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modern advanced accounting
Modern Advanced Accounting 10th Edition E. John Larsen - Solutions
1. The minority interest of preferred stockholders in the net assets of a partially owned subsidiary preferably is measured by the preferred stock’sa. Cash dividend per share.b. Call price per share.c. Liquidation preference per share.d. Par or stated value per share.
4. Is a gain or a loss that is recognized by a parent company on the disposal of part of its investment in common stock of a subsidiary eliminated in the preparation of consolidated financial statements? Explain.5. Explain how the minority interest in net assets of a subsidiary is affected by the
3. Why does a parent company recognize a nonoperating gain or loss when a subsidiary issues common stock to the public at a price per share that differs from the carrying amount per share of the parent company’s investment in the subsidiary’s common stock?Explain.
2. If a parent company acquires the minority interest in net assets of a subsidiary at less than carrying amount, what accounting treatment is appropriate for the difference?Explain.
1. FASB Statement No. 141, “Business Combinations,” requires use of the purchase method of accounting for a parent company’s or a subsidiary’s acquisition of all or part of the minority interest in net assets of the subsidiary. Discuss the reasoning in support of this requirement.
13. If a parent company applies the equity method of accounting retroactively during the course of its installment acquisition of a controlling interest in its subsidiary, consolidated retained earnings on the date that the business combination is completed includes:a. The parent company’s
12. In an installment acquisition of a controlling interest in a subsidiary, the investor uses a Retained Earnings of Investee/Subsidiary ledger account:a. Beginning with the date of the first investment, regardless of amount.b. Beginning when the investment aggregates at least 20%.c. Beginning
11. In a consolidated statement of cash flows prepared under the indirect method, minority interest in net income of subsidiary is added to consolidated net income for the computation of net cash provided by operating activities because:a. Cash dividends paid to minority stockholders by a partially
10. In a consolidated statement of cash flows under the indirect method, the parent company’s investment income from an influenced investee that paid no dividends is displayed in:a. Cash flows from investing activities.b. Cash flows from operating activities.c. The exhibit reconciling net income
9. In a consolidated statement of cash flows (indirect method), a gain on the parent company’s disposal of a portion of its investment in the subsidiary for cash is displayed with:a. Cash flows from investing activities.b. Cash flows from financing activities.c. Noncash investing and financing
8. How is the parent company’s cash acquisition of additional shares of previously unissued common stock directly from a subsidiary displayed in a consolidated statement of cash flows?a. As an operating cash flow.b. As an investing cash flow.c. As a financing cash flow.d. It is not reported.
7. In a consolidated statement of cash flows, cash flows from financing activities include, for a partially owned subsidiary:a. Cash dividends paid to the parent company only.b. Cash dividends paid to minority stockholders only.c. Both cash dividends paid to the parent company and cash dividends
6. If a parent company and its subsidiary file separate income tax returns, a deferred income tax liability is recognized in working paper eliminations for a:a. Parent company’s open-market acquisition of its subsidiary’s outstanding bonds.b. Subsidiary’s sale of merchandise to its parent
5. The appropriate format for a parent company’s journal entry to provide for income taxes on intercompany investment income from a 65%-owned domestic subsidiary that declared and paid dividends less than the amount of that income is:a. Deferred Income Tax Asset XXX Income Taxes Expense XXX
4. Is a deferred income tax liability typically recognized by a combinor/parent company for:Differences between Current Fair Values and Carrying Amounts of Undistributed Earnings of a the Identifiable Net Assets 65%-Owned Domestic of a Subsidiary? Subsidiary?a. Yes Yesb. Yes Noc. No Yesd. No No
3. Under the provisions of FASB Statement No. 109, “Accounting for Income Taxes,” a debit to Deferred Income Tax Assets is required in a working paper elimination accompanying an elimination for all of the following except an:a. Intercompany profit on merchandise.b. Intercompany bondholding
2. In a business combination that is a “tax-free corporate reorganization” for income tax purpose, may the temporary differences between current fair values and tax bases of the combinee’s inventories and plant assets be realized through the assets’:Sale? Depreciation?a. Yes Yesb. Yes Noc.
1. If a business combination (for financial accounting) is a “tax-free corporate reorganization”for income tax purposes, in the journal entry to record the business combination, the current fair value excesses of the combinee’s identifiable net assets are:a. Disregarded.b. The basis for a
8. What amounts comprise consolidated retained earnings on the date of a business combination that involved installment acquisitions of the subsidiary’s outstanding common stock?
7. Logically, at what stage in the installment acquisition of an eventual subsidiary’s outstanding common stock should the parent company ascertain the current fair values of the subsidiary’s identifiable net assets? Explain.
6. How is the equity method of accounting applied when a parent company attains control of a subsidiary in a series of common stock acquisitions? Explain.
5. Are cash dividends declared to minority stockholders displayed in a consolidated statement of cash flows? Explain.
4. A parent company and its subsidiary file separate income tax returns. How does the consolidated deferred income tax asset associated with the intercompany gain on the parent company’s sale of a depreciable plant asset to its subsidiary reverse? Explain.
3. Are interperiod income tax allocation procedures necessary in working paper eliminations for a parent company and subsidiaries that file consolidated income tax returns?Explain.
2. What standards were established in FASB Statement No. 109, “Accounting for Income Taxes,” for income taxes attributable to undistributed earnings of subsidiaries?
1. Under what circumstances do income taxes enter into the measurement of current fair values of a combinee’s identifiable net assets in a business combination?
14. If there is a $60,000 intercompany gain on the sale of machinery by a parent company to its subsidiary, and the subsidiary establishes a five-year economic life, straight-line depreciation, and no residual value for the machinery, the amount of the debit to Retained Earnings—Parent in the
13. If a machine is sold by a wholly owned subsidiary to the parent company at a gain at the end of the affiliates’ fiscal year, the appropriate working paper elimination (in journal entry format) will not include a(n):a. Debit to Retained Earnings—Subsidiary.b. Debit to Intercompany Gain on
12. A working paper elimination (in journal entry format) debiting Retained Earnings—Parent and crediting Land—Subsidiary is prepared in the accounting period or periods:a. Of the sale of the land only.b. Following the period of the sale of the land only.c. Both of the sale of the land and
11. On August 31, 2005, Polanski Corporation acquired for $84,115 (a 14% yield),$100,000 face amount of 10%, 20-year bonds (interest payable semiannually) due August 31, 2011, of Skowalksi Company, its wholly owned subsidiary. The bonds had been issued by Skowalksi to yield 12%. In a working paper
10. A debit to Minority Interest in Net Assets of Subsidiary is inappropriate in a working paper elimination (in journal entry format) for intercompany sales of merchandise by a:a. Parent company to a partially owned subsidiary.b. Partially owned subsidiary to another partially owned subsidiary.c.
9. During the fiscal year ended March 31, 2006, Puritan Corporation sold merchandise costing $120,000 to its 75%-owned subsidiary, Separatist Company, at a gross profit rate of 40%. In the relevant working paper elimination (in journal entry format) on March 31, 2006, Intercompany Sales—Puritan
8. In a working paper elimination (in journal entry format) dated March 31, 2006, for the elimination of intercompany sales, cost of goods sold, and intercompany profit in inventories resulting from a parent company’s sales of merchandise to its partially owned subsidiary, the intercompany profit
7. This sentence appears in ARB No. 51, “Consolidated Financial Statements”: “The amount of intercompany profit or loss to be eliminated . . . is not affected by the existence of a minority interest.” The foregoing statement is consistent with the:a. Parent company concept.b. Economic unit
6. Does a parent company’s open-market acquisition of its subsidiary’s bonds at a cost less than their carrying amount result, from a consolidated viewpoint on the date of acquisition, in:A Realized Gain? An Unrealized Gain?Yes Yes Yes No No Yes No No
5. A working paper elimination (in journal entry format) for intercompany sales of merchandise generally includes a credit to:a. Intercompany Cost of Goods Sold only.b. Cost of Goods Sold only.c. Both Intercompany Cost of Goods Sold and Cost of Goods Sold.d. Neither Intercompany Cost of Goods Sold
4. A subsidiary’s journal entry to record the parent company’s discounting of a note receivable from the subsidiary at a bank includes:
3. Intercompany loans, operating leases of property, and rendering of services do not include an element of intercompany profit (gain) or loss for the consolidated entity because:a. The affiliated companies do not profit at each other’s expense.b. The revenue of one affiliate exactly offsets the
2. On February 28, 2005, Pylon Corporation discounted at Bank of Los Angeles at a 15%discount rate a $120,000, 60-day, 12% note receivable dated February 19, 2005, made by Sullivan Company, a wholly owned subsidiary of Pylon. In its journal entry to record the discounting of the note, Pylon:a.
1. On October 31, 2005, Sol Company, the wholly owned subsidiary of Pan Corporation, borrowed $50,000 from Pan on a 90-day, 8% promissory note. On November 30, 2005, Pan discounted the note at Western National Bank at a 10% discount rate. In Pan’s journal entry to record the discounting of the
16. Intercompany profits (gains) or losses in inventories, plant assets, intangible assets, or bonds result in consolidated net income that differs from the parent company’s equitymethod net income. Why is this true? Explain.
15. What accounting problems result from the reissuance by a subsidiary of parent company bonds that had been acquired in the open market by the subsidiary? Explain.
14. “No intercompany gain or loss should be recognized when a parent company acquires in the open market outstanding bonds of its subsidiary, because the transaction is not an intercompany transaction.” Do you agree with this statement? Explain.
13. In what ways do working paper eliminations (in journal entry format) for intercompany leases of property under capital/sales-type leases resemble eliminations for intercompany sales of plant assets and intangible assets? Explain.
12. Sayles Company, a 90%-owned subsidiary of Partin Corporation, sold to Partin for$10,000 a machine with a carrying amount of $8,000, no residual value, and an economic life of four years. Explain how the intercompany gain element of Partin Corporation’s annual depreciation expense for the
11. Is an intercompany gain on the sale of land ever realized? Explain.
10. How do intercompany sales of plant assets and intangible assets differ from intercompany sales of merchandise?
9. Some accountants have advocated the elimination of intercompany profit in the parent company’s ending inventories only to the extent of the parent’s ownership interest in the partially owned selling subsidiary. What is an argument in opposition to this treatment of intercompany profit in the
8. How is the minority interest in net income of a partially owned subsidiary affected by working paper eliminations for intercompany profits? Explain.
7. How is the unrealized intercompany profit in a subsidiary’s beginning inventories resulting from the parent company’s sales of merchandise to the subsidiary accounted for in a working paper elimination (in journal entry format)? Explain.
6. What consolidated financial statement categories are affected by intercompany sales of merchandise at a profit? Explain.
5. How are consolidated financial statements affected if unrealized intercompany profits(gains) resulting from transactions between a parent company and its subsidiaries are not eliminated? Explain.
4. Is an intercompany note receivable that has been discounted by a bank eliminated in the preparation of a consolidated balance sheet? Explain.
3. Primak Corporation rents a sales office to its wholly owned subsidiary under an operating lease requiring rent of $2,000 a month, payable the first day of the month. What are the income tax effects of the elimination of Primak’s $24,000 rent revenue and the subsidiary’s $24,000 rent expense
2. Identify five common related party transactions between a parent company and its subsidiary.
1. How should a parent company and subsidiary account for related party transactions and balances to assure their correct elimination in the preparation of consolidated financial statements? Explain.
16. At the end of an accounting period, a parent company that uses the equity method of accounting for its partially owned subsidiary closes its:a. Dividends Declared ledger account.b. Intercompany Dividends Receivable ledger account.c. Dividends Payable ledger account.d. Intercompany Dividends
15. On May 31, 2005, the date of the business combination of Passey Corporation and its 80%-owned subsidiary, Sandy Company, for which Passey uses the equity method of accounting, the balance of Sandy’s Retained Earnings account was $100,000, and on May 31, 2006, the after-closing balance was
14. Under the equity method of accounting, a parent company uses the Retained Earnings of Subsidiary ledger account for a subsidiary:a. For closing entries only.b. For dividends declared by the subsidiary only.c. For both dividends declared by the subsidiary and closing entries.d. For neither
13. An Intercompany Dividends Receivable ledger account is used in:a. The cost method of accounting only.b. The equity method of accounting only.c. Both the cost method and the equity method of accounting.d. Neither the cost method nor the equity method of accounting.
12. The post-closing balances of the Retained Earnings ledger accounts of Panich Corporation and its 80%-owned subsidiary, Swenson Company, on February 28, 2006, were as follows (there were no intercompany profits or losses):Panich Corporation:Retained earnings $1,600,000 Retained earnings of
11. The 80%-owned subsidiary of a parent company reported a net income of $80,000 for the year ended May 31, 2006. The parent company’s appropriate journal entry under the equity method of accounting is (explanation omitted):a. Investment in Subsidiary Company Common Stock 80,000 Investment
10. If a parent company uses the equity method of accounting, in the working paper eliminations for the second and succeeding years following a business combination between the parent company and its wholly owned subsidiary, the amount eliminated for the subsidiary’s retained earnings is the
9. During a fiscal year, the balance of a parent company’s Investment in Subsidiary Common Stock ledger account for a wholly owned subsidiary, for which the parent company uses the equity method of accounting, increases by the amount of the subsidiary’s:a. Adjusted net income.b. Dividends.c.
8. On any date, the balance of a parent company’s Retained Earnings of Subsidiary account attributable to a wholly owned subsidiary is equal to the:a. Balance of the subsidiary’s Retained Earnings account.b. Net increase in the parent’s Investment in Subsidiary Common Stock account since the
7. The accuracy of the minority interest in net assets of a partially owned subsidiary subsequent to the date of the business combination may be verified by applying the minority interest percentage to the:a. Total stockholders’ equity of the subsidiary.b. Balance of the parent company’s
6. The end-of-period closing entries for a parent company that uses the equity method of accounting for the operating results of a wholly owned subsidiary include a credit to the Retained Earnings of Subsidiary ledger account in the amount of the:a. Ending retained earnings of the subsidiary.b. Net
5. After completion of the parent company’s equity-method journal entries for its profitable wholly owned subsidiary’s operating results, the balance of the parent’s Intercompany Investment Income ledger is equal to the:a. Subsidiary’s net income.b. Subsidiary’s net Income, less
4. Under the equity method of accounting, dividends declared by the subsidiary to the parent company are credited to the parent’s:a. Intercompany Dividends Receivable account.b. Investment in Subsidiary Common Stock account.c. Retained Earnings of Subsidiary account.d. Retained Earnings account.
3. In a closing entry at the end of an accounting period, a parent company that uses the equity method of accounting for the operations of a subsidiary credits the Retained Earnings of Subsidiary account in the amount of the:a. Balance of the subsidiary’s Retained Earnings account.b. Dividends
2. Under the equity method of accounting for the operating results of a subsidiary, dividends declared by the subsidiary to the parent company are accounted for by the parent company as:a. Dividend revenue on the declaration date.b. A reduction of the investment in subsidiary on the payment date.c.
1. Concepts underlying the equity method and the cost method of accounting for the operating results of a subsidiary may be summarized as follows:Equity Method Cost Method Legal form Economic substance Legal form Legal form Economic substance Economic substance Economic substance Legal form
8. Is a Retained Earnings of Subsidiary ledger account required for a parent company that uses the equity method of accounting for the subsidiary’s operations? Explain.Select the best answer for each of the following multiple-choice questions:
7. Plumstead Corporation’s 92%-owned subsidiary declared a dividend of $3 a share on its 50,000 outstanding shares of common stock. How does Plumstead record this dividend under:a. The equity method of accounting?b. The cost method of accounting?
6. Both Parnell Corporation and Plankton Company have wholly owned subsidiaries. Parnell has an Intercompany Dividends Revenue ledger account, and an Intercompany Investment Income account is included in the Plankton ledger. Do both companies use the same method of accounting for their
5. Discuss some of the advantages that result from the use of the equity method, rather than the cost method, of accounting for a subsidiary’s operating results.
4. Strake Company, a 90%-owned subsidiary of Peale Corporation, had a net income of$50,000 for the first year following the business combination. However, the working paper elimination for the minority interest in the subsidiary’s net income was in the amount of $3,500 rather than $5,000. Is this
3. Describe the special features of closing entries for a parent company that accounts for its subsidiary’s operating results by the equity method.
2. When there are no intercompany profits (gains) or losses in consolidated assets or liabilities, the equity method of accounting produces parent company net income that equals consolidated net income. The equity method also results in parent company retained earnings of the same amount as
1. “Consolidated financial statement amounts are the same, regardless of whether a parent company uses the equity method or the cost method to account for a subsidiary’s operations.”Why is this statement true?
16. Has push-down accounting for a subsidiary’s separate financial statements been sanctioned by the:FASB? SEC?a. Yes Yesb. Yes Noc. No Yesd. No No
15. The cost of Paul Corporation’s 80% investment in Seth Company’s outstanding voting common stock was $1,200,000, and the current fair value of Seth’s identifiable net assets, which had a carrying amount of $1,000,000, was $1,250,000. Under the computation method used in this book,
14. The debits in the working paper elimination (in journal entry format) for the consolidated balance sheet of Parent Corporation and 90%-owned Subsidiary Company totaled$2,080,000, including a debit of $80,000 to Goodwill—Parent. The credit elements of the elimination are:Investment in
13. On the date of the business combination of a parent company and its partially owned subsidiary, under the computation method used in this book, the amount assigned to minority interest in net assets of subsidiary is based on the:a. Cost of the parent company’s investment in the subsidiary’s
12. In a consolidated balance sheet of a parent company and its partially owned subsidiary, minority interest in net assets of subsidiary is displayed as a:a. Liability under the economic unit concept but a part of consolidated stockholders’equity under the parent company concept.b. Part of
11. In a business combination resulting in a parent company–wholly owned subsidiary relationship, goodwill developed in the working paper elimination is attributed:a. In its entirety to the subsidiary.b. In its entirety to the parent company.c. To both the parent company and the subsidiary, in
10. Differences between current fair values and carrying amounts of the identifiable net assets of a subsidiary on the date of a business combination are recognized in a:a. Working paper elimination.b. Subsidiary journal entryc. Parent company journal entry.d. Note to the consolidated financial
9. On the date of the business combination of Pobre Corporation and its wholly owned subsidiary, Sabe Company, Pobre paid (1) $100,000 to the former stockholders of Sabe for their stockholders’ equity of $65,000 and (2) $15,000 for direct out-of-pocket costs of the combination. Goodwill
8. In the working paper for consolidated balance sheet prepared on the date of the business combination of a parent company and its wholly owned subsidiary, whose liabilities had current fair values equal to their carrying amounts, the total of the Eliminations column is equal to:a. The current
7. In a working paper elimination (in journal entry format) for the consolidated balance sheet of a parent company and its wholly owned subsidiary on the date of a business combination, the subtotal of the debits to the subsidiary’s stockholders’ equity accounts equals the:a. Current fair value
6. In a completed working paper elimination (in journal entry format) for a parent company and its wholly owned subsidiary on the date of the business combination, the total of the debits generally equals the:a. Parent company’s total cost of its investment in the subsidiary.b. Carrying amount of
5. If, on the date of the business combination, C consideration given to the former stockholders of wholly owned subsidiary Stacey Company by Passey Corporation;DOP direct out-of-pocket costs of the combination; CA carrying amount, and CFV current fair value of Stacey’s identifiable net assets;
4. FASB Statement No. 94, “Consolidation of All Majority Owned Subsidiaries,” exempts from consolidation:a. No subsidiaries of the parent company.b. Foreign subsidiaries of the parent company.c. Finance-related subsidiaries of the parent company.d. Subsidiaries not controlled by the parent
3. An investor company that owns more than 50% of the outstanding voting common stock of an investee may not control the investee if:a. The investee is in reorganization in bankruptcy proceedings.b. There is a large passive minority interest in the investee.c. A part of the investor company’s
2. The traditional definition of control for a parent company–subsidiary relationship(parent’s ownership of more than 50% of the subsidiary’s outstanding common stock)emphasizes:a. Legal form.b. Economic substance.c. Both legal form and economic substance.d. Neither legal form nor economic
1. A parent company’s correctly prepared journal entry to record the out-of-pocket costs of the acquisition of the subsidiary’s outstanding common stock in a business combination was as follows (explanation omitted):Investment in Sullivan Company Common Stock 36,800 Cash 36,800 The implication
10. What is push-down accounting?
9. The principal limitation of consolidated financial statements is their lack of separate information about the assets, liabilities, revenue, and expenses of the individual companies included in the consolidation. List the problems that users of consolidated financial statements encounter as a
8. Compare the parent company concept and the economic unit concept of consolidated financial statements as they relate to the display of minority interest in net assets of subsidiary in a consolidated balance sheet.
7. Describe three methods that have been proposed for valuing minority interest and goodwill in the consolidated balance sheet of a parent company and its partially owned subsidiary.
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