1.

Under the proportionate consolidation concept, which of the following statements is

true?
A) The accounting emphasis in preparing consolidated financial statements is placed
on the business combination being formed.
B) Holding control of a subsidiary provides the parent with an indivisible interest in
that company.
C) The objective of consolidated financial statements is to serve as a report to the
stockholders of the parent company.
D) The proportional consolidation concept is a hybrid of the proportionate
consolidation concept and the parent company concept.
E) The economic unit concept is no longer allowed according to SFAS 141.

2. Bowler Inc. owns 30% of Yarby Co. and applies the equity method. During the current
year, Bowler bought inventory costing $66,000 and then sold it to Yarby for $120,000.
At year-end, only $24,000 of merchandise was still being held by Yarby. What amount
of unrealized gain must be deferred by Bowler?
A) $ 6,480
B) $ 3,240
C) $10,800
D) $ 5,920
E) $ 6,610

Inventory at year-end $ 24,000.00

Gross profit markup ($54,000 ÷ $120,000) × .45
Unrealized gain $ 10,800
Ownership share × .30
Intercompany unrealized gain — deferred $ 3,240

3. Red Co. purchased 100% of Green, Inc. on October 1, 2003. On January 1, Green had
inventory with a book value (BV) of $42,000 and a fair market value (FMV) of $52,000.
This inventory had not yet been sold at December 31, 2003. Green had a building with
a book value of $200,000 and a FMV of $390,000. Green had equipment with a book
value of $350,000 and a FMV of $280,000. The building had a 10-year remaining
useful life and the equipment had a 5-year remaining useful life. Goodwill of $220,000
was recognized as part of this acquisition. How much amortization expense will be on
the consolidated financial statements for the year ended on December 31, 2003 related
to the acquisition of Green?
A) $43,000
B) $33,000
C) $ 5,000
D) $15,000
E) -0-
 4. The hardware operating segment of Bloom Corporation has the following revenues for
the year ended December 31, 2004:

S a l e s t o o u t s i d e r s $ 4 1 7 , 0 0 0
I n t e r s e g m e n t t r a n s f e r s 2 3 , 0 0 0
I n t e r e s –t o r eu vt s e i n d ue er s 7 , 0 0 0
I n t e r e s –t i r n e t v e e r sn eu g e m e n t l o 3 a 3n ,s 0 0 0

For purposes of the Revenue Test, what amount will be used as total revenues of the
hardware operating segment?
A) $ 417,000
B) $ 440,000
C) $ 424,000
D) $ 460,000
E) $ 480,000

5. When a company applies the cost method in accounting for its investment in subsidiary
and the subsidiary reports income in excess of dividends paid, what worksheet entry
would be made?
A) Retained earnings
Investment in subsidiary
B) Investment in subsidiary
Retained earnings
C) Investment in subsidiary
Equity in subsidiary's income
D) Equity in subsidiary's income
Investment in subsidiary
E) Additional paid-in capital
Retained earnings

Use the following to answer question 6:

On January 1, 2003, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco
Corporation. This investee had assets with a book value of $400,000 and liabilities of $150,000.
A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six
year remaining life. Any goodwill associated with this acquisition will not be amortized. During
2003, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2004 it reported
income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly
influence the operations of Sacco.

6. The amount allocated to goodwill at January 1, 2003, is

A) $25,000.
B) $13,000
 C) $ 9,000.
D) $16,000.
E) $10,000.

7. Which of the following statements is true regarding an acquisition?

A) The original companies dissolve while remaining as separate divisions of a newly
created company.
B) Both companies remain in existence as legal corporations with one corporation
now a subsidiary of the acquiring company.
C) The acquired company dissolves as a separate corporation and becomes a division
of the acquiring company.
D) The acquired company dissolves and goes out of business.
E) None of the above.

Use the following to answer question 8:

Dean Hardware, Inc. is comprised of five operating segments. Information about each of these
segments is as follows (in thousands):

R a k e P s a i l Ss h o v H e la s r d wA a c r c e e s s o r i e s
S a l e s t o o u t s i d e$ r s 9 4 $ 5 0 6 $ 4 4 $ 1 2 2 $ 2 8
I n t e r s e g m e n t t r a n s f 4 e r s2 6 1 4 3 0 2 4
I n t e r e s –t o r eu vt s e i nd ue er s 2 - 4 8 -
I n t e r e s –t i r n e t v e e r sn e u g e m - e n t 6 - - 2 2
O p e r a t i n – og u e t xs i p d e e n r 1 s 1e 6s 4 1 4 4 0 1 0 2 2 6
O p e r a t i n – g i n e t xe rp s e e n g s m e s2 e n 2t 0 6 1 6 2 2
I n t e r e s t e x p e n s e - 1 2 - 2 2 2
I n c o m e t a x e s ( 4 ) 1 0 4 6 2
T a n g i b l e a s s e t s 1 8 1 1 6 1 2 1 2 8
I n t a n g i b l e a s s e t s - - 4 8 6
I n t e r s e g m e n t l o a n s 8 6 - - -

8. What is the total amount of revenues in applying the revenue test?

A) $ 794
B) $ 808
C) $ 906
D) $ 916
E) $ 934
Use the following to answer question 9:

On January 1, 2003, the Moody company purchased 100% of the outstanding common stock of
Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40
shares of common stock having a par value of $1 per share but a fair market value of $10 per
share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this
purchase. Another $15 was paid in connection with stock issuance costs.

Prior to these transactions, the balance sheets for the two companies were as follows:

M o o d yO s o r i o
C a s h $ 1 8 0 $ 4 0
R e c e i v a b l e s 8 1 0 1 8 0
I n v e n t o r i e s 1 , 0 8 0 2 8 0
L a n d 6 0 0 3 6 0
B u i l d i n g s ( n e t ) 1 , 2 6 0 4 4 0
E q u i p m e n t ( n e t ) 4 8 0 1 0 0
A c c o u n t s p a y a b l( e 4 5 0 ) ( 8 0 )
L o - t n e gr m l i a b i l i t i( e 1 s , 2 9 0 ) ( 4 0 0 )
C o m m o n s t o c k ( ( $3 13 0p )a r )
C o m m o n s t o c k ( $ 2 0 p( a2 r 4 ) 0 )
A d d i t i -oi n n a c l a p ai t i a (d 1l , 0 8 0 ) ( 3 4 0 )
R e t a i n e d e a r n i ( n 1 g , 2s 6 0 ) ( 3 4 0 )

Note: Parentheses indicate a credit balance.

In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's
books: Inventory by $10, Land by $40, and Buildings by $60.

9. What amount was recorded as the investment in Osorio?

A) $780.
B) $820.
C) $800.
D) $835.
E) $815.
Use the following to answer question 10:

Pepe, Incorporated purchased 60% of Devin Company on January 1, 2003. On that date Devin
sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated
depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000
and $325,000 for 2003 and 2004, respectively. Pepe uses the equity method to account for its
investment in Devin.

10. Compute the income from Devin reported on Pepe's books for 2003.
A) $174,600.
B) $184,800.
C) $172,000.
D) $171,000.
E) $180,600.

Use the following to answer question 11:

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2002.
Walsh uses the equity method to account for its investment in Fisher. Select the best answer.

11. What worksheet credit entry is made for 2003?

A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment Strickland Company.
E) Additional paid-in capital.

12. In Japan, capitalized goodwill is normally amortized over a period up to

A) twenty years.
B) thirty years.
C) forty years.
D) five years.
E) ten years.
Use the following to answer question 13:

On November 1, 2004, Merrill Company, a U.S. firm, purchased merchandise from Esposito
Company of Italy for 300,000 euro. Payment of the euro is due on February 1, 2005. Merrill
entered into forward contract designated as a cash flow hedge to purchase 300,000 euro on
February 1, 2005. Various applicable exchange rates follow:

D a t e S p o t R F ao t r e w a r d R a t e
N o v e m b e r 1 , 2$ 0. 9 0 8 4 $ 1 . 0 3
D e c e m b e r 3 1 , 2 0 . 09 49 1 . 0 4
F e b r u a r y 1 , 2 0 0 5 . 9 6 ( s .p 9 o 6 t )

The interest rate is 12%. The present value factor for one month is .9901.

13. What is the discount or premium associated with the forward contract?
A) $10,000 premium.
B) $ 5,000 premium.
C) $ 5,000 discount.
D) $15,000 premium.
E) $15,000 discount.

14. Yukon Co. purchased 75% percent of the voting common stock of Ontario Corp. on
January 1, 2003. During the year, Yukon made sales of inventory to Ontario. The
inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario still had
$60,000 of the goods in its inventory at the end of the year. The amount of unrealized
intercompany profit which should be eliminated in the consolidation process at the end
of 2003 is
A) $15,000.
B) $20,000.
C) $32,500.
D) $30,000.
E) $24,500.
Use the following to answer question 15:

Bell Company purchases 80% of Demers Company for $500,000 on January 1, 2003. Demers
reported common stock of $300,000 and retained earnings of $200,000 on that date. Equipment
was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year
remaining life. Any excess cost over fair value was attributed to goodwill with an indefinite life.

Demers earns income and pays dividends as follows:

2 0 0 3 2 0 0 4 2 0 0 5
N e t i n c o $ m 1 e0 0 , $0 10 20 0 , 0 $ 0 1 0 3 0 , 0 0 0
D i v i d e n d s 4 0 , 0 0 50 0 , 0 0 0 6 0 , 0 0 0
Assume the cost method is applied.

15. Compute Bell's income from Demers for the year ended December 31, 2004.
A) $ 90,400.
B) $ 40,000.
C) $114,400.
D) $ 50,400.
E) $ 56,000.

16. Which of the following is not an argument for harmonization of financial reporting
practices?
A) Increased ease of investors to evaluate potential investments in foreign securities.
B) Simplification of the evaluation by multinational companies of possible foreign
takeover targets.
C) Enable companies to lower their cost of capital.
D) Reduced cost of preparing worldwide consolidated financial statements.
E) Difficulty in accomplishing a common set of standards.
Use the following to answer question 17:

Matis Company, a U.S. firm, purchased merchandise from Buckley, Ltd., of Great Britain on
October 1, 2004, for 80,000 British pounds. Payment was due on February 1, 2005. Matis
entered into a fair value hedge to purchase 80,000 British pounds on February 1, 2005. Relevant
exchange rates follow:

D a t e S p o t R F ao t r e w a r d R a t e
O c t o b e r 1 , 2$ 01 0. 54 6 $ 1 . 6 0
D e c e m b e r 3 11 , . 52 90 0 4 1 . 6 1
F e b r u a r y 1 , 21 0. 50 85 1 . 5 8 ( s p o t )

The interest rate is 12%. The present value factor for one month is .9901.

17. What is the gain/loss on the liability at December 31, 2004?

A) $3,200 loss.
B) $800 loss.
C) $800 gain.
D) $2,400 loss.
E) $2,400 gain.

18. All of the following hedges are used for future purchase/sale transactions except
A) Forward contracts used as a fair value hedge of a firm commitment.
B) Options used as a fair value hedge of a firm commitment.
C) Hedge of a foreign currency denominated asset.
D) Forward cash flow hedges of a forecasted transaction.
E) Forward contracts used to hedge a foreign currency denominated liability.
Use the following to answer question 19:

Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2004. Selected
account balances are available for the year ended December 31, 2005, and are stated in euro, the
local currency.

S a l e s € 4 0 0 , 0 0 0
I n v e n t o r y ( b o u g h t o n 2 0F ,e 0 b 0 r 0u a r y 1 , 2 0 0 5 )
E q u i p m e n t ( b o u g h t o9 n0 ,J 0 a 0n 0u a r y 1 , 2 0 0 4 )
D i v i d e n d s ( p a i d o n S 2 e 0p , t0 e 0m 0 b e r 1 , 2 0 0 5 )
A c c u m u l a t –e ed q d u e i pp mr e ec n4i a t5 t ,i 0o 0n 0
D e p r e c i a –t i e o q n u ei p x mp e e n n st e 9 , 0 0 0

R e l e v a n t e x c h a n g e r a t e s a r e g i v e n b e l o w :

J a n u a r y 1 , 2 $0 0 .4 9 1
J a n u a r y 1 , 2 0 0 .5 9 3
F e b r u a r y 1 , 2 0 .0 9 54
S e p t e m b e r 1 , 2 . 09 07 5
D e c e m b e r 3 1 1, . 2 0 01 0 5
4t h
q u a r t e r a v e r a .g9 e0 , 2 0 0 4
4t h
q u a r t e r a v e r a .g9 e8 , 2 0 0 5
A v e r a g e , 2 0 0 5 . 9 5

19. Assume the functional currency is the euro, compute the restated amount for sales for
2005.
A) $364,000.
B) $372,000.
C) $380,000.
D) $360,000.
E) $404,000.

20. Club Co. appropriately uses the equity method to account for its investment in Chip
Corp. As of the end of 2004, Chip's common stock had suffered a significant decline in
market value, which is expected to be recovered over the next several months. How
should Club account for the decline in value?
A) Club should switch to the fair-value method.
B) No accounting because the decline in market value is temporary.
C) Club should decrease the balance in the investment account to the current value and
recognize a loss on the income statement.
D) Club should not record its share of Chip's 2004 earnings until the decline in the
market value of the stock has been recovered.
E) Club should decrease the balance in the investment account to the current value and
 recognize an unrealized loss on the balance sheet.

Use the following to answer question 21:

The financial balances for the Atwood Company and the Franz Company as of December 31,
2000, are presented below. Also included are the fair market values for Franz Company's net
assets.

A t w o o d o . C F r a n z C o .
( i n t h o u s a n d s )
B o o k V a Bl u o e o k V F a al u ire M a r k e t V a l u
D e c e m b eD r e 3 c 1 e , m b eD r e 3 c 1e ,m b e r 3 1 ,
2 0 0 0 2 0 0 0 2 0 0 0
C a s h $ 8 7 0 $ 2 4 0 $ 2 4 0
R e c e i v a b l e s 6 6 0 6 0 0 6 0 0
I n v e n t o r y 1 , 2 3 0 4 2 0 5 8 0
L a n d 1 , 8 0 0 2 6 0 2 5 0
B u i l d i n g s ( n 1e ,t 8) 0 0 5 4 0 6 5 0
E q u i p m e n t ( n e 6 t 6) 0 3 8 0 4 0 0
A c c o u n t s p a y ( a 5 b 7 l e0 ) ( 2 4 0 ) ( 2 4 0 )
A c c r u e d e x p e ( n 2 s 7 e 0s ) ( 6 0 ) ( 6 0 )
L o - t n e gr m l i a b i ( l 2 i t , i7 e 0 s 0 ) ( 1 , 0 2 0 ) ( 1 , 1 0 0 )
C o m m o n s t (o 1 c , k 9 8 ( $0 2) 0 p a r )
C o m m o n s t o c k ( $ 5 p a ( r 4) 2 0 )
A d d i t i -oi n n a c l a p ai t ( i a 2d l 1 0 ) ( 1 8 0 )
R e t a i n e d e a (r 1n , i 1n 7g 0s ) ( 4 8 0 )
R e v e n u e s ( 2 , 8 8 0 ) ( 6 6 0 )
E x p e n s e s 2 , 7 6 0 6 2 0

N o t e : P a r e n t h e s e s i n d i c a t e a c r e d i t b a l a n c e .

In the following situations, determine the value that would be shown in the consolidated
financial statements for Atwood Company at date of acquisition.

Assume a purchase took place at December 31, 2000. Atwood issued 50 shares of its common
stock with a fair market value of $35 for all of the outstanding common shares of Franz. Stock
issuance costs of $15 and direct costs of $10 were paid.

21. Compute consolidated land at date of acquisition.

A) $2,060.
B) $1,800.
C) $ 260.
 D) $2,050.
E) $2,070.

22. Safire Corp. recently acquired $500,000 of the bonds of Regency Co., one of its
subsidiaries, paying more than the carrying value of the bonds. To whom would the
loss probably be attributed using the face value method?
A) To Regency because the bonds were issued by Regency.
B) The loss should be allocated between Safire and Regency based on the purchase
price and the original face value of the debt.
C) The loss should be amortized over the life of the bonds and need not be attributed to
either party.
D) The loss should be deferred until it can be determined to whom the attribution can
be made.
E) To Safire because Safire is the controlling party in the business combination

Use the following to answer question 23:

Webb Company owns 90% of Jones Company. The original balances presented for Jones and
Webb as of January 1, 2003, are as follows:

J o n e s C o m p a n y :
S
h a r e s o u t s t a n 1 d 0 i 0 n , g0 0 0
B o o k v a l u e o$ f 1 J, 2 o 0 n 0 e ,s 0 0 0
B o o k v a l u e p e r s h a$ r1e 2
W e b b C o m p a n y :
S h a r e s o w n e d o 9 f 0 J , o0 n0 e0 s
B o o k v a l u e o$ f 1 i, n0 v8 e0 s, 0t m 0 0 e n t

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for
$10 per share.

23. What is the adjusted book value of Jones after the sale of the shares?
A) $ 200,000.
B) $1,400,000.
C) $1,280,000.
D) $ 240,000.
E) $1,440,000.

24. When translating Quadros' financial statements, which of the following statements is
true?
A) There will be a remeasurement gain reported on the consolidated income statement.
B) There will be a remeasurement loss reported on the consolidated income statement.
 C) There will be a positive cumulative translation adjustment reported on the
consolidated balance sheet.
D) There will be a positive cumulative translation adjustment reported on the
consolidated income statement.
E) There will be a transaction gain reported on the consolidated income statement.

Use the following to answer question 25:

These questions are based on the following information and should be viewed as independent
situations.

Popper Co. purchased 80% of the common stock of Cocker Co. on January 1, 1998, when
Cocker had the following stockholders' equity accounts.

C o m m — o 4n 0 s , t 0 o 0c 0 k s h a r e s$ 1o 4u 0t s , t0 a 0 n 0 d i n g
A d d i t i -oi n n a c l a p ai t i ad l 1 0 5 , 0 0 0
R e t a i n e d e a r n i n g s 4 7 6 , 0 0 0
To t a l s t o c k h o l d e r s ’ e q $u 7i t2 y 1 , 0 0 0

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess cost being
allocated to goodwill.

On January 1, 2004, Cocker reported a net book value of $1,113,000. Popper had accrued the
increase in Cocker's book value through application of the equity method.

25. On January 1, 2004, Cocker reacquired 8,000 of the outstanding shares of its own
common stock for $34 per share. None of these shares belonged to Popper. How would
this transaction have affected the additional paid-in capital of the parent company?
A) $ –0–
B) decrease it by $32,900
C) decrease it by $45,700
D) decrease it by $49,400
E) decrease it by $50,500