## Cost accounting

advanced accounting. Final exam 2009/2010. Islamic university – Gaza. Tuesday 26/01/2010. College of commerce. Two hours. (60 marks). Accounting ...

|advanced accounting |Final exam 2009/2010 |Islamic university – Gaza | |Tuesday 26/01/2010 |[pic] |College of commerce | |Two hours | |Accounting department | |(60 marks) | | |

Name: …………………………………………………… Id.:…………………………

Question 1: choose the best answer. (16 marks)

|1. |The material sale of inventory items by a parent company to an affiliated | | |company | | |a. |enters the consolidated revenue computation only if the transfer was | | | |the result of arm’s length bargaining. | | |b. |affects consolidated net income under a periodic inventory system but | | | |not under a perpetual inventory system. | | |c. |does not result in consolidated income until the merchandise is sold to| | | |outside parties. | | |d. |does not require a working paper adjustment if the merchandise was | | | |transferred at cost. |

|2. |PPP Corporation owns a 40% interest in SSS Company, acquired several years | | |ago at a cost equal to book value and fair value. SSS sells merchandise to | | |PPPr for the first time in 2005. In computing income from the investee for | | |2005 under the equity method, PPPr uses which equation? | | |a. |40% of SSS’s income less 100% of the unrealized profit in PPPr's ending| | | |inventory. | | |b. |40% of SSS’s income plus 100% of the unrealized profit in PPPr's ending| | | |inventory. | | |c. |40% of SSS’s income less 40% of the unrealized profit in PPPr’s ending | | | |inventory. | | |d. |40% of SSS’s income plus 40% of the unrealized profit in PPPr’s ending | | | |inventory. |

|3. |In situations where there are routine inventory sales between parent | | |companies and subsidiaries, when preparing the consolidation statements, | | |which of the following line items is indifferent to the sales being either | | |upstream or downstream? | | |a. |Consolidated retained earnings. | | |b. |Consolidated gross profit. | | |c. |Noncontrolling interest expense. | | |d. |Consolidated net income. |

|4. |The consolidation procedures for intercompany sales are similar for | | |upstream and downstream sales | | |a. |if the merchandise is transferred at cost. | | |b. |under a periodic inventory system but not under a perpetual inventory | | | |system. | | |c. |if the merchandise is immediately sold to outside parties. | | |d. |when the subsidiary is 100% owned. |

|5. |A parent company regularly sells merchandise to its 70%-owned subsidiary. | | |Which of the following statements describes the computation of minority | | |interest income? | | |a. |The subsidiary’s net income times 30%. | | |b. |(The subsidiary’s net income x 30%) + unrealized profits in the | | | |beginning inventory – unrealized profits in the ending inventory. | | |c. |(The subsidiary’s net income + unrealized profits in the beginning | | | |inventory – unrealized profits in the ending inventory) x 30%. | | |d. |(The subsidiary’s net income + unrealized profits in the ending | | | |inventory – unrealized profits in the beginning inventory) x 30%. |

|6. |SSS Corporation, a 90%-owned subsidiary of PPP Corporation, sold inventory | | |items to its parent at a \$24,000 profit in 2005. PPP resold one-third of | | |this inventory to outside entities. SSS reported net income of \$100,000 for| | |2005. Minority interest income that will appear in the consolidated income | | |statement for 2005 is | | |a. |\$ 8,400. |C |\$10,000. | | | | | |b. |\$ 9,200. |D |\$10,800. | | | |

|7. |Which of the following will be debited to the Investment account when the | | |equity method is used? | | |a. |Investee net losses. | | |b. |Investee net profits. | | |c. |Investee declaration of dividends. | | |d. |Depreciation of excess purchase cost attributable to investee | | | |equipment. |

|8. |A parent company uses the equity method to account for its wholly-owned | | |subsidiary. The company correctly uses this method and has fully reflected | | |all items of subsidiary gain, loss, income, deductions, and dividends. If | | |the parent company is preparing the consolidation working papers, which of | | |the following will be a correct working paper procedure for the Investment | | |account? | | |a. |A debit for a subsidiary loss and a credit for dividends received. | | |b. |A credit for subsidiary income and a debit for dividends received. | | |c. |A debit for subsidiary dividends received and a credit for a subsidiary| | | |loss. | | |d. |A credit for a subsidiary loss and a credit for dividends received. |

|9. |A parent corporation owns 55% of the outstanding voting common stock of one| | |domestic subsidiary, but does not control the subsidiary because it is in | | |bankruptcy. Which of the following statements is correct? | | |a. |The parent corporation must still prepare consolidated financial | | | |statements for the economic entity. | | |b. |The parent corporation must stop using the equity method of accounting | | | |for the subsidiary and start using the cost method. | | |c. |The parent company may continue to use the equity method but the | | | |subsidiary cannot be consolidated. | | |d. |The parent company would suspend the operation of the Investment | | | |account until notified by the bankruptcy court that the subsidiary has | | | |emerged from bankruptcy. |

|10. |The majority of errors in consolidated statements | | |a. |result because the Investment in Subsidiary account on the parent’s | | | |books and the subsidiary equity accounts on the subsidiary’s books are | | | |reciprocal. | | |b. |have conceptual problems from the minority interest representation of | | | |the equity investment in consolidated net assets by stockholders | | | |outside the affiliation structure. | | |c. |involve the amortization of book/market differences. | | |d. |appear when the consolidated balance sheet does not balance. |

|11. |At the beginning of 2005, PPP Inc. acquired an 80% interest in SSS | | |Corporation when the book values of identifiable net assets equaled their | | |fair values. On December 26, 2005, SSS declared dividends of \$50,000, and | | |the dividends were unpaid at year-end. PPP had not recorded the dividend | | |receivable at December 31. A consolidated working paper entry is necessary | | |to | | |a. |enter \$50,000 dividends receivable in the consolidated balance sheet. | | |b. |enter \$40,000 dividends receivable in the consolidated balance sheet. | | |c. |reduce the dividends payable account by \$40,000 in the consolidated | | | |balance sheet. | | |d. |eliminate the dividend payable account from the consolidated balance | | | |sheet. |

|12. |A parent company uses the equity method to account for its wholly-owned | | |subsidiary, but has applied it incorrectly. In each of the past four full | | |years, the company adjusted the Investment account when it received | | |dividends from the subsidiary but did not adjust the account for any of the| | |subsidiary’s profits. The subsidiary had four years of profits and paid | | |yearly dividends in amounts that were less than reported net incomes. Which| | |one of the following statements is correct if the parent company discovered| | |its mistake at the end of the fourth year, and is now preparing | | |consolidation working papers? | | |a. |The parent company's Retained Earnings will be increased by the | | | |cumulative total of four years of subsidiary profits. | | |b. |The parent company's Retained Earnings will be increased by the | | | |cumulative total of the first three years of subsidiary profit, and the| | | |Subsidiary Income account will be increased by the profit for the | | | |current year. | | |c. |The parent company's Subsidiary Income account will be increased by the| | | |cumulative total of four years of subsidiary profits. | | | |A prior period adjustment must be recorded for the cumulative effect of| | |d. |four years of accounting errors. |

|13. |PPP Corporation acquired a 60% interest in SSS Company on January 1, 2005, | | |for \$70,000 cash when SSS had Capital Stock of \$60,000 and Retained | | |Earnings of \$40,000. All excess purchase cost was attributable to equipment| | |with a 10-year (straight-line) life. SSS suffered a \$10,000 net loss in | | |2005 and paid no dividends. At year-end 2005, SSS owed PPP \$12,000 on | | |account. PPP’s separate income for 2005 was \$150,000. Consolidated net | | |income for 2005 was | | |a. |\$135,800. | | |b. |\$136,800. | | |c. |\$143,000. | | |d. |\$144,000. |

|14. |On consolidated working papers, a subsidiary’s income has | | |a. |to be reduced from beginning retained earnings. | | |b. |to be completely eliminated. | | |c. |to have an allocation between the noncontrolling interest share and the| | | |parent’s share (which is eliminated). | | |d. |only an entry in the parent company's general ledger. |

|15. |Which one of the following will increase consolidated retained earnings? | | |a. |An increase in the value of goodwill subsequent to the parent's date of| | | |acquisition. | | |b. |The amortization of a \$10,000 excess in the fair value of a note | | | |payable over its recorded book value. | | |c. |The depreciation of a \$10,000 excess in the fair value of equipment | | | |over its recorded book value. | | |d. |The sale of inventory by a subsidiary that had a \$10,000 excess in fair| | | |value over recorded book value on the parent's date of acquisition. |

|16. |In contrast with single entity organizations, consolidated financial | | |statements include which of the following in the calculation of cash flows | | |from operating activities under the direct method? | | |a. |The change in the balance sheet of the investee account. | | |b. |Noncontrolling interest dividends. | | |c. |Noncontrolling interest income expense. | | |d. |Cash dividends from equity investees. |

Please transfer your answer to the following table: |Q. NO. |1 |2 |3 |4 |5 | |ANSWER | | | | | |

Question 3: (23 marks) |PPP Corporation paid \$24,800 for an 80% interest in SSS Corporation on January | |1, 2004, at which time SSS’s stockholders’ equity consisted of \$15,000 of Common| |Stock and \$6,000 of Retained Earnings. The fair values of SSS Corporation’s | |assets and liabilities were identical to recorded book values when PPP acquired | |its 80% interest. | |SSS Corporation reported net income of \$4,000 and paid dividends of \$2,000 | |during 2004. | |PPP Corporation sold inventory items to SSS during 2004 and 2005 as follows: |

| | |2004 | |2005 | | | |PPP’s sales to SSS | |\$ 5,000 | |\$ 6,000 | | | |PPP’s cost of sales to SSS | |3,000 | |3,500 | | | |Unrealized profit at year-end | |1,000 | |1,500 | | | |The accounts payable of SSS include \$1,500 owed to PPP for inventory purchases. | |The following conversion to equity schedule provides information that may be | |helpful in completing the consolidation working papers for the year ended | |December 31, 2005. | | | | | | | | | | | |Retained | |Investment | |Income | | | |Earnings | |In SSS | |from SSS | |Prior years: | | | | | | | | | | | | | | | |Inventory profit |\$ |( 1,000 ) | |\$( 1,000 ) | | | | | | | | | | | |Current year: | | | | | | | | | | | | | | | |Inventory profit-2004 |\$ | | |\$ 1,000 | |\$ 1,000 | |Inventory profit-2005 |\$ | | |\$( 1,500 ) | |\$(1,500 ) | |Totals |\$ |( 1,000 ) | |\$( 1,500 ) | |\$( 500 ) | | | | | | | | | |Required: | | | |Financial statements of PPP and SSS appear in the first two columns of the | |partially completed working papers. Complete the consolidation working papers | |for PPP Corporation and Subsidiary for the year ended December 31, 2005. |

|PPP Corporation and Subsidiary | |Consolidation Working Papers | |for the year ended December 31, 2005 | | | | | |Eliminations |Non- |Balance | | | |PPP |SSS | |Cntrl. |Sheet | | | | | | |Debit | |Credit | | | |INCOME STATEMENT| | | | | | | | | | |Sales |\$|43,000 |\$20,000 | |\$6,000 | | | |\$57,000 | |Income from | | | | |500 | | | | | |SSS | |7,200 | | |6,700 | | | | | | | | | | |1,500 | |6,000 | | | |Cost of Sales | |( 22,000)|( 8,000)| | | |1,000 | |( 24,500)| |Other expenses | |( 12,200)|( 3,000)| | | | | |( 15,200)| |Minority income | | | | | | | |1,800 |( 1,800)| |Net income | |16,000 |9,000 | | | | | |15,500 | |Retained | | | | |1,000 | | | | | |Earnings | |10,000 |8,000 | |8,000 | | | |9,000 | |Retained | | | | | | | | | | |Earnings 1/1 | | | | | | | | | | |Add: Net income | |16,000 |9,000 | | | | | |15,500 | |Less: Dividends | |( 10,000)|( 5,000)| | | |4,000 |(1,000)|( 10,000)| |Retained | | | | | | | | | | |Earnings 12/31 |\$|16,000 |\$12,000 | | | | | |\$14,500 | |BALANCE SHEET | | | | | | | | | | |Cash | |5,400 |3,000 | | | | | |8,400 | |Net Receivables | |14,000 |10,000 | | | |1,500 | |22,500 | |Dividend | | | | | | | | | | |Receivable | |2,000 | | | | |2,000 | | | |Inventories | |18,000 |8,000 | | | |1,500 | |24,500 | |Goodwill | | | | |8,000 | | | |8,000 | |Plant assets-net| |24,000 |31,000 | | | | | |55,000 | |Investment in | | | | |1,000 | |1,500 | | | |SSS | |29,600 | | | | |2,700 | | | | | | | | | | |26,400 | | | |TOTAL ASSETS |\$|93,000 |\$52,000 | | | | | |\$118,400 | |LIAB. & EQUITY | | | | | | | | | | |Accounts payable| |17,500 |12,500 | |1,500 | | | |28,500 | |Dividend payable| |7,000 |2,500 | |2,000 | | | |7,500 | |Other debt | |12,500 |10,000 | | | | | |22,500 | |Capital stock | |40,000 |15,000 | |15,000 | | | |40,000 | |Retained | | | | | | | | | | |Earnings | |16,000 |12,000 | | | | | |14,500 | |1/1 Noncntrl. | | | | | | |4,600 |4,600 | | |Interest | | | | | | | | | | |12/31 Noncntrl. | | | | | | | | | | |Interest | | | | | | | |5,400 |5,400 | |TOTAL LIAB. & | |\$93,000 |\$52,000 | | | | | |\$118,400 | |EQUITY | | | | | | | | | |

Question 4: answer the following (21 marks)

1. Give the reason for preparing the following elimination enteritis : a. Sales 200000 Purchases (COGS) 20000 ………………………………………………………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………… b. Investment in subsidiary 20000 Dividends declared 20000 ………………………………………………………………………………………………………………………………………………………………………………………………………… …………………………………………………………………………… c. Investment in subsidiary 60000 Beginning retained earning –parent 60000 …………………………………………………………………………………………………………...……………………………………………………………………………………… …………………………………………………………………………………

2. Give two differences between using the cost method and partial equity method in the elimination procedures ? ………………………………………………………………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………………………….........

3. What is the difference between the parent concept and the economic entity concept ? ………………………………………………………………………………………………………………………………………………………………………………………………………… ………………………………………………………………………………… ……………………………………………………………………………………………

4.What are the purposes of the elimination entries related to the sale of inventory between parent and subsidiary companies ? ………………………………………………………………………………………………………………………………………………………………………………………………………… ……………………………………………………………………………………………………………………………………………………………………………………