Question 1

Which of the following statements is true?

Accepted Answer

A)  When one affiliate purchases another affiliate's bonds prior to the business combination, the bonds become an intercompany debt as of the business combination date and thus are viewed, for consolidate purposes, as being retired on the purchase date. 
B)  When one affiliate purchases another affiliate's bonds prior to the business combination, the bonds become an intercompany debt as of the purchase date and thus are viewed as being retired on the purchase date if the yield rate on date of purchase is greater than the original yield rate. 
C)  When one affiliate purchases another affiliate's bonds prior to the business combination, the bonds become an intercompany debt as of the purchase date and thus are viewed as being retired on the purchase date if the yield rate on date of purchase is less than the original yield rate. 
D)  All of the above answers are false. 
A)  When one affiliate purchases another affiliate's bonds prior to the business combination, the bonds become an intercompany debt as of the business combination date and thus are viewed, for consolidate purposes, as being retired on the purchase date. 
B)  When one affiliate purchases another affiliate's bonds prior to the business combination, the bonds become an intercompany debt as of the purchase date and thus are viewed as being retired on the purchase date if the yield rate on date of purchase is greater than the original yield rate. 
C)  When one affiliate purchases another affiliate's bonds prior to the business combination, the bonds become an intercompany debt as of the purchase date and thus are viewed as being retired on the purchase date if the yield rate on date of purchase is less than the original yield rate. 
D)  All of the above answers are false. A

Question 2

Elimination procedures for intercompany bonds purchased from outside parties by another member of the consolidated group are:

Accepted Answer

A)  not needed except in the period of acquisition if purchased at par. 
B)  not needed except in the period of acquisition if purchased at a premium or discount. 
C)  not needed except in the period of acquisition if only a portion of the outstanding bonds are purchased. 
D)  needed each period as long as there are intercompany bonds. 
A)  not needed except in the period of acquisition if purchased at par. 
B)  not needed except in the period of acquisition if purchased at a premium or discount. 
C)  not needed except in the period of acquisition if only a portion of the outstanding bonds are purchased. 
D)  needed each period as long as there are intercompany bonds. D

Question 3

The Park Company owns 80% of the outstanding common stock of the Sea Company. Park is about to lease a machine with a 5-year life to the Sea Company. The lease would begin January 1, 20X8.
Required:
Explain the adjustments that will be required in the consolidation process if each of the following occurs.
a.
The lease is an operating lease.
b.
The lease is a direct financing lease with a bargain purchase option.
c.
The lease is a sales-type lease with a bargain purchase option.

Accepted Answer

a.
The intercompany rent expense and rent revenue are eliminated. The asset and related accumulation should be reclassified as normal productive assets.
b.
The intercompany interest expense and revenue recorded on the lease obligation are eliminated. The liability obligation under capital lease is eliminated against the asset, present value of minimum lease payments. The asset--machine under capital lease should be reclassified as a normal productive asset.
c.
In addition to the procedures outlined in part b, the sales profit is eliminated and the asset is reduced to its cost to the consolidated group. Depreciation expense is reduced to that applicable to the cost of the asset to the consolidated group.

Question 4

The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a consolidated group is due to the:

Accepted Answer

A)  subsidiary's ability to borrow larger amounts of capital at more favorable terms than would be available to the parent. 
B)  parent's ability to borrow larger amounts of capital at more favorable terms than would be available to the subsidiary. 
C)  parent's desire to decentralize asset management and credit control. 
D)  parent's desire to eliminate long-term debt. 
A)  subsidiary's ability to borrow larger amounts of capital at more favorable terms than would be available to the parent. 
B)  parent's ability to borrow larger amounts of capital at more favorable terms than would be available to the subsidiary. 
C)  parent's desire to decentralize asset management and credit control. 
D)  parent's desire to eliminate long-term debt.

Question 5

On January 1, 20X1, Parent Company purchased 80% of the common stock of Subsidiary Company for $402,000. On this date Subsidiary had total owners' equity of $440,000. Any excess of cost over book value is due to goodwill. Parent accounts for its investment in Subsidiary using the simple equity method.
On January 1, 20X3, Parent held merchandise acquired from Subsidiary for $50,000. During 20X3, Subsidiary sold merchandise to Parent for $120,000, of which Parent holds $30,000 on December 31, 20X3. Subsidiary's gross profit on sales is 40%. On December 31, 20X3, Parent still owes Subsidiary $5,000 for merchandise.
On December 31, 20X1, Parent sold $100,000 par value of 11%, 10-year bonds for $106,232, which resulted in an effective interest rate of 10%. The bonds pay interest semi-annually on June 30 and December 31. Parent uses the effective-interest method of amortization for the premium.
An amortization table for 20X2 and 20X3 is presented below:
   On December 31, 20X2, Subsidiary repurchased $50,000 par value of the bonds, paying a price equal to par. The bonds are still held on December 31, 20X3.
On December 31, 20X3, Parent sold equipment with a cost of $50,000 and accumulated depreciation of $30,000 to Subsidiary for $40,000. Subsidiary will use the equipment beginning in 20X4.
Required:
Complete the Figure 5-17 worksheet for consolidated financial statements for the year ended December 31, 20X3. Round all computations to the nearest dollar.

Accepted Answer

For the worksheet solution, please refer

Question 6

On January 1, 20X1, Parent Company purchased 100% of the common stock of Subsidiary Company for $390,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent accounts for the Investment in Subsidiary using the simple equity method.
On January 1, 20X2, Parent purchased equipment for $204,120 and immediately leased the equipment to Subsidiary on a 4-year lease. The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease has been capitalized by both companies.
A lease amortization schedule, applicable to either company, is presented below:
   On January 1, 20X3, Parent held merchandise acquired from Subsidiary for $10,000. During 20X3, subsidiary sold merchandise to Parent for $50,000, of which $15,000 is held by Parent on December 31, 20X3. Subsidiary's usual gross profit on affiliated sales is 40%.
Required:
Complete the Figure 5-12 worksheet for consolidated financial statements for the year ended December 31, 20X3. Round all computations to the nearest dollar.

Accepted Answer

For the worksheet solution, please refer

Question 7

Lease terms can be considered to be "significantly affected":

Accepted Answer

A)  when the terms are the same for affiliated firms as for independent firms. 
B)  when the terms could not reasonably be expected to occur between independent firms. 
C)  only if the lease is an operating lease to the lessee and lessor. 
D)  only if the lease is a direct-financing lease to the lessee and lessor. 
A)  when the terms are the same for affiliated firms as for independent firms. 
B)  when the terms could not reasonably be expected to occur between independent firms. 
C)  only if the lease is an operating lease to the lessee and lessor. 
D)  only if the lease is a direct-financing lease to the lessee and lessor.

Question 8

When there is an unguaranteed residual value for the lessor in a Direct-Financing Lease, this means:

Accepted Answer

A)  the total payments to be received by the lessor will come from the lessee. 
B)  the total payments to be received by the lessee will come from the lessor. 
C)  a portion of the total payments to be received by the lessor will come from parties outside the consolidated group. 
D)  a portion of the total payments to be received by the lessee will come from parties outside the consolidated group. 
A)  the total payments to be received by the lessor will come from the lessee. 
B)  the total payments to be received by the lessee will come from the lessor. 
C)  a portion of the total payments to be received by the lessor will come from parties outside the consolidated group. 
D)  a portion of the total payments to be received by the lessee will come from parties outside the consolidated group.

Question 9

The effect of an operating lease on the income distribution schedule:

Accepted Answer

A)  is non-existent. 
B)  affects only the lessee's income. 
C)  affects only the lessor's income. 
D)  affects the amount of income or distribution of income between the noncontrolling and controlling interests. 
A)  is non-existent. 
B)  affects only the lessee's income. 
C)  affects only the lessor's income. 
D)  affects the amount of income or distribution of income between the noncontrolling and controlling interests.

Question 10

On January 1, 20X8, Pope Company acquired 100% of the common stock of Siegel Company for $300,000. On this date Siegel had total owners' equity of $250,000. Any excess of cost over book value is attributable to goodwill. Pope accounts for its investment in Siegel using the simple equity method.
On July 1, 20X8, Siegel Company sold to outside investors $300,000 par value of 10-year, 10% bonds. The price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1.
During early 20X9, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a result, the market value of the bonds increased. On July 1, 20X9, Pope purchased $150,000 par value of Siegel's bonds, paying $163,000. Pope still holds the bonds on December 31, 20X9 and has amortized the premium, using the straight-line method.
Required:
Complete the Figure 5-3 worksheet for consolidated financial statements for the year ended December 31, 20X9. Round all computations to the nearest dollar.

Accepted Answer

For the worksheet solution, please refer

Question 11

The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to:

Accepted Answer

A)  replace the existing debt with new debt at a lower interest rate. 
B)  reduce the parent company's acquisition price for the subsidiary. 
C)  increase the parent company's ownership percentage in the subsidiary. 
D)  create interest revenue to offset interest expense in future income statements. 
A)  replace the existing debt with new debt at a lower interest rate. 
B)  reduce the parent company's acquisition price for the subsidiary. 
C)  increase the parent company's ownership percentage in the subsidiary. 
D)  create interest revenue to offset interest expense in future income statements.

Question 12

On January 1, 20X1, Porter Company purchased 80% of the common stock of Singer Company for $372,000. On this date Singer had total owners' equity of $440,000. Any excess of cost over book value is due to goodwill. Porter accounts for its investment in Singer using the simple equity method.
On January 1, 20X3, Porter held merchandise acquired from Singer for $40,000. During 20X3, Singer sold merchandise to Porter for $120,000, of which $10,000 is held by Porter on December 31, 20X3. Singer's usual gross profit on affiliated sales is 40%.
On December 31, 20X3, Porter still owes Singer $5,000 for merchandise acquired in December.
On December 31, 20X1, Porter sold $100,000 par value of 10%, 10-year bonds for $102,000. Porter uses the straight-line method of amortization for the premium. The bonds pay interest semi-annually on June 30 and December 31.
On December 31, 20X2, Singer repurchased $50,000 par value of the bonds, paying $49,100. Singer uses the straight-line method of amortization for the discount. The bonds are still held on December 31, 20X3.
Required:
Complete the Figure 5-14 worksheet for consolidated financial statements for the year ended December 31, 20X3. Round all computations to the nearest dollar.

Accepted Answer

For the worksheet solution, please refer

Question 13

Phil Company leased a machine to its 100%-owned subsidiary, Scout Company. The direct financing lease required annual lease payments in advance of $2,319 for 5 years. The present value of the minimum lease payments at 8% interest is $10,000.
-Refer to Phil Company. The adjustment needed to arrive at consolidated net income for the first year after the lease is ____.

Accepted Answer

A)  $0 
B)  $800 
C)  $2,319 
D)  $10,000 
A)  $0 
B)  $800 
C)  $2,319 
D)  $10,000

Question 14

On January 1, 20X1 Parent Company acquired 90% of the common stock of Subsidiary Company for $360,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $50,000, $100,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent accounts for the Investment in Subsidiary using the simple equity method.
On January 1, 20X2, Parent purchased equipment for $204,110 and immediately leased the equipment to Subsidiary on a 4-year lease. The minimum lease payments of $60,000 are to be made annually on January 1, beginning immediately, for a total of 4 payments. The implicit interest rate is 12%. The lease provides for an automatic transfer of title at the end of 4 years. The estimated useful life of the equipment is 6 years. The lease has been capitalized by both companies. The lease amortization schedule is presented below:
   Required:
Complete the Figure 5-9 worksheet for consolidated financial statements for the year ended December 31, 20X2. Round all computations to the nearest dollar.

Accepted Answer

For the worksheet solution, please refer

Question 15

Company S is a 100%-owned subsidiary of Company P. Company P purchased, at a premium, Company S bonds that are outstanding and have a remaining discount. Consolidation theory takes the position that:

Accepted Answer

A)  interest expense should be adjusted to reflect the market value of the bonds on the date of Company P's purchase. 
B)  the debt has been retired at a loss. 
C)  the debt is outstanding but should be shown at face value. 
D)  the gain or loss on retirement should be allocated over the remaining life of the bonds. 
A)  interest expense should be adjusted to reflect the market value of the bonds on the date of Company P's purchase. 
B)  the debt has been retired at a loss. 
C)  the debt is outstanding but should be shown at face value. 
D)  the gain or loss on retirement should be allocated over the remaining life of the bonds.

Question 16

Company S is a 100%-owned subsidiary of Company P. Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of the current year, Company P purchased all of the Company S outstanding bonds at a price that reflected the current 6% effective interest rate. How should this event be reflected in the current year's consolidated statements?

Accepted Answer

A)  The bonds remain in the balance sheet and are accounted for at a 7% effective rate. 
B)  The bonds remain in the balance sheet and are accounted for at a 9% effective rate. 
C)  Retirement of the bonds at a gain as of the purchase date. 
D)  Retirement of the bonds at a loss as of the purchase date. 
A)  The bonds remain in the balance sheet and are accounted for at a 7% effective rate. 
B)  The bonds remain in the balance sheet and are accounted for at a 9% effective rate. 
C)  Retirement of the bonds at a gain as of the purchase date. 
D)  Retirement of the bonds at a loss as of the purchase date.

Question 17

Consolidation procedures for Sale-Type Leases:

Accepted Answer

A)  allow for the recognition of the profit or loss from the lease by the lessee at the inception of the lease. 
B)  allow for the recognition of the profit or loss from the lease by the lessor at the inception of the lease. 
C)  defer the profit or loss and then amortize it over the lessee's period of usage. 
D)  defer the profit or loss and then amortize it over the lessor's period of usage. 
A)  allow for the recognition of the profit or loss from the lease by the lessee at the inception of the lease. 
B)  allow for the recognition of the profit or loss from the lease by the lessor at the inception of the lease. 
C)  defer the profit or loss and then amortize it over the lessee's period of usage. 
D)  defer the profit or loss and then amortize it over the lessor's period of usage.

Question 18

On January 1, 20X8, Parent Company purchased 90% of the common stock of Subsidiary Company for $360,000. On this date, Subsidiary had common stock, other paid in capital, and retained earnings of $20,000, $130,000, and $200,000 respectively. Any excess of cost over book value is due to goodwill. Parent account for the Investment in Subsidiary using the simple equity method.
On July 1, 20X8, Subsidiary sold $100,000 par value of 9%, ten-year bonds for $106,755, which resulted in an effective interest rate of 8%. The bonds pay interest semi-annually on January 1 and July 1 of each year. Subsidiary uses the effective-interest method of amortizing the premium.
An amortization table for 20X8 and 20X9 is presented below:
   On July 1, 20X9, Parent repurchased all of Par's bonds for $94,153, which resulted in an effective interest rate of 10%. The bonds are still held at year end.
Both companies have correctly recorded all entries relative to bonds and interest.
Required:
Complete the Figure 5-8 worksheet for consolidated financial statements for the year ended of December 31, 20X9. Round all computations to the nearest dollar.

Accepted Answer

For the worksheet solution, please refer

Question 19

On January 1, 20X8, Pope Company acquired 100% of the common stock of Siegel Company for $300,000. On this date Siegel had total owners' equity of $250,000. Any excess of cost over book value is attributable to goodwill. Pope accounts for its investment in Siegel using the simple equity method.
Also on July 1, 20X8, Siegel Company sold to outside investors $200,000 par value of 10-year, 10% bonds. The price received was equal to par. The bonds pay interest semi-annually on July 1 and January 1.
During early 20X9, market interest rates on bonds similar to those issued by Siegel decreased to 8%. As a result, the market value of the bonds increased. On July 1, 20X9, Pope purchased $100,000 par value of Siegel's bonds, paying $112,695. Pope still holds the bonds on December 31, 20X9 and has amortized the premium, using the effective-interest method.
Required:
Complete the Figure 5-4 worksheet for consolidated financial statements for the year ended December 31, 20X9. Round all computations to the nearest dollar.

Accepted Answer

For the worksheet solution, please refer

Question 20

Park owns an 80% interest in the common stock of Stable Company. Park leased a machine to Stable under a 5-year, direct financing lease with a bargain purchase option. The lease term began January 1, 20X4. The impact of the lease on the Noncontrolling share of income for 20X4:

Accepted Answer

A)  is an increase. 
B)  is a decrease. 
C)  is zero. 
D)  cannot be determined from the information given. 
A)  is an increase. 
B)  is a decrease. 
C)  is zero. 
D)  cannot be determined from the information given.

Which of the following statements is true?

Elimination procedures for intercompany bonds purchased from outside parties by another member of the consolidated group are:

The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a consolidated group is due to the:

Lease terms can be considered to be "significantly affected":

When there is an unguaranteed residual value for the lessor in a Direct-Financing Lease, this means:

The effect of an operating lease on the income distribution schedule:

The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to:

Company S is a 100%-owned subsidiary of Company P. Company P purchased, at a premium, Company S bonds that are outstanding and have a remaining discount. Consolidation theory takes the position that:

Consolidation procedures for Sale-Type Leases:

Park owns an 80% interest in the common stock of Stable Company. Park leased a machine to Stable under a 5-year, direct financing lease with a bargain purchase option. The lease term began January 1, 20X4. The impact of the lease on the Noncontrolling share of income for 20X4:

Business Combinations: New Rules for a Long-Standing Business Practice

Consolidated Statements: Date of Acquisition

Consolidated Statements: Subsequent to Acquisition

Intercompany Transactions: Merchandise, Plant Assets, and Notes

Cash Flow, Eps, and Taxation

Special Issues in Accounting for an Investment in a Subsidiary

Subsidiary Equity Transactions; Indirect and Mutual Holdings

The International Accounting Environment

Foreign Currency Transactions

Translation of Foreign Financial Statements

Interim Reporting and Disclosures About Segments of an Enterprise

Partnerships: Characteristics, Formation, and Accounting for Activities

Partnerships: Ownership Changes and Liquidations

Governmental Accounting: the General Fund and the Account Groups

Governmental Accounting: Other Governmental Funds, Proprietary Funds, and Fiduciary Funds

Financial Reporting Issues

Accounting for Private Not-For-Profit Organizations

Accounting for Not-For-Profit Colleges and Universities and Health Care Organizations

Estates and Trusts: Their Nature and the Accountants Role

Debt Restructuring, Corporate Reorganizations, and Liquidations

Filters

Exam 5: Intercompany Transactions: Bonds and Leases

Which of the following statements is true?

Elimination procedures for intercompany bonds purchased from outside parties by another member of the consolidated group are:

The usual impetus for transactions that create a long-term debtor-creditor relationship between members of a consolidated group is due to the:

Lease terms can be considered to be "significantly affected":

When there is an unguaranteed residual value for the lessor in a Direct-Financing Lease, this means:

The effect of an operating lease on the income distribution schedule:

The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to:

Company S is a 100%-owned subsidiary of Company P. Company P purchased, at a premium, Company S bonds that are outstanding and have a remaining discount. Consolidation theory takes the position that:

Consolidation procedures for Sale-Type Leases:

Park owns an 80% interest in the common stock of Stable Company. Park leased a machine to Stable under a 5-year, direct financing lease with a bargain purchase option. The lease term began January 1, 20X4. The impact of the lease on the Noncontrolling share of income for 20X4:

Business Combinations: New Rules for a Long-Standing Business Practice

Consolidated Statements: Date of Acquisition

Consolidated Statements: Subsequent to Acquisition

Intercompany Transactions: Merchandise, Plant Assets, and Notes

Cash Flow, Eps, and Taxation

Special Issues in Accounting for an Investment in a Subsidiary

Subsidiary Equity Transactions; Indirect and Mutual Holdings

The International Accounting Environment

Foreign Currency Transactions

Translation of Foreign Financial Statements

Interim Reporting and Disclosures About Segments of an Enterprise

Partnerships: Characteristics, Formation, and Accounting for Activities

Partnerships: Ownership Changes and Liquidations

Governmental Accounting: the General Fund and the Account Groups

Governmental Accounting: Other Governmental Funds, Proprietary Funds, and Fiduciary Funds

Financial Reporting Issues

Accounting for Private Not-For-Profit Organizations

Accounting for Not-For-Profit Colleges and Universities and Health Care Organizations

Estates and Trusts: Their Nature and the Accountants Role

Debt Restructuring, Corporate Reorganizations, and Liquidations

Filters