Practice Exam 7.14.23 Flashcards
Dawson Corporation just received its bank statement for the month of May. This statement revealed that $2,500 of Dawson’s deposits had not yet been recorded by the bank, outstanding checks totaled $1,500, a bank service charge of $100 had been assessed, and Dawson had erroneously recorded in the books a check written for $1,000 as $100. As of May 31, Dawson’s records indicated a cash balance of $40,500. The ending cash balance as of May 31 reported on the bank statement would have been
A. $42,500
B. $39,900
C. $41,100
D. $38,500
D. $38,500
Kind Nurses Assoc. is a nongovernmental not-for-profit entity. Nurses are paid to visit homes of elderly people and are reimbursed for mileage and supplies. Which of the following items should Kind record as a support activity expense in its statement of activities?
A. Payment for nurses’ employee benefits.
B. Nurses’ mileage expense.
C. Payment for nurses’ supplies.
D. Fundraising costs.
D. Fundraising costs.
Supporting activities are not program services and include management and general, membership development, and fundraising activities.
On January 1, Year 1, Sam Co. entered into a contract with a customer to sell a machine for two annual payments of $144,049 starting at the end of Year 1. The customer obtains control of the machine at contract inception. The cash selling price of the machine is $250,000. Sam determined that (1) the contract includes a significant financing component and (2) the contract includes an implicit interest rate of 10%. What amounts of revenue and interest income from this contract, if any, were recognized by Sam in Year 2?
D. $0 $13,095
The customer obtained control over the machine at contract inception. The entire revenue from the contract was recognized on 1/1/Year 1.
The interest component of the first installment payment on 12/31/Year 1 is $25,000 ($250,000 × 10%). The remaining amount of the principal to be paid is $130,951 [$250,000 – ($144,049 annual payment – $25,000 Year 1 interest)]. Interest income for Year 2 is therefore $13,095 ($130,951 × 10%).
A state government condemned Cory Co.’s parcel of real estate. Cory will receive $750,000 for this property, which has a carrying amount of $575,000. Cory incurred the following costs as a result of the condemnation:
What amount of cost should Cory use to determine the gain on the condemnation?
A. $581,000
B. $582,000
C. $588,000
D. $584,000
A. $581,000
The replacement property amounts are not included.
As of December 1, Year 2, a company obtained a $1,000,000 line of credit maturing in 1 year on which it has drawn $250,000, a $750,000 secured note due in 5 annual installments, and a $300,000 3-year balloon note. The company has no other liabilities. How should the company’s debt be presented in its classified balance sheet on December 31, Year 2, if no debt repayments were made in December?
A. Current liabilities of $500,000; long-term liabilities of $1,550,000.
B. Current liabilities of $1,000,000; long-term liabilities of $1,050,000.
C. Current liabilities of $500,000; long-term liabilities of $800,000.
D. Current liabilities of $400,000; long-term liabilities of $900,000.
D. Current liabilities of $400,000; long-term liabilities of $900,000.
The $250,000 of credit drawn and the current portion of the secured note ($750,000 ÷ 5 years = $150,000) are considered current liabilities ($250,000 + $150,000 = $400,000).
The 3-year balloon note and the noncurrent portion of the secured note of $600,000 ($750,000 – $150,000) will be classified as long-term liabilities ($300,000 + $600,000). A balloon note is a loan in which only one payment is due upon maturity.
Which of the following is an example of an exchange transaction of a state or local government?
A. A corporation disposes of old equipment with no salvage value.
B. Sponsored funding of a scholarship if the student is not required to work to receive the benefits.
C. An individual donates to charity.
D. A city-run hospital provides medical services for a fee.
D. A city-run hospital provides medical services for a fee.
Exchange revenues result from sales transactions in which each party receives benefits and incurs costs. Each party receives and gives up essentially equal values.
In periods of rising costs, which one of the following inventory cash flow assumptions will result in higher cost of sales?
A. First-in, first-out.
B. Weighted average.
C. Moving average.
D. Last-in, first-out.
D. Last-in, first-out.
A significant advantage of the LIFO method is its matching of current revenues with the most recent product costs. When prices are rising (which is most of the time), the most recent costs are the highest costs, resulting in higher cost of goods sold and lower net income. The lower net income means lower taxes.
Assuming no outstanding encumbrances at year end, closing entries for which of the following situations would increase the general fund’s unassigned fund balance at year end
A. Actual revenues were less than estimated revenues.
B. Actual expenditures exceed appropriations.
C. Appropriations exceed actual expenditures.
D. Estimated revenues exceed actual appropriations.
C. Appropriations exceed actual expenditures.
ppropriations (public funds set aside for a specific purpose) are recognized in the budgetary entry at the beginning of the fiscal period. If they exceed the government’s actual expenditures for the year, unassigned fund balance increases.
A defendant has three outstanding lawsuits at the end of Year 1. The estimated loss for the first, second, and third cases are $5,000,000, $2,000,000, and $1,000,000, respectively. The likelihood that the defendant will lose the first case is highly probable. The chance of losing the second case is reasonably possible, but not probable. The chance of losing the third case is remote. What amount should the defendant accrue as a contingent liability at the end of Year 1?
A. $7,000,000
B. $8,000,000
C. $5,000,000
D. $2,000,000
C. $5,000,000
A contingent loss must be accrued (debit loss and credit liability) when the following two conditions are met: (1) it is probable that, at a balance sheet date, an asset has been impaired or a liability has been incurred, and (2) the amount of the loss can be reasonably estimated. Because the $5,000,000 loss for the first lawsuit is probable, this amount should be accrued.
Zero Corp. suffered a loss that would have a material effect on its financial statements on an uncollectible trade account receivable due to a customer’s bankruptcy. This occurred suddenly due to a natural disaster 10 days after Zero’s balance sheet date but 1 month before the issuance of the financial statements. Under these circumstances,
C. No Yes
Certain subsequent events may provide additional evidence about conditions at the date of the balance sheet, including estimates inherent in the preparation of statements. These events require recognition in the statements at year end. Other subsequent events provide evidence about conditions not existing at the date of the balance sheet but arising subsequent to that date and before the issuance of the statements or their availability for issuance. These events may require disclosure but not recognition in the statements. Thus, the loss must not be recognized in Zero’s statements, but disclosure must be made.
A foreign subsidiary’s functional currency is its local currency, which has not experienced significant inflation. The weighted-average exchange rate for the current year is an appropriate exchange rate for translating
C. Yes Yes
When an entity’s local currency is the functional currency and this currency has not experienced significant inflation, translation into the reporting currency of all elements of the financial statements must be at a current exchange rate. Assets and liabilities are translated at the exchange rate at the balance sheet date. Revenues (e.g., sales), expenses (e.g., wages), gains, and losses should be translated at the rates in effect when they were recognized. However, translation of income statement items at a weighted-average rate for the period is permitted.
Which of the following is a characteristic of nongovernmental not-for-profit entities (NFPs)?
A. Noneconomic reasons seldom underlie the decision to provide resources to NFPs.
B. The operating environment of NFPs ordinarily differs from that of business entities.
C. Both NFPs and business entities use scarce resources in the production and distribution of goods and services.
D. Business entities and NFPs usually obtain resources in the same way.
C. Both NFPs and business entities use scarce resources in the production and distribution of goods and services.
The operating environments of NFPs and business entities are similar in many ways. Both produce and distribute goods and services using scarce resources.
On December 1, Year 4, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, Year 5. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. What amount of income from this loan should Money report in its Year 4 income statement?
A. $2,005
B. $0
C. $7,833
D. $1,833
A. $2,005
Under the effective-interest method, the effective rate of interest is applied to the net carrying amount of the receivable to determine periodic interest revenue. Thus, interest revenue from the loan for the month of December equals $2,005 [$194,000 × 12.4% × (1 ÷ 12)].
Zeff Co. prepared the following reconciliation of its pretax financial statement income to taxable income for the year ended December 31, its first year of operations:
Zeff’s tax rate for the year is 40%. In its income statement, what amount should Zeff report as income tax expense – current portion?
A. $52,000
B. $64,000
C. $62,000
D. $56,000
D. $56,000
Pretax financial income is adjusted for permanent and temporary differences to arrive at the current taxable income. The current portion of income tax expense equals income taxes paid or payable as determined by applying enacted tax law. Thus, the current portion of income tax expense equals $56,000 ($140,000 × 40%).
East Corp. manufactures stereo systems that carry a 2-year warranty against defects. Based on past experience, warranty costs are estimated at 4% of sales for the warranty period. During the year, stereo system sales totaled $3 million, and warranty costs of $67,500 were incurred. In its income statement for the year ended December 31, East should report warranty expense of
A. $60,000
B. $67,500
C. $52,500
D. $120,000
D. $120,000
An assurance-type warranty creates a loss contingency. A liability for warranty costs is recognized on the date the product is sold. Warranty expense equals 4% of sales for the period, or $120,000 ($3,000,000 × 4%).
Alpha Co. has $100 billion in assets, $100 billion in revenues, and $10 billion in profits for the current year. There are 4 operating segments that report directly to the chief operating officer. Which of the following segments is a reportable segment?
A. Segments 1 and 2.
B. Segments 1, 2, and 3.
C. Segments 1, 2, 3, and 4.
D. Segment 1.
B. Segments 1, 2, and 3.
Segment 1 and 2 pass the revenue test because revenues from each of the two segments exceed $10 billion ($100 billion × 10%). Segment 1, 2, and 3 pass the asset test because their assets are over $10 billion ($100 billion × 10%). Only Segment 1 passes the profit or loss test because its profits exceed the threshold of $1.15 billion [($10.5 + $0.5 + $0.5) × 10%]. As a result, Segment 1, 2, and 3 are reportable segments.
On June 30, Purl Corp. issued 150,000 shares of its $20 par common stock for which it received all of Scott Corp.’s common stock. The fair value of the common stock issued is equal to the carrying amount of Scott Corp.’s net assets. Both corporations continued to operate as separate businesses but with uniform accounting policies. Also, both maintain accounting records with years ending December 31. On December 31, Scott held in its inventory merchandise acquired from Purl on December 1 for $150,000, which included a $45,000 markup. Net income from separate company operations and dividends paid were as follows:
Assuming no consolidated adjustments other than those indicated by the facts given, consolidated net income is
A. $1,905,000
B. $2,130,000
C. $1,950,000
D. $1,650,000
A. $1,905,000
Consolidated net income includes net income of the parent for the entire reporting year from its separate operations. Thus, it does not include Purl’s 100% equity in the net income of Scott since the acquisition date. Consolidated net income also includes net income of the subsidiary since the acquisition date, and an elimination of unrealized intraentity gross profit. It is given that no consolidating adjustments are required except for (1) the intraentity gross profit and (2) nonrecognition of subsidiary net income prior to the acquisition date.
Conn Corp. owns an office building and normally charges tenants $30 per square foot per year for office space. Because the occupancy rate is low, Conn agreed to lease 10,000 square feet to Hanson Co. at $12 per square foot for the first year of a 3-year operating lease. Rent for remaining years will be at the $30 rate. Hanson moved into the building on January 1, Year 1, and paid the first year’s rent in advance. What amount of rental revenue should Conn report from Hanson in its income statement for the year ended September 30, Year 1?
A. $120,000
B. $90,000
C. $240,000
D. $180,000
D. $180,000
In an operating lease, when payments differ from year to year, revenue is recognized by allocating the total amount of revenue to be received evenly over the lease term. At 9/30/Year 1, the amount of revenue to be recognized is for 9 months. Thus, rent revenue is $180,000 {[$10,000 square feet × ($12 + $30 + $30)] × (9 ÷ 36)}.
For purposes of consolidating financial interests, a majority voting interest is deemed to be
A. Greater than 50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly or indirectly owned outstanding nonvoting shares of another entity.
B. 50% of the directly or indirectly owned outstanding voting shares of another entity.
C. 50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly or indirectly owned outstanding nonvoting shares of another entity.
D. Greater than 50% of the directly or indirectly owned outstanding voting shares of another entity.
D. Greater than 50% of the directly or indirectly owned outstanding voting shares of another entity.
When one entity controls another, consolidated financial statements must be issued regardless of the percentage of ownership. Control is the direct or indirect ability to determine the direction of management and policies of the investee. This usually means one entity’s direct or indirect ownership of more than 50% of the outstanding voting interests of another entity.
For the year ended December 31, Beal Co. estimated its allowance for credit losses using the year-end aging of accounts receivable. The following data are available:
After year-end adjustment, the credit loss expense should be
A. $48,000
B. $46,000
C. $52,000
D. $56,000
D. $56,000
Management can estimate the amount of loss that will occur if a foreign government expropriates some company assets. If expropriation is reasonably possible, a loss contingency should be
A. Disclosed and accrued as a liability.
B. Disclosed but not accrued as a liability.
C. Accrued as a liability but not disclosed.
D. Neither accrued as a liability nor disclosed.
B. Disclosed but not accrued as a liability.
A contingent loss that is reasonably possible but not probable is disclosed but not accrued. The disclosure indicates the nature of the contingency and gives an estimate of the loss or range of loss or states that an estimate cannot be made.
Nongovernmental not-for-profit organizations are required to provide which of the following external financial statements?
A. Statement of comprehensive income, statement of cash flows, statement of gains and losses.
B. Statement of financial position, statement of activities, statement of cash flows.
C. Statement of financial position, statement of comprehensive income, statement of cash flows.
D. Statement of cash flows, statement of comprehensive income, statement of unrelated business income.
B. Statement of financial position, statement of activities, statement of cash flows.
The Pel Museum, a nongovernmental not-for-profit entity (NFP), received a contribution of historical artifacts. It need not recognize the contribution if the artifacts are to be sold and the proceeds used to
A. Pay for display of collections.
B. Purchase buildings to house collections.
C. Support general museum activities.
D. Acquire other items for collections.
D. Acquire other items for collections.
Contributions of such items as art works and historical treasures need not be capitalized and recognized as revenues if they are added to collections that are (1) held for public exhibition, education, or research for public service purposes rather than financial gain; (2) protected, kept unencumbered, cared for, and preserved; and (3) subject to a policy that requires the proceeds of a sale of collection items to be used for acquisition of new collection items, the direct care of existing items, or both.
A company performing its long-lived asset impairment testing is reviewing the fair value of equipment. Each of the following valuation techniques may be appropriate for measuring the fair value of the equipment, except the
A. Income approach.
B. Cost approach.
C. Net realizable value approach.
D. Market approach.
C. Net realizable value approach.
The net realizable value approach is not an appropriate valuation technique for measuring the fair value of the equipment. Net realizable value is used to measure inventory and not items of property, plant, and equipment.
Depreciation is computed on the original cost less estimated salvage value under which of the following depreciation methods?
C. No Yes
The productive-output method but not the DDB method includes salvage in the calculation.
Fact Pattern: Royce Company had the following transactions during the fiscal year ended December 31, Year 2:
The total of cash provided (used) by operating activities plus cash provided (used) by investing activities plus cash provided (used) by financing activities is
A. Cash provided of $178,000.
B. Cash provided of $284,000.
C. Cash used of $582,000.
D. Equal to net income reported for fiscal year ended December 31, Year 2.
A. Cash provided of $178,000.
The total of cash provided (used) by the three activities (operating, investing, and financing) should equal the increase or decrease in cash for the year. During Year 2, the cash balance increased from $106,000 to $284,000. Thus, the sources of cash must have exceeded the uses by $178,000.
Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year:
What is Balm’s weighted average of common stock outstanding at December 31?
A. 162,342
B. 131,000
C. 139,008
D. 150,675
C. 139,008
Stock dividends are treated as if they were issued at the beginning of the earliest period reported. The shares outstanding at January 1, April 1, and June 1 must be adjusted for the dividend. Moreover, a treasury stock purchase decreases the amount of outstanding stock. The calculation for weighted average common stock is:
A large nongovernmental not-for-profit entity’s statement of activities must report the net change for net assets that are
A. Yes Yes
The statement of financial position must at a minimum report the amounts of net assets without donor restrictions, net assets with donor restrictions, and total net assets. The statement of activities should report the changes in each category.
Sable Co., organized on January 2, Year 1, had pretax accounting income of $300,000 and taxable income of $800,000 for the year ended December 31, Year 1. Sable expected to maintain this level of taxable income in future years. The only temporary difference is for accrued product warranty costs expected to be paid as follows:
The applicable enacted income tax rate is 30%. In Sable’s December 31, Year 1, balance sheet, the deferred income tax asset and related valuation allowance should be
D. $150,000 $0
Sable should report an accrued product warranty liability of $500,000. The result is a deductible temporary difference of $500,000 because the liability will be settled and related amounts will be tax deductible when the warranty costs are incurred. A deferred tax asset should be measured for deductible temporary differences using the applicable tax rate. Hence, Sable should record a $150,000 ($500,000 × 30%) deferred tax asset. A valuation allowance is not necessary since there is sufficient taxable income that will be available for the future realization of the tax benefit.
Cross Corp. had 2,000 outstanding shares of 11% preferred stock, $50 par. These shares were not mandatorily redeemable. On August 8, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross’s additional paid-in capital from preferred stock totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts as follows:
C. $25,000. $(2,500)
Under the cost method, the entry to record a treasury stock purchase is to debit treasury stock at cost ($22,500) and credit cash. The entry to retire this stock is to debit preferred stock at par [(2,000 shares × 25%) × $50 = $25,000], debit additional paid-in capital from the original issuance ($30,000 × 25% = $7,500), credit treasury stock at cost ($22,500), and credit additional paid-in capital from stock retirement ($10,000). Thus, the net effect on additional paid-in capital is a $2,500 credit ($10,000 credit – $7,500 debit). No entry to retained earnings is necessary.
In its Year 3 income statement, Noll Corp. reported depreciation of $400,000. Noll reported depreciation of $550,000 on its Year 3 income tax return. The difference in depreciation is the only temporary difference, and it will reverse equally over the next 3 years. Assume that the enacted income tax rates are 35% for Year 3, 30% for Year 4, and 25% for Year 5 and Year 6. What amount should be included in the deferred income tax liability in Noll’s December 31, Year 3, balance sheet?
A. $45,000
B. $37,500
C. $52,500
D. $40,000
D. $40,000
At 12/31/Year 3, the only temporary difference is the $150,000 ($550,000 – $400,000) excess of the tax depreciation over the book depreciation. This temporary difference will give rise to a $50,000 taxable amount in each of the years Year 4 through Year 6. Given the enacted tax rates of 30% in Year 4 and 25% in Year 5 and Year 6, the total tax consequences are $40,000, which is the balance that should be reported in the deferred income tax liability at year end.
Which of the following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other than generally accepted accounting principles?
A. Neither I nor II.
B. II only.
C. Both I and II.
D. I only.
C. Both I and II
A comprehensive basis of accounting other than GAAP may be (1) a basis of accounting used to comply with the requirements or financial reporting provisions of a regulatory agency; (2) a basis of accounting used for tax purposes; (3) the cash basis, and modifications of the cash basis having substantial support, such as recording depreciation on fixed assets or accruing income taxes; or (4) a definite set of criteria having substantial support that is applied to all material items, for example, the price-level basis.
Shore Co. records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in euros. Shore recorded a foreign currency transaction gain on collection of the receivable and an exchange loss on settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates?
D. Decrease Decrease
A gain on a foreign currency receivable and a loss on a foreign currency payable result when the dollar weakens.
A large nongovernmental not-for-profit entity’s statement of activities must report the net change for net assets that are
A. Yes Yes
The statement of financial position must at a minimum report the amounts of net assets without donor restrictions, net assets with donor restrictions, and total net assets. The statement of activities should report the changes in each category.
On November 1, Year 1, Key Co. paid $3,600 to renew its now-expired insurance policy for 3 years. It recorded this payment as an expense. At December 31, Year 1, Key’s unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Key’s December 31, Year 1, financial statements?
D. $3,400 $1,100
Key Co. renewed its policy on November 1. Thus, (1) the prior policy had expired and (2) the only insurance expense properly recognized for the last two months of Year 1 for accrual accounting purposes was $200 [($3,600 cost of the new 3-year policy ÷ 36 months) × 2 months]. Accordingly, the asset prepaid insurance should be adjusted at year-end to $3,400 ($3,600 – $200). Moreover, annual insurance expense should equal $1,100 [$90 of pre-November 1 prepaid insurance not previously expensed + $200 expired amount of the November 1 payment + ($4,410 – $3,600 amount expensed on November 1)].
A county that operates a capital projects fund for infrastructure needs had the following information available on transactions for the current year:
How much would the capital projects fund report as other financing sources for the current year?
A. $900,000
B. $1,000,000
C. $1,500,000
D. $500,000
C. $1,500,000
The capital projects fund is a governmental fund. In this fund, other financing sources and uses include (1) the face amount of long-term debt, (2) issuance premium or discount, (3) some payments to escrow agents for bond refundings, (4) interfund transfers, (5) sales of capital assets (unless the sale is a special item), and (6) debt refundings. The amount of other financing sources reported by the county for the current year is $1,500,000 ($1,000,000 proceeds from debt issuance + $500,000 transfer from general fund).
The following information pertained to Azur Co. for the year:
What amount should Azur report as cost of goods sold for the year?
A. $123,360
B. $118,220
C. $128,500
D. $102,800
B. $118,220
Cost of goods sold equals beginning inventory, plus net price of goods purchased, plus freight-in, minus ending inventory. Freight-out is a cost of selling the goods rather than a cost of acquiring the goods. Thus, cost of goods sold is $118,220 [$30,840 + ($102,800 – $10,280) + $15,420 – $20,560]. NOTE: The assumption is that purchases, freight-in, etc., are tracked in separate accounts.
Which method of recording credit loss expense accounts receivable is consistent with accrual accounting?
D. Yes No
The allowance method attempts both to match the expense with the related revenue and to determine the net amount expected to be collected from the accounts receivable. This method is acceptable under GAAP. The direct write-off method debits expense and credits accounts receivable at the time uncollectibility is established. This method does not match revenue and expense. It is not acceptable under GAAP.
On January 1, Year 4, Babson, Inc., leased two automobiles for executive use. The lease requires Babson to make 5 annual payments of $13,000 beginning January 1, Year 4. At the end of the lease term, December 31, Year 8, Babson guarantees the residual value of the automobiles will total $30,000. Babson estimates that it will probably owe only $10,000 at the end of the lease term under the residual value guarantee. The interest rate implicit in the lease is 9%. Present value factors for the 9% rate implicit in the lease are as follows:
Babson’s recorded lease liability immediately after the first required payment should be
A. $35,620
B. $48,620
C. $61,620
D. $44,070
B. $48,620
The lessee records a lease as an asset and a liability at the present value of the lease payments. If no purchase option exists, the lease payments equal the sum of (1) the rental payments, (2) the amount probable of being owed by the lessee under the residual value guarantee, and (3) any nonrenewal penalty imposed. Accordingly, the lease liability recorded at the inception of the lease was $61,620 [($13,000 annual payment × 4.240 PV of an annuity due at 9% for 5 periods) + ($10,000 amount probable of being owed under the residual value guarantee × .650 PV of $1 at 9% for 5 periods)]. The first required payment reduced this amount to $48,620 ($61,620 - $13,000).
Rent should be reported by the lessor as revenue over the lease term as it becomes receivable according to the provisions of the lease for a(n)
B. No Yes No
A lessor reports rent revenue as it becomes receivable according to the provisions of the lease for an operating lease but not for sales-type and direct financing leases.
Which of the following costs of goodwill should be capitalized and amortized?
A. No No
Goodwill arising from a business combination must be capitalized. However, amortization of goodwill is prohibited. Moreover, the cost of developing, maintaining, or restoring intangible assets (including goodwill) that (1) are not specifically identifiable, (2) have indeterminate useful lives, or (3) are inherent in a continuing business and related to an entity as a whole are expensed as incurred.
On January 1, Year 4, Pane Corp. exchanged 150,000 shares of its $20 par value common stock for all of Sky Corp.’s common stock. At that date, the fair value of Pane’s common stock issued was equal to the fair value of the identifiable assets acquired and liabilities assumed. Both corporations continued to operate as separate businesses, maintaining accounting records with years ending December 31. In its separate statements, Pane accounts for the investment using the equity method. Information from separate company operations follows:
If consolidated net income was $800,000, what amount of retained earnings should Pane report in its December 31, Year 4, consolidated balance sheet?
A. $3,250,000
B. $4,125,000
C. $4,925,000
D. $3,050,000
A. $3,250,000
Retained earnings of the consolidated entity at the acquisition date consist solely of the retained earnings of the parent. The consolidated entity does not report any equity amounts of the subsidiary. Retained earnings of the consolidated entity at the reporting date consist of acquisition-date retained earnings, plus consolidated net income (no NCI exists), minus consolidated dividends paid. Sky’s dividends, if any, are paid solely to Pane. Thus, consolidated dividends (those paid outside the entity) consist entirely of those paid by Pane.
