Question 20. Subsidiary Company issued $200,000 o

29 Jun Question 20. Subsidiary Company issued $200,000 o

Question
20. Subsidiary Company issued $200,000 of 8%, 5-year bonds on January 1, 20X6. The discount on issuance was $12,000. Bond interest is paid annually on December 31. On December 31, 20X8, Parent Company purchased one-half of the outstanding bonds for $96,000. Both companies use the straight-line method of amortization. How much interest expense will appear on the December 31, 20X8, consolidated income statement?

a. $18,400

b. $16,000

c. $9,200

d. $8,000

21. Subsidiary Company issued $200,000 of 8%, 5-year bonds on January 1, 20X6. The discount on issuance was $12,000. Bond interest is paid annually on December 31. On December 31, 20X8, Parent Company purchased one-half of the outstanding bonds for $96,000. Both companies use the straight-line method of amortization. How much interest expense will appear on the December 31, 20X9, consolidated income statement?

a. $18,400

b. $16,000

c. $9,200

d. $8,000

22. The consolidated income statement in the year one member of a consolidated group purchases bonds from outside parties includes:

a. an extraordinary gain if purchased above book value.

b. an extraordinary gain if purchased below book value.

c. loss if purchased below book value.

d. gain if purchased above book value.

1 The consolidated income statement in the year one member of a consolidated group purchases bonds from outside parties includes a(n):

a. extraordinary loss if purchased above book value.

b. extraordinary loss if purchased below book value.

c. loss if purchased above book value.

d. loss if purchased above book value.

24. On an income distribution schedule, any gain or loss resulting from intercompany bonds is absorbed by:

a. the issuer of the bonds.

b. the purchaser of the bonds.

c. allocation between the issuer and the purchaser.

d. none of the above

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Chapter 5

25. In years subsequent to the year one member of a consolidated group purchases bonds from outside parties, Consolidated Income Statements:

a. recognize a prorated share of any gain or loss from intercompany bonds.

b. recognize a prorated share of any gain but would not show a share of a loss from intercompany bonds.

c. recognize a prorated share of any loss but would not show a share of a gain from intercompany bonds.

d. would not recognize any gain or loss from intercompany bonds.

26. When one member of a consolidated group purchases only part of the outstanding bonds of another member of the group (for example, 80% of the bonds),

a. all bonds, and all the interest expense and interest revenue applicable to the bonds should be eliminated.

b. 20% of the bonds, and 20% the interest expense and interest revenue applicable to the bonds should be eliminated.

c. 80% of the bonds, and 80% the interest expense and interest revenue applicable to the bonds should be eliminated.

d. none of the bonds, and none of the interest expense and interest revenue applicable to the bonds should be eliminated.

27. Leasing subsidiaries are formed to achieve centralized asset management through leasing to affiliated firms, and when they are consolidated with the parent, they are consolidated with the parent

a. only if the parent controls at least 20% of the leasing subsidiary.

b. only if the parent controls at least 50% of the leasing subsidiary.

c. only if the parent controls at least 90% of the leasing subsidiary.

d. regardless of the ownership percentage of the parent.

28. The effect of an operating lease on the income distribution schedule:

a. is non-existent.

b. affects only the lessee’s income.

c. affects only the lessor’s income.

d. affects the amount of income or distribution of income between the noncontrolling and controlling interests.

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Chapter 5

29. Lease terms can be considered to be “significantly affected:”

a. when the terms are the same for affiliated firms as for independent firms.

b. when the terms could not reasonably be expected to occur between independent firms.

c. only if the lease is an operating lease to the lessee and lessor.

d. only if the lease is a direct-financing lease to the lessee and lessor.

30. Which of the following statements is true?

a. No adjustments are made in the income distribution schedule as a result of Operating, Direct-Financing, and Sales-Type leases.

b. No adjustments are made in the income distribution schedule as a result of Operating and Direct-Financing leases.

c. No adjustments are made in the income distribution schedule as a result of Operating and Sales-Type leases.

d. No adjustments are made in the income distribution schedule as a result of Direct-Financing and Sales-Type leases.

31. Which of the following statements is true?

a. No elimination entries are required on a worksheet as a result of Operating, Direct-Financing, and Sales-Type leases.

b. No elimination entries are required on a worksheet as a result of Direct-Financing and Sales-Type leases.

c. No elimination entries are required on a worksheet as a result of Operating leases.

d. All the preceding are false.

32. When there is an unguaranteed residual value for the lessor in a Direct-Financing Lease, this means:

a. the total payments to be received by the lessor will come from the lessee.

b. the total payments to be received by the lessee will come from the lessor.

c. a portion of the total payments to be received by the lessor will come from parties outside the consolidated group.

d. a portion of the total payments to be received by the lessee will come from parties outside the consolidated group.