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Flashcards in FAR: ALL: 2/17/2018 Deck (10):

The separate condensed balance sheets and income statements of Purl Corp. and its wholly owned subsidiary, Scott Corp., are as follows:

December 31, year 2

Purl Scott
Current assets:
Cash $ 80,000 $ 60,000
Accounts receivable (net) 140,000 25,000
Inventories 90,000 50,000
Total current assets 310,000 135,000
Property, plant, and equipment (net) 625,000 280,000
Investment in Scott (equity method) 400,000 —
Total assets $1,335,000 $ 415,000

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 160,000 $ 95,000
Accrued liabilities 110,000 30,000
Total current liabilities 270,000 125,000
Stockholders’ equity:
Common stock ($10 par) 300,000 50,000
Additional paid-in capital — 10,000
Retained earnings 765,000 230,000
Total stockholders’ equity 1,065,000 290,000
Total liabilities and stockholders’ equity $1,335,000 $ 415,000

For the year ended December 31, year 2

Purl Scott
Sales $2,000,000 750,000
Cost of goods sold 1,540,000 500,000
Gross margin 460,000 250,000
Operating expenses 260,000 150,000
Operating income 200,000 100,000
Equity in earnings of Scott 70,000—
Income before income taxes 270,000 100,000
Provision for income taxes 60,000 30,000
Net income $ 210,000 $ 70,000

Additional information:

• On January 1, year 2, Purl acquired for $360,000 all of Scott’s $10 par, voting common stock. On January 1, year 2, the fair value of Scott’s assets and liabilities equaled their carrying amount of $410,000 and $160,000, respectively, except that the fair values of certain items identifiable in Scott’s inventory were $10,000 more than their carrying amounts. These items were still on hand at December 31, year 2. Goodwill is determined to be unimpaired at December 31, year 2.

• During year 2, Purl and Scott paid cash dividends of $100,000 and $30,000, respectively. For tax purposes, Purl receives the 100% exclusion for dividends received from Scott.

• There were no intercompany transactions, except for Purl’s receipt of dividends from Scott and Purl’s recording of its share of Scott’s earnings.

• Both Purl and Scott paid income taxes at the rate of 30%.

In the December 31, year 2, consolidated financial statements of Purl and its subsidiary, net income should be

1) $270,000
2) $210,000
3) $190,000
4) $170,000


Under the “full” equity method of accounting, the acquirer’s net income equals consolidated net income. Therefore, in this case consolidated net income is $210,000. This amount can be proved as the acquirer’s income from independent operations plus its share of reported acquiree income.

Purl’s operating income less taxes ($200,000 -$60,000)= $140,000
ADD: Scott’s net income, $70,000


In a barter transaction where advertising services provided are exchanged for advertising services received, under which of the following situations can the advertising provider recognize revenue for the services performed? Assume the accounting is under IFRS guidelines.

1) When the advertising services in the exchange are similar
2) When the fair value of the advertising services received can be reliably measured
3) When there is a nonbarter transaction for similar advertising services that can be reliably measured with the same counterparty
4) When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty

When there is a nonbarter transaction for similar advertising services that can be reliably measured with a different counterparty

The fair value of the advertising services provided can be reliably measured by reference to a nonbarter transaction for similar advertising with a different counterparty (SIC Interpretation 31, para 5).


On January 2, 2005, Morey Corp. granted Dean, its president, 20,000 stock appreciation rights for past services. Those rights are exercisable immediately and expire on January 1, 2008.

On exercise, Dean is entitled to receive cash for the excess of the stock's market price on the exercise date over the market price on the grant date. Dean did not exercise any of the rights during 2005. The market price of Morey's stock was $30 on January 2, 2005 and $45 on December 31, 2005.

As a result of the stock appreciation rights, Morey should recognize compensation expense for 2005 of

1) $0
2) $100,000
3) $300,000
4) $600,000


The 2005 compensation expense for these stock-appreciation rights equals: (number of shares) × (ending market price − grant-date market price) = 20,000($45 − $30) = $300,000.

The rights are immediately vested, because they can be exercised immediately. Therefore, the entire $300,000 amount is recognized as expense in 2005. Changes in market price in future years, before the rights are exercised, are recognized on a current and prospective basis (change in estimate).


Pahn, a nongovernmental not-for-profit organization, received an unconditional pledge of $50,000. The donor stipulated that the pledge must be used in the next fiscal year. Pahn received and spent the $50,000 in the next year. For the current fiscal year, what element of Pahn's statement of financial position will increase as a result of the unconditional pledge?

1) Cash and cash equivalents.
2) Pledge receivables.
3) Contribution revenues without donor restriction.
4) Deferred contributions.

Pledge receivables.

Pledge receivables will increase.


According to ASC Topic 250, the cumulative effect of changing to a new accounting principle should be included in net income of

Future periods The period of change
No No
Yes No
Yes Yes
No Yes

Future Periods, No
The Period of change, NO

A change in accounting principle is accounted for through retrospective application to all prior periods, unless it is impracticable to do so.


Excel City's store supply internal service fund provides services only to general government departments. During 20X1, the internal service fund reported operating revenue of $50,000 and operating expenses of $35,000. What amount of adjustment is needed to convert the governmental funds Statement of Revenues, Expenditures, and Changes in Fund Balance to governmental activities in Excel City's government-wide Statement of Activities?

1) Increase revenue by $50,000.
2) Increase expenses by $35,000.
3) Decrease revenue by $15,000.
4) Decrease expenses by $15,000.

Decrease expenses by $15,000.

The general government departments have recorded a total of $50,000 in expenditures related to billings from the internal service fund. The conversion to government-wide financial statements requires the elimination of the $15,000 "profit" by decreasing the $50,000 expenditure to $35,000 and reclassifying it as "expense."


How would the declaration of a 10% stock dividend by a corporation affect each of the following on its books?

Retained earnings (RE) Total stockholders' equity (SE)
Decrease No effect
Decrease Decrease
No effect Decrease
No effect No effect

Retained earnings (RE), DECREASE
Total stockholders' equity (SE), NO EFFECT

Regardless of the size of a stock dividend, RE is decreased and other SE accounts are increased. Since the dividend described in this question is small (< 20-25% of the outstanding shares), the journal entry would be

Retained earnings (FV)
Common stock dividend distributable (par value)
Additional paid-in capital (plug)

Accordingly, RE will decrease and, since all affected accounts are elements of SE, total SE will not change. Note that the entry for a large stock dividend would be

Retained earnings (par)
Common stock dividend distributable (par)


Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred stock. No dividends on common stock were declared during the year. Net income was $2,000,000.

What was Jen's basic earnings per share?

1) $9.00
2) $9.09
3) $10.00
4) $11.11


Earnings per share is: (net income - preferred dividends)/common shares outstanding. Preferred stock dividends are $100 × 10% × 20,000 shares = $200,000. Earnings per share is (2,000,000-200,000)/200,000=$9 per share.


The following information was taken from Baxter Department Store's financial statements:

Inventory on January 1 $ 100,000
Inventory on December 31 300,000
Net sales 2,000,000
Net purchases 700,000

What was Baxter's inventory turnover for the year ending December 31?

1) 2.5
2) 3.5
3) 5
4) 10


Inventory turnover is the ratio of cost of goods (CGS) sold to average inventory.

First, calculate CGS = beginning inventory $100,000 + purchases $700,000 - ending inventory $300,000 = $500,000.

Then, average inventory = (beginning inventory + ending inventory)/2 = ($100,000 + $300,000)/2 = $200,000.

Turnover = $500,000/$200,000 = 2.5.


When a new entity is formed to effect a business combination, which of the following statements, if any, is/are correct?

I. A legal consolidation has occurred.

II. The new entity is always the acquirer in the business combination.

1) Neither I nor II.
2) I only.
3) II only.
4) Both I and II.

I only

Only Statement I is correct; Statement II is not correct.

When a new entity is formed to effect a business combination, a legal consolidation has occurred (Statement I), but the new entity is not always the acquirer in the combination (Statement II).

If the new entity transfers cash or other assets or incurs liabilities to effect the combination, the new entity is likely the acquirer, but if the new entity issues equity interest to effect the business combination, one of the pre-existing combining entities must be the acquirer.