accounts data bank

| August 14, 2017

1.
The
usual impetus for transactions that create a long-term debtor-creditor
relationship between members of a consolidated group is due to the:
a. subsidiary’s
ability to borrow larger amounts of capital at more favorable terms than would
be available to the parent.

b.
parent’s ability to borrow larger amounts of capital
at more favorable terms than would be available to the subsidiary.
c. parent’s
desire to decentralize asset management and credit control.

d. parent’s desire to eliminate
long-term debt.

2.
The
motivation of a parent company to purchase the outstanding bonds of

a
subsidiary could be to:
a.
replace the existing debt with new debt at a lower
interest rate.
b.
reduce the parent company’s acquisition price for
the subsidiary.
c.
increase the parent company’s ownership percentage
in the subsidiary.

d.
create interest revenue to offset interest expense
in future income statements.

3.
Company S is a 100%-owned subsidiary of Company P.
Company S has outstanding 8%, 10-year bonds sold to yield 7%. On January 1 of
the current year, Company P purchased all of the Company S outstanding bonds at
a price that reflected the current 9% effective interest rate. How should this
event be reflected in the current year’s consolidated statements?

a. The bonds
remain in the balance sheet and are accounted for at a 7% effective rate.

b. The bonds
remain in the balance sheet and are accounted for at a 9% effective rate.

c. Retirement
of the bonds at an extraordinary gain as of the purchase date.

d. Retirement
of the bonds at an extraordinary loss as of the purchase date.

Chapter 5

4.
Company S is a 100%-owned subsidiary of Company P.
Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of
the current year, Company P purchased all of the Company S outstanding bonds at
a price that reflected the current 9% effective interest rate. How should this
event be reflected in the current year’s consolidated statements?

a. The bonds
remain in the balance sheet and are accounted for at a 7% effective rate.

b. The bonds
remain in the balance sheet and are accounted for at a 9% effective rate.

c. Retirement
of the bonds at an extraordinary gain as of the purchase date.

d. Retirement
of the bonds at an extraordinary loss as of the purchase date.

5.
Company S is a 100%-owned subsidiary of Company P.
Company S has outstanding 6%, 10-year bonds sold to yield 7%. On January 1 of
the current year, Company P purchased all of the Company S outstanding bonds at
a price that reflected the current 6% effective interest rate. How should this
event be reflected in the current year’s consolidated statements?

a. The bonds
remain in the balance sheet and are accounted for at a 7% effective rate.

b. The bonds
remain in the balance sheet and are accounted for at a 9% effective rate.

c. Retirement
of the bonds at an extraordinary gain as of the purchase date.

d. Retirement
of the bonds at an extraordinary loss as of the purchase date.

6.
Intercompany debt which must be eliminated from
consolidated financial statements may results from:

a. one member
of a consolidated group selling its bonds directly to another member of the
group.

b. one member
of a consolidated group advancing funds to another member of the group so that
the member may retire bonds it had issued to outside parties.

c. one member
of a consolidated group purchasing bonds from outside parties as an investment
that had been issued to outside parities by another member of the group.

d. all of the above.

5-2

Chapter 5

7.
Elimination procedures for intercompany bonds
purchased from outside parties by another member of the consolidated group are:

a. not needed
except in the period of acquisition if purchased at par.

b. not needed
except in the period of acquisition if purchased at a premium or discount.

c. not needed
except in the period of acquisition if only a portion of the outstanding bonds
are purchased.

d. needed each period as long
as there are intercompany bonds.

8.
Assuming the correct bond eliminations entry(s) are
made for intercompany bonds, intercompany bond interest expense will appear on:

a.
the consolidated income statement.
b.
the income statement of the bond issuer.
c.
the income statement of the bond purchaser.
d. none of the above.

9.
Assuming the correct bond eliminations entry(s) are
made for intercompany bonds, intercompany bond interest payable will appear on:

a.
the consolidated balance sheet.
b.
the balance sheet of the bond issuer.
c.
the balance sheets of the bond issuer and the bond
purchaser.
d. none of the above.

10.
Company S is a 100%-owned subsidiary of Company P.
On January 1, 20X9, Company S has $200,000 of 8% face rate bonds outstanding,
which were issued at face value. The bonds had 5 years to maturity on January
1, 20X9. Premiums or discounts would be amortized on a straight-line basis. On
that date, Company P purchased the bonds for $198,000. The amount on the
consolidated balance sheet relative to the debt is:

a.
bonds payable $200,000.
b.
bonds payable $200,000, discount $2,000.
c.
bonds payable $200,000, discount $1,600.
d. The bonds do not appear on
the balance sheet.

11.
Company S is a 100%-owned subsidiary of Company P.
On January 1, 20X9, Company S has $100,000 of 8% face rate bonds outstanding.
The bonds had 5 years to maturity on January 1, 20X9, and had an amortized
discount of $5,000. On that date, Company P purchased the bonds for $99,000.
The net adjustment needed to consolidate retained earnings on December 31, 20X9
is __________.

a.
$(4,000)
b.
$(3,200)
c.
$(800)
d. $0

5-3

Chapter 5

12.
Sun Company is a 100%-owned subsidiary of Peter
Company. On January 1, 20X1, Sun Company has $500,000 of 8% face rate bonds
outstanding, with an unamortized discount of $5,000 which is being amortized
over a 5 year remaining life to maturity. On that date, Peter Company purchased
the bonds for $497,000. The adjustment to the consolidated income of the two
companies needed in the consolidation process for 20X2 (the following year) is
__________.
a.
$2,800
b.
$(400)
c.
$400
d. $(2,800)

13. Company S is a 100%-owned
subsidiary of Company P. Company P purchased, at a premium, Company S bonds
that are outstanding and have a remaining discount. Consolidation theory takes
the position that:
a.
interest expense should be adjusted to reflect the
market value of the bonds on the date of Company P’s purchase.

b.
the debt has been retired at an extraordinary loss.
c.
the debt is outstanding, but should be shown at face
value.
d. the gain or
loss on retirement should be allocated over the remaining life of the bonds.

14.
Company S is a 100%-owned subsidiary of Company P.
Company P purchased all the outstanding bonds of Company S at a discount. The
bonds had a remaining issuance premium at the time of Company P’s purchase. The
bonds have 5 years to maturity. At the end of 5 years, retained earnings:
a.
is greater as a result of the purchase.
b.
is less as a result of the purchase.
c.
is not affected by the purchase.
d. cannot be determined from
the information provided.

15.
Company P owns 80% of Company S. On January 1, 20X9
Company S has outstanding 6% bonds with a face value of $200,000 and an
unamortized discount of $3,000, which is being amortized on a straight-line
basis over a remaining term of 10 years. On January 1, 20X9, Company P
purchased all the bonds for $205,000. The premium also is amortized on a
straight-line basis. The net impact of the purchase on the noncontrolling
interest as of December 31, 20X9, is __________.
a.
$(8,000)
b.
$(1,600)
c.
$(1,440)
d. $(1,200)

5-4

Chapter 5

16. The
purchase of outstanding subsidiary bonds by the parent company has the same
impact on consolidated statements as:

a.
the subsidiary retiring its own debt with the
proceeds of new debt issued to outside parties.

b. the
subsidiary retiring the debt with the proceeds of a loan from the parent.

c. the
subsidiary retiring the debt with the proceeds of a new stock issue.

d. allowing the bonds to
continue to be held by outside interests.

17.
A subsidiary has outstanding $100,000 of 8% bonds that
were issued at face value. The parent purchased all the bonds for $96,000 with
5 years remaining to maturity. How will the parent’s use of the effective
interest amortization rather than straight-line amortization of the discount
affect the consolidated statements?
a.
No impact.
b.
Will result in a different gain on retirement
c. Will result
in more interest expense in the first year after the intercompany purchase.

d. Will result
in less interest expense in the first year after the intercompany purchase.

18.
Powell Company owns an 80% interest in Sauter, Inc.
On January 1, 20X1, Sauter issued $400,000 of 10-year, 12% bonds at a premium
of $25,000. On December 31, 20X5, 5 years after original issuance, Powell
purchased all of the outstanding bonds for $390,000. Both firms use the
straight-line method of amortization.

What is the extraordinary gain on retirement on the 20X5
consolidated income statement?

a.
$12,500
b.
$22,500
c.
$10,000
d. $35,000

19.
Powell Company owns an 80% interest in Sauter, Inc.
On January 1, 20X1, Sauter issued $400,000 of 10-year, 12% bonds at a premium
of $25,000. On December 31, 20X5, 5 years after original issuance, Powell
purchased all of the outstanding bonds for $390,000. Both firms use the straight-line
method of amortization.

Bond interest expense included in the 20X5 subsidiary income
distribution schedule is __________.

a.
$48,000
b.
$45,500
c.
$47,500
d. $0

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