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Chapter 09 Foreign Currency Transactions and Hedging Foreign

Exchange Risk Answer Key

Multiple Choice Questions

1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2013.

Pigskin received payment of 35,000 British pounds on May 8, 2013. The exchange rate was

£1 = $1.54 on April 8 and £1 = 1.43 on May 8. What amount of foreign exchange gain or loss

should be recognized? (round to the nearest dollar)

A. $10,500 loss

B. $10,500 gain

C. $1,750 loss

D. $3,850 loss

E. No gain or loss should be recognized.

$1.43 - $1.54 = ($.11) × £35,000 = ($3,850) Loss

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Difficulty: 2 Medium

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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2. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000

British pounds to be received in sixty days. The pertinent exchange rates were as follows:

For what amount should Sales be credited on December 1?

A. $5,500.

B. $16,949.

C. $18,182.

D. $17,241.

E. $16,667.

December 1st Spot Rate $1.7241 × £10,000 = $17,241 Sales Revenue

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Difficulty: 1 Easy

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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3. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000

British pounds to be received in sixty days. The pertinent exchange rates were as follows:

What amount of foreign exchange gain or loss should be recorded on December 31?

A. $300 gain.

B. $300 loss.

C. $0.

D. $941 loss.

E. $941 gain.

$1.8182 - $1.7241 = $.0941 × £10,000 Gain

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Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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4. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000

British pounds to be received in sixty days. The pertinent exchange rates were as follows:

What amount of foreign exchange gain or loss should be recorded on January 30?

A. $1,516 gain.

B. $1,516 loss.

C. $575 loss.

D. $500 loss.

E. $500 gain.

$1.6666 - $1.8182 = ($.1516) × £10,000 = ($1,516) Loss

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Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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5. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8.

Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal

year-end. The pertinent exchange rates were as follows:

For what amount should Brisco's Accounts Payable be credited on May 8?

A. $2,500,000.

B. $2,440,000.

C. $1,600,000.

D. $1,639,344.

E. $1,666,667.

$1.25 × FC 2,000,000 = $2,500,000 A/P

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Difficulty: 1 Easy

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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6. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8.

Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal

year-end. The pertinent exchange rates were as follows:

How much Foreign Exchange Gain or Loss should Brisco record on May 31?

A. $2,520,000 gain.

B. $20,000 gain.

C. $20,000 loss.

D. $80,000 gain.

E. $80,000 loss.

$1.26 - $1.25 = ($.01) × FC 2,000,000 = ($20,000) Loss

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Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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7. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8.

Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal

year-end. The pertinent exchange rates were as follows:

How much U.S. $ will it cost Brisco to finally pay the payable on June 7?

A. $1,666,667.

B. $2,440,000.

C. $2,520,000.

D. $2,500,000.

E. $2,400,000.

$1.20 × FC 2,000,000 = FC 2,400,000 A/P

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Difficulty: 2 Medium

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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8. On June 1, CamCo received a signed agreement to sell inventory for ¥500,000. The sale

would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the

yen as soon as they are received. The spot rate on June 1 was ¥1 = $.004167, and the 90-day

forward rate was ¥1 = $.00427. At what amount would CamCo record the Forward Contract on

June 1?

A. $2,083.

B. $0.

C. $2,110.

D. $2,532.

E. $2,135.

Forward Contract Not Recorded at Date of Sale

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Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to

hedge foreign exchange risk.

Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

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9. Belsen purchased inventory on December 1, 2012. Payment of 200,000 stickles was to be

made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in

sixty days. The spot rate was §1 = .35714, and the 60-day forward rate was §1 = $.38462. On

December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168.

Assume an annual interest rate of 12% and a fair value hedge. The present value for one

month at 12% is .9901.

In the journal entry to record the establishment of a forward exchange contract, at what

amount should the Forward Contract account be recorded on December 1?

A. $71,428.

B. $76,924.

C. $588.

D. $582.

E. $0, since there is no cost, there is no value for the contract at this date.

Forward Contract Not Recorded at Date of Sale

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Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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10. Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot

rate was $.24 per stickle. A one-month forward contract was signed on that date to purchase

§100,000 at a forward rate of $.25 per stickle. On June 12, when the parts were received and

payment was made, the spot rate was $.28 per stickle. At what amount should inventory be

reported?

A. $0.

B. $28,000.

C. $24,000.

D. $25,000.

E. $2,000.

$.28 × §100,000 = $28,000

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Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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11. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,

with payment of 10 million Korean won to be received on January 15, 2014. The following

exchange rates applied:

Assuming a forward contract was not entered into, what would be the net impact on Car

Corp.'s 2013 income statement related to this transaction?

A. $500 (gain).

B. $500 (loss).

C. $200 (gain).

D. $200 (loss).

E. $- 0 -

$.00090 - $.00092 = ($.00002) × $10,000,000 = ($200) Loss

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Difficulty: 2 Medium

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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12. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,

with payment of 10 million Korean won to be received on January 15, 2014. The following

exchange rates applied:

Assuming a forward contract was entered into, the foreign currency was originally sold in the

foreign currency market on December 16, 2013 at a

A. forward contract discount $600.

B. forward contract premium $600.

C. forward contract discount $980.

D. forward discount premium $980.

E. There is no premium or discount because the fair value of the contract is zero.

$.00098 - $.00092 = $.00006 × $10,000,000 = $600 Premium

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Difficulty: 2 Medium

Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

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13. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,

with payment of 10 million Korean won to be received on January 15, 2014. The following

exchange rates applied:

Assuming a forward contract was entered into, at what amount should the forward contract be

recorded at December 31, 2013? Assume an annual interest rate of 12% and a fair value

hedge. The present value for one month at 12% is .9901.

A. $200.

B. $295.

C. $495.

D. $500.

E. $9,300.

$.00098 - $.00093 = $.00005 × .9901 × $10,000,000 = $495

AACSB: Analytic

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Blooms: Apply

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Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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14. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,

with payment of 10 million Korean won to be received on January 15, 2014. The following

exchange rates applied:

Assuming a forward contract was entered into, how would the forward contract be reflected on

Car's December 31, 2013 balance sheet?

A. Forward contract (asset).

B. Forward contract (liability).

C. Foreign currency (asset).

D. Foreign currency (liability).

E. Foreign exchange (liability).

AACSB: Analytic

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Blooms: Evaluate

Difficulty: 2 Medium

Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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15. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,

with payment of 10 million Korean won to be received on January 15, 2014. The following

exchange rates applied:

Assuming a forward contract was entered into, what would be the net impact on Car Corp.'s

2013 income statement related to this transaction? Assume an annual interest rate of 12%

and a fair value hedge. The present value for one month at 12% is .9901.

A. $700 (gain).

B. $700 (loss).

C. $300 (gain).

D. $300 (loss).

E. $297 (gain).

$.00098 - $.00095 = $.00003 × .9901 × $10,000,000 = $297 Gain

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Difficulty: 3 Hard

Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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16. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013,

with payment of 10 million Korean won to be received on January 15, 2014. The following

exchange rates applied:

Assuming a forward contract was entered into on December 16, what would be the net impact

on Car Corp.'s 2014 income statement related to this transaction?

A. $500 (gain).

B. $303 (gain).

C. $300 (gain).

D. $300 (loss).

E. $0.

($.00090 - $.00095 = $.00005) - ($.00093 - $.00095 = $.00002) = $.00003/.9901 ×

$10,000,000 = $303 Gain

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Difficulty: 3 Hard

Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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17. Mills Inc. had a receivable from a foreign customer that is due in the local currency of the

customer (stickles). On December 31, 2012, this receivable for §200,000 was correctly

included in Mills' balance sheet at $132,000. When the receivable was collected on February

15, 2013, the U.S. dollar equivalent was $144,000. In Mills' 2013 consolidated income

statement, how much should have been reported as a foreign exchange gain?

A. $0.

B. $36,000.

C. $48,000.

D. $10,000.

E. $12,000.

$144,000 - $132,000 = $12,000 Gain

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Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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18. A spot rate may be defined as

A. The price a foreign currency can be purchased or sold today.

B. The price today at which a foreign currency can be purchased or sold in the future.

C. The forecasted future value of a foreign currency.

D. The U.S. dollar value of a foreign currency.

E. The Euro value of a foreign currency.

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

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19. The forward rate may be defined as

A. The price a foreign currency can be purchased or sold today.

B. The price today at which a foreign currency can be purchased or sold in the future.

C. The forecasted future value of a foreign currency.

D. The U.S. dollar value of a foreign currency.

E. The Euro value of a foreign currency.

AACSB: Diversity

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

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20. Which statement is true regarding a foreign currency option?

A. A foreign currency option gives the holder the obligation to buy or sell foreign currency in

the future.

B. A foreign currency option gives the holder the obligation only sell foreign currency in the

future.

C. A foreign currency option gives the holder the obligation to only buy foreign currency in the

future.

D. A foreign currency option gives the holder the right but not the obligation to buy or sell

foreign currency in the future.

E. A foreign currency option gives the holder the obligation to buy or sell foreign currency in

the future at the spot rate on the future date.

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Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

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21. A U.S. company sells merchandise to a foreign company denominated in U.S. dollars. Which

of the following statements is true?

A. If the foreign currency appreciates, a foreign exchange gain will result.

B. If the foreign currency depreciates, a foreign exchange gain will result.

C. No foreign exchange gain or loss will result.

D. If the foreign currency appreciates, a foreign exchange loss will result.

E. If the foreign currency depreciates, a foreign exchange loss will result.

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Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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22. A U.S. company sells merchandise to a foreign company denominated in the foreign currency.

Which of the following statements is true?

A. If the foreign currency appreciates, a foreign exchange gain will result.

B. If the foreign currency depreciates, a foreign exchange gain will result.

C. No foreign exchange gain or loss will result.

D. If the foreign currency appreciates, a foreign exchange loss will result.

E. Any gain or loss will be included in comprehensive income.

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Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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23. A U.S. company buys merchandise from a foreign company denominated in U.S. dollars.

Which of the following statements is true?

A. If the foreign currency appreciates, a foreign exchange gain will result.

B. If the foreign currency depreciates, a foreign exchange gain will result.

C. No foreign exchange gain or loss will result.

D. If the foreign currency appreciates, a foreign exchange loss will result.

E. Any gain or loss will be included in comprehensive income.

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Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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24. A U.S. company buys merchandise from a foreign company denominated in the foreign

currency. Which of the following statements is true?

A. If the foreign currency appreciates, a foreign exchange gain will result.

B. If the foreign currency depreciates, a foreign exchange loss will result.

C. No foreign exchange gain or loss will result.

D. If the foreign currency appreciates, a foreign exchange loss will result.

E. Any gain or loss will be included in comprehensive income.

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Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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25. U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk

except

A. Recognized foreign currency denominated assets and liabilities.

B. Unrecognized foreign currency firm commitments.

C. Forecasted foreign currency denominated transactions.

D. Net investment in foreign operations.

E. Deferred foreign currency gains and losses.

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Difficulty: 1 Easy

Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to

hedge foreign exchange risk.

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26. All of the following data may be needed to determine the fair value of a forward contract at any

point in time except

A. The forward rate when the forward contract was entered into.

B. The current forward rate for a contract that matures on the same date as the forward

contract entered into.

C. The future spot rate.

D. A discount rate.

E. The company's incremental borrowing rate.

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Difficulty: 2 Medium

Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to

hedge foreign exchange risk.

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27. A forward contract may be used for which of the following?

1) A fair value hedge of an asset.

2) A cash flow hedge of an asset.

3) A fair value hedge of a liability.

4) A cash flow hedge of a liability.

A. 1 and 3

B. 2 and 4

C. 1 and 2

D. 1, 3, and 4

E. 1, 2, 3, and 4

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Difficulty: 1 Easy

Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to

hedge foreign exchange risk.

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28. A company has a discount on a forward contract for a foreign currency denominated asset.

How is the discount recognized over the life of the contract under fair value hedge

accounting?

A. As a debit to discount expense.

B. As a debit to amortization expense.

C. As a debit to accumulated other comprehensive income.

D. As a debit impact on net income, as a result of the hedge.

E. As a decreases to sales.

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Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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29. Which of the following statements is true concerning hedge accounting?

A. Hedges of foreign currency firm commitments are used for future sales only.

B. Hedges of foreign currency firm commitments are used for future purchases only.

C. Hedges of foreign currency firm commitments are used for current sales or purchases.

D. Hedges of foreign currency firm commitments are used for future sales or purchases.

E. Hedges of foreign currency firm commitments are speculative in nature.

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Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to

hedge foreign exchange risk.

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30. 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. Option contract cash flow hedge of a forecasted transaction.

D. Forward contract cash flow hedges of a forecasted transaction.

E. Forward contracts used to hedge a foreign currency denominated liability.

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Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to

hedge foreign exchange risk.

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31. On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of

Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February

1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on

December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant

exchange rates follow:

Compute the fair value of the foreign currency option at December 1, 2013.

A. $6,000.

B. $4,500.

C. $3,000.

D. $7,500.

E. $1,500.

$.05 × C$150,000 = $7,500

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Difficulty: 2 Medium

Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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32. On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of

Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February

1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on

December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant

exchange rates follow:

Compute the fair value of the foreign currency option at December 31, 2013.

A. $6,000.

B. $4,500.

C. $3,000.

D. $7,500.

E. $1,500.

$.04 × C$150,000 = $6,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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McGraw-Hill Education.

33. On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of

Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February

1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on

December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant

exchange rates follow:

Compute the fair value of the foreign currency option at February 1, 2014.

A. $6,000.

B. $4,500.

C. $3,000.

D. $7,500.

E. $1,500.

$.03 × C$150,000 = $4,500

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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McGraw-Hill Education.

34. On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of

Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February

1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on

December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant

exchange rates follow:

Compute the U.S. dollars received on February 1, 2014.

A. $138,000.

B. $136,500.

C. $145,500.

D. $141,000.

E. $142,500.

Strike Price $.97 × C$150,000 = $145,500

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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McGraw-Hill Education.

35. Which of the following approaches is used in the United States in accounting for foreign

currency transactions?

A. One-transaction perspective; defer foreign exchange gains and losses.

B. Two-transaction perspective; accrue foreign exchange gains and losses.

C. Three-transaction perspective; defer foreign exchange gains and losses.

D. One-transaction perspective; accrue foreign exchange gains and losses.

E. Two-transaction perspective; defer foreign exchange gains and losses.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

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McGraw-Hill Education.

36. When a U.S. company purchases parts from a foreign company, which of the following will

result in zero foreign exchange gain or loss?

A. The transaction is denominated in U.S. dollars.

B. The option strike price to sell foreign currency is less than the spot rate of the currency.

C. The option strike price to buy foreign currency is less than the spot rate of the currency.

D. The foreign currency appreciated in value relative to the U.S. dollar.

E. The foreign currency depreciated in value relative to the U.S. dollar.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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McGraw-Hill Education.

37. Alpha Inc., a U.S. company, had a receivable from a customer that was denominated in

Mexican pesos. On December 31, 2012, this receivable for 75,000 pesos was correctly

included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2013,

when the U.S. equivalent was $6,900. How much foreign exchange gain or loss will Alpha

record on the income statement for the year ended December 31, 2013?

A. $1,100 loss.

B. $1,100 gain.

C. $6,900 loss.

D. $6,900 gain.

E. $8,000 gain.

$6,900 - $8,000 = ($1,100) Loss

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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McGraw-Hill Education.

38. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a

foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan

was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2012 income

statement?

A. $3,000 gain.

B. $3,000 loss.

C. $6,000 gain.

D. $6,000 loss.

E. $7,000 gain.

$97,000 - $103,000 = ($6,000) Loss

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

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McGraw-Hill Education.

39. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a

foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan

was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2013 income

statement?

A. $1,000 gain.

B. $1,000 loss.

C. $2,000 gain.

D. $2,000 loss.

E. $8,000 loss.

$103,000 - $105,000 = ($2,000) Loss

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

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McGraw-Hill Education.

40. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a

foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan

was as follows:

Angela Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound

payable resulting from imports from England. Angela recorded foreign exchange gain related

to both its euro receivable and pound payable. Did the foreign currencies increase or decrease

in dollar value from the date of the transaction to the settlement date?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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McGraw-Hill Education.

41. Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a

euro payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss

related to both its ruble receivable and euro payable. Did the foreign currencies increase or

decrease in dollar value from the date of the transaction to the settlement date?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

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McGraw-Hill Education.

42. Parker Corp., a U.S. company, had the following foreign currency transactions during 2013:

(1.) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S. dollar

equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of

$82,000.

(2.) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-

interest-bearing note payable in euros on October 1, 2013. The U.S. dollar equivalent of the

note amount was $860,000 on December 31, 2013, and $881,000 on October 1, 2014.

What amount should be included as a foreign exchange gain or loss from the two transactions

for 2013?

A. $2,000 loss.

B. $2,000 gain.

C. $10,000 gain.

D. $14,000 loss.

E. $14,000 gain.

[$80,000 - $82,000 = ($2,000) Loss] + [$872,000 - $860,000 = $12,000 Gain] = $10,000 Gain

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

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McGraw-Hill Education.

43. Parker Corp., a U.S. company, had the following foreign currency transactions during 2013:

(1.) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S. dollar

equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of

$82,000.

(2.) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-

interest-bearing note payable in euros on October 1, 2013. The U.S. dollar equivalent of the

note amount was $860,000 on December 31, 2013, and $881,000 on October 1, 2014.

What amount should be included as a foreign exchange gain or loss from the two transactions

for 2014?

A. $9,000 loss.

B. $9,000 gain.

C. $11,000 loss.

D. $21,000 loss.

E. $21,000 gain.

$860,000 - $881,000 = ($21,000) Loss

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

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McGraw-Hill Education.

44. Winston Corp., a U.S. company, had the following foreign currency transactions during 2013:

(1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar

equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of

$54,000.

(2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a

non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of

the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014.

What amount should be included as a foreign exchange gain or loss from the two transactions

for 2013?

A. $9,000 loss.

B. $9,000 gain.

C. $11,000 loss.

D. $13,000 gain.

E. $14,000 gain.

[$47,000 - $54,000 = ($7,000) Loss] + [$315,000 - $295,000 = $20,000 Gain] = $13,000 Gain

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

1-606 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

45. Winston Corp., a U.S. company, had the following foreign currency transactions during 2013:

(1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar

equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of

$54,000.

(2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a

non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of

the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014.

What amount should be included as a foreign exchange gain or loss from the two transactions

for 2014?

A. $1,000 loss.

B. $1,000 gain.

C. $2,000 loss.

D. $4,000 gain.

E. $4,000 loss.

$295,000 - $299,000 = ($4,000) Loss

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

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McGraw-Hill Education.

46. Williams Inc., a U.S. company, has a Japanese yen account receivable resulting from an

export sale on March 1 to a customer in Japan. The exporter signed a forward contract on

March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The

spot rate was $.0094, and the forward rate was $.0095. Which of the following did the U.S.

exporter report in net income?

A. Discount revenue.

B. Premium revenue.

C. Discount expense.

D. Premium expense.

E. Both discount revenue and premium expense.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

1-608 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

47. Larson Company, a U.S. company, has an India rupee account receivable resulting from an

export sale on September 7 to a customer in India. Larson signed a forward contract on

September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable.

The spot rate was $.023, and the forward rate was $.021. Which of the following did the U.S.

exporter report in net income?

A. Discount revenue.

B. Premium revenue.

C. Discount expense.

D. Premium expense.

E. Both discount revenue and premium expense.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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McGraw-Hill Education.

48. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on

July 7 when the spot rate was $.025 per rupee. A one-month forward contract was signed on

that date to purchase 100,000 rupee at a rate of $.027. The forward contract is properly

designated as a fair value hedge of the 100,000 rupee firm commitment. On August 7, when

the parts are received, the spot rate is $.028. At what amount should the parts inventory be

carried on Primo's books?

A. $2,000.

B. $2,100.

C. $2,500.

D. $2,700.

E. $2,800.

$.028 × ₹100,000 = $2,800

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

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McGraw-Hill Education.

49. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a

foreign supplier on July 7 when the spot rate was $.025 per baht. A one-month forward

contract was signed on that date to purchase 1,000,000 bahts at a rate of $.027. The forward

contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment.

On August 7, when the parts are received, the spot rate is $.028. What is the amount of

accounts payable that will be paid at this date?

A. $20,000.

B. $20,100.

C. $25,000.

D. $27,000.

E. $28,000.

$.028 × ฿1,000,000 = $28,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

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McGraw-Hill Education.

50. On December 1, 2013, Joseph Company, a U.S. company, entered into a three-month forward

contract to purchase 50,000 pesos on March 1, 2014, as a fair value hedge of a foreign

currency denominated account payable. The following U.S. dollar per peso exchange rates

apply:

Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at

an annual interest rate of 12 percent is .9803. Which of the following is included in Joseph's

December 31, 2013 balance sheet for the forward contract?

A. $5,146.58 asset.

B. $5,146.58 liability.

C. $500.00 liability.

D. $490.15 asset.

E. $490.15 liability.

$0.105 - $0.095 = ($0.01) × MP50,000 = ($500.00) × .9803 = ($490.15) Liability

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets

and liabilities.

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McGraw-Hill Education.

51. On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a French

customer in three months, denominating the transaction in euros. On April 1, the spot rate is

$1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell

400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro,

and Quality delivers the merchandise, collecting 400,000 euros. What are the effects on net

income from these transactions?

A. $16,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when the

merchandise is delivered.

B. $16,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the

merchandise is delivered.

C. $16,000 Discount Expense plus a $20,000 negative Adjustment to Net Income when the

merchandise is delivered.

D. $16,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when the

merchandise is delivered.

E. $16,000 Discount Expense plus an $16,000 positive Adjustment to Net Income when the

merchandise is delivered.

[$1.41 - $1.37 = $.04 × €400,000 = $16,000 Discount] & [$1.41 - $1.36 = $.05 × €400,000 =

$20,000 Adjustment at Delivery]

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency

transactions.

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McGraw-Hill Education.

52. Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of

250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey

purchased a three-month put option for 250,000 British pounds and designated this option as

a cash flow hedge of a forecasted foreign currency transaction expected to be completed in

late October. The following exchange rates apply:

What amount will Woolsey include as an option expense in net income for the period July 24

to October 24?

A. $4,000.

B. $5,000.

C. $10,000.

D. $12,000.

E. $14,000.

Cost of the Option Contract $4,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency

transactions.

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McGraw-Hill Education.

53. Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of

250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey

purchased a three-month put option for 250,000 British pounds and designated this option as

a cash flow hedge of a forecasted foreign currency transaction expected to be completed in

late October. The following exchange rates apply:

What amount will Woolsey include as Adjustment to Net Income for the period ended October

31?

A. $6,000 positive.

B. $6,000 negative.

C. $10,000 positive.

D. $10,000 negative.

E. $14,000 positive.

$2.17 - $2.13 = $.04 × £250,000 = $10,000 Positive Adjustment

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency

transactions.

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McGraw-Hill Education.

54. Atherton Inc., a U.S. company, expects to order goods from a foreign supplier at a price of

100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton

purchased a three-month call option on 100,000 lira and designated this option as a cash flow

hedge of a forecasted foreign currency transaction. The following exchange rates apply:

What amount will Atherton include as an option expense in net income for the period January

17 to April 17?

A. $4,000

B. $4,260

C. $4,340

D. $5,000

E. $5,260

Cost of the Option Contract $5,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency

transactions.

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McGraw-Hill Education.

55. On May 1, 2013, Mosby Company received an order to sell a machine to a customer in

Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was

received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right

to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates

the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had

a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months

at a 12 percent annual rate is .9803.

What was the impact on Mosby's 2013 net income as a result of this fair value hedge of a firm

commitment?

A. $1,760.60 decrease.

B. $1,960.60 decrease.

C. $1,000.00 decrease.

D. $1,760.60 increase.

E. $1,960.60 increase.

$.094 - $.095 = ($.001) × MP2,000,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm

Commitment

$3,200 - $3,000 = $200 Option Value Increase

($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction

in 2013 Net Income

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McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

1-618 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

56. On May 1, 2013, Mosby Company received an order to sell a machine to a customer in

Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was

received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right

to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates

the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had

a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months

at a 12 percent annual rate is .9803.

What was the impact on Mosby's 2014 net income as a result of this fair value hedge of a firm

commitment?

A. $1,800.00 decrease.

B. $2,500.00 increase.

C. $2,500.00 decrease.

D. $188,760.60 increase.

E. $188,760.60 decrease.

[$190,000 Sales Revenue] - [$3,000 Cost of Option] + [$1,760.60 Adjustment from 2013 Net

Income] = $188,760.60 Increase to 2014 Net Income

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McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

1-620 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

57. On May 1, 2013, Mosby Company received an order to sell a machine to a customer in

Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was

received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right

to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates

the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had

a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months

at a 12 percent annual rate is .9803.

What was the overall result of having entered into this hedge of exposure to foreign exchange

risk?

A. $0

B. $9,000 net loss on the option.

C. $9,000 net gain on the option.

D. $2,000 net gain on the option.

E. $2,000 net loss.

$.095 - $.089 = $.006 × MP2,000,000 = $12,000 Gain from Hedge - $3,000 Cost of Option =

$9,000 Net Gain on Option

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McGraw-Hill Education.

AACSB: Analytic

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

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McGraw-Hill Education.

58. On March 1, 2013, Mattie Company received an order to sell a machine to a customer in

England at a price of 200,000 British pounds. The machine was shipped and payment was

received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right

to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly

designates the option as a fair hedge of the pound firm commitment. The option cost $2,000

and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates

apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months

at a 12 percent annual rate is .9803.

What was the net impact on Mattie's 2013 income as a result of this fair value hedge of a firm

commitment?

A. $1,800.00 decrease.

B. $1,760.60 decrease.

C. $2,240.40 decrease.

D. $1,660.40 increase.

E. $2,240.60 increase.

$1.89 - $1.90 = ($.001) × £200,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm

Commitment

$2,200 - $2,000 = $200 Option Value Increase

($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction

in 2013 Net Income

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McGraw-Hill Education.

AACSB: Analytic

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

1-624 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

59. On March 1, 2013, Mattie Company received an order to sell a machine to a customer in

England at a price of 200,000 British pounds. The machine was shipped and payment was

received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right

to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly

designates the option as a fair hedge of the pound firm commitment. The option cost $2,000

and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates

apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months

at a 12 percent annual rate is .9803.

What was the net impact on Mattie's 2014 income as a result of this fair value hedge of a firm

commitment?

A. $379,760.60 decrease.

B. $8,360.60 increase.

C. $8,360.60 decrease.

D. $4,390.40 decrease.

E. $379,760.60 increase.

[$380,000 Sales Revenue] - [$2,000 Cost of Option] + [$1,760.60 Adjustment from 2013 Net

Income] = $379,760.60 Increase to 2014 Net Income

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

1-626 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

60. On March 1, 2013, Mattie Company received an order to sell a machine to a customer in

England at a price of 200,000 British pounds. The machine was shipped and payment was

received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right

to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly

designates the option as a fair hedge of the pound firm commitment. The option cost $2,000

and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates

apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months

at a 12 percent annual rate is .9803.

What was the net increase or decrease in cash flow from having purchased the foreign

currency option to hedge this exposure to foreign exchange risk?

A. $0

B. $10,000 increase.

C. $10,000 decrease.

D. $20,000 increase.

E. $20,000 decrease.

$1.90 - $1.84 = $.06 × £200,000 = $12,000 Cash Flow from Hedge - $2,000 Cost of Option =

$10,000 Increase in Cash Flow

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

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61. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British

supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle

pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per

pound. The option is considered to be a cash flow hedge of a forecasted foreign currency

transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot

exchange rates apply:

What journal entry should Eagle prepare on October 1, 2013?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

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McGraw-Hill Education.

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AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency

transactions.

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McGraw-Hill Education.

62. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British

supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle

pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per

pound. The option is considered to be a cash flow hedge of a forecasted foreign currency

transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot

exchange rates apply:

What journal entry should Eagle prepare on December 31, 2013?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

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Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency

transactions.

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McGraw-Hill Education.

63. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British

supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle

pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per

pound. The option is considered to be a cash flow hedge of a forecasted foreign currency

transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot

exchange rates apply:

What is the amount of option expense for 2014 from these transactions?

A. $1,000.

B. $1,600.

C. $2,500.

D. $2,600.

E. $0.

Option Expense is the Balance Sheet Fair Value of the Option for 2014 = $1,600

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Difficulty: 2 Medium

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency

transactions.

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McGraw-Hill Education.

64. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British

supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle

pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per

pound. The option is considered to be a cash flow hedge of a forecasted foreign currency

transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot

exchange rates apply:

What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2014

from these transactions?

A. $1,000.

B. $1,600.

C. $1,800.

D. $2,000.

E. $2,600.

$2.01 - $2.00 = $.01 × £100,000 = $1,000 Adjustment to AOCI for 2014

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Difficulty: 2 Medium

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency

transactions.

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McGraw-Hill Education.

65. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British

supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle

pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per

pound. The option is considered to be a cash flow hedge of a forecasted foreign currency

transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot

exchange rates apply:

What is the amount of Cost of Goods Sold for 2014 as a result of these transactions?

A. $200,000.

B. $195,000.

C. $201,000.

D. $202,600.

E. $203,000.

£100,000 × $2.00 Strike Price = $200,000 + $1,000 AOCI Adjustment = $201,000 COGS

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Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency

transactions.

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McGraw-Hill Education.

66. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British

supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle

pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per

pound. The option is considered to be a cash flow hedge of a forecasted foreign currency

transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot

exchange rates apply:

What is the 2014 effect on net income as a result of these transactions?

A. $195,000

B. $201,600

C. $201,000

D. $202,600

E. $203,000

[£100,000 × $2.00 Strike Price = $200,000] + [$1,600 Fair Value of the Option in 2014] =

$201,600

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AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency

transactions.

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Chapter 10 Translation of Foreign Currency Financial Statements

Answer Key

Multiple Choice Questions

1. In accounting, the term translation refers to

A. the calculation of gains or losses from hedging transactions.

B. the calculation of exchange rate gains or losses on individual transactions in foreign

currencies.

C. the procedure required to identify a company's functional currency.

D. the calculation of gains or losses from all transactions for the year.

E. a procedure to prepare a foreign subsidiary's financial statements for consolidation.

AACSB: Diversity

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AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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McGraw-Hill Education.

2. What is a company's functional currency?

A. the currency of the primary economic environment in which it operates.

B. the currency of the country where it has its headquarters.

C. the currency in which it prepares its financial statements.

D. the reporting currency of its parent for a subsidiary.

E. the currency it chooses to designate as such.

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

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McGraw-Hill Education.

3. According to U.S. GAAP for a local currency perspective, which method is usually required for

translating a foreign subsidiary's financial statements into the parent's reporting currency?

A. the temporal method.

B. the current rate method.

C. the current/noncurrent method.

D. the monetary/nonmonetary method.

E. the noncurrent rate method.

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

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McGraw-Hill Education.

4. In translating a foreign subsidiary's financial statements, which exchange rate does the current

method require for the subsidiary's assets and liabilities?

A. the exchange rate in effect when each asset or liability was acquired.

B. the average exchange rate for the current year.

C. a calculated exchange rate based on market value.

D. the exchange rate in effect as of the balance sheet date.

E. the exchange rate in effect at the start of the current year.

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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McGraw-Hill Education.

5. The translation adjustment from translating a foreign subsidiary's financial statements should

be shown as

A. an asset or liability (depending on the balance) in the consolidated balance sheet.

B. a revenue or expense (depending on the balance) in the consolidated income statement.

C. a component of stockholders' equity in the consolidated balance sheet.

D. a component of cash flows from financing activities in the consolidated statement of cash

flows.

E. an element of the notes which accompany the consolidated financial statements.

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AICPA FN: Measurement

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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McGraw-Hill Education.

6. Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional currency is

the pound sterling (£). The following exchange rates were in effect during 2013:

Westmore reported sales of £1,500,000 during 2013. What amount (rounded) would have

been included for this subsidiary in calculating consolidated sales?

A. $2,415,000.

B. $2,400,000.

C. $2,385,000.

D. $943,396.

E. $931,677.

£1,500,000 × $1.59 (Avg Rate) = $2,385,000

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Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

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McGraw-Hill Education.

7. Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional currency is

the pound sterling (£). The following exchange rates were in effect during 2013:

On December 31, 2013, Westmore had accounts receivable of £280,000. What amount

(rounded) would have been included for this subsidiary in calculating consolidated accounts

receivable?

A. $173,913.

B. $176,100.

C. $445,200.

D. $448,000.

E. $450,800.

£280,000 × $1.61 = $450,800

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Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

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McGraw-Hill Education.

8. Gunther Co. established a subsidiary in Mexico on January 1, 2013. The subsidiary engaged

in the following transactions during 2013:

What amount of foreign exchange gain or loss would have been recognized in Gunther's

consolidated income statement for 2013?

A. $800,000 gain.

B. $760,000 gain.

C. $320,000 loss.

D. $280,000 loss.

E. $440,000 loss.

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Difficulty: 3 Hard

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the

associated remeasurement gain or loss.

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9. Darron Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S.

corporation. Darron's functional currency was the stickle (§). The following transactions and

events occurred during 2013:

What exchange rate should have been used in translating Darron's revenues and expenses

for 2013?

A. $1 = §.48.

B. $1 = §.44.

C. $1 = §.46.

D. $1 = §.42.

E. $1 = §.45.

Average Rate for Revenues & Expenses [$1 = §.44]

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Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

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McGraw-Hill Education.

10. Darron Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S.

corporation. Darron's functional currency was the stickle (§). The following transactions and

events occurred during 2013:

What was the amount of the translation adjustment for 2013?

A. $52,000 decrease in relative value of net assets.

B. $60,800 decrease in relative value of net assets.

C. $61,200 decrease in relative value of net assets.

D. $466,400 increase in relative value of net assets.

E. $26,000 increase in relative value of net assets.

[§1,000,000 × [$.42 - $.48] ($.06) = ($60,000)] + [§20,000 × [$.42 - $.46] ($.04)] = ($800) =

($60,800) Loss in Relative Asset Value

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McGraw-Hill Education.

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

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McGraw-Hill Education.

11. Sinkal Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S.

corporation. Sinkal's functional currency was the stickle (§). The following transactions and

events occurred during 2013:

What was the amount of the translation adjustment for 2013?

A. $52,000 decrease in relative value of net assets.

B. $60,800 decrease in relative value of net assets.

C. $61,200 decrease in relative value of net assets.

D. $466,400 increase in relative value of net assets.

E. $26,000 increase in relative value of net assets.

[§1,000,000 × [$.42 - $.48] ($.06) = ($60,000)] + [§20,000 × [$.42 - $.46] ($.04)] = ($800) =

($60,800) Loss in Relative Asset Value

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McGraw-Hill Education.

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AACSB: Diversity

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AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

12. Which accounts are translated using current exchange rates?

A. all revenues and expenses.

B. all assets and liabilities.

C. cash, receivables, and most liabilities.

D. all current assets and liabilities.

E. all noncurrent assets and liabilities.

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Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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McGraw-Hill Education.

13. Which accounts are remeasured using current exchange rates?

A. all revenues and expenses.

B. all assets and liabilities.

C. cash, receivables, and most liabilities.

D. all current assets and liabilities.

E. all noncurrent assets and liabilities.

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Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

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14. For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is

required to ready the financial statements for consolidation?

A. Current/Noncurrent Method.

B. Monetary/Nonmonetary Method.

C. Current Rate Method.

D. Temporal Method.

E. Indirect Method.

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

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15. Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional

currency was the U.S. dollar.

Which one of the following statements would justify this conclusion?

A. Most of the subsidiary's sales and purchases were with companies in the U.S.

B. Dilty's functional currency is the dollar and Dilty is the parent.

C. Dilty's other subsidiaries all had the dollar as their functional currency.

D. Generally accepted accounting principles require that the subsidiary's functional currency

must be the dollar if consolidated financial statements are to be prepared.

E. Dilty is located in the U.S.

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Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

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16. Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional

currency was the U.S. dollar.

What must Dilty do to ready the subsidiary's financial statements for consolidation?

A. first translate them, then remeasure them.

B. first remeasure them, then translate them.

C. state all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the

balance sheet date.

D. translate them.

E. remeasure them.

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Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

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17. Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in

U.S. dollars as follows:

If the subsidiary's local currency is its functional currency, what total amount should be

included in Tulip's balance sheet in U.S. dollars?

A. $609,000.

B. $658,000.

C. $602,000.

D. $630,000.

E. $616,000.

If LC is the Functional Currency, Current Rates Used for All Items = $602,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-654 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

18. Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in

U.S. dollars as follows:

If the U.S. dollar is the functional currency of this subsidiary, what total amount should be

included in Tulip's balance sheet in U.S. dollars?

A. $609,000.

B. $658,000.

C. $602,000.

D. $630,000.

E. $616,000.

If the Dollar is the Functional Currency, Current Rates Used for Receivables at their Historical

Rate ($280,000 + $140,000 + $77,000 + $119,000) = $616,000

1-655 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the

associated remeasurement gain or loss.

1-656 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

19. A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional

currency of this subsidiary was the Stickle (§), the local currency where the subsidiary is

located. The subsidiary acquired inventory on credit on November 1, 2012, for §120,000 that

was sold on January 17, 2013 for §156,000. The subsidiary paid for the inventory on January

31, 2013. Currency exchange rates between the dollar and the Stickle were as follows:

What amount would have been reported for this inventory in Porter's consolidated balance

sheet at December 31, 2012?

A. $24,000.

B. $26,400.

C. $22,800.

D. $27,600.

E. $28,800.

§120,000 × $.20 = $24,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-657 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

20. A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional

currency of this subsidiary was the Stickle (§), the local currency where the subsidiary is

located. The subsidiary acquired inventory on credit on November 1, 2012, for §120,000 that

was sold on January 17, 2013 for §156,000. The subsidiary paid for the inventory on January

31, 2013. Currency exchange rates between the dollar and the Stickle were as follows:

What amount would have been reported for cost of goods sold on Porter's consolidated

income statement at December 31, 2013?

A. $24,000.

B. $26,400.

C. $22,800.

D. $27,600.

E. $28,800.

§120,000 × $.24 = $28,800

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-658 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

21. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2013:

The average exchange rate during 2013 was §1 = $.96. The beginning inventory was acquired

when the exchange rate was §1 = $1.20. The ending inventory was acquired when the

exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84.

Assuming that the foreign country had a highly inflationary economy, at what amount should

the foreign subsidiary's cost of goods sold have been reflected in the 2013 U.S. dollar income

statement?

A. $11,253,600.

B. $11,577,600.

C. $11,649,600.

D. $11,613,600.

E. $11,523,600.

Beginning Inventory [(§240,000 × $1.20) $288,000] - Purchases [Beginning Inventory

§240,000 - COGS §12,000,000 - Ending Inventory §600,000 = §12,360,000 × $.96 =

$11,865,600] - Ending Inventory [(§600,000 × $.90) $540,000] = COGS $11,613,600

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-659 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

22. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional

currency, in 2013:

The average exchange rate during 2013 was §1 = $.96. The beginning inventory was acquired

when the exchange rate was §1 = $1.20. The ending inventory was acquired when the

exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84. At

what amount should the foreign subsidiary's cost of goods sold have been reflected in the

2013 U.S. dollar income statement?

A. $11,253,600.

B. $11,577,600.

C. $11,520,000.

D. $11,613,600.

E. $11,523,600.

§12,000,000 × $.96 = $11,520,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-660 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

23. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional

currency, in 2013:

The average exchange rate during 2013 was §1 = $.96. The beginning inventory was acquired

when the exchange rate was §1 = $1.20. The ending inventory was acquired when the

exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84.

Assuming that the foreign nation for the subsidiary had a highly inflationary economy, at what

amount should that foreign subsidiary's purchases have been reflected in the 2013 U.S. dollar

income statement?

A. $11,865,600.

B. $11,577,600.

C. $11,520,000.

D. $11,613,600.

E. $11,523,600.

Beginning Inventory §240,000 - COGS §12,000,000 - Ending Inventory §600,000 = Purchases

§12,360,000 × $.96 = $11,865,600

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-661 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

24. A historical exchange rate for common stock of a foreign subsidiary is best described as

A. The rate at date of the acquisition business combination.

B. The rate when the common stock was originally issued for the acquisition transaction.

C. The average rate from date of acquisition to the date of the balance sheet.

D. The rate from the prior year's balances.

E. The January 1 exchange rate.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-662 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

25. A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the

following statements is true?

A. There is no translation adjustment.

B. There is a transaction loss.

C. There is a transaction gain.

D. There is a negative translation adjustment.

E. There is a positive translation adjustment.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-663 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

26. A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the

following statements is true?

A. There is no translation adjustment.

B. There is a transaction loss.

C. There is a transaction gain.

D. There is a negative translation adjustment.

E. There is a positive translation adjustment.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-664 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

27. A net liability balance sheet exposure exists and the foreign currency appreciates. Which of

the following statements is true?

A. There is no translation adjustment.

B. There is a transaction loss.

C. There is a transaction gain.

D. There is a negative translation adjustment.

E. There is a positive translation adjustment.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-665 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

28. A net liability balance sheet exposure exists and the foreign currency depreciates. Which of

the following statements is true?

A. There is no translation adjustment.

B. There is a transaction loss.

C. There is a transaction gain.

D. There is a negative translation adjustment.

E. There is a positive translation adjustment.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-666 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

29. Which method of translating a foreign subsidiary's financial statements is correct?

A. Historical rate method.

B. Working capital method.

C. Current rate method.

D. Remeasurement.

E. Temporal method.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

1-667 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

30. Which method of remeasuring a foreign subsidiary's financial statements is correct?

A. Historical rate method.

B. Working capital method.

C. Current rate method.

D. Translation.

E. Temporal method.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

1-668 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

31. Under the temporal method, inventory at market would be remeasured at what rate?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-669 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

32. Under the current rate method, inventory at market would be translated at what rate?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-670 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

33. Under the temporal method, common stock would be remeasured at what rate?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-671 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

34. Under the current rate method, common stock would be translated at what rate?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-672 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

35. Under the current rate method, property, plant & equipment would be translated at what rate?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-673 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

36. Under the temporal method, property, plant & equipment would be remeasured at what rate?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-674 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

37. Under the current rate method, retained earnings would be translated at what rate?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-675 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

38. Under the temporal method, retained earnings would be remeasured at what rate?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-676 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

39. Under the current rate method, depreciation expense would be translated at what rate?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-677 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

40. Under the temporal method, depreciation expense would be remeasured at what rate?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-678 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

41. Under the temporal method, how would cost of goods sold be remeasured?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. A single historical rate.

E. A combination of historical rates.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-679 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

42. Under the current rate method, how would cost of goods sold be translated?

A. Beginning of the year rate.

B. Average rate.

C. Current rate.

D. Historical rate.

E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-680 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

43. Where is the disposition of a translation loss reported in the parent company's financial

statements?

A. Net loss in the income statement.

B. Cumulative translation adjustment as a deferred asset.

C. Cumulative translation adjustment as a deferred liability.

D. Accumulated other comprehensive income.

E. Retained earnings.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

1-681 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

44. Where is the disposition of a remeasurement gain or loss reported in the parent company's

financial statements?

A. Net income/loss in the income statement.

B. Cumulative translation adjustment as a deferred asset.

C. Cumulative translation adjustment as a deferred liability.

D. Other comprehensive income.

E. Retained earnings.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

1-682 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

45. A highly inflationary economy is defined as

A. Cumulative 5-year inflation in excess of 100%.

B. Cumulative 3-year inflation in excess of 100%.

C. Cumulative 5-year inflation in excess of 90%.

D. Cumulative 3-year inflation in excess of 90%.

E. Any country designated as a company operating in a third-world economy.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

1-683 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

46. If a subsidiary is operating in a highly inflationary economy, how are the financial statements

to be restated?

A. Historical rate.

B. Working capital rate.

C. Translation.

D. Remeasurement.

E. Current rate.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

1-684 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

47. When consolidating a foreign subsidiary, which of the following statements is true?

A. Parent reports a cumulative translation adjustment from adjusting its investment account

under the equity method.

B. Parent reports a gain or loss in net income from adjusting its investment account under the

equity method.

C. Subsidiary's cumulative translation adjustment is carried forward to the consolidated

balance sheet.

D. Subsidiary's income/loss is carried forward to the consolidated balance sheet.

E. All foreign currency gains/losses are eliminated in the consolidated income statement and

balance sheet.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 3 Hard

Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

1-685 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

48. When preparing a consolidating statement of cash flows, which of the following statements is

false?

A. All operating activity items are translated at an average exchange rate for the period.

B. A change in accounts receivable is translated using the current rate.

C. A change in long-term debt is translated using the historical rate at the date of the change.

D. Dividends paid are translated using the historical rate at the date of the payment.

E. All items follow translation rates used for the balance sheet and the income statement.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-686 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

49. When preparing a consolidation worksheet for a parent and its foreign subsidiary accounted

for under the equity method, which of the following statements is false?

A. The cumulative translation adjustment included in the Investment in Subsidiary account is

eliminated.

B. The excess of fair value over book value since the date of acquisition is revalued for the

change in exchange rate.

C. The amount of equity income recognized by the parent in the current year is eliminated.

D. The allocations of excess of fair value over book value at the date of acquisition are

eliminated.

E. The subsidiary's stockholders' equity accounts as of the beginning of the year are

eliminated.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

1-687 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

50. Esposito is an Italian subsidiary of a U.S. company.

Esposito's ending inventory is valued at the average cost for the last quarter of the year.

The following account balances are available for Esposito for 2013:

Compute the cost of goods sold for 2013 in U.S. dollars using the temporal method.

A. $376,650.

B. $387,750.

C. $388,800.

D. $400,950.

E. $409,050.

Begin Inventory (€20,000 × $.93 = $18,600) + Purchases (€400,000 × $.96 = $384,000) - End

Inventory (€15,000 × $.99 = $14,850) = COGS $387,750

1-688 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the

associated remeasurement gain or loss.

1-689 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

51. Esposito is an Italian subsidiary of a U.S. company.

Esposito's ending inventory is valued at the average cost for the last quarter of the year.

The following account balances are available for Esposito for 2013:

Compute the cost of goods sold for 2013 in U.S. dollars using the current rate method.

A. $376,550.

B. $387,750.

C. $388,800.

D. $400,950.

E. $409,050.

€405,000 × $.96 = $388,800

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-690 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

52. Esposito is an Italian subsidiary of a U.S. company.

Esposito's ending inventory is valued at the average cost for the last quarter of the year.

The following account balances are available for Esposito for 2013:

Compute ending inventory for 2013 under the temporal method.

A. $13,950.

B. $14,100.

C. $14,400.

D. $14,850.

E. $15,150.

€15,000 × $.99 = $14,850

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the

associated remeasurement gain or loss.

1-691 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

53. Esposito is an Italian subsidiary of a U.S. company.

Esposito's ending inventory is valued at the average cost for the last quarter of the year.

The following account balances are available for Esposito for 2013:

Compute ending inventory for 2013 under the current rate method.

A. $13,950.

B. $14,100.

C. $14,400.

D. $14,850.

E. $15,150.

€15,000 × $1.01 = $15,150

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-692 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

54. A foreign subsidiary uses the first-in first-out inventory method. The following inventory

balances are given at December 31, 2013 in local currency units (LCU):

Compute the December 31, 2013, inventory balance using the lower of cost or market method

under the temporal method.

A. $429,000.

B. $457,600.

C. $596,400.

D. $568,000.

E. $426,000.

Inventory at Cost 320,000 LCU × $1.43 = $457,600

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-693 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

55. A foreign subsidiary uses the first-in first-out inventory method. The following inventory

balances are given at December 31, 2013 in local currency units (LCU):

Compute the December 31, 2013, inventory balance using the current rate method.

A. $454,400.

B. $457,600.

C. $596,400.

D. $568,000.

E. $426,000.

Inventory at Cost 320,000 LCU × $1.42 = $454,400

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-694 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

56. Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000

pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2013.

The equipment was purchased on January 1, 2012. Relevant exchange rates for the peso are

as follows:

The financial statements for Perez are translated by its U.S. parent. What amount of gain or

loss would be reported in its translated income statement?

A. $1,530.

B. $1,575.

C. $1,590.

D. $1,090.

E. $1,650.

[Sales Price MNP 140,000 × .106 = $14,840] - [BV as Historical Cost MNP 200,000 - Acc.

Deprec. MNP 75,000 = MNP 125,000 × .106 = $13,250] = $1,590 Gain

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-695 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

57. Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000

pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2013.

The equipment was purchased on January 1, 2012. Relevant exchange rates for the peso are

as follows:

The financial statements for Perez are remeasured by its U.S. parent. What amount of gain or

loss would be reported in its translated income statement?

A. $1,530.

B. $1,575.

C. $1,590.

D. $1,090.

E. $1,650.

[Sales Price MNP 140,000 × .106 = $14,840] - [BV as Historical Cost MNP 200,000 - Acc.

Deprec. MNP 75,000 = MNP 125,000 × .110 = $13,750] = $1,090 Gain

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-696 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

58. Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31,

2013, have been restated into U.S. dollars as follows:

Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be

included in Parker's consolidated balance sheet at December 31, 2013, for the above items?

A. $407,500.

B. $418,000.

C. $396,000.

D. $403,500.

E. $398,500.

If the Dollar is the Functional Currency, Current Rates Used for All Items except PP&E at their

Historical Values ($47,500 + $95,000 + $76,000 + $54,000 + $135,000) = $407,500

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

1-697 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

59. Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31,

2013, have been restated into U.S. dollars as follows:

Assuming the functional currency of the subsidiary is the local currency, what total should be

included in Parker's consolidated balance sheet at December 31, 2013, for the above items?

A. $407,500.

B. $418,000.

C. $396,000.

D. $403,500.

E. $398,500.

If LC is the Functional Currency, Current Rates Used for All Items = $418,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

1-698 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

60. Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31,

2013, have been restated into U.S. dollars as follows:

If the current rate used to restate these amounts is $.95, what was the average historical rate

used to arrive at the total amount for historical rates?

A. $0.9000.

B. $1.0000.

C. $0.9500.

D. $0.9474.

E. $1.0556.

$418,000/$.95 = $440,000; $396,000/$440,000 = $.90

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the

current rate method and when they are to be translated using the temporal method.

1-699 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

61. Kennedy Company acquired all of the outstanding common stock of Hastie Company of

Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian

dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book

value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over

fair value was attributed to an unrecorded patent with a remaining life of five years. The

functional currency of Hastie is the Canadian dollar.

For the year ended December 31, 2013, Hastie's trial balance net income was translated at

U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68,

and the 2013 year-end exchange rate was U.S. $.65.

Calculate the U.S. dollar amount allocated to the patent at January 1, 2013.

A. $50,000.

B. $35,000.

C. $34,000.

D. $32,500.

E. $28,200.

$350,000 - FV of Assets (C$450,000 × $.70) $315,000 = $35,000 Patent Value

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

1-700 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

62. Kennedy Company acquired all of the outstanding common stock of Hastie Company of

Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian

dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book

value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over

fair value was attributed to an unrecorded patent with a remaining life of five years. The

functional currency of Hastie is the Canadian dollar.

For the year ended December 31, 2013, Hastie's trial balance net income was translated at

U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68,

and the 2013 year-end exchange rate was U.S. $.65.

Amortization of the patent, translated, for 2013 would be

A. $7,000.

B. $10,000.

C. $6,800.

D. $9,000.

E. $6,500.

Patent Value $35,000/$.70 = Patent Value C$50,000/5 yrs = C$10,000 per year × $.68 =

$6,800 Translated

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-701 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

63. Kennedy Company acquired all of the outstanding common stock of Hastie Company of

Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian

dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book

value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over

fair value was attributed to an unrecorded patent with a remaining life of five years. The

functional currency of Hastie is the Canadian dollar.

For the year ended December 31, 2013, Hastie's trial balance net income was translated at

U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68,

and the 2013 year-end exchange rate was U.S. $.65.

Compute the amount of the patent reported in the consolidated balance sheet at December

31, 2013.

A. $28,200.

B. $25,700.

C. $35,000.

D. $27,200.

E. $26,000.

Patent Value C$50,000 - Amortization for 2013 C$10,000 = BV C$40,000 × $.65 = $26,000

Translated

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

1-702 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

64. Kennedy Company acquired all of the outstanding common stock of Hastie Company of

Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian

dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book

value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over

fair value was attributed to an unrecorded patent with a remaining life of five years. The

functional currency of Hastie is the Canadian dollar.

For the year ended December 31, 2013, Hastie's trial balance net income was translated at

U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68,

and the 2013 year-end exchange rate was U.S. $.65.

Kennedy's share of Hastie's net income for 2013 would be

A. $18,000.

B. $15,000.

C. $18,200.

D. $16,000.

E. $18,500.

Translated Net Income $25,000 - Translated Amortization $6,800 = $18,200 Parent's Share of

Net Income for 2013

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

1-703 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

65. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. income statement amount for

sales for 2013.

A. $364,000.

B. $372,000.

C. $380,000.

D. $360,000.

E. $404,000.

€400,000 × $.95 = $380,000

1-704 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-705 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

66. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for

inventory at December 31, 2013.

A. $18,800.

B. $19,600.

C. $18,000.

D. $20,200.

E. $19,000.

€20,000 × $1.01 = $20,200

1-706 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-707 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

67. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for

equipment for 2013.

A. $81,900.

B. $90,900.

C. $83,700.

D. $88,200.

E. $85,500.

€90,000 × $1.01 = $90,900

1-708 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-709 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

68. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. Statement of Retained Earnings

amount reported for Dividends in 2013.

A. $19,000.

B. $20,200.

C. $18,600.

D. $19,400.

E. $19,600.

€20,000 × $.97 = $19,400

1-710 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-711 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

69. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for

accumulated depreciation for 2013.

A. $40,950.

B. $41,850.

C. $45,450.

D. $42,750.

E. $44,100.

€45,000 × $1.01 = $45,450

1-712 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-713 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

70. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. income statement amount for

depreciation expense for 2013.

A. $8,190.

B. $8,370.

C. $8,820.

D. $9,090.

E. $8,550.

€9,000 × $.95 = $8,550

1-714 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the

current rate method and calculate the related translation adjustment.

1-715 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

71. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount

for sales for 2013.

A. $364,000.

B. $372,000.

C. $380,000.

D. $360,000.

E. $404,000.

€400,000 × $.95 = $380,000

1-716 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the

associated remeasurement gain or loss.

1-717 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

72. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for

inventory, at cost, for 2013.

A. $18,800.

B. $19,600.

C. $18,000.

D. $20,200.

E. $19,000.

€20,000 × $.94 = $18,800

1-718 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the

associated remeasurement gain or loss.

1-719 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

73. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for

equipment for 2013.

A. $81,900.

B. $90,900.

C. $83,700.

D. $88,200.

E. $85,500.

€90,000 × $.91 = $81,900

1-720 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the

associated remeasurement gain or loss.

1-721 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

74. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. statement of retained

earnings amount for dividends for 2013.

A. $19,000.

B. $20,200.

C. $18,600.

D. $19,400.

E. $19,600.

€20,000 × $.97 = $19,400

1-722 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the

associated remeasurement gain or loss.

1-723 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

75. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for

accumulated depreciation for 2013.

A. $40,950.

B. $41,850.

C. $45,450.

D. $42,750.

E. $44,100.

€45,000 × $.91 = $40,950

1-724 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

1-725 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

76. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012.

Selected account balances are available for the year ended December 31, 2013, and are

stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount

for depreciation expense for 2013.

A. $8,190.

B. $8,370.

C. $8,820.

D. $9,090.

E. $8,550.

€9,000 × $.91 = $8,190

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

1-726 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Chapter 11 Worldwide Accounting Diversity and International Standards

Answer Key

Multiple Choice Questions

1. In the United States, foreign companies filing annual reports with the SEC that are not

prepared in accordance with U.S. GAAP must:

A. present financial statements that comply with international GAAP.

B. conform with U.S. GAAP or present a reconciliation to U.S. GAAP.

C. have a demonstrated need for capital to be used for operations in the U.S.

D. use the U.S. dollar as their reporting currency.

E. use IFRS, or use foreign GAAP and provide a reconciliation to U.S. GAAP.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-04 Describe the ways and the extent to which IFRS are used around the world.

1-727 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

2. Which of the following are not key FASB initiatives to further converge IFRS and U.S. GAAP?

A. Short-term convergence projects.

B. Joint projects sharing FASB and IASB staff resources.

C. Having the IASB Chairman in-residence at the FASB office.

D. Monitoring ongoing IASB projects.

E. Researching differences between U.S. GAAP and IFRS.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-04 Describe the ways and the extent to which IFRS are used around the world.

1-728 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

3. In countries where there is less pressure for public accountability and information disclosure:

A. information needs can be satisfied by requesting information from internal company

sources.

B. public offerings of stock shares are the primary source of financing for companies.

C. accounting information is prepared to meet the needs of taxing authorities.

D. accounting standards emphasize accounting for high inflation situations.

E. the accounting focus is on recent market economy reforms.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

1-729 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

4. Which of the following is not an IFRS pronouncement originally issued by the IASB?

A. Business Combinations.

B. First-Time Adoption of IFRS.

C. Financial Instruments: Disclosures.

D. Agriculture.

E. Operating Segments.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-03 List the authoritative pronouncements that constitute International Financial Reporting Standards

(IFRS).

1-730 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

5. In countries of Latin America:

A. accounting practice is designed to provide adequate information to investors and creditors.

B. accounting standards emphasize accounting for high inflation situations.

C. banks are the primary source of financing for companies.

D. accounting focuses are based recent market economy reforms.

E. accounting information is prepared to meet the needs of governmental planners.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

1-731 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

6. Which of the following is not a way for a country to use IFRS?

A. Require foreign companies listed on that country's stock exchange to use IFRS for

consolidated financial statements.

B. Allow foreign companies listed on that country's stock exchange to use IFRS.

C. Allow that country's companies listed on its stock exchange to use IFRS.

D. Adopt IFRS as that country's national GAAP.

E. All of these are ways a country can use IFRS.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-04 Describe the ways and the extent to which IFRS are used around the world.

1-732 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

7. Convergence of accounting standards would not occur by:

A. FASB adopting an existing IASB standard.

B. IASB adopting an existing FASB standard.

C. IASB issuing a new standard.

D. IASB and FASB jointly developing a new standard.

E. IASB and FASB each issuing a similar but not identical standard.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

1-733 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

8. The types of differences that exist between IFRS and U.S. GAAP would not generally include:

A. Presentation differences.

B. Measurement differences.

C. Disclosure differences.

D. Comparability differences.

E. Recognition differences.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-734 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

9. Which of the following is not true about IFRS?

A. The IASB does not have the ability to enforce proper usage of IFRS.

B. IFRS is available to any organization or nation that wishes to use those standards.

C. IFRS is a comprehensive set of financial reporting standards.

D. IFRS includes only pronouncements issued by the IASB.

E. IFRS are considered as generally accepted accounting principles.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-03 List the authoritative pronouncements that constitute International Financial Reporting Standards

(IFRS).

1-735 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

10. Which one of the following is not a background requirement for any IASB members?

A. Audit.

B. Tax.

C. Financial statement preparation.

D. Academia.

E. Financial statement user.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Industry

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-02 Understand the problems created by differences in accounting standards across countries and the

reasons to develop a set of internationally accepted accounting standards.

1-736 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

11. Which of the following are not authoritative pronouncements of International Financial

Reporting Standards (IFRSs)?

1) International Financial Reporting Standards issued by the IASB

2) International Accounting Standards issued by the IASC and adopted by the IASB

3) Interpretations originated by the International Financial Reporting Interpretations Committee

(IFRIC)

4) U.S. Generally Accepted Accounting Principles

A. 4 only.

B. 3 and 4.

C. 1, 3, and 4.

D. 2, 3, and 4.

E. 1, 2, 3, and 4.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Research

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-03 List the authoritative pronouncements that constitute International Financial Reporting Standards

(IFRS).

1-737 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

12. The IASB and FASB are working on several joint projects. Which of the following is not a topic

of the Revenue Recognition Project?

A. Eliminate inconsistencies in existing literature.

B. Cash flow presentation of revenue.

C. Business models issues for revenue recognition.

D. Conceptual basis as framework for future issues of revenue recognition.

E. Contract-based revenue recognition.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

1-738 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

13. Which of the following is not a factor influencing a country's financial reporting practices?

A. Providers of financing.

B. Inflation.

C. Legal system.

D. Gross National Product.

E. Political and economic ties.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

1-739 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

14. Which of the following statements is false regarding a country's legal system?

A. The two major types of legal systems are common law and codified Roman law.

B. Common law originated in the Roman jus civile.

C. Code law countries tend to have more statutes governing a wider range of human activity.

D. Accounting law is rather general in code law countries.

E. A nongovernmental organization is more likely to develop in a common law country than in

a code law country.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA BB: Legal

AICPA FN: Research

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

1-740 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

15. Which of the following statements is false regarding providers of financing?

A. There is less pressure to provide accounting information in those countries in which

financing is primarily by banks.

B. In countries where capital stock is the primary source of financing, accounting emphasizes

the income statement.

C. Disclosures are less extensive in those countries financed primarily by stock.

D. Bankers tend to focus more on solvency and stockholders focus more on profitability.

E. As companies become more dependent on financing by stock, more information is

demanded.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

1-741 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

16. Which of the following is not a problem caused by diverse accounting practices across

countries?

A. Preparation of consolidated financial statements.

B. Gaining access to foreign capital markets.

C. Lack of comparability of financial statements between companies in the same country.

D. Cost and expertise required of consolidations accounting staff.

E. Need for a company to maintain multiple sets of accounting records.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-02 Understand the problems created by differences in accounting standards across countries and the

reasons to develop a set of internationally accepted accounting standards.

1-742 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

17. A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial

statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely

accounting issues to resolve for the opening IFRS balance sheet?

A. Inventory valuation.

B. Capitalizing development costs.

C. Classifying deferred taxes as current or noncurrent.

D. Acquisition value for a subsidiary.

E. Liability for restructuring charges.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

1-743 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

18. A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial

statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely

accounting issues to resolve for the opening IFRS balance sheet?

A. Measuring asset impairment.

B. Classifying extraordinary items.

C. Sale and leaseback gain recognition.

D. Measuring salaries expense.

E. Prior service cost recognition for pension amendments.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-744 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

19. Foreign companies whose stock is listed on a U.S. stock exchange and using foreign GAAP

other than IFRS must file their annual report with the SEC on:

A. Form 8-A.

B. Form 10-A.

C. Form 16-K.

D. Form 20-F.

E. Form 20-K.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA BB: Legal

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

1-745 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

20. What international organization currently promulgates IFRS?

A. IASB.

B. IASC.

C. IOSCO.

D. FASB.

E. EU.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

AICPA FN: Research

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 11-03 List the authoritative pronouncements that constitute International Financial Reporting Standards

(IFRS).

1-746 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

21. Which topic was not covered by FASB under the short-term convergence project?

A. Inventory costs.

B. Asset exchanges.

C. Liability transfers.

D. Accounting changes.

E. Earnings-per-share.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-04 Describe the ways and the extent to which IFRS are used around the world.

1-747 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

22. The IASB and FASB are working on several joint projects. What is the purpose of the

Financial Statement Presentation Project?

A. to provide guidance on the application of the acquisition method.

B. to enhance the usefulness of information in assessing the financial performance of the

reporting enterprise.

C. to develop a common comprehensive standard on revenue recognition.

D. to develop a common conceptual framework that both boards can use as a basis for future

standard-setting.

E. to agree upon financial statement titles that will have no differentiation after translation to

various languages.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

1-748 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

23. The IASB and FASB are working on several joint projects. What is the purpose of the

Revenue Recognition Project?

A. to provide guidance on the application of the acquisition method.

B. to enhance the usefulness of information in assessing the financial performance of the

reporting enterprise.

C. to develop a common comprehensive standard on revenue recognition.

D. to develop a common conceptual framework that both boards can use as a basis for future

standard-setting.

E. to agree upon financial statement titles that will have no differentiation after translation to

various languages.

AACSB: Diversity

AACSB: Reflective thinking

AICPA BB: Global

AICPA FN: Measurement

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

1-749 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

24. The following information pertains to inventory held by a company at December 31, 2013.

What amount of inventory should be reported under U.S. GAAP?

A. $25,000.

B. $21,000.

C. $20,000.

D. $16,800.

E. $16,000.

NRV $21,000 > NRV - Normal Profit ($21,000 × ($21,000 × 20%) = $16,800), so RC becomes

carrying Value $20,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-750 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

25. The following information pertains to inventory held by a company at December 31, 2013.

What is the amount of inventory loss shown on the income statement under U.S. GAAP?

A. $1,000.

B. $2,000.

C. $4,000.

D. $5,000.

E. $8,200.

Cost $25,000 - Replacement Cost $20,000 = $5,000 Loss on Inventory from LCM

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-751 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

26. The following information pertains to inventory held by a company at December 31, 2013.

What amount of inventory should be reported under IFRS?

A. $25,000

B. $21,000

C. $20,000

D. $4,000

E. $5,000

Net Realizable Value $21,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-752 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

27. The following information pertains to inventory held by a company at December 31, 2013.

What is the amount of inventory loss shown on the income statement under IFRS?

A. $1,000.

B. $2,000.

C. $4,000.

D. $5,000.

E. $6,000.

Cost $25,000 - Net Realizable Value $21,000 = $4,000 Loss on Inventory from LCM

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-753 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

28. The following information pertains to inventory held by a company at December 31, 2013.

As a result of inventory loss, what is the difference in income between reporting using U.S.

GAAP and IFRS?

A. U.S. GAAP income is $1,000 higher.

B. U.S. GAAP income is $2,000 lower.

C. IFRS income is $1,000 higher.

D. IFRS income is $1,000 lower.

E. IFRS income is $5,000 higher.

$5,000 GAAP Loss on Inventory from LCM - $4,000 IFRS Loss on Inventory from LCM =

$1,000 Higher Income under IFRS

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 11-07 Determine the impact that specific differences between IFRS and U.S. GAAP have on the

measurement of income and stockholders' equity.

1-754 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

29. The following information pertains to inventory held by a company on December 31, 2013.

What amount of inventory should be reported under U.S. GAAP?

A. $16,000.

B. $27,000.

C. $30,000.

D. $21,600.

E. $20,000.

Net Realizable Value $27,000 - Normal 20% Markup $5,400 = $21,600

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-755 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

30. The following information pertains to inventory held by a company on December 31, 2013.

What is the amount of inventory loss shown on the income statement under U.S. GAAP?

A. $0.

B. $3,000.

C. $14,000.

D. $10,000.

E. $8,400.

Historical Cost $30,000 - [Net Realizable Value $27,000 - Normal 20% Markup $5,400 =

$21,600] = $8,400 GAAP Loss on Inventory from LCM

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-756 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

31. The following information pertains to inventory held by a company on December 31, 2013.

What amount of inventory should be reported under IFRS?

A. $25,000.

B. $27,000.

C. $30,000.

D. $5,000.

E. $2,000.

Net Realizable Value $27,000

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-757 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

32. The following information pertains to inventory held by a company on December 31, 2013.

What is the amount of inventory loss shown on the income statement under IFRS?

A. $0.

B. $3,000.

C. $14,000.

D. $10,000.

E. $8,400.

Cost $30,000 - Net Realizable Value $27,000 = $3,000 IFRS Loss on Inventory from LCM

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-758 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

33. The following information pertains to inventory held by a company on December 31, 2013.

As a result of inventory loss, what is the difference in income between reporting using U.S.

GAAP and IFRS?

A. U.S. GAAP income is $3,000 higher.

B. U.S. GAAP income is $10,000 lower.

C. IFRS income is $8,400 higher.

D. IFRS income is $3,000 lower.

E. IFRS income is $5,400 higher.

$8,400 GAAP Loss on Inventory from LCM - $3,000 IFRS Loss on Inventory from LCM =

$5,400 Higher Income under IFRS

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 11-07 Determine the impact that specific differences between IFRS and U.S. GAAP have on the

measurement of income and stockholders' equity.

1-759 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

34. A company acquired a new piece of equipment on January 1, 2011 at a cost of $200,000. The

equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is

depreciated on a straight-line basis. On January 1, 2013, the equipment was appraised and

determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining

useful life of 10 years.

At what amount should the equipment be reported on the December 31, 2013 balance sheet

under U.S. GAAP?

A. $160,000

B. $150,000

C. $146,000

D. $140,000

E. $116,000

Cost $200,000 - Salvage $20,000 = $180,000/10 years = $18,000 Depreciation per year × 3

years = $54,000

Cost $200,000 - Acc. Deprec. ($18,000 × 3) $54,000 = $146,000 BV on 12/31/13

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

1-760 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

35. A company acquired a new piece of equipment on January 1, 2011 at a cost of $200,000. The

equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is

depreciated on a straight-line basis. On January 1, 2013, the equipment was appraised and

determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining

useful life of 10 years.

At what amount should the equipment be reported on the December 31, 2013 balance sheet

under the IFRS cost model?

A. $160,000

B. $150,000

C. $146,000

D. $140,000

E. $116,000

Cost $200,000 - Salvage $20,000 = $180,000/10 years = $18,000 Depreciation per year × 3

years = $54,000

Cost $200,000 - Acc. Deprec. ($18,000 × 3) $54,000 = $146,000 BV on 12/31/13

AACSB: Analytic

AACSB: Diversity

AICPA BB: Global

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

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36. A company acquired a new piece of equipment on January 1, 2011 at a cost of $200,000. The

equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is

depreciated on a straight-line basis. On January 1, 2013, the equipment was appraised and

determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining

useful life of 10 years.

At what amount should the equipment be reported on the December 31, 2013 balance sheet

under the IFRS revaluation model?

A. $190,000

B. $173,500

C. $165,000

D. $136,000

E. $110,000

FV $190,000 - Salvage $25,000 = $165,000/10 years = $16,500 Depreciation per year

FV $190,000 - Revised Depreciation Expense $16,500 = $173,500 BV 12/31/2013 under IFRS

Revaluation Model

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Difficulty: 3 Hard

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

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McGraw-Hill Education.

37. A company incurs research and development costs of $200,000 in 2013 of which $50,000 of

these costs relate to development activities because certain criteria have been met which

suggest that an intangible asset has been created.

What amount should be recognized as research and development expense in 2013 using U.S.

GAAP?

A. $50,000.

B. $150,000.

C. $200,000.

D. $0.

E. $250,000.

R&D Costs are Expensed as Incurred $200,000

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Difficulty: 1 Easy

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

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McGraw-Hill Education.

38. A company incurs research and development costs of $200,000 in 2013 of which $50,000 of

these costs relate to development activities because certain criteria have been met which

suggest that an intangible asset has been created.

What amount should be recognized as research and development expense in 2013 using

IFRS?

A. $50,000.

B. $150,000.

C. $200,000.

D. $0.

E. $250,000.

R&D Costs $200,000 - IFRS R&D Capitalizable as Asset $50,000 = R&D Costs Expensed

$150,000

AACSB: Analytic

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Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

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McGraw-Hill Education.

39. A company incurs research and development costs of $200,000 in 2013 of which $50,000 of

these costs relate to development activities because certain criteria have been met which

suggest that an intangible asset has been created.

As a result of research and development costs, what is the difference in income between

reporting using U.S. GAAP and IFRS in 2013?

A. U.S. GAAP income is $50,000 higher.

B. U.S. GAAP income is $50,000 lower.

C. IFRS income is $50,000 lower.

D. IFRS income is $150,000 lower.

E. IFRS income is $150,000 higher.

GAAP [R&D Costs are Expensed as Incurred $200,000] - [R&D Costs $200,000 - IFRS R&D

Capitalizable as Asset $50,000 = R&D Costs Expensed $150,000] = $50,000 Lower Income

under GAAP

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Learning Objective: 11-07 Determine the impact that specific differences between IFRS and U.S. GAAP have on the

measurement of income and stockholders' equity.

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40. A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases

the building back for period of five years. The lease is accounted for as an operating lease.

The building was originally purchased for $200,000 and currently had a book value of $50,000

at the date of the sale.

What amount should be recognized in 2013 as a gain on the sale using U.S. GAAP?

A. $20,000.

B. $50,000.

C. $100,000.

D. $150,000.

E. $200,000.

Gain on Sale $100,000/5 year term of the Lease = $20,000 Gain Recognized in Year One

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Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

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McGraw-Hill Education.

41. A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases

the building back for period of five years. The lease is accounted for as an operating lease.

The building was originally purchased for $200,000 and currently had a book value of $50,000

at the date of the sale.

What amount should be recognized as a gain in 2013 using IFRS?

A. $20,000.

B. $50,000.

C. $100,000.

D. $150,000.

E. $200,000.

Gain on Sale $100,000 Recognized in Year One

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Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

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McGraw-Hill Education.

42. A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases

the building back for period of five years. The lease is accounted for as an operating lease.

The building was originally purchased for $200,000 and currently had a book value of $50,000

at the date of the sale.

As a result of the sale and leaseback transaction in 2013, what is the difference between

income using U.S. GAAP and IFRS in 2013?

A. U.S. GAAP income is $80,000 higher.

B. U.S. GAAP income is $100,000 higher.

C. IFRS income is $50,000 lower.

D. IFRS income is $100,000 lower.

E. IFRS income is $80,000 higher.

IFRS Gain $100,000 - GAAP Gain $20,000 = $80,000 Higher Income under IFRS

AACSB: Analytic

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AICPA FN: Measurement

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Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-07 Determine the impact that specific differences between IFRS and U.S. GAAP have on the

measurement of income and stockholders' equity.

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McGraw-Hill Education.

43. A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases

the building back for period of five years. The lease is accounted for as an operating lease.

The building was originally purchased for $200,000 and currently had a book value of $50,000

at the date of the sale.

As a result of the sale and leaseback transaction in 2013, what is the difference between

income using U.S. GAAP and IFRS in 2014?

A. $0.

B. U.S. GAAP income is $20,000 higher.

C. IFRS income is $80,000 lower.

D. IFRS income is $60,000 lower.

E. IFRS income is $80,000 higher.

Gain on Sale $100,000/5 year term of the Lease = $20,000 Gain Recognized in Year Two, so

GAAP Income is Higher by $20,000 in 2014

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AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS

and U.S. GAAP.

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McGraw-Hill Education.

44. A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases

the building back for period of five years. The lease is accounted for as an operating lease.

The building was originally purchased for $200,000 and currently had a book value of $50,000

at the date of the sale.

Assume the seller of the building is a U.S. company that is preparing to convert from U.S.

GAAP to IFRS. At December 31, 2014, with regard to the sale and leaseback accounting,

what amount would reconcile stockholders' equity from U.S. GAAP to IFRS at December 31,

2014?

A. Increase $40,000.

B. Decrease $40,000.

C. Decrease $60,000.

D. Increase $60,000.

E. No amount would be necessary for reconciliation.

In Conversion from GAAP to IFRS, the $60,000 Deferred Gain on the Sale Increases the

Equity Reconciliation by $60,000 at Year-End 2014

AACSB: Analytic

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AICPA FN: Measurement

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Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 11-07 Determine the impact that specific differences between IFRS and U.S. GAAP have on the

measurement of income and stockholders' equity.

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Chapter 16 Accounting for State and Local Governments (Part 1)

Answer Key

Multiple Choice Questions

1. Which standard issued by the Governmental Accounting Standards Board in 1999 required

two distinct sets of financial statements for state and local governments?

A. GASB Statement No. 32.

B. GASB Statement No. 33.

C. GASB Statement No. 34.

D. GASB Statement No. 35.

E. GASB Statement No. 36.

AACSB: Reflective thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

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2. Which group of governmental financial statements reports all revenues and all costs of

providing services each year?

A. GAAP-Based Financial Statements.

B. Fund Financial Statements.

C. Cost-Based Financial Statements.

D. Government-Wide Financial Statements.

E. General Fund Financial Statements.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

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McGraw-Hill Education.

3. Proprietary funds are

A. Funds used to account for the activities of a government that are carried out primarily to

provide services to citizens.

B. Funds used to account for a government's ongoing organizations and activities that are

similar to those operated by for-profit organizations.

C. Funds used to account for monies held by the government in a trustee capacity.

D. Funds used to account for all financial resources except those required to be accounted for

in another fund.

E. Funds used to account for revenues that have been legally restricted as to expenditure.

AACSB: Reflective thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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McGraw-Hill Education.

4. Fiduciary funds are

A. Funds used to account for the activities of a government that are carried out primarily to

provide services to citizens.

B. Funds used to account for a government's ongoing organizations and activities that are

similar to those operated by for-profit organizations.

C. Funds used to account for monies held by the government in a trustee capacity.

D. Funds used to account for all financial resources except those required to be accounted for

in another fund.

E. Funds used to account for revenues that have been legally restricted as to expenditure.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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McGraw-Hill Education.

5. Governmental funds are

A. Funds used to account for the activities of a government that are carried out primarily to

provide services to citizens.

B. Funds used to account for a government's ongoing organizations and activities that are

similar to those operated by for-profit organizations.

C. Funds used to account for monies held by the government in a trustee capacity.

D. Funds used to account for all financial resources except those required to be accounted for

in another fund.

E. Funds used to account for revenues that have been legally restricted as to expenditure.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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McGraw-Hill Education.

6. Special Revenue funds are

A. Funds used to account for the activities of a government that are carried out primarily to

provide services to citizens.

B. Funds used to account for a government's ongoing organizations and activities that are

similar to those operated by for-profit organizations.

C. Funds used to account for monies held by the government in a trustee capacity.

D. Funds used to account for all financial resources except those required to be accounted for

in another fund.

E. Funds used to account for revenues that have been legally restricted as to expenditure.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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McGraw-Hill Education.

7. The term "current financial resources" refers to

A. Those assets that can quickly be converted into cash.

B. Monetary assets available to meet the government's needs.

C. The government's current assets and current liabilities.

D. The current value of all net assets owned by the governmental unit.

E. Financial resources used to provide electricity to local citizens.

AACSB: Reflective thinking

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AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

8. What are the broad types or classifications of funds for a governmental entity such as a city?

A. general, governmental, and trust funds.

B. governmental, proprietary, and fiduciary funds.

C. revenue, trust, and governmental funds.

D. enterprise, revenue, and fiduciary funds.

E. governmental, agency, and enterprise funds.

AACSB: Reflective thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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9. Which group of financial statements is prepared using the "modified accrual accounting"

approach?

A. GAAP-Based Financial Statements.

B. Fund Financial Statements.

C. Cost-Based Financial Statements.

D. Government-Wide Financial Statements.

E. General Purpose Financial Statements.

AACSB: Reflective thinking

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AICPA FN: Measurement

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

10. Under modified accrual accounting, revenues should be recognized when they are

A. collected.

B. realizable.

C. reasonably estimable.

D. measurable and available.

E. earned.

AACSB: Reflective thinking

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AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

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11. Under modified accrual accounting, when should an expenditure be recorded to recognize

interest on long-term debt?

A. at the end of each accounting period.

B. when payment is due within one fiscal year.

C. when payment is due.

D. when cash is available to pay the interest.

E. when the interest is incurred.

AACSB: Reflective thinking

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Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

12. Which of the following funds is most likely created with an endowed gift?

A. Enterprise Fund.

B. Internal Service Fund.

C. Debt Service Fund.

D. Capital Projects Fund.

E. Permanent Fund.

AACSB: Reflective thinking

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AICPA FN: Measurement

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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13. Revenue from property taxes should be recorded in the General Fund

A. when received.

B. when there is an enforceable legal claim.

C. when they are available for recognition.

D. in the period for which they are required or permitted to be used.

E. in the period in which the tax bills are mailed.

AACSB: Reflective thinking

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Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions.

14. Which type of fund is not included in the Government-Wide Financial Statements?

A. Governmental Funds

B. Proprietary Funds

C. Fiduciary Funds

D. Debt Service Funds

E. Special Revenue Funds

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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McGraw-Hill Education.

15. A city received a grant of $5,000,000 from a private agency. The money was to be used to

build a new city library. In which fund should the money be recorded for the Fund Financial

Statements?

A. the General Fund.

B. an Expendable Trust Fund.

C. a Capital Projects Fund.

D. an Agency Fund.

E. a Permanent Fund.

AACSB: Reflective thinking

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AICPA FN: Reporting

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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16. When a city received a federal grant for providing food and other assistance to the homeless,

the money should have been recorded in

A. the General Fund.

B. an Expendable Trust Fund.

C. a Capital Projects Fund.

D. an Agency Fund.

E. a Special Revenue Fund.

AACSB: Reflective thinking

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AICPA FN: Reporting

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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McGraw-Hill Education.

17. Bay City received a federal grant to provide health care services to low income mothers and

children. When should the revenues be recognized?

A. as health care services are provided.

B. when the awarding of the grant is announced.

C. when the grant money is received.

D. at the end of Bay City's fiscal year.

E. when the grant money is receivable.

AACSB: Reflective thinking

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AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions.

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McGraw-Hill Education.

18. Trapper City issued 30-year bonds for the purpose of building a new City Hall. The proceeds

of the bonds are deposited in the General Fund. For the Fund Financial Statements, in what

fund will Bonds Payable appear?

A. General Fund.

B. Capital Projects Fund.

C. Permanent Fund.

D. Debt Service Fund.

E. Bonds Payable do not appear in Fund Financial Statements.

AACSB: Reflective thinking

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Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 16-09 Accounts for the issuance of long-term bonds and the reporting of special assessment projects.

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19. Which of the following is a governmental fund?

A. Enterprise fund.

B. Internal service fund.

C. Permanent fund.

D. Investment trust fund.

E. Agency fund.

AACSB: Reflective thinking

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AICPA FN: Reporting

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

20. Which of the following is a fiduciary fund?

A. Pension trust fund.

B. Debt service fund.

C. Permanent fund.

D. Enterprise fund.

E. Capital projects fund.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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21. According to GASB Concepts Statement No. 1, what are the three groups of primary users of

external state and local governmental financial reports?

A. The Securities Exchange Commission, the citizenry, and legislative and oversight bodies.

B. The Securities Exchange Commission, legislative and oversight bodies, and investors and

creditors.

C. The Securities Exchange Commission, the citizenry, and investors and creditors.

D. The citizenry, legislative and oversight bodies, and investors and creditors.

E. The citizenry, management, and the Governmental Accounting Office.

AACSB: Reflective thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-01 Explain the history of and the reasons for the unique characteristics of the financial statements

produced by state and local governments.

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22. Which of the following statements is true regarding fund financial statements?

A. Fund financial statements report a government's activities and financial position as a

whole.

B. Fund financial statements should tell the amount spent this year on such services as public

safety, education, health and sanitation, and the construction of a new road.

C. Fund financial statements utilize the accrual basis of accounting much like any for-profit

entity.

D. Fund financial statements help to determine whether the government's overall financial

position improved or deteriorated.

E. Fund financial statements report all assets and liabilities in a way comparable to business-

type accounting.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

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McGraw-Hill Education.

23. Which of the following statements is false regarding government-wide financial statements?

A. Government-wide financial statements report a government's activities and financial

position as a whole.

B. The government-wide financial statement approach helps users make long-term

evaluations of the financial decisions and stability of the government.

C. Government-wide financial statements focus on the short-term instead of the long-term.

D. Government-wide financial statements assess the finances of the government in its

entirety, including the year's operating results.

E. The measurement focus of government-wide financial statements is on all economic

resources and utilizes accrual accounting.

AACSB: Reflective thinking

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Difficulty: 2 Medium

Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

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McGraw-Hill Education.

24. How do the balance sheet and statement of revenues, expenditures, and changes in fund

balances of governmental funds differ from the financial statement presentation for the

governmental activities in the government-wide statement of net assets and statement of

activities?

(1) Internal service funds are not included in the fund financial statements of governmental

funds but could be reported in the governmental activities of government-wide financial

statements.

(2) The economic resources measurement basis is used for fund financial statements of

governmental funds and the current financial resources measurement basis is used for

governmental activities in the government-wide financial statements.

(3) Modified accrual accounting is used for fund financial statements of governmental funds to

time revenues and expenditures and accrual accounting is used for governmental activities of

government-wide financial statements.

(4) The financial statements of governmental funds for fund financial statements are the same

as governmental activities in government-wide financial statements but with different titles of

the financial statements.

A. 1 and 2.

B. 2, 3, and 4.

C. 1, 2, and 3.

D. 1 and 3.

E. 1, 2, 3, and 4.

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McGraw-Hill Education.

AACSB: Reflective thinking

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Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

Learning Objective: 16-05 Understand the basic structure of government-wide financial statements and fund financial

statements (as produced for the government funds).

25. Which of the following is not a classification of non-exchange transactions?

A. Derived tax expenditures.

B. Voluntary non-exchange transactions.

C. Government-mandated non-exchange transactions.

D. Derived tax revenues.

E. Imposed non-exchange revenues.

AACSB: Reflective thinking

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Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions.

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26. GASB Codification Section N50.104 divides all eligibility requirements into four general

classifications including all of the following except:

A. Required characteristics of the recipients.

B. Time requirements.

C. Reimbursement.

D. Contingencies.

E. Refunding.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions.

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McGraw-Hill Education.

27. Which statement is not correct?

A. Governmental funds account for expenditures of financial resources rather than matching

revenues and expenses.

B. The Fund Balance Reserved for Encumbrances account is not closed at the end of a fiscal

year.

C. Revenues from licenses and permit fees are recognized when received in cash if using the

modified accrual basis of accounting for governmental funds.

D. A fund is an independent accounting entity composed of cash and other financial

resources, segregated for the purpose of carrying on specific activities and objectives.

E. Commitments for purchase orders are recorded as expenses.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

1-792 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

28. For governmental entities, the accrual basis of accounting is used for:

A. Special revenue funds.

B. Internal service funds.

C. Debt service funds.

D. General Fund.

E. Capital Projects Fund.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

Learning Objective: 16-07 Understand the reporting of capital assets; supplies; and prepaid expenses by a state or local

government.

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McGraw-Hill Education.

29. What account is debited in the general fund when equipment is received by a governmental

entity?

A. Expenditures.

B. Encumbrances.

C. Plant assets.

D. Accounts Payable.

E. Fund Balance-Reserve for Encumbrances.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

30. Generally, annual budgets are recorded within the following funds:

A. General fund and special revenue funds.

B. Capital projects funds and debt service fund.

C. Enterprise funds and internal service funds.

D. General Fund and Pension Trust Fund.

E. Agency Funds and General Fund.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

1-794 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

31. When a city received a federal grant for books to be purchased for a library, the money should

have been recorded in

A. the Permanent Fund.

B. an Expendable Trust Fund.

C. a Capital Projects Fund.

D. an Agency Fund.

E. a Special Revenue Fund.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

32. When a city holds pension monies for city employees, the monies should be recorded in

A. the General Fund.

B. an Expendable Trust Fund.

C. a Fiduciary Fund.

D. an Agency Fund.

E. a Special Revenue Fund.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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McGraw-Hill Education.

33. When a city received a private donation of $1,000,000 stipulating that the principal donation

would be preserved but allowing the interest income to be spent on building a city park with

access for disabled children, which fund should the money be recorded in?

A. the General Fund.

B. an Expendable Trust Fund.

C. a Permanent Fund.

D. an Agency Fund.

E. a Special Revenue Fund.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

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McGraw-Hill Education.

34. When a city collects fees from citizens who use the public swimming pool, the money should

be recorded in

A. the General Fund.

B. an Enterprise Fund.

C. a Capital Projects Fund.

D. an Agency Fund.

E. an Internal Service Fund.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

1-797 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

35. A city operates a central data processing facility. The expenses of this facility would be

accounted for using

A. the General Fund.

B. an Enterprise Fund.

C. a Capital Projects Fund.

D. an Agency Fund.

E. an Internal Service Fund.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

1-798 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

36. What are the two proprietary fund types?

(1) Internal service funds.

(2) Investment trust funds.

(3) Enterprise funds.

(4) Agency funds.

A. 1 and 2.

B. 2 and 3.

C. 1 and 3.

D. 2 and 4.

E. 1 and 4.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

1-799 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

37. Salaries and wages that have been earned by governmental employees that have not yet

been paid are recorded in the general fund as:

A. An expenditure.

B. An encumbrance.

C. An appropriation.

D. An expense.

E. An investment.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

1-800 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

38. The reporting of the fund balance of governmental funds will result in a maximum of

___________ categories:

A. One

B. Two

C. Three

D. Four

E. Five

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

39. Which classifications may be not used for the Fund Balance of governmental funds?

A. Spendable

B. Non-Spendable

C. Assigned

D. Unassigned

E. Restricted

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

1-801 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

40. Which of the following statements is true about Fund Balance classifications for the

governmental funds?

A. A restricted fund balance is for monies the governing board has appropriated.

B. An assigned fund balance has been designated for a specific purpose and is restricted to

use for only that purpose.

C. An unassigned fund balance has no restriction for use of the money and is only applicable

to the General Fund.

D. A committed fund balance has been designated by an outside party for a particular use.

E. A non-spendable fund balance is designated only for Permanent Fund balances.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Chapter 18 Accounting and Reporting for Private Not-for-Profit Entities

Answer Key

Multiple Choice Questions

1-802 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

1. Reciprocal transfers where both parties give and receive something of value are

A. contributed services.

B. unconditional promises to give.

C. endowment transactions.

D. exchange transactions.

E. required contributions.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

1-803 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

2. Which of the following types of health care organizations follow FASB Accounting Standards

Codification for GAAP?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Research

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 18-01 Understand the basic composition of the financial statements produced for a private not-for-profit

organization.

1-804 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

3. Which of the following types of health care organizations recognize depreciation expense?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

1-805 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

4. In accruing patient charges for the current month, which one of the following accounts should

a hospital credit?

A. Accounts Payable.

B. Deferred Revenue.

C. Unearned Revenue.

D. Patient Service Revenues.

E. Accounts Receivable.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

1-806 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

5. Which account would be credited in recording a gift of medicine to a nursing home from an

outside party?

A. Non-Operating Gain-Special Revenues.

B. Contractual Adjustments.

C. Patient Service Revenues.

D. Drugs and Medicines.

E. Non-Operating Revenues-Contribution.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

1-807 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

6. Which one of the following financial statements is not required by GAAP regarding a voluntary

health and welfare organization?

A. Statement of Financial Position.

B. Statement of Functional Expense.

C. Statement of Activities and Changes in Net Assets.

D. Statement of Cash Flows.

E. Statement of Operations.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

1-808 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

7. Unconditional transfers of cash or other resources to an entity in a voluntary nonreciprocal

transaction is the GAAP definition for

A. miscellaneous revenues.

B. contributions.

C. unconditional promises to give.

D. exchange transactions.

E. pledges.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

1-809 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

8. Which one of the following is a voluntary health and welfare organization?

A. Charity raising money for underprivileged children.

B. Nursing home.

C. Clinic.

D. Hospital.

E. Preschool.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

1-810 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

9. On a statement of functional expenses for a voluntary health and welfare organization, how

are expenses classified?

A. health services expenses and operating expenses.

B. program services expenses and administrative services expenses.

C. program services expenses and supporting services expenses.

D. operating expenses and supporting services expenses.

E. operating expenses and administrative expenses.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 18-03 Explain the purpose and the construction of a statement of functional expenses.

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McGraw-Hill Education.

10. Which of the following is not a question individuals ask of not-for-profit organizations in

considering whether to make a contribution?

A. Will donated funds be used effectively by the organization to accomplish its purpose?

B. Will the donated funds be wasted?

C. How much should this organization receive?

D. Is this organization profitable?

E. Is contributing to this charity a wise allocation of resources?

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

1-812 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

11. Historically, what was the pattern of reporting of not-for-profit organizations?

(1) Patterned after for-profit accounting

(2) Emphasis on separate fund types

(3) Disregard for the entire entity

A. 1 only.

B. 2 only.

C. 1 and 2 only.

D. 1, 2 and 3.

E. 2 and 3 only.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 18-01 Understand the basic composition of the financial statements produced for a private not-for-profit

organization.

1-813 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

12. Which of the following statements is required for voluntary health and welfare organizations,

but not for other not-for-profit organizations?

A. Statement of Activities and Changes in Net Assets.

B. Statement of Functional Expenses.

C. Statement of Financial Position.

D. Statement of Cash Flows.

E. Statement of Budget to Actual.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

1-814 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

13. What are the three categories of net assets required by GAAP in reporting a not-for-profit

organization?

A. Unrestricted, Temporarily Restricted, and Permanently Restricted.

B. Unrestricted, Restricted, and Fund Balance.

C. Restricted, Permanently Restricted, and Fund Balance.

D. Unrestricted, Temporarily Restricted, and Fund Balance.

E. None of these.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 18-01 Understand the basic composition of the financial statements produced for a private not-for-profit

organization.

1-815 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

14. What is the basis of accounting used in reporting the Statement of Activities and Changes in

Net Assets?

A. Cash basis.

B. Modified accrual basis.

C. Accrual basis.

D. Either cash basis or accrual basis, depending on the type of revenue.

E. Either modified accrual basis or accrual basis, depending on the type of revenue.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 18-01 Understand the basic composition of the financial statements produced for a private not-for-profit

organization.

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McGraw-Hill Education.

15. When are unconditional promises to give recognized as revenues?

A. In the period the promise is received.

B. In the period the promise is collected.

C. In the period in which the conditions on which they depend are substantially met.

D. In the period in which the conditions on which they depend have begun to be met.

E. Unconditional promises from potential donors are not revenues.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

1-817 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

16. The following gifts are received in Year One by a not-for-profit organization:

I. $2,000 specified by the donor to be used to pay salaries.

II. $10,000 for new conference room furniture.

III. $5,000 to be held for one year before being expended.

The salaries are paid in Year Two and the conference room furniture is purchased in Year

One.

How much should be shown as increases as Temporarily Restricted Net Assets in Year One?

A. $2,000

B. $7,000

C. $12,000

D. $15,000

E. $17,000

Restricted Funds [I. Salaries $2,000] + [III. Time Restricted Funds $5,000] = $7,000 Funds

Restricted in Year One.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

1-818 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

17. The following gifts are received in Year One by a not-for-profit organization:

I. $2,000 specified by the donor to be used to pay salaries.

II. $10,000 for new conference room furniture.

III. $5,000 to be held for one year before being expended.

The salaries are paid in Year Two and the conference room furniture is purchased in Year

One.

How much should be reclassified on the Statement of Activities in Year Two from the

Temporarily Restricted column to the Unrestricted column?

A. $2,000.

B. $5,000.

C. $7,000.

D. $10,000.

E. $12,000.

Restricted Funds [I. Salaries $2,000] + [III. Time Restricted Funds $5,000] = $7,000 Funds

Restricted in Year One are Reclassified as unrestricted in Year Two.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

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McGraw-Hill Education.

18. How are investments in equity securities with readily determinable market values and their

related unrealized gains and losses reported by a not-for-profit organization?

A. Lower of cost or market, with unrealized losses in the Statement of Activities.

B. Fair value, with unrealized gains and losses in the Statement of Activities.

C. Lower of cost or market, with unrealized losses in Temporarily Restricted Net Assets.

D. Cost, with unrealized gains and losses in the Statement of Activities.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

1-820 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

19. Which statement below is not correct?

A. The accounting period in which pledged revenues are recognized is dependent on donor

specifications.

B. The permanently restricted section of a nonprofit organization's net assets is set aside by

donor restrictions.

C. A contributed asset is recognized as revenue by a nonprofit organization.

D. Depreciation expense is not recognized by nonprofit organizations.

E. Nonprofit organizations issue a statement of activities.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

1-821 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

20. A gift to a not-for-profit school that is not restricted by the donor is credited to:

A. Fund Balance.

B. Deferred Revenues.

C. Contribution Revenues.

D. Non-Operating Revenues.

E. Encumbrances.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or

permanently restricted and explain the method of reporting these categories.

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McGraw-Hill Education.

21. Which entry would be the correct entry on the donor's books when the donor relinquishes

control of an asset that it contributes to a not-for-profit organization?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

1-823 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

22. Which entry would be the correct entry on the donor's books when the donor retains control of

an asset that it contributes to a not-for-profit organization?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

1-824 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

23. Which entry would be the correct entry on the not-for-profit organization's books to record a

donor's gift when the money is simply passing through the not-for-profit organization and

creates no direct benefit, and when control of the assets has been relinquished by the donor?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

1-825 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

24. Which entry would be the correct entry on the not-for-profit organization's books to record a

donor's gift when power over the assets has been retained by the donor?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

1-826 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

25. Which entry would be the correct entry to record pledges of $100,000 to a public television

fundraiser? The public television organization estimates that 5% of the funds will be

uncollectible.

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

Pledges Made $100,000 - Estimated Uncollectable Pledges $5,000 = Net Receivables

Recorded $95,000

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

1-827 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

26. Which entry would be the correct entry to record that a not-for-profit organization collected

$80,000 of the amounts pledged and wrote off $3,000 of the amounts pledged as amounts

uncollectible?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

Cash $80,000 + Allowance for Uncollectable $3,000 = Pledges Receivable $83,000

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

1-828 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

27. In not-for-profit accounting, an acquisition occurs when one not-for-profit organization obtains:

A. Significant influence over another not-for-profit organization.

B. The direct ability to determine the direction of management of another not-for-profit

organization.

C. The indirect ability to direct the policies of management of another not-for-profit

organization.

D. Control over another not-for-profit organization.

E. None of these. An acquisition can only occur for profit-oriented organizations.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 18-06 Account for both mergers and acquisitions of not-for-profit organizations.

1-829 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

28. If the total acquisition value of an acquired not-for-profit organization is greater than the fair

value of all identifiable net assets of the organization, and that organization's revenues are not

earned by dues or other types of earned revenues, then the excess of acquisition value over

identifiable net assets is immediately reported:

A. As goodwill on the consolidated balance sheet.

B. As a pro-rata increase to the identifiable assets and liabilities acquired.

C. As a direct reduction in unrestricted net assets on the balance sheet.

D. As a reduction in unrestricted net assets on the statement of activities.

E. As an increase in other assets on the balance sheet.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 18-06 Account for both mergers and acquisitions of not-for-profit organizations.

1-830 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

29. When an acquisition occurs in not-for-profit accounting, recognition of goodwill depends on:

A. Whether control has been achieved by the acquiring not-for-profit entity.

B. Whether the acquired not-for-profit entity has the ability to generate significant amounts of

earned revenue or whether it generates mostly contribution and investment revenue in the

future.

C. Whether the acquired not-for-profit entity has the ability to generate significant amounts of

both earned revenues and contribution revenues in the future.

D. Whether the acquired not-for-profit entity has a history of generating significant revenues of

any type.

E. None of these. Goodwill can only be recognized in an acquisition of a for-profit entity.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 18-06 Account for both mergers and acquisitions of not-for-profit organizations.

1-831 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

30. Which of the following is not true about a merger of two not-for-profit organizations?

A. The two organizations will continue to legally exist but there will be a new governing board.

B. Neither organization is considered to be acquired.

C. Identifiable assets and liabilities are not adjusted to their fair values at the date of the

merger.

D. The two entities will together form an entirely new organization with a new governing

board.

E. There will be no acquisition value or goodwill determination.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 18-06 Account for both mergers and acquisitions of not-for-profit organizations.

1-832 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

31. Which entry would be the correct entry to record that a hospital has provided patient services

for $200,000, of which 25% will be billed to a third party?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

A/R Patients $150,000 + A/R Third Party Providers $50,000 = Patient Service Revenue

Recognized $200,000

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

1-833 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

32. What is the appropriate account to debit when reducing net patient service revenue as a result

of arrangements with third party payors?

A. Contractual Adjustments.

B. Allowance for uncollectible and reduced accounts.

C. Patient Service Revenues.

D. Account Receivable-Patients.

E. Accounts Receivable-Third Party.

AACSB: Analytic

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AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

33. What is the appropriate account to credit when estimating a portion of health care organization

receivables that will prove to be uncollectible?

A. Bad Debt Expense.

B. Allowance for Uncollectible Accounts.

C. Patient Service Revenues.

D. Accounts Receivable.

E. Contractual Adjustments.

1-834 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Chapter 17 Accounting for State and Local Governments (Part 2)

Answer Key

Multiple Choice Questions

1. For government-wide financial statements, what account is credited when a piece of

equipment is leased on a capital lease?

A. Equipment-Capital Lease

B. Encumbrances-Long Term

C. Encumbrances-Lease Obligations

D. Capital Lease Obligation

E. The lease is not recorded.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or

lessee.

1-835 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

2. For fund financial statements, what account is credited when a piece of equipment is leased

on a capital lease?

A. Equipment-Capital Lease.

B. Encumbrances-Long Term.

C. Encumbrances-Lease Obligations.

D. Capital Lease Obligation.

E. Other Financing Sources-Capital Lease.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or

lessee.

1-836 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

3. Jones College, a public institution of higher education, must prepare financial statements

A. As if the college was an enterprise fund.

B. Following the same rules as state and local governments.

C. According to GAAP.

D. As if the college was a fiduciary fund.

E. In the same manner as private colleges and universities.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 17-09 Understand the presentation of financial statements for a public college or university.

1-837 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

4. For the purpose of government-wide financial statements, the cost of cleaning up a

government-owned landfill and closing the landfill

A. Is not recognized until the costs are actually incurred.

B. Is accrued and amortized over the expected useful life of the landfill.

C. Is accrued on a pro-rated basis each period based on how full the landfill is.

D. Is accrued in full at the time the costs become estimable.

E. Is treated as an encumbrance at the time it become estimable, and then as an expenditure

when it is actually paid.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid

waste landfill as well as for the compensated absences earned by government employees.

1-838 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

5. A method of depreciation for infrastructure assets that allows the expensing of all maintenance

costs each year instead of computing depreciation is called

A. Government-wide depreciation.

B. Proprietary depreciation.

C. GASB depreciation.

D. Modified approach.

E. Alternative depreciation.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-05 Explain the reporting and possible depreciation of infrastructure assets.

1-839 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

6. Drye Township has received a donation of a rare painting worth $1,000,000. For Drye's

government-wide financial statements, three criteria must be met before Drye can opt not to

recognize the painting as an asset. Which of the following is not one of the three criteria?

(1.) The painting is held for public exhibition, education, or research in furtherance of public

service, rather than financial gain.

(2.) The painting is scheduled to be sold immediately at auction.

(3.) The painting is protected, kept unencumbered, cared for, and preserved.

A. Item 1 is not one of the three criteria.

B. Item 2 is not one of the three criteria.

C. Item 3 is not one of the three criteria.

D. All three items are required criteria.

E. None of the three items are required criteria.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 17-04 Record the donation and acquisition of works of art and historical treasures.

1-840 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

7. GASB Codification Section 2200.106-107 makes which of the following statements regarding

Management's Discussion and Analysis?

A. MD&A is required only for Proprietary Fund Financial Statements.

B. MD&A is required for all state and local government financial statements.

C. MD&A is only required for comprehensive annual financial reports.

D. MD&A for state and local government financial statements must include an analysis of

potential, untapped revenue sources.

E. MD&A is an optional inclusion for state and local government financial statements.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-06 Understand the composition of a state or local government's comprehensive annual financial report

(CAFR).

1-841 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

8. Which one of the following is a criterion for identifying a primary government?

A. it has an appointed board of directors.

B. it is fiscally dependent.

C. it is a local government.

D. it has a separately elected governing body.

E. it must prepare financial statements.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 17-07 Explain the makeup of a primary government and its relationship to component units.

1-842 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

9. A local government's basic financial statements would include a statement of cash flows for

all

A. proprietary fund types.

B. governmental fund types.

C. fund types.

D. fiduciary fund types.

E. A statement of cash flows is not required for any fund types.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a

complete set of fund financial statements.

1-843 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

10. According to the GASB (Governmental Accounting Standards Board), which one of the

following is not a criterion for determining whether a government is legally separate?

A. The government can determine its own budget.

B. The government can issue debt.

C. The government has corporate powers including the right to sue and be sued.

D. The government has the power to levy taxes.

E. The government can issue preferred stock.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-07 Explain the makeup of a primary government and its relationship to component units.

1-844 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

11. Which of the following is not a criterion of a capital lease?

A. The lease transfers ownership of the property to the lessee by the end of the lease term.

B. The present value of the minimum lease payments equals or exceeds 90 percent of the fair

value of the leased property, net of lessor's investment tax credit.

C. The lease contains an option to purchase the leased property at a bargain price.

D. The lease contains an option to renew.

E. The lease term is equal to or greater than 75 percent of the estimated economic life of the

leased property.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or

lessee.

1-845 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

12. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The

asset will be returned to the lessor at the end of the lease. The present value of the lease is

$20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is

signed. The interest portion of the second payment is $1,604.75. The equipment is to be used

in City Hall and was purchased from appropriated funds of the General Fund.

What should be recorded in the General Fund on the date the lease is signed?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Analyze

Difficulty: 2 Medium

Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or

lessee.

1-846 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

13. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The

asset will be returned to the lessor at the end of the lease. The present value of the lease is

$20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is

signed. The interest portion of the second payment is $1,604.75. The equipment is to be used

in City Hall and was purchased from appropriated funds of the General Fund.

What should be recorded in the General Fund one year from the date the lease is signed?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

Payment $5,411.41 - Interest Expenditure $1,604.75 = Lease Principle $3,806.66

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or

lessee.

1-847 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

14. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The

asset will be returned to the lessor at the end of the lease. The present value of the lease is

$20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is

signed. The interest portion of the second payment is $1,604.75. The equipment is to be used

in City Hall and was purchased from appropriated funds of the General Fund.

What entry should be made for the government-wide financial statements on the date the

lease is signed?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

Equipment Cost $20,000 - Cash Payment $5,411.41 = Capital Lease Obligation $14,588.59

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or

lessee.

1-848 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

15. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The

asset will be returned to the lessor at the end of the lease. The present value of the lease is

$20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is

signed. The interest portion of the second payment is $1,604.75. The equipment is to be used

in City Hall and was purchased from appropriated funds of the General Fund.

What entry should be made for the government-wide financial statements one year from the

date the lease is signed?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

Payment $5,411.41 - Interest Expense $1,604.75 = Capital Lease Obligation $3,806.66

1-849 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or

lessee.

16. Which of the following is a section of the general purpose external financial statements of a

state or local government?

(1) Management's discussion and analysis (MD&A).

(2) Required supplementary information (other than MD&A).

(3) Basic financial statements and notes to financial statements.

A. 1 and 2.

B. 2 and 3.

C. 1 and 3.

D. 3 only.

E. 1, 2, and 3.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-06 Understand the composition of a state or local government's comprehensive annual financial report

(CAFR).

1-850 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

17. Which of the following must be presented in the MD&A of a government?

A. A brief discussion of the basic financial statements.

B. Total assets.

C. Total liabilities.

D. Net assets.

E. An organization chart of government officials.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-06 Understand the composition of a state or local government's comprehensive annual financial report

(CAFR).

1-851 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

18. What are the three broad sections of a state or local government's CAFR?

A. Introductory, financial, and statistical.

B. Financial statements, notes to the financial statements, and component units.

C. Introductory, statistical, and component units.

D. Component units, financial, and statistical.

E. Financial statements, notes to the financial statements, and statistical.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-06 Understand the composition of a state or local government's comprehensive annual financial report

(CAFR).

1-852 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

19. Which of the following is a financial statement of a proprietary fund?

A. Balance sheet.

B. Statement of Operations.

C. Statement of Changes in Cash Flows.

D. Statement of Net Assets.

E. Statement of Revenues, Expenditures, and Changes in Fund Balance.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a

complete set of fund financial statements.

1-853 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

20. Which criteria must be met to be considered a special purpose government?

(1.) Have a separately elected governing body

(2.) Be legally independent

(3.) Be fiscally independent

A. 1 only.

B. 1 and 2.

C. 2 and 3.

D. 1 and 3.

E. 1, 2, and 3.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 17-07 Explain the makeup of a primary government and its relationship to component units.

1-854 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

21. Which statement is false regarding the government-wide Statement of Net Assets?

A. the purpose of the Statement of Net Assets is to report the economic resources of the

government as a whole.

B. assets are reported excluding capital assets.

C. capital assets are reported net of depreciation.

D. investments are reported at fair value rather than historical cost.

E. Business-type activities include Enterprise Funds.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a

complete set of fund financial statements.

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McGraw-Hill Education.

22. Which item is not included on the government-wide Statement of Activities?

A. revenues.

B. expenses.

C. assets.

D. operating grants.

E. capital contributions.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a

complete set of fund financial statements.

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McGraw-Hill Education.

23. Which statement is false regarding the Balance Sheet for Fund Financial Statements?

A. The Balance Sheet for Fund Financial Statements measures only current financial

resources of the governmental entity.

B. The Balance Sheet for Fund Financial Statements uses the modified accrual method for

timing purposes.

C. Capital Assets are not reported on the Balance Sheet for Fund Financial Statements.

D. The Balance Sheet for Fund Financial Statements measures only long-term financial

resources of the governmental entity.

E. Long-term debts are not reported on the Balance Sheet for Fund Financial Statements.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a

complete set of fund financial statements.

1-857 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

24. The city operates a public pool where each person is assessed a $2 entrance fee. Which fund

is most appropriate to record these revenues?

A. General Fund.

B. Enterprise Fund.

C. Special Revenue Fund.

D. Internal Service Fund.

E. Capital Projects Fund.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a

complete set of fund financial statements.

1-858 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

25. Which statement is false regarding the Statement of Revenues, Expenditures, and Changes in

Fund Balance when it is included with government-wide financial statements?

A. The Statement of Revenues, Expenditures, and Changes in Fund Balance uses the

modified accrual method for timing purposes.

B. The Statement of Revenues, Expenditures, and Changes in Fund Balance presents

revenues as either program revenues or general revenues.

C. A presentation reconciles the change in governmental fund balance to the change in net

assets for governmental activities.

D. Other financing sources are presented on the Statement of Revenues, Expenditures, and

Changes in Fund Balance.

E. All non-major funds are combined and reported together.

AACSB: Reflective thinking

AICPA BB: Industry

AICPA FN: Reporting

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a

complete set of fund financial statements.

1-859 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

26. A city starts a solid waste landfill during 2012. When the landfill was opened the city estimated

that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5

million which will not be paid until the facility is closed. At the end of 2012, the facility was 20%

full, and at the end of 2013 the facility was 45% full. On government-wide financial statements,

which of the following are the appropriate amounts to present in the financial statements for

2013?

A. Both expense and liability will be zero.

B. Expense will be $300,000 and liability will be $600,000.

C. Expense will be $600,000 and liability will be $600,000.

D. Expense will be $675,000 and liability will be $600,000.

E. Expense will be $375,000 and liability will be $675,000.

$1,500,000 × 20% = $300,000 Expense & Liability for 2012

$1,500,000 × 45% = $675,000 Liability at Year End of 2013

$675,000 Liability at Year-End of 2013 - $300,000 Liability at Year-End 2012 = $375,000

Expense for 2013

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid

waste landfill as well as for the compensated absences earned by government employees.

1-860 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

27. A city starts a solid waste landfill during 2012. When the landfill was opened the city estimated

that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5

million which will not be paid until the facility is closed. At the end of 2012, the facility was 20%

full, and at the end of 2013 the facility was 45% full. If the landfill is judged to be a

governmental fund, what liability is reported on the fund financial statements at the end of

2013?

A. $0.

B. $300,000.

C. $375,000.

D. $600,000.

E. $675,000.

As a Governmental Fund, No Liability is Recorded, Only Expenditures.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid

waste landfill as well as for the compensated absences earned by government employees.

1-861 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

28. The employees of the City of Raymond earn vacation compensation that totals $1,500 per

week. During 2013, $30,000 in vacation time was taken and the remainder is expected to be

used during the latter part of next year. In the government-wide financial statements,

assuming there was no beginning balance, what liability should be reported at the end of

2013?

A. $0.

B. $1,500.

C. $30,000.

D. $48,000.

E. $78,000.

Beginning Balance $0 + Accrued Liability $78,000 - Vacation Used $30,000 = Ending Liability

Balance $48,000

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid

waste landfill as well as for the compensated absences earned by government employees.

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McGraw-Hill Education.

29. The employees of the City of Raymond earn vacation compensation that totals $1,500 per

week. During 2013, $30,000 in vacation time was taken and $48,000 is expected to be used

during the latter part of next year. On fund financial statements, what liability should be

reported at the end of 2013?

A. $0.

B. $1,500.

C. $30,000.

D. $48,000.

E. $78,000.

As a Governmental Fund, No Liability is Recorded in 2013, Expenditures are Recorded as

Vacation Time is Taken.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid

waste landfill as well as for the compensated absences earned by government employees.

1-863 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

30. The Town of Conway opened a solid waste landfill in 2001 that is now filled to capacity. The

city initially anticipated closure costs of $2 million. These costs were not expected to be

incurred until the landfill is closed. What is the final journal entry to record these costs

assuming the estimated $2 million closure costs were properly recorded and the landfill is

accounted for in an enterprise fund?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

Previously Accrued Closure Liability Balance of $2,000,000 is satisfied by $2,000,000 Cash

Payment at Closure of Facility.

AACSB: Analytic

AICPA BB: Industry

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid

waste landfill as well as for the compensated absences earned by government employees.

1-864 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Chapter 14 Partnerships: Formation and Operation Answer Key

Multiple Choice Questions

1. Cherryhill and Hace had been partners for several years, and they decided to admit Quincy to

the partnership. The accountant for the partnership believed that the dissolved partnership and

the newly formed partnership were two separate entities. What method would the accountant

have used for recording the admission of Quincy to the partnership?

A. the bonus method.

B. the equity method.

C. the goodwill method.

D. the proportionate method.

E. the cost method.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 14-07 Explain the meaning of partnership dissolution and understand that a dissolution will often have little

or no effect on the operations of the partnership business.

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McGraw-Hill Education.

2. When the hybrid method is used to record the withdrawal of a partner, the partnership

A. revalues assets and liabilities and records goodwill to the continuing partner but not to the

withdrawing partner.

B. revalues liabilities but not assets, and no goodwill is recorded.

C. can recognize goodwill but does not revalue assets and liabilities.

D. revalues assets but not liabilities, and records goodwill to the continuing partner but not to

the withdrawing partner.

E. revalues assets and liabilities but does not record goodwill.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 14-07 Explain the meaning of partnership dissolution and understand that a dissolution will often have little

or no effect on the operations of the partnership business.

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McGraw-Hill Education.

3. The disadvantages of the partnership form of business organization, compared to

corporations, include

A. the legal requirements for formation.

B. unlimited liability for the partners.

C. the requirement for the partnership to pay income taxes.

D. the extent of governmental regulation.

E. the complexity of operations.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

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McGraw-Hill Education.

4. The advantages of the partnership form of business organization, compared to corporations,

include

A. single taxation.

B. ease of raising capital.

C. mutual agency.

D. limited liability.

E. difficulty of formation.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

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McGraw-Hill Education.

5. The dissolution of a partnership occurs

A. only when the partnership sells its assets and permanently closes its books.

B. only when a partner leaves the partnership.

C. at the end of each year, when income is allocated to the partners.

D. only when a new partner is admitted to the partnership.

E. when there is any change in the individuals who make up the partnership.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 14-07 Explain the meaning of partnership dissolution and understand that a dissolution will often have little

or no effect on the operations of the partnership business.

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McGraw-Hill Education.

6. The partnership of Clapton, Seidel, and Thomas was insolvent and will be unable to pay

$30,000 in liabilities currently due. What recourse was available to the partnership's creditors?

A. they must present equal claims to the three partners as individuals.

B. they must try obtain a payment from the partner with the largest capital account balance.

C. they cannot seek remuneration from the partners as individuals.

D. they may seek remuneration from any partner they choose.

E. they must present their claims to the three partners in the order of the partners' capital

account balances.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

1-870 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

7. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Wasser's total share of net income for 2012?

A. $63,000.

B. $53,000.

C. $58,000.

D. $29,000.

E. $51,000.

Interest $15,000 + Salary $10,000 + Remainder (40%) $38,000 = $63,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-871 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

8. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Nolan's total share of net income for 2012?

A. $63,000.

B. $53,000.

C. $58,000.

D. $29,000.

E. $51,000.

Interest $20,000 + Salary $0 + Remainder (40%) $38,000 = $58,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-872 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

9. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Cleary's total share of net income for 2012?

A. $63,000.

B. $53,000.

C. $58,000.

D. $29,000.

E. $51,000.

Interest $10,000 + Salary $0 + Remainder (20%) $19,000 = $29,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-873 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

10. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Nolan's capital balance at the end of 2012?

A. $200,000.

B. $224,000.

C. $238,000.

D. $246,000.

E. $254,000.

Beginning $200,000 + Interest $20,000 + Salary $0 + Remainder (40%) $38,000 - Withdrawals

$12,000 = $246,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-874 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

11. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Wasser's capital balance at the end of 2012?

A. $150,000.

B. $160,000.

C. $165,000.

D. $213,000.

E. $201,000.

Beginning $150,000 + Interest $15,000 + Salary $10,000 + Remainder (40%) $38,000 -

Withdrawals $12,000 = $201,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-875 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

12. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Cleary's capital balance at the end of 2012?

A. $100,000.

B. $117,000.

C. $119,000.

D. $129,000.

E. $153,000.

Beginning $100,000 + Interest $10,000 + Salary $0 + Remainder (20%) $19,000 - Withdrawals

$12,000 = $117,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

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McGraw-Hill Education.

13. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was the total capital balance for the partnership at December 31, 2012?

A. $600,000

B. $564,000

C. $535,000

D. $523,000

E. $545,000

Cleary $117,000 + Wasser $201,000 + Nolan $246,000 = $564,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-877 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

14. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was the amount of interest attributed to Wasser for 2013?

A. $17,600

B. $18,800

C. $20,100

D. $17,800

E. $30,100

Beginning $201,000 × 10% = $20,100

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-878 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

15. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Wasser's total share of net income for 2013?

A. $34,420.

B. $75,540.

C. $65,540.

D. $70,040.

E. $61,420.

Interest $20,100 + Salary $10,000 + Remainder (40%) $45,440 = $75,540

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-879 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

16. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was the remainder portion of net income allocated to Nolan for 2013?

A. $45,440

B. $58,040

C. $70,040

D. $72,000

E. $82,040

$113,600 × 40% = $45,440

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-880 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

17. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Nolan's total share of net income for 2013?

A. $34,420.

B. $75,540.

C. $65,540.

D. $70,040.

E. $61,420.

Interest $24,600 + Salary $0 + Remainder (40%) $45,440 = $70,040

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-881 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

18. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Cleary's total share of net income for 2013?

A. $34,420.

B. $75,540.

C. $65,540.

D. $70,040.

E. $61,420.

$11,700 + Salary $0 + Remainder (20%) $22,720 = $34,420

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-882 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

19. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Nolan's capital balance at the end of 2013?

A. $139,420.

B. $246,000.

C. $276,540.

D. $279,440.

E. $304,040.

Beginning $246,000 + Interest $24,600 + Salary $0 + Remainder (40%) $45,440 - Withdrawals

$12,000 = $304,040

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-883 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

20. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Wasser's capital balance at the end of 2013?

A. $201,000.

B. $263,520.

C. $264,540.

D. $304,040.

E. $313,780.

Beginning $201,000 + Interest $20,100 + Salary $10,000 + Remainder (40%) $45,440 -

Withdrawals $12,000 = $264,540

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-884 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

21. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was Cleary's capital account balance at the end of 2013?

A. $163,420.

B. $151,420.

C. $139,420.

D. $100,000.

E. $142,000.

Beginning $117,000 + Interest $11,700 + Salary $0 + Remainder (20%) $22,720 - Withdrawals

$12,000 = $139,420

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-885 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

22. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What was the total capital balance for the partnership at December 31, 2013?

A. $852,000

B. $780,000

C. $708,000

D. $744,000

E. $594,000

Cleary $139,420 + Wasser $264,540 + Nolan $304,040 = $708,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-886 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

23. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of

$100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1)

interest of 10% of the beginning capital balance each year, (2) annual compensation of

$10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for

Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and

$180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012

and 2013.

What will be the amount of interest attributed to Cleary for 2014?

A. $15,142

B. $13,942

C. $12,942

D. $14,142

E. $10,000

$139,420 × 10% = $13,942

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-887 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

24. Jell and Dell were partners with capital balances of $600 and $800 and an income sharing

ratio of 2:3. They admitted Zell to a 30% interest in the partnership, and the total amount of

goodwill credited to the original partners was $700. What amount did Zell contribute to the

business?

A. $900.

B. $560.

C. $600.

D. $590.

E. $630.

Jell $600 + Dell $800 + Goodwill $700 = $2,100/70% = $3,000 × 30% = $900 Cash

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

1-888 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

25. Jerry, a partner in the JSK partnership, begins the year on January 1, 2013 with a capital

balance of $20,000. The JSK partnership agreement states that Jerry receives 6% interest on

this weighted average capital balance.

• On March 1, 2013, when the partnership tax return for 2012 was completed, Jerry's capital

account was credited for his share of 2012 profit of $120,000.

• Jerry withdrew $5,000 quarterly, beginning March 31st.

• On September 1, Jerry's capital account was credited with a special bonus of $60,000 for

business he brought to the partnership.

What amount of interest will be attributed to Jerry for year 2013 that will go toward his profit

distribution for the year? (Use a 360-day year for calculations.)

A. $5,250

B. $6,000

C. $6,400

D. $7,000

E. $7,200

Beginning Balance $20,000 + Profit $40,000 ($120,000/3) + Bonus $60,000 - Withdrawals

$20,000 = Ending $100,000 × .06 = $6,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-889 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

26. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was Young's total share of net loss for the first year?

A. $3,900 loss.

B. $11,700 loss.

C. $10,400 loss.

D. $24,700 loss.

E. $9,100 loss.

Net Loss ($26,000) - Interest $39,000 - Salaries $39,000 = ($104,000) × 50% = Young's

Portion ($52,000) + Interest $14,300 + Salary $26,000 = Young's Share of Loss ($11,700)

1-890 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-891 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

27. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was Eaton's total share of net loss for the first year?

A. $3,900 loss.

B. $11,700 loss.

C. $10,400 loss.

D. $24,700 loss.

E. $9,100 loss.

Net Loss ($26,000) - Interest $39,000 - Salaries $39,000 = ($104,000) × 20% = Eaton's

Portion ($20,800) + Interest $10,400 + Salary $0 = Eaton's Share of Loss ($10,400)

1-892 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-893 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

28. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was Thurman's total share of net loss for the first year?

A. $3,900 loss.

B. $11,700 loss.

C. $10,400 loss.

D. $24,700 loss.

E. $9,100 loss.

Net Loss ($26,000) - Interest $39,000 - Salaries $39,000 = ($104,000) × 30% = Thurman's

Portion ($31,200) + Interest $14,300 + Salary $13,000 = Thurman's Share of Loss ($3,900)

1-894 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-895 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

29. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was the balance in Young's Capital account at the end of the first year?

A. $120,900.

B. $118,300.

C. $126,100.

D. $80,600.

E. $111,500.

Beginning $143,000 + Interest $14,300 + Salary $26,000 + Remainder (50%) ($52,000) -

Withdrawals $13,000 = Ending Balance $118,300

1-896 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-897 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

30. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was the balance in Eaton's Capital account at the end of the first year?

A. $120,900.

B. $118,300.

C. $126,100.

D. $80,600.

E. $111,500.

Beginning $104,000 + Interest $10,400 + Salary $0 + Remainder (20%) ($20,800) -

Withdrawals $13,000 = Ending Balance $80,600

1-898 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-899 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

31. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was the balance in Thurman's Capital account at the end of the first year?

A. $120,900.

B. $118,300.

C. $126,100.

D. $80,600.

E. $111,500.

Beginning $143,000 + Interest $14,300 + Salary $13,000 + Remainder (30%) ($31,200) -

Withdrawals $13,000 = Ending Balance $126,100

1-900 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-901 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

32. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was Young's total share of net income for the second year?

A. $17,160 income.

B. $4,160 income.

C. $19,760 income.

D. $17,290 income.

E. $28,080 income.

Net Income $52,000 - Interest $32,500 - Salaries $39,000 = ($19,500) × 50% = Young's

Portion ($9,750) + Interest $11,830 + Salary $26,000 = Young's Share of Income $28,080

1-902 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-903 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

33. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was Eaton's total share of net income for the second year?

A. $17,160 income.

B. $4,160 income.

C. $19,760 income.

D. $17,290 income.

E. $28,080 income.

Net Income $52,000 - Interest $32,500 - Salaries $39,000 = ($19,500) × 20% = Eaton's

Portion ($3,900) + Interest $8,060 + Salary $0 = Eaton's Share of Income $4,160

1-904 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-905 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

34. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was Thurman's total share of net income for the second year?

A. $17,160 income.

B. $4,160 income.

C. $19,760 income.

D. $17,290 income.

E. $28,080 income.

Net Income $52,000 - Interest $32,500 - Salaries $39,000 = ($19,500) × 30% = Thurman's

Portion ($5,850) + Interest $12,610 + Salary $13,000 = Thurman's Share of Income $19,760

1-906 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

1-907 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

35. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was the balance in Young's Capital account at the end of the second year?

A. $133,380.

B. $84,760.

C. $105,690.

D. $132,860.

E. $71,760.

Beginning $118,300 + Interest $11,830 + Salary $26,000 + Remainder (50%) ($9,750) -

Withdrawals $13,000 = Ending Balance $133,380

1-908 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-909 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

36. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was the balance in Eaton's Capital account at the end of the second year?

A. $133,380.

B. $84,760.

C. $105,690.

D. $132,860.

E. $71,760.

Beginning $80,600 + Interest $8,060 + Salary $0 + Remainder (20%) ($3,900) - Withdrawals

$13,000 = Ending Balance $71,760

1-910 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-911 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

37. A partnership began its first year of operations with the following capital balances:

Young, Capital: $143,000

Eaton, Capital: $104,000

Thurman, Capital: $143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following

manner:

Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to

Thurman.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the

first day of the year.

The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman,

respectively.

Each partner withdrew $13,000 per year.

Assume that the net loss for the first year of operations was $26,000 with net income of

$52,000 in the second year.

What was the balance in Thurman's Capital account at the end of the second year?

A. $133,380.

B. $84,760.

C. $105,690.

D. $132,860.

E. $71,760.

Beginning $126,100 + Interest $12,610 + Salary $13,000 + Remainder (30%) ($5,850) -

Withdrawals $13,000 = Ending Balance $132,860

1-912 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

38. Which of the following is not a characteristic of a partnership?

A. The partnership itself pays no income taxes.

B. It is easy to form a partnership.

C. Any partner can be held personally liable for all debts of the business.

D. A partnership requires written Articles of Partnership.

E. Each partner has the power to obligate the partnership for liabilities.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

1-913 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

39. Partnerships have alternative legal forms including all of the following except:

A. General Partnership.

B. Limited Partnership.

C. Subchapter S Partnership.

D. Limited Liability Partnership.

E. Limited Liability Company.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

1-914 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

40. Which of the following type of organization is classified as a partnership, or similar to a

partnership, for tax purposes?

(I.) Limited Liability Company

(II.) Limited Liability Partnership

(III.) Subchapter S Corporation

A. II only.

B. II and III.

C. I and II.

D. I and III.

E. I, II, and III.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

1-915 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

41. Which of the following statements is correct regarding the admission of a new partner?

A. A new partner must purchase a partnership interest directly from the business.

B. The right of co-ownership in the business property can be transferred to a new partner

without the consent of other existing partners.

C. The right to participate in management of the business cannot be conveyed without the

consent of other existing partners.

D. The right to share in profits and losses can be sold to a new partner without the consent of

other existing partners.

E. A new partner always pays book value.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 14-03 Prepare the journal entry to record the initial capital investment made by a partner.

1-916 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

42. Withdrawals from the partnership capital accounts are typically not used

A. to reward partners for work performed in the business.

B. to reduce the partners' capital account balances at the end of an accounting period.

C. to record interest earned on a partner's capital balance.

D. to reduce the basic investment that has been made in the business.

E. to record the partnership's payment of a partner's personal expense such as income tax.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 14-04 Use both the bonus method and the goodwill method to record a partner's capital investment.

1-917 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

43. The partnership contract for Hanes and Jones LLP provides that Hanes is to receive a bonus

of 20% of net income (after the bonus) and that the remaining net income is to be divided

equally. If the partnership income before the bonus for the year is $57,600, Hanes' share of

this pre-bonus income is:

A. $28,800.

B. $33,600.

C. $34,560.

D. $35,520.

E. $38,400.

Bonus = .20 (NI - Bonus) = (.20 NI) - (.20 Bonus)

1.2 Bonus = $11,520 Bonus = $9,600

Remainder to share equally = $48,000. Hanes receives $24,000 + $9,600 = $33,600

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

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McGraw-Hill Education.

44. The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio,

respectively. The capital account balances on January 1, 2013, were as follows:

The carrying amounts of the assets and liabilities of the partnership are the same as their

current fair values. Dorr will be admitted to the partnership with a 20% capital interest and a

20% share of net income and losses in exchange for a cash investment. The amount of cash

that Dorr should invest in the partnership is:

A. $25,000.

B. $30,000.

C. $37,500.

D. $75,000.

E. $90,000.

($150,000/.8 = $187,500. $187,500 - $150,000 = $37,500 to invest)

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

1-919 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

45. The appropriate format of the December 31, 2012 closing entry for John & Hope Limited

Liability Partnership, whose two partners had withdrawn their salaries from the partnership

during the year is:

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

1-920 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

46. When Danny withdrew from John, Daniel, Harry, and Danny, LLP, he was paid $80,000,

although his capital account balance was only $60,000. The four partners shared net income

and losses equally. The journal entry to record the effect on John's capital due to Danny's

withdrawal would include:

A. $6,667 debit to John, Capital.

B. $6,667 credit to John, Capital.

C. $20,000 debit to John, Capital.

D. $5,000 debit to John, Capital.

E. $5,000 credit to John, Capital.

($80,000 - $60,000) ÷ 3 = $6,667

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

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McGraw-Hill Education.

47. Max, Jones and Waters shared profits and losses 20%, 40%, and 40% respectively and their

partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to

withdraw from the partnership. An appraisal of the business and its property estimates the fair

value to be $200,000. Land with a book value of $30,000 has a fair value of $45,000. Max has

agreed to receive $20,000 in exchange for her partnership interest after revaluation. At what

amount should land be recorded on the partnership books?

A. $20,000.

B. $30,000.

C. $45,000.

D. $50,000.

E. $200,000.

Land will be recorded at the fair value of $45,000.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

1-922 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

48. The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners

agreed to admit May to the partnership with a 35% interest in partnership capital and net

income. May invested $100,000 cash, and no goodwill was recognized.

What is the balance of May's capital account after the new partnership is created?

A. $84,000.

B. $100,000.

C. $140,000.

D. $176,000.

E. $200,000.

Donald $200,000 + Hanes $100,000 + Cash $100,000 = $400,000 × .35 = $140,000 to May

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

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McGraw-Hill Education.

49. The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners

agreed to admit May to the partnership with a 35% interest in partnership capital and net

income. May invested $100,000 cash, and no goodwill was recognized.

What is the balance of Donald's capital account after the new partnership is created?

A. $84,000.

B. $100,000.

C. $140,000.

D. $176,000.

E. $200,000.

Bonus to May $40,000 × .60 = $24,000 from Donald's $200,000 = $176,000 New Capital

Balance

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

1-924 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

50. The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners

agreed to admit May to the partnership with a 35% interest in partnership capital and net

income. May invested $100,000 cash, and no goodwill was recognized.

What is the balance of Hanes's capital account after the new partnership is created?

A. $84,000.

B. $100,000.

C. $140,000.

D. $176,000.

E. $200,000.

Bonus to May $40,000 × .40 = $16,000 from Hanes' $100,000 = $84,000 New Capital Balance

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

1-925 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

51. The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners

agreed to admit May to the partnership with a 35% interest in partnership capital and net

income. May invested $100,000 cash, and no goodwill was recognized.

What is the new total balance of the partnership accounts?

A. $84,000.

B. $140,000.

C. $176,000.

D. $200,000.

E. $400,000.

Donald $176,000 + Hanes $84,000 + May $140,000 = Total Partners Capital $400,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

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McGraw-Hill Education.

52. Which of the following could be used as a basis to allocate profits among partners who are

active in the management of the partnership?

1) allocation of salaries.

2) the number of years with the partnership.

3) the amount of time each partner works.

4) the average capital invested.

A. 1 and 2.

B. 1 and 3.

C. 1, 2, and 4.

D. 1, 3, and 4.

E. 1, 2, 3, and 4.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

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McGraw-Hill Education.

53. P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who

share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when

they agree to admit C for a 20% interest.

If C is to contribute an amount equal to his book value share of the new partnership, how

much should C contribute?

A. $22,000

B. $20,000

C. $25,000

D. $18,000

E. $10,000

$50,000 + $30,000 + $20,000 = $100,000/80% = $125,000 - Current Capital $100,000 =

$25,000 Cash

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

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McGraw-Hill Education.

54. P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who

share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when

they agree to admit C for a 20% interest.

C contributes $38,000 to the partnership and the bonus method is used. What amount will be

credited for C's beginning capital balance?

A. $20,000

B. $25,000

C. $27,600

D. $32,600

E. $38,000

Current Capital $100,000 + New Cash $38,000 = $138,000 × 20% = $27,600 to C

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

1-929 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

55. P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who

share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when

they agree to admit C for a 20% interest.

If C contributes $40,000 to the partnership and the goodwill method is used, what amount will

be debited for goodwill?

A. $15,000

B. $20,000

C. $25,000

D. $28,000

E. $60,000

$40,000/20% = $200,000 - Current Capital $100,000 - New Cash $40,000 = $60,000 Goodwill

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

1-930 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

56. P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who

share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when

they agree to admit C for a 20% interest.

C contributes $10,000 to the partnership and the goodwill method is used. What will be the

result of the goodwill calculation?

A. Goodwill of $15,000; split among the original partners.

B. Goodwill of $15,000; all to C.

C. Goodwill of $15,000; split among all four partners: P, L, O, and C.

D. Goodwill of $12,000; all to C.

E. Goodwill of $12,000; split among original partners.

$50,000 + $30,000 + $20,000 = $100,000/80% = $125,000 - Current Capital $100,000 =

$25,000 Cash is needed for 20%, $10,000 Cash received, $15,000 Goodwill is Recorded to

C's Capital Account

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

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McGraw-Hill Education.

57. Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and

$60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively.

Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the

goodwill method is used, what is the capital balance of Peter?

A. $20,000.

B. $60,000.

C. $110,000.

D. $120,000.

E. $230,000.

Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40

percent of all profits and losses, this extra allocation indicates total goodwill of $150,000,

which must be split among all partners.

40% of Goodwill = $60,000

.40 G = $60,000

G = $150,000 and Peter receives 20% = $30,000.

Peter's balance = $80,000 + $30,000 = $110,000.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

1-932 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

58. Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and

$60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively.

Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the

goodwill method is used, what is the capital balance of Dana?

A. $20,000.

B. $60,000.

C. $110,000.

D. $120,000.

E. $230,000.

Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40

percent of all profits and losses, this extra allocation indicates total goodwill of $150,000,

which must be split among all partners.

40% of Goodwill = $60,000

Goodwill = $150,000

Dana receives 40% = $60,000

Dana's Balance = $60,000 + $60,000 = $120,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

1-933 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

59. Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and

$60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively.

What is the total partnership capital after Roberts retires receiving $160,000 and using the

goodwill method?

A. $290,000.

B. $176,000.

C. $80,000.

D. $120,000.

E. $230,000.

Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40

percent of all profits and losses, this extra allocation indicates total goodwill of $150,000,

which must be split among all partners.

40% of Goodwill = $60,000

Goodwill = $150,000

Total Capital is $240,000 + Goodwill $150,000 = $390,000

Roberts receives $160,000 and Partnership Capital is then $390,000 - $160,000 = $230,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

1-934 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

60. Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000

respectively. The partners share profits and losses 20%, 40%, and 40% respectively.

Anne retires and is paid $80,000 based on an independent appraisal of the business. If the

goodwill method is used, what is the capital of the remaining partners?

A. Donald, $55,000; Todd, $60,000

B. Donald, $40,000; Todd, $30,000

C. Donald, $65,000; Todd, $55,000

D. Donald, $15,000; Todd, $30,000

Anne receives an additional $30,000 above her capital balance. Since she is assigned 40

percent of all profits and losses, this extra allocation indicates total goodwill of $75,000, which

must be split among all partners.

40% of Goodwill = $30,000

Goodwill = $75,000

Donald = 20% Goodwill = $15,000 [$40,000 + $15,000] = $55,000

Todd = 40% Goodwill = $30,000 [$30,000 + $30,000] = $60,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

1-935 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

61. Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000

respectively. The partners share profits and losses 20%, 40%, and 40% respectively.

Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If

the bonus method is used, what is the capital of the remaining partners?

A. Donald, $40,000; Todd, $30,000

B. Donald, $30,000; Todd, $10,000

C. Donald, $50,000; Todd, $50,000

D. Donald, $24,000; Todd, $18,000

The $30,000 bonus is deducted from the remaining partners according to their relative profit

and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split

Donald = $40,000 - (1/3 × $30,000) = $30,000

Todd = $30,000 - (2/3 × $30,000) = $10,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

1-936 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

62. Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000

respectively. The partners share profits and losses 20%, 40%, and 40% respectively.

What is the total partnership capital after Anne retires receiving $80,000 and using the bonus

method?

A. $70,000.

B. $40,000.

C. $60,000.

D. $80,000.

E. $42,000.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

Essay Questions

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McGraw-Hill Education.

63. What is the dissolution of a partnership?

The dissolution of a partnership is the breakup of the partnership caused by any change in the

members that make up the partnership.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 14-07 Explain the meaning of partnership dissolution and understand that a dissolution will often have little

or no effect on the operations of the partnership business.

64. By what methods can a person gain admittance to a partnership?

A person can gain admittance to a partnership by purchasing all or part of a current partner's

interest or by investing assets in the partnership.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 14-03 Prepare the journal entry to record the initial capital investment made by a partner.

1-938 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

65. What events cause the dissolution of a partnership?

The dissolution of a partnership occurs whenever there is a change in the members that make

up the partnership. Dissolution does not mean going out of business, although, on occasion,

dissolution would be accompanied by liquidation of assets and termination of the business.

Dissolution would occur whenever a new partner is admitted to the partnership, dissolving one

partnership and forming a new one. Dissolution also occurs when a partner leaves the

partnership or when a partner dies or retires. The Articles of Partnership may allow the

partners to force dissolution under some circumstances.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 14-07 Explain the meaning of partnership dissolution and understand that a dissolution will often have little

or no effect on the operations of the partnership business.

1-939 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

66. For what events or conditions should the Articles of Partnership make provision?

The Articles of Partnership should be a comprehensive document that is fair to all the

partners. It should contain the following provisions:

(A.) The amounts that will be invested in the partnership by the founding partners.

(B.) The amounts of withdrawals that partners can make. Limiting the amount of withdrawals

causes the partners to maintain a reasonable investment in the partnership.

(C.) The division of income or loss between the partners.

(D.) Guidelines for admission of new partners or withdrawal or retirement of partners.

(E.) In some cases, guidelines for division of assets when the partnership liquidates.

In addition, the Articles of Partnership should specify how much time each partner will spend

in the business; the responsibilities of each partner; and procedures for resolution of disputes

between partners.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Risk Analysis

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 14-02 Describe the purpose of the articles of partnership and list specific items that should be included in

this agreement.

1-940 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

67. How is accounting for a partnership different from accounting for a corporation?

Financial accounting for a partnership differs from corporate accounting only in accounting for

owners' equity. A partnership does not sell capital stock and does not have a retained

earnings account. Each partner will have a capital account and a drawing account. On the

balance sheet, the balance in each of the partner's capital accounts should be reported. The

accountant for a partnership must divide income or loss among partners, following the

provisions of the Articles of Partnership. Income tax accounting differs between corporations

and partnerships. A corporation is a taxable entity and must file an income tax return. A

partnership is not a taxable entity but is required to file an informational return that reports the

various amounts of revenues and expenses attributed to each partner.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

1-941 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

68. Why are the terms of the Articles of Partnership important to partners?

The Articles of Partnership contain terms that help to protect the interests of each partner and

the longevity and profitability of the business. One of the most important terms in the Articles

of Partnership is the provision for division of income or loss. The amount of income or loss

assigned to partners affects the balances in their capital accounts and may affect the amount

of withdrawals the partners can make and the assets they receive upon the liquidation of the

partnership. The terms in the Articles of Partnership help to prevent one partner from taking

advantage of other partners.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Risk Analysis

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 14-02 Describe the purpose of the articles of partnership and list specific items that should be included in

this agreement.

1-942 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

69. Brown and Green are forming a business as partners. If they do not create a formal written

partnership agreement, what risks are they exposing themselves to?

The Articles of Partnership should help every partner protect his or her interests. Because of

mutual agency and unlimited liability, being a partner involves some risk. If a partnership

becomes insolvent, any or all of the partners may be required to use personal assets to settle

partnership liabilities. The Articles of Partnership can require each partner to maintain his or

her investment in the partnership and to meet other responsibilities, such as working in the

business. With a formal written agreement, each partner would have recourse if another

partner does not fulfill the terms in the Articles of Partnership.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Risk Analysis

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-02 Describe the purpose of the articles of partnership and list specific items that should be included in

this agreement.

1-943 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

70. What theoretical argument could be made against the recognition of goodwill when there is a

change in the ownership of a partnership?

Goodwill should be recognized only when a business is purchased in an arms-length

transaction — a transaction between independent parties. Generally, partners are not

independent parties. Transactions between partners or between a partner and the partnership

may be influenced by factors other than fair value and bargaining between independent

parties. For example, if one partner has been causing trouble for a partnership, the other

partners might agree to pay more than fair value to convince that partner to leave the

business. The amount of goodwill that could be calculated for such a transaction would not be

an indication of the fair value of the business.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 14-04 Use both the bonus method and the goodwill method to record a partner's capital investment.

1-944 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

71. Under what circumstances does a partner's balance in his or her capital account have

practical consequences for the partner?

The most direct practical consequence of a partner's capital account balance occurs when the

partnership is liquidated. After assets are sold and liabilities are paid, each partner receives

the balance in his or her capital account. The balance in the capital account may also

influence the division of income or loss each year and could affect the amount of cash each

partner is allowed to withdraw from the partnership.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 14-03 Prepare the journal entry to record the initial capital investment made by a partner.

Short Answer Questions

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McGraw-Hill Education.

72. Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000,

and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased

30% of each partner's interest, with payments directly to Reed, Sharp, and Tucker of $32,000,

$40,000, and $28,000, respectively. Before the admission of Upton, the profit and loss sharing

ratio was 2:3:2. The partners agreed to use the book value method to account for the

admission of Upton to the partnership.

Required:

Prepare the journal entry to record the admission of Upton to the partnership.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-08 Prepare journal entries to record the acquisition by a new partner of either all or a portion of a

current partner's interest.

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McGraw-Hill Education.

73. Jipsom and Klark were partners with capital account balances of $80,000 and $100,000,

respectively. Looney directly paid $32,000 to Jipsom and $40,000 to Klark for 30% of their

interests in the partnership. Jipsom and Klark shared income in the ratio of 2:3. They believed

that revaluation of the partnership was appropriate when a new partner was admitted.

Required:

Prepare the journal entries to record the admission of Looney to the partnership.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 14-08 Prepare journal entries to record the acquisition by a new partner of either all or a portion of a

current partner's interest.

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McGraw-Hill Education.

74. Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000

and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair

value of $50,000. For both partners, the beginning capital balance was to equal the initial

investment. Norr and Caylor agreed to the following procedure for sharing profits and losses:

- 12% interest on the yearly beginning capital balance

- $10 per hour of work that can be billed to the partnership's clients

- the remainder divided in a 3:2 ratio

The Articles of Partnership specified that each partner should withdraw no more than $1,000

per month.

For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor

worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and

Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per

month throughout 2012 and 2013.

Determine the amount of net income allocated to each partner for 2012.

Distribution of income for 2012:

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

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McGraw-Hill Education.

75. Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000

and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair

value of $50,000. For both partners, the beginning capital balance was to equal the initial

investment. Norr and Caylor agreed to the following procedure for sharing profits and losses:

- 12% interest on the yearly beginning capital balance

- $10 per hour of work that can be billed to the partnership's clients

- the remainder divided in a 3:2 ratio

The Articles of Partnership specified that each partner should withdraw no more than $1,000

per month.

For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor

worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and

Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per

month throughout 2012 and 2013.

Determine the balance in both capital accounts at the end of 2012.

Capital account balances at the end of 2012:

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AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

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76. Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000

and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair

value of $50,000. For both partners, the beginning capital balance was to equal the initial

investment. Norr and Caylor agreed to the following procedure for sharing profits and losses:

- 12% interest on the yearly beginning capital balance

- $10 per hour of work that can be billed to the partnership's clients

- the remainder divided in a 3:2 ratio

The Articles of Partnership specified that each partner should withdraw no more than $1,000

per month.

For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor

worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and

Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per

month throughout 2012 and 2013.

Determine the amount of net income allocated to each partner for 2013. (Round all

calculations to the nearest whole dollar).

Distribution of income for 2013:

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AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

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77. Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000

and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair

value of $50,000. For both partners, the beginning capital balance was to equal the initial

investment. Norr and Caylor agreed to the following procedure for sharing profits and losses:

- 12% interest on the yearly beginning capital balance

- $10 per hour of work that can be billed to the partnership's clients

- the remainder divided in a 3:2 ratio

The Articles of Partnership specified that each partner should withdraw no more than $1,000

per month.

For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor

worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and

Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per

month throughout 2012 and 2013.

Determine the balance in both capital accounts at the end of 2013 to the nearest dollar.

Capital account balances at the end of 2013:

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AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

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78. The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the

admission of new partner, Eden.

Eden contributes $49,000 into the partnership for a 25% interest. The four original partners

share profits and losses equally. Using the bonus method, determine the balances for each of

the five partners after Eden joins the partnership.

Eden's contribution of $49,000 into the partnership raises the total partnership net assets to

$400,000. Eden's capital account is credited, by agreement, for 25% of the partnership's total

tangible assets, or $100,000.

The journal entry to record the admission of Eden is:

The capital balances of each of the five partners after Eden's entry into the partnership are as

follows:

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AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

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79. The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the

admission of new partner, Eden.

Eden contributed $124,000 in cash to the business to receive a 20% interest in the

partnership. Goodwill was to be recorded. The four original partners shared all profits and

losses equally. After Eden made his investment, what were the individual capital balances?

Eden's contribution of $124,000 to the partnership increases the partnership's net assets to

$475,000. The implied value of the partnership is $620,000 ($124,000 ÷ 20%). Goodwill of

$145,000 ($620,000 - $475,000) resulted from this transaction.

The first entry requires that the goodwill be allocated to each of the original four partners

according to their profit and loss sharing percentages. As indicated in the problem, the four

original partners share profits and losses equally.

After allocating the goodwill to each of the original four partners, their partnership capital

balances are as follows:

The second step is to record Eden's cash contribution and to record Eden's capital account

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balance:

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the

partnership.

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80. The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the

admission of new partner, Eden.

Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to

the other four partners. No goodwill is to be recorded. Profits and losses have previously been

split according to the following percentages: Adams, 15%, Barnes, 35%, Cordas, 30%, and

Davis, 20%. After Eden made his investment, what were the individual capital balances?

The partnership's total net assets are still $351,000, because Eden's $71,500 went to the

partners. Using the book value method, each of the original partners will give up 20% of their

current capital balance to Eden. The journal entry is:

The partners' balances following the admission of Eden are:

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AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-08 Prepare journal entries to record the acquisition by a new partner of either all or a portion of a

current partner's interest.

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81. The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the

admission of new partner, Eden.

Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to

the other four partners. Goodwill is to be recorded. Profits and losses have previously been

split according to the following percentages: Adams, 15%; Barnes, 35%; Cordas, 30%; and

Davis, 20%. After Eden made his investment, what were the individual capital balances?

Eden's contribution of $71,500 will go to the original four partners, not into the partnership.

Therefore, the partnership's total net assets remain $351,000. The implied value of the

partnership, based on Eden's contribution, is $357,500 ($71,500 ÷ 20%). Goodwill arising out

of this transaction is $6,500.

First, the goodwill should be allocated to each of the original four partners:

The adjusted balances for the four original partners, after allocating goodwill, are:

The next step is to allocate 20% of each of the original partners' balances to Eden:

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The partners' capital balances after admitting Eden are:

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-08 Prepare journal entries to record the acquisition by a new partner of either all or a portion of a

current partner's interest.

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82. Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of

years. Dean decides to withdraw from the partnership when the partners' capital balances are

as follows:

An appraisal of the business and its property estimates the fair value to be $100,000. Dean

has agreed to receive $64,000 in exchange for his partnership interest.

Prepare the journal entry for the payment to Dean in the dissolution of his partnership interest,

assuming the bonus method is to be applied.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

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83. Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of

years. Dean decides to withdraw from the partnership when the partners' capital balances are

as follows:

An appraisal of the business and its property estimates the fair value to be $100,000. Dean

has agreed to receive $64,000 in exchange for his partnership interest.

What are the remaining partners' capital balances after Dean's interest is dissolved, assuming

the bonus method is applied?

Hardin: $12,600 = ($15,000 - $2,400)

Roth: $23,400 = ($25,000 - $1,600)

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

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84. Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number of

years. Howell decides to withdraw from the partnership when the partners' capital balances

are as follows:

An appraisal of the business and its net assets estimates the fair value to be $154,000. Land

with a book value of $20,000 has a fair value of $35,000. Howell has agreed to receive

$84,000 in exchange for her partnership interest.

Prepare the journal entries for the dissolution of Howell's partnership interest, assuming the

goodwill method is to be applied.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

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85. Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number of

years. Howell decides to withdraw from the partnership when the partners' capital balances

are as follows:

An appraisal of the business and its net assets estimates the fair value to be $154,000. Land

with a book value of $20,000 has a fair value of $35,000. Howell has agreed to receive

$84,000 in exchange for her partnership interest.

What are the remaining partners' capital balances after Howell's interest is dissolved,

assuming the goodwill method is applied?

Madrid: $33,000 = ($15,000 + $18,000)

Waldrop: $37,000 = ($25,000 + $12,000)

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

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86. On January 1, 2013, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for

an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net

assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the

admission of Noris, the partnership contract included the following provisions:

• Salary of $40,000 a year to Noris.

• Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%.

• During the fiscal year ended December 31, 2013, the partnership had income of $90,000

prior to recognition of salary to Noris.

Record the journal entry for the admission of Noris. Goodwill is not to be recorded.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-03 Prepare the journal entry to record the initial capital investment made by a partner.

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87. On January 1, 2013, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for

an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net

assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the

admission of Noris, the partnership contract included the following provisions:

• Salary of $40,000 a year to Noris.

• Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%.

• During the fiscal year ended December 31, 2013, the partnership had income of $90,000

prior to recognition of salary to Noris.

Record the journal entry to allocate the salary of Noris.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

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88. On January 1, 2013, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for

an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net

assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the

admission of Noris, the partnership contract included the following provisions:

• Salary of $40,000 a year to Noris.

• Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%.

• During the fiscal year ended December 31, 2013, the partnership had income of $90,000

prior to recognition of salary to Noris.

Record the journal entry to record the remainder of net income to the capital accounts.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual

capital balances.

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89. James, Keller, and Rivers have the following capital balances; $48,000, $70,000 and $90,000

respectively. Because of a cash shortage James invests an additional $12,000 on June 1st.

Each partner withdraws $1,000 per month. James, Keller, and Rivers receive a salary of

$13,000, $15,000 and $20,000, respectively, for work done during the year. Each partner

receives interest of 8% on their weighted average capital balance without regard to normal

drawings. Any remaining profits are split 20%, 30%, and 50% respectively. The net income for

the year is $30,000. What are the ending capital balances for each partner?

Remaining income (loss):

CALCULATION OF JAMES INTEREST ALLOCATION

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Chapter 15 Partnerships: Termination and Liquidation Answer Key

Multiple Choice Questions

1. When a partnership is insolvent and a partner has a deficit capital balance, that partner is

legally required to:

A. declare personal bankruptcy.

B. initiate legal proceedings against the partnership.

C. contribute cash to the partnership.

D. deliver a note payable to the partnership with specific payment terms.

E. None of these. The partner has no legal responsibility to cover the capital deficit balance.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

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2. The Abrams, Bartle, and Creighton partnership began the process of liquidation with the

following balance sheet:

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5. Liquidation

expenses are expected to be $12,000.

If the noncash assets were sold for $234,000, what amount of the loss would have been

allocated to Bartle?

A. $43,200.

B. $46,800.

C. $40,000.

D. $42,400.

E. $43,100.

Non-Cash Assets BV $434,000 - Cash Received $234,000 = Loss on Non-Cash Assets

($200,000) × 20% = Loss to Bartle ($40,000)

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

3. The Abrams, Bartle, and Creighton partnership began the process of liquidation with the

following balance sheet:

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McGraw-Hill Education.

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5. Liquidation

expenses are expected to be $12,000.

The noncash assets were sold for $134,000. Which partner(s) would have had to contribute

assets to the partnership to cover a deficit in his or her capital account?

A. Abrams.

B. Bartle.

C. Creighton.

D. Abrams and Creighton.

E. Abrams and Bartle.

Non-Cash Assets BV $434,000 - Cash Received $134,000 = Loss on Non-Cash Assets

($300,000) × 30% = Loss to Abrams ($90,000) - Capital Balance $80,000 = Abrams'

Contribution to Cover $10,000

Non-Cash Assets BV $434,000 - Cash Received $134,000 = Loss on Non-Cash Assets

($300,000) × 20% = Loss to Abrams ($60,000) - Capital Balance $90,000 = Bartle Excess

after Loss $30,000

Non-Cash Assets BV $434,000 - Cash Received $134,000 = Loss on Non-Cash Assets

($300,000) × 50% = Loss to Abrams ($150,000) - Capital Balance $130,000 = Creighton's

Contribution to Cover $20,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

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McGraw-Hill Education.

balance or become personally insolvent.

4. The Abrams, Bartle, and Creighton partnership began the process of liquidation with the

following balance sheet:

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5. Liquidation

expenses are expected to be $12,000.

After the liquidation expenses of $12,000 were paid and the noncash assets sold, Creighton

had a deficit of $8,000. For what amount were the noncash assets sold?

A. $170,000.

B. $264,000.

C. $158,000.

D. $146,000.

E. $185,000.

[Non-Cash Assets BV $434,000 - Cash Received $170,000] + Liquidation Expenses $12,000

= Loss on Non-Cash Assets ($276,000) × 50% = Loss to Abrams ($138,000) - Capital Balance

$130,000 = Creighton's Contribution to Cover $8,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

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5. The Keaton, Lewis, and Meador partnership had the following balance sheet just before

entering liquidation:

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were

sold for $180,000. Liquidation expenses were $10,000.

Assume that Lewis was personally insolvent and could not contribute any assets to the

partnership, while Keaton and Meador were both solvent. What amount of cash would Keaton

have received from the distribution of partnership assets?

A. $38,000.

B. $30,000.

C. $24,000.

D. $34,000.

E. $31,600.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

6. The Keaton, Lewis, and Meador partnership had the following balance sheet just before

entering liquidation:

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Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were

sold for $60,000. How much will each partner receive in the liquidation?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

Non-Cash Assets BV $210,000 - Cash Received $60,000 = Loss on Non-Cash Assets

($150,000) × 20% = Loss to Keaton ($30,000) - Capital Balance $90,000 = Keaton Distribution

$60,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

7. The Keaton, Lewis, and Meador partnership had the following balance sheet just before

entering liquidation:

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McGraw-Hill Education.

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. The partnership feels

confident it will be able to eventually sell the noncash assets and wants to distribute some

cash before paying liabilities. How much would each partner receive of a total $60,000

distribution of cash?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

Non-Cash Assets BV $210,000 - Assumed Cash Received $0 = Loss on Non-Cash Assets

($210,000) × 20% = Loss to Keaton ($42,000) - Capital Balance $90,000 = Keaton Tentative

Distribution $48,000

Non-Cash Assets BV $210,000 - Cash Received $0 = Loss on Non-Cash Assets ($210,000) ×

40% = Loss to Lewis ($84,000) - Capital Balance $60,000 = Lewis' Deficit ($24,000) × 1/3 =

Lewis' Deficit Portion to Keaton ($8,000)

Keaton Tentative Distribution $48,000 + Lewis' Deficit Portion to Keaton ($8,000) = Keaton's

Safe Distribution $40,000

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AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

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8. The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following

account balances:

Estimated expenses of liquidation were $5,000. Henry, Isaac, and Jacobs shared profits and

losses in a ratio of 2:4:4.

What amount of cash was available for safe payments, based on the above information?

A. $30,000.

B. $85,000.

C. $25,000.

D. $35,000.

E. $40,000.

Cash $90,000 - Liabilities $60,000 - Liquidation Expenses $5,000 = "Safe" Cash $25,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

9. The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following

account balances:

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McGraw-Hill Education.

Estimated expenses of liquidation were $5,000. Henry, Isaac, and Jacobs shared profits and

losses in a ratio of 2:4:4.

Before liquidating any assets, the partners determined the amount of cash available for safe

payments. How should the amount of safe cash payments be distributed?

A. in a ratio of 2:4:4 among all the partners.

B. $18,333 to Henry and $16,667 to Jacobs.

C. in a ratio of 1:2 between Henry and Jacobs.

D. $15,000 to Henry and $10,000 to Jacobs.

E. $21,667 to Henry and $3,333 to Jacobs.

Non-Cash Assets BV $300,000 - Assumed Cash Received $0 = Loss on Non-Cash Assets

($300,000) × 20% = Loss to Henry ($60,000) - Capital Balance $80,000 = Henry's Provisional

Balance $20,000

Non-Cash Assets BV $300,000 - Assumed Cash Received $0 = Loss on Non-Cash Assets

($300,000) × 40% = Loss to Isaac ($120,000) - Capital Balance $110,000 = Isaac's

Provisional Balance ($10,000)

Non-Cash Assets BV $300,000 - Assumed Cash Received $0 = Loss on Non-Cash Assets

($300,000) × 40% = Loss to Jacobs ($120,000) - Capital Balance $140,000 = Jacobs'

Provisional Balance $20,000

Isaac's Provisional Balance ($10,000) + Liquidation Expenses ($5,000) = Loss for Remaining

Partners ($15,000)/3 = Henry's Portion ($5,000) + Henry's Provisional Balance $20,000 =

Henry's Safe Distribution $15,000

Isaac's Provisional Balance ($10,000) + Liquidation Expenses ($5,000) = Loss for Remaining

Partners ($15,000) × 2/3 = Jacobs' Portion ($10,000) + Jacobs' Provisional Balance $20,000 =

Jacobs' Safe Distribution $10,000

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AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

10. The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following

account balances:

Estimated expenses of liquidation were $5,000. Henry, Isaac, and Jacobs shared profits and

losses in a ratio of 2:4:4.

Before liquidating any assets, the partners determined the amount of cash for safe payments

and distributed it. The noncash assets were then sold for $120,000. The liquidation expenses

of $5,000 were paid. How would the $120,000 be distributed to the partners? (Hint: Either a

predistribution plan or a schedule of safe payments would be appropriate for solving this item.)

A. Option A

B. Option B

C. Option C

D. Option D

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E. Option E

Cash from Sale $120,000 - Liquidation Expenses $5,000 = Cash to Distribute $115,000 × 20%

= $23,000 + Henry's Portion of Deficit Balance at Safe Distribution $5,000 = Henry's

Distribution of $28,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

11. The following account balances were available for the Perry, Quincy, and Renquist partnership

just before it entered liquidation:

Included in Perry's capital balance is a $20,000 partnership loan owed to Perry. Perry, Quincy,

and Renquist shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected

to be $15,000.

All partners were solvent.

What amount would noncash assets need to be sold for in order for any partner to receive

some cash?

A. $185,000

B. $170,000

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C. $165,000

D. $95,000

E. $90,000

Cash $90,000 - Liquidation Expenses $15,000 - Liabilities $170,000 = Balance Needed from

Non-Cash Assets ($95,000)

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

12. The following account balances were available for the Perry, Quincy, and Renquist partnership

just before it entered liquidation:

Included in Perry's capital balance is a $20,000 partnership loan owed to Perry. Perry, Quincy,

and Renquist shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected

to be $15,000.

All partners were solvent.

What would be the minimum amount for which the noncash assets must have been sold, in

order for Quincy to receive some cash from the liquidation?

A. any amount in excess of $170,000.

B. any amount in excess of $190,000.

C. any amount in excess of $260,000.

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D. any amount in excess of $280,000.

E. any amount in excess of $300,000.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

13. A local partnership was in the process of liquidating and reported the following capital

balances:

Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution.

However, the two remaining partners asked to receive the $31,000 that was then in the cash

account.

How much of this money should Justice receive?

A. $15,467.

B. $15,533.

C. $17,333.

D. $16,533.

E. $15,867.

Douglass' Deficit ($14,000) × (.40/.75) = ($7,467) + Justice's Capital Balance $23,000 =

$15,533 Distribution to Justice

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McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

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McGraw-Hill Education.

14. A local partnership was in the process of liquidating and reported the following capital

balances:

Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution.

However, the two remaining partners asked to receive the $31,000 that was then in the cash

account.

How much of this money should Zobart receive?

A. $15,467.

B. $14,467.

C. $17,333.

D. $15,633.

E. $15,867.

Douglass' Deficit ($14,000) × (.35/.75) = ($6,533) + Zobart's Capital Balance $22,000 =

$15,467 Distribution to Zobart

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

15. A local partnership was considering the possibility of liquidation since one of the partners

(Ding) was personally insolvent. Capital balances at that time were as follows. Profits and

losses were divided on a 4:2:2:2 basis, respectively.

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McGraw-Hill Education.

Creditors of partner Ding filed a $25,000 claim against the partnership's assets. At that time,

the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There

was no cash on hand at the time.

If the assets could be sold for $228,000, what is the minimum amount that Ding's creditors

would have received?

A. $36,000.

B. $0.

C. $2,500.

D. $38,720.

E. $67,250.

Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets

($132,000) × 40% = Loss to Ding ($52,800) - Capital Balance $60,000 = Ding Excess after

Loss $7,200

Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets

($132,000) × 20% = Loss to Ezzard ($26,400) - Capital Balance $17,000 = Ezzard's Deficit

($9,400) × 4/8 = Deficit to Ding's Capital Account ($4,700)

Ding Excess after Loss $7,200 + Ezzard's Deficit to Ding's Capital Account ($4,700) = Ding's

Available Balance to Creditors $2,500

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

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McGraw-Hill Education.

Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

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McGraw-Hill Education.

16. A local partnership was considering the possibility of liquidation since one of the partners

(Ding) was personally insolvent. Capital balances at that time were as follows. Profits and

losses were divided on a 4:2:2:2 basis, respectively.

Creditors of partner Ding filed a $25,000 claim against the partnership's assets. At that time,

the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There

was no cash on hand at the time.

If the assets could be sold for $228,000, what is the minimum amount that Laurel's creditors

would have received?

A. $36,000.

B. $0.

C. $2,500.

D. $38,250.

E. $67,250.

Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets

($132,000) × 20% = Loss to Laurel ($26,400) - Capital Balance $67,000 = Laurel Excess after

Loss $40,600

Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets

($132,000) × 20% = Loss to Ezzard ($26,400) - Capital Balance $17,000 = Ezzard's Deficit

($9,400) × 2/8 = Deficit to Laurel's Capital Account ($2,350)

Laurel Excess after Loss $40,600 + Ezzard's Deficit to Laurel's Capital Account ($2,350) =

Laurel's Available Balance to Creditors $38,250

AACSB: Analytic

AICPA BB: Legal

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McGraw-Hill Education.

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

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McGraw-Hill Education.

17. A local partnership was considering the possibility of liquidation since one of the partners

(Ding) was personally insolvent. Capital balances at that time were as follows. Profits and

losses were divided on a 4:2:2:2 basis, respectively.

Creditors of partner Ding filed a $25,000 claim against the partnership's assets. At that time,

the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There

was no cash on hand at the time.

If the assets could be sold for $228,000, what is the minimum amount that Ezzard's creditors

would have received?

A. $36,000.

B. $0.

C. $2,500.

D. $38,250.

E. $67,250.

Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets

($132,000) × 20% = Loss to Ezzard ($26,400) - Capital Balance $17,000 = Ezzard's Deficit

($9,400), so Ezzard has $0 Available Balance to Creditors and Owes Other Partners $9,400

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

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McGraw-Hill Education.

18. A local partnership was considering the possibility of liquidation since one of the partners

(Ding) was personally insolvent. Capital balances at that time were as follows. Profits and

losses were divided on a 4:2:2:2 basis, respectively.

Creditors of partner Ding filed a $25,000 claim against the partnership's assets. At that time,

the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There

was no cash on hand at the time.

If the assets could be sold, for $228,000 what is the minimum amount that Tillman's creditors

would have received?

A. $36,000.

B. $0.

C. $2,500.

D. $38,250.

E. $67,250.

Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets

($132,000) × 20% = Loss to Tillman ($26,400) - Capital Balance $96,000 = Tillman Excess

after Loss $69,600

Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets

($132,000) × 20% = Loss to Ezzard ($26,400) - Capital Balance $17,000 = Ezzard's Deficit

($9,400) × 2/8 = Deficit to Tillman's Capital Account ($2,350)

Tillman Excess after Loss $69,600 + Ezzard's Deficit to Laurel's Capital Account ($2,350) =

Tillman's Available Balance to Creditors $67,250

AACSB: Analytic

AICPA BB: Legal

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McGraw-Hill Education.

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

19. Dancey, Reese, Newman, and Jahn were partners who shared profits and losses on a 4:2:2:2

basis, respectively. They were beginning to liquidate their business. At the start of the process,

capital balances were as follows:

Which one of the following statements is true for a predistribution plan?

A. The first available $16,000 would go to Newman.

B. The first available $20,000 would go to Dancey.

C. The first available $8,000 would go to Jahn.

D. The first available $8,000 would go to Newman.

E. The first available $4,000 would go to Jahn.

D = $72,000; R = $32,000; N = $52,000; J = $24,000 with Losses Shared 4:2:2:2

First eliminate lowest value J = $24,000 - $24,000 = 0

D = $72,000 - $48,000 = $24,000 - $16,000 = $8,000 - $8,000 = 0

R = $32,000 - $24,000 = $8,000 - $8,000 = 0

N = $52,000 - $24,000 = $28,000 - $8,000 = $20,000 - $4,000 = $16,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

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McGraw-Hill Education.

20. Dancey, Reese, Newman, and Jahn were partners who shared profits and losses on a 4:2:2:2

basis, respectively. They were beginning to liquidate their business. At the start of the process,

capital balances were as follows:

Which one of the following statements is true for a predistribution plan?

A. The first available $16,000 would go to Newman. The next $12,000 would go $8,000 to

Dancey and $4,000 to Newman. The following $32,000 would be shared by Dancey,

Reese, and Newman. The total distribution would be $60,000 before all four partners share

any further payments equally.

B. The first available $16,000 would go to Newman. The next $12,000 would go $8,000 to

Dancey and $4,000 to Newman. The following $32,000 would be shared by Dancey,

Reese, and Newman. The total distribution would be $60,000 before all four partners share

any further payments in their profit and loss sharing ratios.

C. The first $20,000 would go to Newman. The next $8,000 would go to Dancey. The next

$12,000 would be shared by Dancey, Reese, and Newman. The total distribution would be

$40,000 before all four partners share any further payments equally.

D. The first available $8,000 would go to Newman. The next $4,000 would be split equally

between Dancey and Newman. The following $12,000 would be shared by Dancey, Reese,

and Newman. The total distribution would be $24,000 before all four partners share any

further payments equally.

E. The first available $8,000 would go to Newman. The next $4,000 would be split equally

between Dancey and Newman. The following $12,000 would be shared by Dancey, Reese,

and Newman. The total distribution would be $24,000 before all four partners share any

further payments in their profit and loss sharing ratios.

D = $72,000; R = $32,000; N = $52,000; J = $24,000 with Losses Shared 4:2:2:2

First eliminate lowest value J = $24,000 - $24,000 = 0

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McGraw-Hill Education.

D = $72,000 - $48,000 = $24,000 - $16,000 = $8,000 - $8,000 = 0

R = $32,000 - $24,000 = $8,000 - $8,000 = 0

N = $52,000 - $24,000 = $28,000 - $8,000 = $20,000 - $4,000 = $16,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

21. Which of the following could result in the termination and liquidation of a partnership?

1) Partners are incompatible and choose to cease operations.

2) There are excessive losses that are expected to continue.

3) Retirement of a partner.

A. 1 only

B. 1 and 2 only

C. 2 and 3 only

D. 3 only

E. 1, 2, and 3

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

22. What accounting transactions are not recorded by an accountant during partnership

liquidation?

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A. The conversion of partnership assets into cash.

B. The allocation of gains and losses from sales of assets.

C. The payment of liabilities and expenses.

D. The initiation of legal action by creditors of the partnership.

E. Write-off of remaining unpaid debts.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

23. Which of the following statements is false concerning the partnership Schedule of

Liquidation?

A. Liquidations may take a considerable length of time to complete.

B. Frequent reporting by the accountant is rarely necessary.

C. The Schedule of Liquidation provides a listing of transactions to date, current cash, and

capital balances.

D. The Schedule of Liquidation provides a listing of property still held by the partnership as

well as liabilities remaining unpaid.

E. The Schedule of Liquidation keeps creditors and partners apprised of the results of the

process of dissolution.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

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McGraw-Hill Education.

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

24. What is the preferred method of resolving a partner's deficit balance, according to the Uniform

Partnership Act?

A. Partners never have a deficit balance.

B. The other partners must contribute personal assets to cover the deficit balance.

C. The partnership must sell assets in order to cover the deficit balance.

D. The partner with a deficit balance must contribute personal assets to cover the deficit

balance.

E. The partner with a deficit balance contributes personal assets only if those personal assets

exceed personal liabilities.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

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25. Which of the following statements is true concerning the distribution of safe payments?

A. The distribution of safe payments assumes that any capital deficit balances will prove to be

a total loss to the partnership.

B. Safe payments are equal to the recorded capital balances of partners with positive capital

balances.

C. The distribution of safe payments may only be made after all liabilities have been paid.

D. In computing safe payments, partners with positive capital balances are assumed to

absorb an equal share of any deficit balance(s).

E. There are no safe payments until the liquidation is complete.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

26. Which one of the following statements is correct?

A. If a partner of a liquidating partnership is unable to pay a capital account deficit, the deficit

is absorbed by the other partners in the profit and loss ratio of those partners.

B. Gains and losses from the sale of noncash assets are divided in the ratio of the partners'

capital account balances if there is no income-sharing plan in the partnership contract.

C. A loan receivable from a partner is added to the partner's capital account balance in the

preparation of a cash distribution plan.

D. Partners may not receive any cash before partnership creditors receive cash when

liquidating a partnership.

E. All cash payments to partners are made using their profit and loss ratio when liquidating

the partnership.

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McGraw-Hill Education.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

27. Which item is not shown on the schedule of partnership liquidation?

A. Current cash balances.

B. Property owned by the partnership.

C. Liabilities still to be paid.

D. Personal assets of the partners.

E. Current capital balances of the partners.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

28. Harding, Jones, and Sandy is in the process of liquidating and the partners have the following

capital balances; $24,000, $24,000, and ($9,000) respectively. The partners share all profits

and losses 16%, 48%, and 36%, respectively. Sandy has indicated that the ($9,000) deficit will

be covered with a forthcoming contribution. The remaining partners have requested to

immediately receive $20,000 in cash that is available. How should this cash be distributed?

A. Harding $5,000; Jones $15,000.

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B. Harding $17,000; Jones $3,000.

C. Harding $11,154; Jones $8,846.

D. Harding $14,297; Jones $5,703.

E. Harding $12,500; Jones $7,500.

Harding = $72,000; Jones = $32,000; Sandy = $52,000 beginning balances with Losses

Shared 16:48:36

First eliminate Sandy's negative capital loss to Harding & Jones

Losses shared 16/64 & 48/64 or 25% & 75%

Harding = $24,000 - ($9,000 × 25%) $2,250 = $21,750 - $5,750 = $16,000 + ($4,000 × 25%)

$1,000 = $17,000

Jones = $24,000 - ($9,000 × 75%) $6,750 = $17,250 - $17,250 = 0 + ($4,000 × 75%) $3,000 =

$3,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

29. Gonda, Herron, and Morse is considering possible liquidation because partner Morse is

personally insolvent. The partners have the following capital balances: $60,000, $70,000, and

$40,000, respectively, and share profits and losses 30%, 45%, and 25%, respectively. The

partnership has $200,000 in noncash assets that can be sold for $150,000. The partnership

has $10,000 cash on hand, and $40,000 in liabilities. What is the minimum that partner

Morse's creditors would receive if they have filed a claim for $50,000?

A. $0.

B. $27,500.

C. $45,000.

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D. $47,500.

E. $50,000.

M = $40,000 - Loss on Non-Cash Asset Sale ($50,000 × .25) $12,500 = $27,500

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

30. White, Sands, and Luke has the following capital balances and profit and loss ratios:

$60,000 (30%); $100,000 (20%); and $200,000 (50%).

The partnership has received a predistribution plan.

How would $90,000 be distributed?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

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McGraw-Hill Education.

Sands: $20,000 + $20,000 ($90,000 - $20,000 = $70,000 × 2/7) = $40,000

Luke: $50,000 ($90,000 - $20,000 = $70,000 × 5/7)

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

31. White, Sands, and Luke has the following capital balances and profit and loss ratios:

$60,000 (30%); $100,000 (20%); and $200,000 (50%).

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The partnership has received a predistribution plan.

How would $200,000 be distributed?

A. Option A

B. Option B

C. Option C

D. Option D

E. Option E

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McGraw-Hill Education.

White: ($200,000 - $20,000 - $140,000) × 30% = $12,000

Sands: $20,000 + $40,000 ($140,000 × 2/7) + $8,000 (($200,000 - $20,000 - $140,000) ×

20%) = $68,000

Luke: $100,000 ($140,000 × 5/7) + $20,000 (($200,000 - $20,000 - $140,000) × 50%) =

$120,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

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McGraw-Hill Education.

Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

32. A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All

liabilities have been paid. The partners' capital accounts are as follows Harry $40,000,

Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2.

If the building is sold for $50,000, how much cash will Harry receive in the final settlement?

A. $5,000.

B. $9,000.

C. $18,000.

D. $28,000.

E. $55,000.

H = $40,000 - Loss on Blg ($30,000 × .40) $12,000 = $28,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

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McGraw-Hill Education.

33. A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All

liabilities have been paid. The partners' capital accounts are as follows Harry $40,000,

Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2.

If the building is sold for $50,000, how much cash will Waters receive in the final settlement?

A. $5,000.

B. $9,000.

C. $18,000.

D. $28,000.

E. $55,000.

W = $15,000 - Loss on Blg ($30,000 × .20) $6,000 = $9,000

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

34. A local partnership has assets of cash of $130,000 and land recorded at $700,000. All

liabilities have been paid and the partners are all personally insolvent. The partners' capital

accounts are as follows Roberts, $500,000, Ferry, $300,000 and Mones, $30,000. The

partners share profits and losses 5:3:2.

If the land is sold for $450,000, how much cash will Roberts receive in the final settlement?

A. $0.

B. $30,000.

C. $217,500.

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D. $362,500.

E. $502,500.

R = $500,000; F = $300,000; M = $30,000 with Losses Shared 5:3:2

First eliminate M Balance of $30,000 in $250,000 Loss

Losses now shared 5/8 & 3/8

R = $500,000 - ($220,000 × 5/8) $137,500 = $362,500

F = $300,000 - ($220,000 × 3/8) $82,500 = $217,500

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

35. A local partnership has assets of cash of $130,000 and land recorded at $700,000. All

liabilities have been paid and the partners are all personally insolvent. The partners' capital

accounts are as follows Roberts, $500,000, Ferry, $300,000 and Mones, $30,000. The

partners share profits and losses 5:3:2.

If the land is sold for $450,000, how much cash will Mones receive in the final settlement?

A. $0.

B. $15,000.

C. $300,000.

D. $217,500.

E. $362,500.

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R = $500,000; F = $300,000; M = $30,000 with Losses Shared 5:3:2

M Share of $250,000 Loss × 20% = $50,000; Capital Balance of $30,000 is Lost; Balance = 0

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Accessibility: Keyboard Navigation

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

Matching Questions

36. Matching

1. Safe capital

balances

A schedule should be produced periodically

by the accountant to disclose losses and gains

that have been incurred, remaining assets and

liabilities, and current capital balances. 4

2. Predistribution

plan

One or more partners may have a negative

capital balance often as a result of losses

incurred in disposing of assets. 3

3. Deficit capital

balances

A provision for an equitable distribution of

assets during liquidation. 1

4. The schedule of

liquidation

At the start of a liquidation, this document

provides guidance for all payments made to

the partners throughout the liquidation. 2

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AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

Essay Questions

37. What is the role of the accountant during the liquidation process?

The accountant works to ensure the equitable treatment of all parties involved in the

liquidation. The accountant is responsible for recording and reporting the conversion of

partnership assets into cash, the allocation of gains and losses, the payment of liabilities and

expenses, and any remaining unpaid debts and distributions to the partners.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

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38. The partnership of Rayne, Marin, and Fulton was being liquidated by the partners. Rayne was

insolvent and did not have enough assets to pay all his personal creditors. Under what

conditions might Rayne's personal creditors have claimed some of the partnership assets?

Rayne's personal creditors might have claimed some partnership assets if Rayne had a credit

balance in his capital account.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Analyze

Difficulty: 1 Easy

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

39. The Arnold, Bates, Carlton, and Delbert partnership was liquidating. It had paid all its liabilities

and had some assets yet to be sold. The partners had capital account balances of ($50,000),

$90,000, $110,000, and $130,000. There was $40,000 cash available for distribution to the

partners. What procedures would be followed to determine the amount of cash that could

safely be distributed to each partner?

To determine the amount of cash that can be safely distributed to each partner, one should

assume that maximum losses will be realized on the disposal of noncash assets, estimate

liquidation expenses, and assume that any partners with deficit balances cannot pay them.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

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McGraw-Hill Education.

balance or become personally insolvent.

40. Xygote, Yen, and Zen were partners who were liquidating their partnership. Each partner has

a deficit balance in their respective capital account. All assets from the partnership have been

liquidated and all of the liabilities had been paid. How should any additional cash coming into

the partnership be distributed to the partners?

All partners with deficits in their capital accounts should transfer personal assets into the

partnership to eliminate their deficits in the capital accounts. Then each partner should receive

any additional cash equal to his or her profit sharing ratio or specific treatment as noted in the

partnership agreement based on the source of the cash inflow.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

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McGraw-Hill Education.

41. What is the purpose of a predistribution plan?

The purpose of a predistribution plan is to determine how assets should be distributed to

creditors and partners as the partnership's noncash assets are realized. A predistribution plan

would be particularly useful for a liquidation that takes a long time to complete.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

42. What financial schedule would be prepared for a partnership that has begun liquidation but

has not yet completed the process? What is the purpose of this schedule?

The appropriate financial schedule is a schedule of liquidation. The purpose of this schedule is

to report to partners and creditors on the progress of the liquidation to date, summarizing the

various transactions that have occurred.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

43. What events or circumstances might force the termination of a partnership and liquidation of

its assets?

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McGraw-Hill Education.

There are many events or situations that can lead to the termination of a partnership and the

liquidation of its assets. These circumstances include insolvency of the partnership and

dissension among the partners. A partnership would be liquidated if it was formed to

accomplish a specific purpose and has no further usefulness. Liquidation of the partnership

may be required whenever there is a large claim against the partnership's assets. Such a

claim might occur through the loss of a lawsuit and the payment of a large judgment, the

insolvency of a partner, or the death or retirement of a partner.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

44. For a partnership, how should liquidation gains and losses be accounted for?

Gains and losses on the liquidation of assets should be allocated to the partners' capital

accounts using the profit and loss sharing ratio.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

45. What should occur when a solvent partner has a deficit balance?

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McGraw-Hill Education.

The partner should contribute personal assets to the extent of the deficit balance.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Understand

Difficulty: 1 Easy

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

46. Why is a Schedule of Liquidation prepared?

To provide information to the creditors and partners about liquidation transactions to date,

property still held by the partnership, liabilities remaining to be paid, and current cash and

capital balances.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

47. What is a safe cash payment?

A safe cash payment is a fair allocation of funds made available before liquidation has been

completed. Safe cash payments are based on the assumption that any capital deficits will

prove to be a total loss to the partnership and must be absorbed by the remaining partners

based on their relative profit and loss ratio.

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McGraw-Hill Education.

AACSB: Reflective thinking

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Remember

Difficulty: 2 Medium

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

Short Answer Questions

48. The Albert, Boynton, and Creamer partnership was in the process of liquidating its assets and

going out of business. Albert, Boynton, and Creamer had capital account balances of $80,000,

$120,000, and $200,000, respectively, and shared profits and losses in the ratio of 1:3:2.

Equipment that had cost $90,000 and had a book value of $60,000 was sold for $24,000 cash.

Required:

Prepare the appropriate journal entry to record the sale of the equipment, distributing any gain

or loss directly to the partners.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

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McGraw-Hill Education.

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

49. The Amos, Billings, and Cleaver partnership had two assets: (1) cash of $40,000 and (2) an

investment with a book value of $110,000. The ratio for sharing profits and losses is 2:1:1. The

balances in the capital accounts were:

Amos, capital: $45,000

Billings, capital: $75,000

Cleaver, capital: $30,000

Required:

If the investment was sold for $80,000, how much cash would each partner have received?

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

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McGraw-Hill Education.

50. As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account

balances and percentages for the sharing of profits and losses:

The partnership incurred losses in recent years and decided to liquidate. The liquidation

expenses were expected to be $10,000.

How much of the existing cash balance could be distributed safely to partners at this time?

The amount of cash that could be distributed to partners at this time = current cash balance

$80,000 - liabilities $47,000 - estimate for liquidation expenses $10,000 = $23,000.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

51. As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account

balances and percentages for the sharing of profits and losses:

The partnership incurred losses in recent years and decided to liquidate. The liquidation

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McGraw-Hill Education.

expenses were expected to be $10,000.

How much cash should each partner receive at this time, pursuant to a proposed schedule of

liquidation?

To determine the amount to be distributed to partners, assuming maximum losses on

liquidation:

The entire $23,000 should be distributed to Canton.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

52. As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account

balances and percentages for the sharing of profits and losses:

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McGraw-Hill Education.

The partnership incurred losses in recent years and decided to liquidate. The liquidation

expenses were expected to be $10,000.

What would be the maximum amount Garr might have to contribute to the partnership to

eliminate a deficit balance in his account?

The maximum amount that Garr might have to contribute to eliminate a deficit would be

$84,000, assuming that the noncash assets cannot be sold and become a total loss to the

partnership.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

53. As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account

balances and percentages for the sharing of profits and losses:

The partnership incurred losses in recent years and decided to liquidate. The liquidation

expenses were expected to be $10,000.

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If the noncash assets are sold for $105,000, what would be the maximum amount of cash that

Canton could expect to receive?

The maximum amount that Canton could be expected to recover is $105,000. This assumes

that Garr can cover his deficit:

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

54. A partnership had the following account balances: Cash, $91,000; Other Assets, $702,000;

Liabilities, $338,000; Polk, Capital (50% of profits and losses), $221,000; Garfield, Capital

(30%), $143,000; Arthur, Capital (20%), $91,000. The company liquidated and $10,400

became available to the partners.

Required:

Who would have received the $10,400?

Since the partnership had total capital of $455,000, the $10,400 that was available would have

indicated maximum potential losses of $444,600.

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McGraw-Hill Education.

The $10,400 would have gone to Garfield ($8,840) and Arthur ($1,560).

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

55. A partnership held three assets: Cash, $13,000; Land, $45,000; and a Building, $65,000.

There were no recorded liabilities. The partners anticipated that expenses required to liquidate

their partnership would amount to $6,000. Capital balances were as follows:

King, Capital: $32,700

Murphy, Capital: 36,400

Madison, Capital: 26,000

Pond, Capital: 27,900

The partners shared profits and losses 30:30:20:20, respectively.

Required:

Prepare a proposed schedule of liquidation, showing how cash could be safely distributed to

the partners at this time.

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Murphy received $700, Madison received $2,200, and Pond received $4,100.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

56. On January 1, 2013, the partners of Won, Cadel, and Dax (who shared profits and losses in

the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this

date was as follows:

The partners planned a program of piecemeal conversion of the business assets to minimize

liquidation losses. All available cash, less an amount retained to provide for future expenses,

was to be distributed to the partners at the end of each month. A summary of liquidation

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transactions follows:

Prepare a schedule to calculate the safe payments to be made to the partners at the end of

January.

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McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

57. On January 1, 2013, the partners of Won, Cadel, and Dax (who shared profits and losses in

the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this

date was as follows:

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McGraw-Hill Education.

The partners planned a program of piecemeal conversion of the business assets to minimize

liquidation losses. All available cash, less an amount retained to provide for future expenses,

was to be distributed to the partners at the end of each month. A summary of liquidation

transactions follows:

Prepare a schedule to calculate the safe installment payments to be made to the partners at

the end of February.

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McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

58. On January 1, 2013, the partners of Won, Cadel, and Dax (who shared profits and losses in

the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this

date was as follows:

The partners planned a program of piecemeal conversion of the business assets to minimize

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McGraw-Hill Education.

liquidation losses. All available cash, less an amount retained to provide for future expenses,

was to be distributed to the partners at the end of each month. A summary of liquidation

transactions follows:

Prepare a schedule to calculate the safe payments to be made to the partners at the end of

March.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

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59. Hardin, Sutton, and Williams have operated a local business as a partnership for several

years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently,

Williams has undergone personal financial problems, and is insolvent. To satisfy Williams'

creditors, the partnership has decided to liquidate.

The following balance sheet has been produced:

During the liquidation process, the following transactions take place:

- Noncash assets are sold for $116,000.

- Liquidation expenses of $12,000 are paid. No further expenses are expected.

- Safe capital distributions are made to the partners.

- Payment is made of all business liabilities.

- Any deficit capital balances are deemed to be uncollectible.

Develop a predistribution plan for this partnership, assuming $12,000 of liquidation expenses

are expected to be paid.

(1.) The first $92,000 pays for liabilities and liquidation expenses.

(2.) The next $28,500 goes to Hardin.

(3.) The next $32,500 goes to Hardin (60%) and Sutton (40%).

(4.) The remainder goes to all three partners in their 3:2:1 ratio.

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McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

60. Hardin, Sutton, and Williams have operated a local business as a partnership for several

years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently,

Williams has undergone personal financial problems, and is insolvent. To satisfy Williams'

creditors, the partnership has decided to liquidate.

The following balance sheet has been produced:

During the liquidation process, the following transactions take place:

- Noncash assets are sold for $116,000.

- Liquidation expenses of $12,000 are paid. No further expenses are expected.

- Safe capital distributions are made to the partners.

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McGraw-Hill Education.

- Payment is made of all business liabilities.

- Any deficit capital balances are deemed to be uncollectible.

Compute safe cash payments after the noncash assets have been sold and the liquidation

expenses have been paid.

Safe Cash Payments:

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital

balance or become personally insolvent.

61. Hardin, Sutton, and Williams have operated a local business as a partnership for several

years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently,

Williams has undergone personal financial problems, and is insolvent. To satisfy Williams'

creditors, the partnership has decided to liquidate.

The following balance sheet has been produced:

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McGraw-Hill Education.

During the liquidation process, the following transactions take place:

- Noncash assets are sold for $116,000.

- Liquidation expenses of $12,000 are paid. No further expenses are expected.

- Safe capital distributions are made to the partners.

- Payment is made of all business liabilities.

- Any deficit capital balances are deemed to be uncollectible.

Prepare journal entries to record the actual liquidation transactions.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

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McGraw-Hill Education.

62. Jones, Marge, and Tate LLP decided to dissolve and liquidate the partnership on September

30, 2013. After realization of a portion of the noncash assets, the capital account balances

were Jones $50,000; Marge $40,000; and Tate $15,000. Cash of $35,000 and other assets

with a carrying amount of $100,000 were on hand. Creditors' claims totaled $30,000. Jones,

Marge, and Tate shared net income and losses in a 2:1:1 ratio, respectively.

Prepare a working paper to compute the amount of cash that may be paid to creditors and to

partners at this time, assuming that no partner is solvent.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

63. The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

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McGraw-Hill Education.

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash

assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000, and the

balance of cash was retained pending future developments.

Record the journal entry for the sale of the noncash assets.

To record sale of noncash of assets at a loss of $20,000, divided in 5:3:2 ratio

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

64. The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash

assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000, and the

balance of cash was retained pending future developments.

Record the journal entry for payment of outstanding liabilities to the creditors.

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McGraw-Hill Education.

To record payment to creditors.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

65. The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash

assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000, and the

balance of cash was retained pending future developments.

Determine the cash to be retained and prepare a schedule to distribute $35,000 cash to the

partners.

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McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

66. The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash

assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000, and the

balance of cash was retained pending future developments.

Record the journal entry for the cash distribution to the partners.

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McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

67. The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013. The

balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and

30%, respectively.

The disposal of Other Assets with a carrying amount of $200,000 realized $140,000, and all

available cash was distributed.

Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2013, to record the

realization of Other Assets.

1-1039 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 2 Medium

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

68. The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013. The

balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and

30%, respectively.

The disposal of Other Assets with a carrying amount of $200,000 realized $140,000, and all

available cash was distributed.

Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2013, to record payment

of liabilities.

1-1040 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

69. The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013. The

balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and

30%, respectively.

The disposal of Other Assets with a carrying amount of $200,000 realized $140,000, and all

available cash was distributed.

Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2013, to record the offset

of the loan receivable from Donald.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 1 Easy

Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

1-1041 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

70. The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013. The

balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and

30%, respectively.

The disposal of Other Assets with a carrying amount of $200,000 realized $140,000, and all

available cash was distributed.

Prepare the schedule to compute the cash payments to the partners.

Total cash of $70,000 can be safely distributed. Beginning cash $60,000 + sale of assets

$140,000 - payment of liabilities $130,000 = $70,000.

AACSB: Analytic

AICPA BB: Legal

AICPA FN: Measurement

Blooms: Apply

Difficulty: 3 Hard

Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable

preliminary distribution of available partnership assets.

1-1042 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.