imputed total business fair value of Sub is in excess of the fair value of Sub's identifiable assets.

Q: Which of the following statements does not properly describe the accounting for business combinations? A. Under the purchase method, the subsidiary's assets and liabilities are not valued at their full fair values on the consolidated balance sheet when minority interests are present. B. Under the acquisition method, the subsidiary's assets and liabilities are valued at their full fair values on the consolidated balance sheet when minority interests are present. C. The parent company has the option of choosing either the purchase method or the acquisition method to account for the business combination. D. The noncontrolling interest is reported as a component of stockholders' equity when using the acquisition method.

Q: The parent company's investment account would include an element which is representative of A. the unrecorded book value of the investor's assets. B. the recorded current value of the investee's assets. C. the unrecorded difference between fair value and book value of the investee's assets. D. the goodwill accrued since the purchase of the investee.

Q: If one company owns exactly 50% of the voting shares of another company A. the cost method is used. B. the equity method is used and line-by-line consolidation is required. C. the equity method is used and line-by-line consolidation is not required. D. the company that has more net assets is deemed the parent.

Q: If the parent company owns more than 50% of the subsidiary's voting stock, and effectively has control of the subsidiary, consolidated financial statements are A. optional. B. required. C. not possible. D. required only by the SEC.

Q: Which of the following does not properly describe the accounting for an investment using the equity method when the fair value option has been elected? A. The carrying value of the investment is the fair value of the investment. B. A retroactive adjustment is required if the investor switches from the fair value method. C. Dividends received by the investor increase net income. D. Unrealized gains and losses resulting from changes in market value are reported in the investor's income statement.

Q: The market value of the Lite stock investment at the end of 2012 was $210,000. Which of the following amounts are correct assuming that Como elected to use the fair value option to account for the Lite investment? A. Option a B. Option b C. Option c D. Option d

Q: The carrying value of the Lite investment at the end of 2012 is A. $200,000 B. $290,000 C. $272,000 D. $263,000

Q: The amount of the excess cost over book value attributable to inventory written off in 2012 is A. $3,000. B. $4,500. C. $7,500. D. $9,000.

Q: The excess amount paid for Lite Company attributable to inventory is A. $9,000. B. $11,000. C. $20,000. D. $22,000.

Q: The amount of goodwill implicit in Como's transaction is A. $9,000. B. $11,000. C. $20,000. D. $22,000.

Q: When the cost of the investor's shares exceeds the underlying book value at the acquisition date, the investor must amortize any excess that is attributable to inventory, or depreciable assets. The rationale for this amortization is A. conservatism. B. historical cost. C. the matching principle. D. cost benefit constraint.

Q: Regal has elected the fair value option to account for equity method investments. The fair value of the Air investment as of December 31, 2012 was $295,000. The carrying value of the Air investment on December 31, 2012 was A. $295,000 B. $300,000 C. $310,500 D. $313,500

Q: The income reported by Regal during 2012 pertaining to the Air investment was A. $9,000 B. $22,500 C. $31,500 D. $19,500

Q: What is the balance in the investment account as of December 31, 2012? A. $70,000 B. $98,000 C. $56,000 D. $84,000

Q: Ramsey's share of Vapor's income for 2012 is A. $14,000 B. $28,000 C. $42,000 D. $40,000

Q: A minority active investment is accounted for by the A. cost method. B. equity method. C. lower of cost or market method. D. speculative investment method.

Q: When an investor is capable of influencing the investee company's dividend policy, the investor is able to augment its own reported income when using A. minority passive accounting treatment. B. minority active accounting treatment. C. majority active accounting treatment. D. the equity method.

Q: When an investor owns less than 20 percent of the investee company, the investor may still be able to exert influence over the investee company if the other stock is A. closely held by a few investors. B. widely distributed across a few investors. C. widely distributed across a large number of individual investors. D. controlled a small group of investors.

Q: When the ownership percentage of stock exceeds 20 percent but is less than 50 percent, GAAP presumes that the investor A. has no influence to exert over the investee company. B. is only investing for a short term trading position. C. is able to exert influence over the investee company. D. is trying to take over the investee company.

Q: Ralmond Industries owns an investment that experienced a decline during 2012 that has been judged to be "other than temporary". The investment is held in Ralmond's available-for-sale debt portfolio, and Ralmond does not expect to sell the security and it is unlikely that Almond will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. It was purchased in March 2011 at a cost of $460,000. At the end of 2011, the fair value of the investment was $520,000 and its amortized cost basis was $454,000. At the end of 2012, the fair value of the investment is $410,000 and its amortized cost is $448,000. At the end of 2012, the present value of expected cash flows associated with the security discounted at the effective interest rate implicit when it was originally acquired is $432,000. What amount of loss will Ralmond Industries report on its income statement for the year ending December 31, 2012 related to this investment? A. An unrealized loss $16,000. B. An unrealized loss of $38,000. C. An unrealized loss of $44,000. D. An unrealized loss of $22,000.

Q: Palmon Industries owns an investment that experienced a decline during 2012 that has been judged to be "other than temporary". The investment is held in Palmon's available-for-sale debt portfolio, and Palmon expects to sell the security before recovery of its amortized cost basis less current-period credit loss. It was purchased in March 2011 at a cost of $460,000. At the end of 2011, the fair value of the investment was $520,000 and its amortized cost basis was $454,000. At the end of 2012, the fair value of the investment is $410,000 and its amortized cost is $448,000. What amount of loss will Palmon Industries report on its income statement for the year ending December 31, 2012 related to this investment? A. An unrealized loss $110,000. B. An unrealized loss of $38,000. C. An unrealized loss of $44,000. D. An unrealized loss of $50,000.

Q: Almond Industries owns an investment that experienced a decline during 2012 that has been judged to be "other than temporary". The investment is held in Almond's trading portfolio. It was purchased in March 2011 at a cost of $460,000. At the end of 2011, the fair value of the investment was $520,000. At the end of 2012, the fair value of the investment is $410,000. What amount of loss will Almond Industries report on its income statement for the year ending December 31, 2012 related to this investment? A. An unrealized loss $110,000. B. An unrealized loss of $50,000. C. An unrealized loss of $60,000. D. A realized loss of $50,000.

Q: The Kerry Company began operations during 2011 and purchased shares of Molson Corporation stock during the year. The market value of the Molson stock had increased as of the end of 2011. Kerry should have classified this investment as a trading security but mistakenly classified it as an available-for-sale security. Which of the following properly describes the impact of this error? A. The 2011 net income was not misstated. B. Total assets as of December 31, 2011 were understated. C. Total stockholders' equity as of December 31, 2011 was understated. D. Total stockholders' equity as of December 31, 2011 was not misstated.

Q: The Shasta Corporation began operations in 2011. Shasta's investment portfolio reported the following on December 31, 2011: Which of the following is correct with respect to the accounting for Shasta's investment portfolio? A. Net income was decreased $55,000 during 2011. B. Total stockholders' equity was decreased $55,000 as of December 31, 2011. C. Net income was increased $15,000 during 2011. D. Total stockholders' equity was decreased $15,000 as of December 31, 2011.

Q: Which of the following properly describes a difference between the accounting for a trading security relative to the accounting for an available-for-sale security for a particular investment? A. Total stockholders' equity at any point in time differs between the two alternatives. B. Total assets at any point in time differs between the two alternatives. C. Net income for a particular period may differ between the two alternatives. D. Net income over the life of the investment will differ.

Q: How much income was reported on the 2012 income statement? A. $240 B. $14,240 C. $14,000 D. $0

Q: The 2013 year-end adjustment resulted in A. a $12,000 reduction of stockholders' equity. B. a $2,000 reduction of stockholders' equity. C. a $2,000 increase in stockholders' equity. D. a realized gain of $2,000.

Q: Assume that the Roy Company stock was sold during 2014 for $31,000. The proper accounting recognition at the date of sale was A. an unrealized loss $1,000. B. a realized gain of $7,000. C. a realized gain of $6,000. D. a realized loss of $1,000.

Q: If the securities purchased are classified as available-for-sale securities, Perry should record the year-end adjustment as A. Option a B. Option b C. Option c D. Option d

Q: Perry should record the year-end adjustment as A. Option a B. Option b C. Option c D. Option d

Q: Perry should record the receipt of the Baker dividend as A. Option a B. Option b C. Option c D. Option d

Q: The entry to record the purchase of Able, Inc. common stock would be A. Option a B. Option b C. Option c D. Option d

Q: A company purchased shares of stock of another company for $75,000 during 2011; the shares were classified as available-for-sale. The shares' market value was $79,000 at the end of 2011 and $81,000 at the end of 2012. Which of the following statements correctly describes the investor's accounting for the investment? A. A realized gain of $4,000 was recorded during 2011. B. An unrealized gain of $6,000 was recorded during 2012. C. An unrealized gain of $2,000 was recorded during 2012. D. A realized gain of $2,000 was recorded during 2012.

Q: The fair value adjustment for available-for-sale securities results in A. a realized gain or loss to be reported within income from continuing operations. B. an unrealized gain or loss to be reported within income from continuing operations. C. a reduction of retained earnings. D. an unrealized gain or loss to be reported as a component of other comprehensive income.

Q: The unrealized holding gain or loss on trading securities is recorded on A. the income statement in the period after the security price change. B. the income statement in the period of the security price change. C. the balance sheet as a deferred charge in the period of the security price change. D. the balance sheet as a separate component of stockholders' equity.

Q: Minority active equity investments are accounted for by the A. fair value method. B. purchase method. C. equity method. D. cost.

Q: Bond investments made to generate trading gains are classified as A. available-for-sale securities. B. trading securities. C. held to maturity securities. D. minority securities.

Q: Minority passive equity securities designated by the investor to be held for the long-term are A. trading securities. B. available-for-sale securities. C. fair value securities. D. adjusted historical cost securities.

Q: Equity or debt securities designated by the investor intended to be held for a short period of time are usually classified as A. available-for-sale securities. B. trading securities. C. fair value securities. D. adjusted historical cost securities.

Q: A minority active ownership is represented by A. less than 20% ownership. B. 20% or more but less than 50% ownership. C. more than 50% ownership. D. more than 60% and less than 70% ownership.

Q: Minority ownership occurs when a corporate investor owns less than which of the following percentages of the stock of another company? A. 20% B. 30% C. 40% D. 50%

Q: The consolidated financial statements under a pooling of interests combine the market values of the two entities.

Q: In a pooling of interests, both companies are assumed to combine their resources with neither having a controlling interest over the other.

Q: Under the Exposure Draft issued by the FASB (based on joint deliberations with IASB), debt instruments held for collection of contractual cash flows will be reported at amortized cost.

Q: Under both IFRS and GAAP special purpose entities are consolidated when the firm is the "primary beneficiary".

Q: Under IFRS, firms can elect to measure the noncontrolling interest at the book value of the identifiable net assets at the acquisition date, which excludes goodwill from the measurement of the noncontrolling interest.

Q: While both IFRS and GAAP require companies to consolidate entities they control, IFRS defines control more narrowly than GAAP.

Q: IFRS reports all impairment losses for AFS-debt securities in income regardless of reason.

Q: Under IFRS, nonmarketable equity securities whose fair value can be determined are included in the trading portfolio.

Q: IFRS does not permit use of the fair value option for equity-method investments.

Q: Under the temporal method, foreign translation gains and losses are reported on the income statement.

Q: Any foreign translation gains or losses using the current rate method should be reported as other comprehensive income.

Q: On January 2, 2012, Cannon Company issued $10,000,000 of convertible debt. The bonds are zero-coupon, and each $1,000 bond is convertible into 10 shares of Cannon Company's common stock at the bond holder's option. The bonds mature in 2016 and were issued at par. Companies with similar credit profiles were issuing non-convertible debt at an effective rate of interest of 8%. The present value factor for $1 for 5 periods at 8% is .68058. For each of the following assumptions, prepare the journal entry to record the issuance of debt and entries for 2012 and 2013 to record interest expense. No bonds were converted during 2012 or 2013. A. Cannon Company uses U.S. GAAP to prepare its external financial reporting to shareholders and regulators. B. Cannon Company uses IFRS to prepare its external financial reporting to shareholders and regulators.

Q: McQueen, Inc. grants 200,000 nonqualified stock options to Robert Chalmers, the CEO, on January 1, 2011. The par value of McQueen's common stock is $1. The exercise price on the options is $35 per share, and the options are exercisable in two years. The stock price on January 1, 2011 is $31 per share. This is a fixed option plan. Using the Black-Scholes option pricing model, the value of each option is estimated to be $15.50 at the date of grant. Stock prices are $45, $65, and $50 at December 31, 2011, 2012, and 2013, respectively. Robert exercises his options on April 14, 2014, when the stock price is $57 per share. Required: 1. How much expense would have been recognized for the year ended December 31, 2011 assuming current standards allowed McQueen to use the intrinsic value method (as per APB Opinion No. 25) to measure compensation expense for the options? 2. Using current GAAP, how much expense will McQueen, Inc. recognize for the year ended December 31, 2012 related to the options? 3. Continuing with the assumptions in part #2, prepare the journal entries needed on the date of exercise. 4. Continuing with the assumptions made in part #2, explain how the tax benefits will affect McQueen's financial statements in the year of exercise. Give specific amounts and accounts assuming a 35% income tax rate.

Q: Prince Corp. has the following balance sheet information at December 31, 2011. The convertible bonds were issued at par on April 1, 2011 and are convertible into Prince's common stock at a ratio of 25 shares of stock to 1 bond. Prince did not have any treasury stock at December 31, 2010 and purchased the 9,000 shares evenly throughout 2011. The average price of the common stock for the year was $40, and the year end price was $45. Prince Corp. also has 60,000 outstanding and exercisable qualified employee stock options. Employees obtain one share of stock for each option exercised. The exercise price for each option is $21 per share. Prince's net income for the year ended 2011 was $292,500. Its tax rate for the year was 35%. Required: 1. Compute basic EPS for the year ended December 31, 2011. Show all computations. 2. Compute diluted EPS for the year ended December 31, 2011. Show all computations.

Q: The Slazenger Company has provided the following information: Shareholders' equity on January 1, 2012 was $2,225,900. Shareholders' equity on December 31, 2012 was $2,379,300. Treasury stock costing $71,000 was sold for $62,000; the treasury stock was acquired during 2011. A property dividend was declared and distributed during 2012. The property's book value was $42,325 on the declaration date; the property's market value was $54,485 on the declaration date and $57,500 on the distribution date. 10,000 shares of $20 par value preferred stock was purchased and retired during 2012. The shares were initially issued for $25 per share and were purchased for $29 per share. 5,000 shares of $5 par value common stock were issued as the result of a small stock dividend. The market value per share was $9 at the declaration date and $9.50 at the distribution date. Cash dividends declared and paid during the year totaled $70,000. What was Slazenger's 2012 net income assuming that the only other transactions impacting shareholders' equity are described above?

Q: The Dunlop Corporation reported basic EPS of $3.50 for the year ended December 31, 2011; the denominator used in the basic EPS calculation was 360,000 shares. Dunlop's marginal income tax rate is 40%. Dunlap had the following convertible securities outstanding during the entire year: 8% convertible preferred stock with a total par value of $1,000,000; the preferred stock is convertible into 22,000 shares of common stock. 10% convertible bonds with a total par value of $6,000,000; the convertible bonds are convertible into 120,000 shares of common stock. What is the diluted EPS? (Hint: First test each security separately for dilution.)

Q: Penn Company had 10,000,000 shares of common stock outstanding on January 1, 2012. Penn entered into the following stock transactions during 2012: 2,000,000 shares of common stock were issued on April 1st. 600,000 shares of common stock were purchased on May 1st and were being held as treasury stock. 500,000 shares of preferred stock were issued on July 1st. 400,000 shares of treasury stock were reissued on October 1st. A 2-for-1 common stock split was declared on November 1st. Bonds convertible into 1,200,000 shares of common stock were issued on December 1st; the bonds are considered to be dilutive. Determine the number of shares to be used in the calculation of basic EPS and diluted EPS.

Q: Evert Company recently acquired 5,000 shares of its $2 par value common stock for $10 per share. Evert initially issued the stock for $7.50 per share. Required: 1. Assuming the shares were purchased as treasury shares, prepare the necessary journal entry to record the purchase of the 5,000 shares. 2. Continuing with the assumption that the shares were purchased as treasury shares, prepare the journal entry to record the sale of 2,500 shares of the treasury stock for $11.50 per share. 3. Continuing with the assumption that the shares were purchased as treasury shares, prepare the journal entry to record the subsequent sale of 2,000 shares of treasury stock for $9.75 per share. 4. Assuming the shares were purchased and retired, prepare the journal entry to record the retirement of the shares.

Q: The Sports Corporation previously issued convertible bonds with a maturity value of $5,000,000; the book value of the bonds as of October 1, 2012 was $5,250,000. Each $1,000 bond is convertible into 100 shares of $5 par value common stock. On October 1, 2012, bonds with a maturity value of $2,000,000 were converted into common stock; the common stock's market value on the conversion date was $12.75 per share. Prepare the journal entry to record the bond conversion given the above facts only.

Q: The Squash Company's shareholders' equity on January 1, 2012 was $3,125,500. During 2012, Squash Company reported the following: Net income of $575,325. Declared cash dividends totaling $125,000; the dividends had not been paid as of December 31, 2012. Issued 10,000 shares of $5 par value common stock at $9 per share. Purchased 5,000 shares of its common stock for $9.75 per share; the shares are being held as treasury shares. Sold 1,500 shares of treasury stock for $9.25 per share. Issued 2,000 shares of $5 par value common stock resulting from the declaration of a stock dividend during 2012; the market value of the common stock on the date of declaration was $10.25 per share. What was shareholders' equity as of December 31, 2012?

Q: When Cheery records interest expense on December 31, 2012 the entry will include A. A debit to interest expense for 25 million. B. A credit to Convertible notes payable for 12.5 million. C. A debit to Convertible notes payable for 17.5 million. D. A credit to Convertible notes payable for 5 million.

Q: How much cash will Cheery pay for interest during 2012? A. 25 million B. 12.5 million C. 17.5 million D. 8.75 million

Q: On Cheery's December 31, 2012 income statement how much interest expense will be recorded? A. 25 million B. 12.5 million C. 17.5 million D. 8.75 million

Q: Which of the following correctly describes U.S. GAAP accounting for convertible bonds and the implication of that requirement? A. separation of debt and equity components; interest expense is overstated. B. no separation of debt and equity components; interest expense is understated. C. no separation of debt and equity components; interest expense is overstated. D. separation of debt and equity components; interest expense is understated.

Q: Financial statement users must recognize that interest expense may seriously A. overstate the true cost of debt financing when convertible debt is used. B. understate the true cost of debt financing when convertible debt is used. C. impact the dividend rate. D. impact the amount of dividend declared.

Q: To record newly issued stock shares upon conversion of debt, managers most often choose the method known as the A. market value method. B. book value method. C. Black-Scholes method. D. par value method.

Q: With the development of modern option pricing methods, the Accounting Principles Board would probably have reached the conclusion today that the conversion feature of convertible bonds A. has no value. B. has value. C. has value, but should be ignored. D. does not lend itself to these option pricing models.

Q: Call provisions on convertible bonds protect the A. investor against extreme stock price increases. B. company against extreme stock price increases. C. bank against extreme stock price decreases. D. company against extreme stock price decreases.

Q: Convertible bonds are usually A. mortgage bonds. B. senior bonds. C. subordinated debentures. D. real estate bonds.

Q: A bond with a carrying value of $790,000 was converted into 100,000 shares of $5 per share par value common stock at a time when the market value per share was $9.00 per share. Which of the following statements does not accurately describe the financial accounting for the conversion? A. A loss of $110,000 will be recognized if the market value method of recording the conversion is used. B. Total owners' equity increases $790,000 if the market value method of recording the conversion is used. C. Total owners' equity increases $790,000 if the book value method of recording the conversion is used. D. Total owners' equity increases $900,000 if the market value method of recording the conversion is used.