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PART IINTERMIDATE ACCOUNTING

Multiple Choice (42%):
1. According to the FASB conceptual framework, which of the following situations violates the
concept of reliability?
a. Data on segments having the same expected risks and growth rates are reported to analysts
estimating future profits.
b. Financial statements are issued nine months late.
c. Management reports to stockholders regularly refer to new projects undertaken, but the
financial statements never report project results.
d. Financial statements include property with a carrying amount increased to managements
estimate of market value.
2. Amar Farms produced 300,000 pounds of cotton during the 2001 season. Amar sells all of its
cotton to Brye Co., which has agreed to purchase Amars entire production at the prevailing
market price. Recent legislation assures that the market price will not fall below $.70 per pound
during the next two years. Amars costs of selling and distributing the cotton are immaterial and
can be reasonably estimated. Amar reports its inventory at expected exit value. During 2001,
Amar sold and delivered to Brye 200,000 pounds at the market price of $.70. Amar sold the
remaining 100,000 pounds during 2002 at the market price of $.72. What amount of revenue
should Amar recognize in 2001?
a. $140,000
b. $144,000
c. $210,000
d. $216,000
3. The first examination of Rudd Corp.s financial statements was made for the year ended
December 31, 2001. The auditor found that Rudd had purchased another company in January
1999 and had recorded goodwill of $100,000 in connection with this purchase. It was determined
that the goodwill had an estimated useful life of only five years because of obsolescence. No
amortization of goodwill had ever been recorded. For the December 31, 2001 financial
statements, Rudd should debit
Amortization expense
Retained earnings
a.
$0
$100,000
b.
$20,000
$ 40,000
c.
$33,333
$0
d.
$60,000
$0

Items 4 and 5 are based on the following:

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During 2001, Orca Corp. decided to change from the FIFO method of inventory valuation to
the weighted-average method. Inventory balances under each method were as follows:
FIFO
Weighted-average
January 1, 2001
$71,000
$77,000
December 31, 2001
79,000
83,000
Orcas income tax rate is 30%.
4. In its 2001 financial statements, what amount should Orca report as the cumulative effect of this
accounting change?
a. $2,800
b. $4,000
c. $4,200
d. $6,000
5. Orca should report the cumulative effect of this accounting change as a(n)
a. prior period adjustment.
b. component of income from continuing operations.
c. extraordinary item.
d. component of income after extraordinary items.
Items 6 and 7 are based on the following:
A company buys ten shares of securities at $2,000 each on December 31, 1999. The securities
are classified as available for sale. The fair value of the securities increases to $2,500 on December
31, 2000, and to $2,750 on December 31, 2001. On December 31, 2001, the company sells the
securities. Assume no dividends are paid and that the company has a tax rate of 30%.
6. In 2001, what is the amount of the reclassification adjustment for other comprehensive income?
a. $7,500
b. ($7,500)
c. $5,250
d. ($5,250)
7. What is the amount of the holding gain arising during the period that is classified in other
comprehensive income for the period ending December 31, 2001?
a. 0
b. $7,500
c. $2,500
d. $1,750
8. Reporting inventory at the lower of cost or market is a departure from the accounting principle of
a. historical cost.
b. consistency.
c. conservatism.
d. full disclosure.
9. Brock Co. adopted the dollar-value LIFO inventory method as of January 1, 2000. A single
inventory pool and an internally computed price index are used to compute Brocks LIFO
inventory layers. Information about Brocks dollar-value inventory follows:
Inventory
At base
At current
At dollar

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Date
year cost
year cost
value LIFO
1/1/00
$40,000
$40,000
$40,000
2000layer
5,000
14,000
6,000
12/31/00
$45,000
$54,000
$46,000
2001layer
15,000
26,000
?
12/31/01
$60,000
$80,000
?
What was Brocks dollar-value LIFO inventory at December 31, 2001?
a. $80,000
b. $74,000
c. $66,000
d.$60,000
Items 10 and 11 are based on the following:
During 2001, Pitt Corp. incurred costs to develop and produce a routine, low-risk computer
software product, as follows:
Completion of detailed program design

$13,000

Costs incurred for coding and testing to establish technological feasibility

10,000

Other coding costs after establishment of technological feasibility

24,000

Other testing cost after establishment of technological feasibility

20,000

Costs of producing product masters for training materials

15,000

Duplication of computer software and training materials from product

masters (1,000 units)
Packaging product (500 units)

25,000
9,000

10. In Pitts December 31, 2001 balance sheet, what amount should be reported in inventory?
a. $25,000
b. $34,000
c. $40,000
d.$49,000
11. In Pitts December 31, 2001 balance sheet, what amount should be capitalized as software cost,
subject to amortization?
a. $54,000
b. $57,000
c. $59,000
d. $69,000
Items 12 and 13 are based on the following:
On January 2, 2001, Emme Co. sold an equipment with a carrying amount of $480,000 in
exchange for a $600,000 noninterest-bearing note due January 2, 2004. There was no established
exchange price for the equipment. The prevailing rate of interest for a note of this type at January
2, 2001, was 10%. The present value of $1 at 10% for three periods is 0.75.
12. In Emmes 2001 income statement, what amount should be reported as interest income?
a. $9,000
b. $45,000
c. $50,000
d. $60,000
13. In Emmes 2001 income statement, what amount should be reported as gain(loss) on sale of
machinery?

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a. ($30,000) loss.
c. $120,000 gain.

b. $ 30,000 gain.
d. $270,000 gain.

Items 14 and 15 are based on the following:

The following information pertains to the transfer of real estate pursuant to a trouble debt
restructuring by Knob Co. to Mene Corp. in full liquidation of Knobs liability to Mene:
Carrying amount of liability liquidated
$ 150,000
Carrying amount of real estate transferred
100,000
Fair value of real estate transferred
90,000
14. What amount should Knob report as a pretax extraordinary gain(loss) on restructuring of
payables?
a. ($10,000)
b. $0
c. $50,000
d. $60,000
15. What amount should Knob report as ordinary gain(loss) on transfer of real estate?
a. ($10,000)
b. $0
c. $50,000
d. $60,000
16. Which of the following differences would result in future taxable amounts?
a. Expenses or losses that are deductible after they are recognized in financial income.
b. Revenues or gains that are taxable before they are recognized in financial income.
c. Expenses or losses that are deductible before they are recognized in financial income.
d. Revenues or gains that are recognized in financial income but are never included in taxable
income.
17. In 1999, Fogg, Inc. issued $10 per value common stock for $25 per share. No other common
stock transactions occurred until March 31, 2001, when Fogg acquired some of the issued
shares for $20 per share and retired them. Which of the following statements correctly states an
effect of this acquisition and retirement?
a. 2001 net income is decreased.
b. 2001 net income is increased.
c. Additional paid-in capital is decreased.
d. Retained earnings is increased.
18. On June 30, 2000, Lomond, Inc. issued twenty $10,000, 7% bonds at par. Each bond was
convertible into 200 shares of common stock. On January 1, 2001, 10,000 shares of common
stock were outstanding. The bondholders converted all the bonds on July 1, 2001. The
following amounts were reported in Lomonds income statement for the year ended December
31, 2001:
Revenues
Operating expenses
Interest on bonds

$977,000
(920,000)
( 7,000)

Income before income tax

Income tax at 30%
Net income

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$50,000
( 15,000)

$35,000

What is Lomonds 2001 diluted earnings per share?

a. $2.50
b. $2.85
c. $2.92

d. $3.50

Items 19 through 21 are based on the following:

Grant, Inc. acquired 30% of South Co.s voting stock for $200,000 on January 2, 2000.
Grants 30% interest in South gave Grant the ability to exercise significant influence over Souths
operating and financial policies. During 2000, South earned $80,000 and paid dividends of
$50,000. South reported earnings of $100,000 for the six months ended June 30, 2001, and
$200,000 for the year ended December 31, 2001. On July 1, 2001, Grant sold half of its stock in
South for $150,000 cash. South paid dividends of $60,000 on October 1, 2001.
19. Before income taxes, what amount should Grant include in its 2000 income statement as a result
of the investment?
a. $15,000
b. $24,000
c. $50,000
d. $80,000
20. In Grants December 31, 2000 balance sheet, what should be the carrying amount of this
investment?
a. $200,000
b. $209,000
c. $224,000
d. $230,000
21. In its 2001 income statement, what amount should Grant report as gain from the sale of half of
its investment?
a. $24,500
b. $30,500
c. $35,000
d. $45,500
Problem 1 (8%)
The following information pertains to Sparta Co.s defined benefit pension plan.
Discount rate
8%
Expected rate of return
10%
Average service life
12 years
At January 1, 2001:
Projected benefit obligation
$600,000
Fair value of pension plan assets 720,000
Unrecognized prior service cost 240,000
Unamortized prior pension gain
96,000
At December 31, 2001:
Projected benefit obligation
910,000
Fair value of pension plan assets 825,000
Service cost for 2001 was $90,000. There were no contributions made or benefits paid during

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the year. Spartas unfounded accrued pension liability was $8,000 at January 1, 2001. Sparta uses
the straight-line method of amortization over 12 years, the average service life of the employees.
Required:
For items 1 through 4, calculate the amounts to be recognized as components of Spartas
unfounded accrued pension liability at December 31, 2001.
1. Interest cost.
2. Expected return on plan assets.
3. Actual return on plan assets.
4. Amortization of prior service costs.
Problem 2 (8%)
On January 2, 2001, Elsee Co. leased equipment from Grant, Inc. Lease payments are
$100,000, payable annually every December 31 for twenty years. Title to the equipment passes to
Elsee at the end of the lease term. The lease is noncancelable.
Additional facts
The equipment has a $750,000 carrying amount on Grants books. Its estimated economic life
was twenty-five years on January 2, 2001.
The rate implicit in the lease, which is known to Elsee, is 10%. Elsees incremental borrowing
rate is 12%.
Elsee uses the straight-line method of depreciation.
The rounded present value factors of an ordinary annuity for twenty years are as follow:
12%
7.5
10%
8.5
Required:
Prepare the necessary journal entries, without explanations, to be recorded by Elsee for
1. entering into the lease on January 2, 2001.
2. making the lease payment on December 31, 2001.
3. expenses related to the lease for the year ended December 31, 2001.
Show supporting calculations for all entries.
Problem 3 (12%)
Chester Company has the following contingencies:
A threat of expropriation exists for one of its manufacturing plants located in foreign country.
Expropriation is deemed to be reasonably possible. Any compensation from the foreign
government would be less than the carrying amount of the plant.
Potential costs exist due to the discovery of a safety hazard related to one of its products.
These costs are probable and can be reasonably estimated.
One of its warehouses located at the base of a mountain could no longer be insured against

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rock slide losses. No rock slide losses have occurred.

Required:
1. How should Chester report the threat of expropriation of assets? Why?
2. How should Chester report the potential costs due to the safety hazard? Why?
3. How should Chester report the noninsurable rock slide risk? Why?

PART II: ADVANCED ACCOUNTING

Multiple choice: Please choose the best answer (each question 3 points, total 30 points)
1. A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the
dividend have on the retained earnings and minority interest balances in the parent companys
consolidated balance sheet?
a. No effect on retained earnings and a decrease in minority interest.
b. No effect on either retained earnings or minority interest.
c. A decrease in retained earnings and no effect on minority interest.
d. Decreases in both retained earnings and minority interest.

2. APB Opinion No. 16, Business Combinations, contains conditions that must be met in order for
the pooling-of-interests method of accounting to be used. Which one of the following is not a
condition that must be met to use the pooling-of-interests method to record a business
combination?
a. No constituent company may have more than a 10% ownership of the outstanding voting
common stock of another constituent company.
b. No additional capital stock must be contingently issuable to former shareholders of a
combinee after a combination has been initiated.
c. A majority of the officers of the combinee company must also be officers in the combined
enterprise after the combination.
d. At least 90% of the combinees outstanding voting common stock must be exchanged for the
combinors majority voting common stock.
3. On January 1, 2001, Chenghua Co. issued 100,000 shares of its $10 par value common stock in
exhange for all of Taichung Inc.s outstanding stock. This buiness combination was accounted for
as a pooling of interests. The fair value of Chenghuas common stock on December 31, 2000 was
$19 per share. The carrying amounts and fair values of Taichungs assets and liabilities on

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December 31, 2000 were as follows:

Cash
Receivables
Inventory
Property, plant and equipment
Liabilities
Net assets

Carrying Amount
$ 240,000
270,000
435,000
1,305,000
(525,000)
$1,725,000

Fair Value
$ 240,000
270,000
405,000
1,440,000
(525,000)
$1,830,000

What is the amount of goodwill resulting from the business combination?

a. $0
b. $70,000
c. $105,000
d. $175,000
4. Honda Co. had the following transactions with affiliated parties during 2001:
1) Sales of $50,000 to Ford, Inc., with $20,000 gross profit. Ford had $15,000 of this inventory
on hand at year-end. Honda owns a 15% interest in Ford and does not exert significant
influence.
2) Purchases of raw materials totaling $240,000 from Kent Corp., a wholly owned subsidiary.
Kents gross profit on the sale was $48,000. Honda had $60,000 of this inventory remaining
on December 31, 2001.
Before eliminating entries, Honda had consolidated current assets of $320,000. What amount
should Honda report in its December 31, 2001 consolidated balance sheet for current assets?
a. $302,000 b. $308,000 c. $314,000 d. $320,000
5. Paisa, Inc. owns 80% of Leo, Inc.s outstanding common stock. Leo, in turn, owns 10% of Paisas
outstanding common stock. What percentage of the common stock cash dividends declared by
the individual companies should be reported as dividends declared in the consolidated financial
statements?

a.
b.
c.
d.

Dividends Declared
By Paisa
90%
90%
100%
100%

Dividends Declared
by Leo
0%
20%
0%
20%

6. Which represents the proper journal entry for a periodic inventory system that should be made on
the books of the branch when goods that cost the home office $100,000 to manufacture are
shipped to the branch at a price of $125,000?

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a.Shipments from home office

$100,000

Home office

$100,000

b.Shipments from home office

$125,000

Home office

$125,000

c.Shipments from home office

$125,000

Unrealized profit

$ 25,000

Hone office

100,000

d.Shipments to branch

$100,000

Unrealized profit

25,000

Shipments from home office

$125,000

7. Sharp Corp. had a realized foreign currency transaction loss of $15,000 for the year ended
December 31, 2001 and must also determine whether the following items will require year-end
adjustment:
1) Sharp had an $8,000 loss resulting from the translation of the accounts of its wholly owned
foreign subsidiary for the year ended December 31, 2001.
2) Sharp had an account payable to an unrelated foreign supplier payable in the suppliers local
currency. The U.S. dollar equivalent of the payable was $64,000 on the October 31, 2001
invoice date and $60,000 on December 31, 2001. The invoice is payable on January 30,
2002.
In Sharps 2001 consolidated income statement, what amount should be included as foreign
currency transaction loss?
a. $23,000

b. $19,000

c. $15,000

d. $11,000

8.George Company had net assets according to its books of $1 million on January 1, 2001. On the
same date, Bluce Company owned 9,000 of the 12,000 outstanding shares of Georges only class
of stock, and its investment in George Company account had a balance of $795,000. If, on
January 1, 2001, George repurchased 2,000 shares from Bluce for $200,000, the gain on the sale
of the stock recognized by Bluce was
a. $23,333

b. $10,000

c. $7,000

d. $3,000

9. Nissen Co.s planned combination with Toyota Co. on January 1, 2001 can be structured as either
a purchase or a pooling of intrests. In a purchase, Nissen would acquire Toyotas identifiable net

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assets for less than their book values. These book values approximate fair values. Toyotas assets
consist of current assets and depreciable noncurrent assets. How would the combined entitys
2001 net income and operating cash flows under purchase accounting compare to those under
pooling-of-interests accounting? Ignore costs required to effect the combination and income tax
expense.
Purchase Accounting
Purchase Accounting
Net Income
Operating Cash Flows
a. Equal to pooling
Greater than pooling
b. Equal to pooling
Equal to pooling
c. Greater than pooling
Greater than pooling
d. Greater than pooling
Equal to pooling
10. A foreign subsidiarys functional currency is its local currency, which has not experienced
significant inflation. The weighted-average exchange rate for the current year is the appropriate
exchange rate for translating
Wages Expense
Sales to Customers
a.
No
No
b.
No
Yes
c.
Yes
Yes
d.
Yes
No