ACC405 Final Exam Fall 2015

Master Corporation owns 85 percent of Servant Corporation’s voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
1. Based on the information given above, in the preparation of the 20X8 consolidated financial statements, premium on bonds payable will be:
A. debited for $45,000 in the consolidating entries.
B. credited for $40,500 in the consolidating entries.
C. debited for $40,500 in the consolidating entries.
D. credited for $45,000 in the consolidating entries.

2. Based on the information given above, in the preparation of the 20X8 consolidated financial statements, interest income will be:
A. debited for $11,500 in the consolidating entries.
B. credited for $11,500 in the consolidating entries.
C. debited for $16,000 in the consolidating entries.
D. credited for $16,000 in the consolidating entries.

3. Based on the information given above, what amount of investment in bonds will be eliminated in the preparation of the 20X8 consolidated financial statements?
A. $240,500
B. $200,000
C. $245,000
D. $211,500

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite’s bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite’s voting common stock.

4. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500

5. Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?
A. $17,000 loss
B. $12,800 loss
C. $18,500 gain
D. $22,200 gain

6. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500

7. Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200

8. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X9 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200

9. Based on the information given above, what amount of constructive gain will be allocated to noncontrolling interest in 20X8 consolidated financial statements?
A. $4,925
B. $5,550
C. $5,625
D. $4,625

Senior Corporation acquired 80 percent of Junior Company’s voting shares on January 1, 20X8, at underlying book value. On that date, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5, with a 12-year maturity. During preparation of the consolidated financial statements for December 31, 20X8, the following consolidating entry was made in the worksheet:

Bonds Payable 500,000
Bond Premium 30,000
Loss on Bond Retirement 16,875
Interest Income ?
Investment in Junior Company Bonds 545,000
Interest Expense ?
10. Based on the information given above, what price did Senior pay to purchase the Junior bonds?
A. $530,000
B. $516,875
C. $533,750
D. $550,625

11. Based on the information given above, what was the carrying amount of the bonds on Junior’s books on the date of purchase?
A. $533,750
B. $516,875
C. $545,000
D. $550,625

12. Cutler Company owns 80 percent of the common stock of Marina Inc. Cutler acquires some of Marina’s bonds from an unrelated party for less than the carrying value on Marina’s books and holds them as a long-term investment. For consolidated reporting purposes, how is the acquisition of Marina’s bonds treated?
A. As a decrease in the Bonds Payable account on Marina’s books.
B. As an increase in noncurrent assets.
C. Everything related to the bonds is eliminated in the consolidation worksheet, and nothing related to the bonds appears in the consolidated financial statements.
D. As a retirement of bonds.

13. Culver owns 80 percent of the common stock of Fowler Company. Culver also purchases some of Fowler’s bonds directly from Fowler and holds the bonds as a long-term investment. How is the acquisition of the bonds treated for consolidated reporting purposes?
A. As a retirement of bonds.
B. As an increase in the Bonds Payable account on Fowler’s books.
C. Everything related to the intercompany bonds is eliminated in the consolidation worksheet, and nothing related to the bonds appears in the consolidated financial statements.
D. As an increase in noncurrent assets.

14. At the end of the year, a parent acquires a wholly owned subsidiary’s bonds from unaffiliated parties at a cost less than the subsidiary’s carrying value. The consolidated net income for the year of acquisition should include the parent’s separate operating income plus:
A. the subsidiary’s net income increased by the gain on constructive retirement of debt.
B. the subsidiary’s net income decreased by the loss on constructive retirement of debt.
C. the subsidiary’s net income increased by the gain on constructive retirement of debt, and decreased by the subsidiary’s bond interest expense.
D. the subsidiary’s net income decreased by the loss on constructive retirement of debt, and decreased by the subsidiary’s bond interest expense.