Under the allocation method followed in this text, how is the noncontrolling interest in consolidated income affected by intercompany bondholdings?
> A company that manufactures and sells a product excludes depreciation expense from the computation of cost of goods sold. The company computes the gross margin by subtracting this cost-of goods- sold number from sales. Is this a violation of current GAAP
> Define an extraordinary item.
> Suppose that a firm would like to adopt the LIFO method to account for its inventories, but it is not practical to determine the amounts assigned to major classes of inventories. Can the firm use the LIFO method? If so, what option is available?
> If a firm uses the LIFO method to account for inventories, is the firm required to disclose the excess of replacement or current cost over the stated LIFO value?
> P Company holds an 80% interest in S Company. Determine the effect (that is, increase, decrease, no change, not determinable) on both the total book value of the noncontrolling interest and the noncontrolling interest’s percentage of ownership in the net
> When a subsidiary issues additional shares of stock to noncontrolling stockholders and such issuance results in an increase in the book value of the parent’s share of the subsidiary’s equity, how should the increase be reflected in the financial statemen
> Explain how a parent company that owns less than 100% of a subsidiary can purchase an entire new issue of common stock directly from the subsidiary.
> When a parent company has obtained control of a subsidiary through several purchases and subsequently sells a portion of its shares in the subsidiary, how is the carrying value of the shares sold determined?
> Refer to Exercise 6-1. Calculate the amount of the noncontrolling interest to be deducted from consolidated income in arriving at 2014 controlling interest in consolidated net income. Downstream Sales LO2 P Company owns 80% of the outstanding stock
> Green Mountain Coffee Roasters reported net income for the year ended September 26, 2009 of $54.439 million. There were 120,370,659 common shares outstanding. On November 13, 2009, Green Mountain acquired all the outstanding shares of Timothyâ€
> One issue concerning Enron’s collapse centered on the amount of non-audit fees paid by Enron to its external auditor, Arthur Andersen. For each of the following items, discuss the potential ethical issues between the firm and its auditor. For each item,
> During a recent review of the quarterly financial statements and supporting ledgers, you noticed several unusual journal entries. While the dollar amounts of the journal entries were not large, there did not appear to be supporting documentation. You dec
> Some people believe that the use of executive stock options is directly related to the increased number of earnings restatements. For each of the following items, discuss the potential ethical issues that might be related to earnings management within th
> From an ethical perspective, some believe that it is never justifiable for an individual or business to declare bankruptcy. Others believe that some actions are appropriate only in extreme circumstances. Without question, as stated in the Journal of Acco
> The company that you work for is a subsidiary of a larger company. At the beginning of each year, the subsidiary prepares a budget for the year that includes a forecast of revenues for the coming year. The subsidiary sells a significant amount of invento
> Goodman Group is an Australian company reporting under a form of IFRS acceptable in Australia. Under IFRS, associate companies are those entities over whose financial and operating policies the consolidated entity exercises significant influence but not
> ABC Corporation purchased 10,000 shares (80%) of EZ Company at $30 per share and sold them several years later for $35 per share. The consolidated income statement reports a loss on the sale of this investment. Explain.
> On September 30, 2014, SRP Company filed a petition for reorganization with a bankruptcy court. The plan was approved by the court and all parties of interest on January 2, 2015, when SRP Company’s balance sheet was as follows: The t
> On January 19, 2010, Kraft Foods announced the terms of its final offer for each outstanding ordinary share of Cadbury, including each ordinary share represented by an American Depositary Share (“Cadbury ADS”), and the Cadbury Board of Directors recommen
> Why is it important to distinguish between upstream and downstream sales in the analysis of intercompany profit eliminations?
> One of the officers of a corporation that had just received a discharge in bankruptcy said, “Good, now we don’t owe anyone.” Is he correct?
> What are “dividends” in a bankruptcy proceeding?
> What is the purpose of a combining workpaper prepared by a trustee?
> Explain how the reciprocity calculation is modified in periods after the declaration of a stock dividend for firms using the cost method.
> An outside party issued a note to Affiliate X, who then sold the note to Affiliate Y. Y discounted the note at an unaffiliated bank, endorsing it with recourse. Which party is primarily liable and which party is contingently liable for the note?
> Investor Company purchased 70% of the $500,000 par value outstanding bonds of Investee Company, a 70% owned subsidiary. The bonds cost $338,000 and had a carrying value of $360,000 on the date of purchase. a. What portion of the gain or loss resulting fr
> What journal entry, if any, would the parent company make to record the receipt of a stock dividend?
> What effect would cumulative preferred stock have on the allocation of a net loss to the common stockholders?
> When a parent company that records its investment using the cost method during a fiscal year sells a portion of its investment, explain the correct accounting for any differences between selling price and recorded values.
> Explain how to account for the difference between implied and book value interest of an investment in preferred stock of a subsidiary.
> How does the existence of preferred stock affect the calculation of noncontrolling interest?
> What effect does a stock dividend have on the consolidated statements workpaper in the year of declaration? In subsequent periods?
> In what period and in what manner should profits relating to the intercompany sale of merchandise be recognized in the consolidated financial statements?
> P Company owns 80% of the outstanding stock of S Company. The 2015 sales of S Company included revenue of $390,000 consisting of consulting services billed to P Company at cost plus 30%. P Company was billed the full $390,000; of this amount, $260,000 wa
> Cash dividends are viewed as a distribution of the most recent earnings. How are stock dividends viewed?
> In what period and in what manner should profits relating to the intercompany sale of depreciable property and equipment be recognized in the consolidated financial statements?
> What procedure is used in the consolidated statements workpaper to adjust the noncontrolling interest in consolidated net assets at the beginning of the year for the effects of intercompany profits?
> Why is it important to distinguish between upstream and downstream sales in the analysis of intercompany profit eliminations?
> P Company sells inventory costing $100,000 to its subsidiary, S Company, for $150,000. At the end of the current year, one-half of the goods remains in S Company’s inventory. Applying the lower of cost or market rule, S Company writes down this inventory
> Why is the date of acquisition of subsidiary stock important under the purchase method?
> Select the best answer for each of the following: 1. Johnson joined other creditors of Alpha Company in a composition agreement seeking to avoid the necessity of a bankruptcy proceeding against Alpha. Which statement describes the composition agreement?
> What are the duties of a trustee in a liquidation proceeding?
> What is the purpose of a Statement of Affairs?
> For each of the following debt restructurings, indicate whether a gain is recognized and, if so, how the gain is measured and reported. (a) Transfer of assets by the debtor to the creditor. (b) Grant of an equity interest by the debtor to the creditor. (
> Five priority categories of unsecured claims must be paid before general unsecured creditors are paid. Briefly describe what makes up each category.
> Distinguish among fully secured, partially secured, and unsecured claims of creditors.
> Distinguish between a voluntary and involuntary bankruptcy petition.
> What is the purpose of a realization and liquidation account?
> List the primary types of contractual agreements between a debtor company and its creditors and briefly explain what is involved in each of them.
> Identify three types of transactions that result in a change in a parent company’s ownership interest in its subsidiary.
> Give the primary argument(s) in favor of assigning the total gain or loss on constructive bond retirement to the company that issued the bonds.
> Allocating the gain or loss on constructive bond retirement between the purchasing and issuing companies is preferred conceptually. Describe how this allocation would be made.
> The gain or loss on the constructive retirement of debt is recognized subsequently by the individual companies. Explain.
> Define “constructive retirement of debt.” How is the total constructive gain or loss computed?
> Define consolidated retained earnings using the analytical approach.
> Define the controlling interest in consolidated net income using the t-account approach.
> In what circumstances might a consolidated gain be recognized on the sale of assets to a nonaffiliate when the selling affiliate recognizes a loss?
> Define the controlling interest in consolidated net income using the t-account or analytical approach.
> What is the essential procedural difference between workpaper eliminating entries for unrealized intercompany profit made when the selling affiliate is a less than wholly owned subsidiary and those made when the selling affiliate is the parent company or
> From a consolidated point of view, when should profit be recognized on intercompany sales of depreciable assets? Nondepreciable assets?
> A balance sheet for Bran Company on June 30, 2015, the date Jim Brown was appointed trustee, is presented here: The following information concerning the period from June 30, 2015, to December 31, 2015, is also available: 1. All Bran Companyâ€
> Why are adjustments made to the calculation of the noncontrolling interest for the effects of intercompany profit in upstream but not in downstream sales?
> Are the adjustments to the noncontrolling interest for the effects of intercompany profit eliminations illustrated in this text necessary for fair presentation in accordance with generally accepted accounting principles? Explain.
> What is the essential procedural difference between workpaper eliminating entries for unrealized intercompany profit when the selling affiliate is a less than wholly owned subsidiary and such entries when the selling affiliate is the parent company or a
> Why is the gross profit on intercompany sales, rather than profit after deducting selling and administrative expenses, ordinarily eliminated from consolidated inventory balances?
> Does the elimination of the effects of intercompany sales of merchandise always affect the amount of reported consolidated net income? Explain.
> Parson Industries purchased 80% of the common stock of Succo Company on January 1, 2013, for $300,000 when Succo Company’s capital consisted of common stock of $200,000, preferred stock of $100,000, other contributed capital of $50,000, and retained earn
> P Company owns 80% of S Company’s common stock (cost $650,000) and 20% of its preferred stock (cost $50,000). Both interests were acquired on January 1, 2012. On the date of purchase, S Company’s stockholdersâ
> PAL Corporation acquired 40% of the outstanding preferred stock of Saltz, Inc. for $60,000 and 90% of that firm’s outstanding common stock for $600,000 on January 1, 2013. On the date that the controlling interest was acquired, the stoc
> On January 1, 2009, Pabst Company acquired 80% of Secor Company’s common stock and 30% of Secor Company’s 10% preferred stock. Pabst Company paid $680,000 for the common stock and $135,000 for the preferred stock. The
> Prost Company has filed a bankruptcy petition. Its account balances at December 31, 2015, are presented here: The following additional information is available: 1. All notes receivable with the exception of one for $2,500 are expected to be collected.
> Condensed financial information for Prince Company and South Company follows: Prince Company purchased 80% of South Company’s common stock for $1,000,000 at the beginning of 2013 and uses the partial equity method to account for the i
> On January 1, 2013, Pasta Company purchased an 80% interest in Salsa Company for $152,000. On this date, Salsa Company reported capital stock and retained earnings of $100,000 and $90,000, respectively. During 2013, Salsa Company reported net income of $
> Prezo Company purchased 80% of Satz Company’s common stock for $880,000 on January 2, 2012. Condensed financial information for Prezo Company and Satz Company is given below. // On July 1, 2012, Prezo Company purchased 60% of Satz Company’s bonds for $
> Prezo Company purchased 80% of Satz Company’s common stock for $880,000 on January 2, 2014. Condensed financial information for Prezo Company and Satz Company is given below. On July 1, 2014, Prezo Company purchased 60% of Satz Compan
> On January 1, 2009, Pace Corporation issued $500,000 par value, 10-year, 15% bonds. Interest is payable each June 30 and December 31. On January 1, 2012, Supra Corporation, a 90%-owned subsidiary, purchased on the open market all of the parent company bo
> On January 1, 2013, Purdy Company acquired 84% of the capital stock of Sally Company for $840,000. On that date, Sally Company’s stockholders’ equity was: Capital Stock, $20 par $600,000 Other Contributed Capital 200,000 Retained Earnings 160,000 Total $
> Pryor Company acquired 51,000 shares of Spero Company’s common stock on January 1, 2013, for $400,000 when Spero Company had common stock ($5 par) of $300,000 and retained earnings of $200,000. On January 1, 2015, Spero Company issued 7,500 additional s
> On January 1, 2014, Plum Company made an open-market purchase of 30,000 shares of Spivey Company common stock for $122,000. At that time, Spivey Company had common stock ($2 par) of $600,000 and retained earnings of $240,000. On July 1, 2014, an addition
> (Note: This is the same problem as Problem 8-4, but assuming use of the complete or the partial equity method.) Trial balances for Porter Company and its subsidiary, Spitz Company, as of December 31, 2014, follow: Porter Company made the following open
> (Note: This is the same problem as Problem 8-3, but assuming use of the complete or the partial equity method.) The accounts of Pyle Company and its subsidiary, Stern Company, are summarized below as of December 31, 2014: Pyle Company made the followin
> On February 1, 2015, Clover Company filed a petition for reorganization under the bankruptcy statutes. The court approved the plan on September 1, 2015, including the following provisions: 1. Unsecured creditors of open accounts amounting to $71,600 are
> Trial balances for Porter Company and its subsidiary, Spitz Company, as of December 31, 2014, follow: Porter Company made the following open-market purchase and sale of Spitz Company common stock: January 1, 2010, purchased 45,000 shares for $135,000;
> The accounts of Pyle Company and its subsidiary, Stern Company, are summarized below as of December 31, 2014: Pyle Company made the following open-market purchase and sale of Stern Company common stock: January 2, 2012, purchased 51,000 shares, cost $5
> The accounts of Pyle Company and its subsidiary, Stern Company, are summarized below as of December 31, 2014: Pyle Company made the following open-market purchase and sale of Stern Company common stock: January 2, 2012, purchased 51,000 shares (85% of
> This is a continuation of Problem 8-14. Trial balances for Phan Company and its subsidiary Sato Company on December 31, 2014, are as follows: Phan Company acquired its investment in Sato Company through open-market purchases of stock as follows: Requ
> Trial balances for Phan Company and its subsidiary Sato Company on December 31, 2013, are as follows: Phan Company acquired its investment in Sato Company through open-market purchases of stock as follows: Any difference between implied and book val
> This is a continuation of Problem 8-12. Trial balances for Phan Company and its subsidiary Sato Company on December 31, 2014, are as follows: Phan Company acquired its investment in Sato Company through open-market purchases of stock as follows: Requ
> Trial balances for Phan Company and its subsidiary Sato Company on December 31, 2013, are as follows: Phan Company acquired its investment in Sato Company through open-market purchases of stock as follows: Any difference between implied and book valu
> The accounts of Pyle Company and its subsidiary, Stern Company, are summarized below as of December 31, 2014: Pyle Company made the following open-market purchase and sale of Stern Company common stock: January 2, 2012, purchased 51,000 shares (85% of
> On January 2, 2013, Pullen Company purchased, on the open market, 135,000 shares of Souza Company common stock for $665,000. At that time, Souza Company had common stock ($2 par value) of $300,000 and retained earnings of $400,000. On May 1, 2014, Pullen
> Sarko Company had 300,000 shares of $10 par value common stock outstanding at all times, and retained earnings balances as indicated here: Pelzer Company acquired Sarko Company stock through open-market purchases as follows: Sarko Company declared no
> A receiver was appointed by the court to manage the affairs of Davis Manufacturing Company on March 31, 2015. On this date, the following balance sheet applied: Additional Information: 1. The cash account includes a $500 travel advance that has been sp
> Using the information presented in Problem 7-4, prepare a consolidated financial statements workpaper for the year ended December 31, 2015, using the trial balance format. Prout Company Sexton Company $ 568,000 $ 271,000 Cument Assets Fixed Assets 1
> Prout Company owns 80% of the common stock of Sexton Company. The stock was purchased for $1,600,000 on January 1, 2012, when Sexton Company’s retained earnings were $800,000. On January 1, 2014, Prout Company sold fixed assets to Sexton Company
> On January 1, 2015, P Company purchased equipment from its 80% owned subsidiary for $600,000. The carrying value of the equipment on the books of S Company was $450,000. The equipment had a remaining useful life of six years on January 1, 2015. On Januar
> Pico Company, a truck manufacturer, owns 90% of the voting stock of Seward Company. On January 1, 2014, Pico Company sold trucks to Seward Company for $350,000. The trucks, which represented inventory to Pico Company, had a cost to Pico Company of $260,0
> Powell Company owns 80% of the outstanding common stock of Sullivan Company. On June 30, 2014, Sullivan Company sold equipment to Powell Company for $500,000. The equipment cost Sullivan Company $780,000 and had accumulated depreciation of $400,000 on th
> Padilla Company acquired 90% of the outstanding common stock of Sanchez Company on June 30, 2014, for $426,000. On that date, Sanchez Company had retained earnings in the amount of $60,000, and the fair value of its recorded assets and liabilities was eq
> (This is the same problem as Problem 7-12, but assuming the complete equity method.) Prather Company owns 80% of the common stock of Stone Company. The stock was purchased for $960,000 on January 1, 2012, when Stone Company’s retained
