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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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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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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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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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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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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
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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).
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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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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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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.
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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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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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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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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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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.
1-603 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-607 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-609 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-610 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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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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.
1-622 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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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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.
1-624 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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AICPA FN: Measurement
Blooms: Apply
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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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McGraw-Hill Education.
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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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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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.
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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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.
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.
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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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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.
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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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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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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: 10-04 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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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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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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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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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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McGraw-Hill Education.
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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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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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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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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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.
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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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McGraw-Hill Education.
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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AICPA FN: Measurement
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Blooms: Apply
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
AACSB: Analytic
AACSB: Diversity
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AICPA FN: Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
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
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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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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AICPA FN: Measurement
Accessibility: Keyboard Navigation
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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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
AACSB: Analytic
AACSB: Diversity
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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.
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
AACSB: Analytic
AACSB: Diversity
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AICPA FN: Measurement
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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.
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
AACSB: Diversity
AICPA BB: Global
AICPA FN: Measurement
Accessibility: Keyboard Navigation
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
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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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
Accessibility: Keyboard Navigation
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
AICPA BB: Industry
AICPA FN: Reporting
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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McGraw-Hill Education.
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
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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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
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.
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
AICPA BB: Industry
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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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.
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
AICPA BB: Industry
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.
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
AICPA BB: Industry
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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McGraw-Hill Education.
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
AICPA BB: Industry
AICPA FN: Measurement
Accessibility: Keyboard Navigation
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
AICPA BB: Industry
AICPA FN: Measurement
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.
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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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.
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
AICPA BB: Industry
AICPA FN: Reporting
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.
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
AICPA BB: Industry
AICPA FN: Reporting
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.
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
AICPA BB: Industry
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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Accessibility: Keyboard Navigation
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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McGraw-Hill Education.
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
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.
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
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.
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
AICPA BB: Legal
AICPA FN: Reporting
Accessibility: Keyboard Navigation
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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McGraw-Hill Education.
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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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.
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
AICPA BB: Industry
AICPA FN: Reporting
Accessibility: Keyboard Navigation
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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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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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.
1-791 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-793 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-795 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-796 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-811 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-816 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-819 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-822 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
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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.
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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.
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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
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.
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.
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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.
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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.
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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.
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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).
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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.
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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.
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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.
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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.
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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.
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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.
1-876 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-918 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-921 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-923 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-926 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-928 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-931 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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
1-937 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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
1-945 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-946 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-947 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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.
1-948 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
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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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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McGraw-Hill Education.
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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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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McGraw-Hill Education.
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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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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McGraw-Hill Education.
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.