De La Salle Araneta University

College of Business
Salvador Araneta Campus, Victoneta Avenue, Potrero, Malabon City

Brines, Christian Joseph C.

Theory of Accounts
(Operating Segments)

Note: Correct answers are in RED FONT COLOR (78 items)

PART 1: Operating Segment

Nos. 1 to 7 (Source: RESA Hand outs)

1. Which is not an objective of PFRS 8 on Operating Segments?

a. To set out principles for reporting financial information by operating segments
b. To help users evaluate the nature and financial effects of the entity’s business activities
c. To help users understand the economic environment in which the entity operates
d. To disclose information not adequately covered by the basic set of financial statement
2. What is an operating segment?
I. It is a component of an entity that engages in business activities from which it
may earn revenue and incur expenses, including revenue and expenses relating
to transactions with other components of the same entity.
II. It is a component of an entity whose operating results are regularly reviewed by
the entity’s chief operating decision maker to make decisions about resources to
be allocated to the segment and assess its performance
a. I only
b. II only
c. Both I and II
d. Neither I nor II
3. Under PFRS 8, which of the following entities is not required to apply operating segment
standards.
a. Entities whose equity or debt securities are publicly traded
b. Entities that are in the process of issuing equity of debt securities in securities market
c. Entities whose operating activities are so diversified that segment reporting is in order
d. Entities that choose to disclose segment information voluntarily in FS that comply with PFRS
4. In the financial report contains both the consolidated FS of a parent and the parents separate
FS, Segment Information is required in
a. The separate FS only
b. The consolidated FS only
c. Both the separate and Consolidated FS
d. Neither the separate nor consolidated FS
5. An entity shall report information about an operating segment when

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a. Its segment revenue(excluding internal sales) is more than 10% of the combined segment
revenue(excluding Internal sales) of all operating segments.
b. Its segment revenue(including internal sales) is more than 10% of the combined segment
revenue(including Internal sales) of all operating segments.
c. Its segment revenue(excluding internal sales) is 10% or more of the combined segment
revenue(excluding Internal sales) of all operating segments.
d. Its segment revenue(including internal sales) is 10% or more of the combined segment
revenue(including Internal sales) of all operating segments.
6. Which measure is not used to determine whether an operating segment is considered as
reportable?
a. Segment Revenue
b. Segment profit or loss
c. Segment Assets
d. Segment Equity
7. The sum of reportable segment revenue must be at least equal to what percent of total
revenue?
a. 100%
b. 75%
c. 65%
d. 50%

Nos. 8 to 17 (Source: http://highered.mcgraw-

hill.com/sites/0078136628/student_view0/chapter8/chapter_quiz.html)

8. Assuming that each of the items below is significant (constitutes more than ten percent of the
appropriate total), a company would not have to disclose under ASC Topic 280:

a) types of products and services from which each operating segment derives its revenues
b) factors used to identify operating segments
c) revenues from external customers
d) income tax expense or benefit
e) the identity of a major customer who accounts for thirty percent of all sales

9. ASC Topic 280 requires a company to disclose the following information for each reportable
operating segment, except for:

a) revenues
b) gross profit
c) total segment assets
d) expenditures for additions to long-lived assets
e) income tax expense or benefit

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College of Business
Salvador Araneta Campus, Victoneta Avenue, Potrero, Malabon City

10. All of the following items of information are required to be included in interim reports for each
operating segment,except for:

a) revenues from external customers

b) intersegment revenues
c) revenues from internal customers
d) segment profit or loss
e) total assets, if there has been a material change from the last annual report

11. Which one of the following is a test for identifying operating segments for which separate
disclosure is required?

a) asset test
b) liability test
c) expense test
d) gross profit test
e) equity test

12. Using the information in #6 above, which segments are reportable using the revenue test?

a) Boats and Publishing

b) Boats and Aircraft
c) Aircraft and Publishing
d) Aircraft only
e) Boats, Aircraft, and Publishing

13. Ashley Inc. has a publishing industry operating segment. Which one of the following is included
in calculating the segment's operating profit or loss?

a) intersegment revenues
b) interest expense
c) extraordinary losses
d) income taxes
e) pension expense

14. ASC Topic 280 requires a company to disclose the following information for each reportable
industry segment, except for:

a) identifiable liabilities
b) revenues
c) operating profit or loss
d) capital expenditures

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e) equity in net income from an investment in the net assets of equity investees

15. Under ASC Topic 280, an operating segment would not be required to disclose the following
information even if it were material in amount:

a) revenues from transactions with other operating segments

b) investment in equity method affiliates
c) net income from discontinued operations
d) cash flow information
e) amount of revenues from a major customer

16. ASC Topic 280 requires management to consider the following aggregation criteria except for:

a) the type or class of customer

b) the nature of the production process
c) the distribution methods
d) the total amount of long-lived assets for each operating segment
e) the nature of the products and services provided by each operating segment

17. Advantages of segment reporting that aligns with a company's internal structure include all of
the following, except for:

a) A company's internal segments are probably less subjective than industry-based segments.
b) The incremental cost should be minimal.
c) An easy application of GAAP to internal segments would exist, that would not have bee possible
if the segments were not aggregated.
d) Analysts' predictions of management actions that affect cash flows should improve.
e) Internal segments reflect risks and opportunities that management believes are important.

Nos. 18 to 33 (Source: http://www.eruditeape.com/quizzes/ifrs-8-operating-segments-quiz/)

18. IFRS 8 Operating Segments applies to:

a) Standalone financial statements

b) Consolidated financial statements

c) Both A & B

d) Neither A nor B

e) None of the above

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Salvador Araneta Campus, Victoneta Avenue, Potrero, Malabon City

20. IFRS 8 Operating Segments applies to entities:

a) Whose debt is traded in the public market

b) Whose equity is traded in the public market

c) Whose debt or equity is traded in the public market

d) Whose debt and equity is traded in the public market

e) None of the above

21. When the standalone financial statements and consolidated financial statements are presented as a
single report, then the information relating to operating segments need to be presented:

a) Only in the standalone statements

b) Only in the consolidated statements

c) Both in the standalone and consolidated statements

d) Neither in standalone nor consolidated statements

e) None of the above

22. An operating segment is a component of an entity:

a) that engages in business activities from which it may earn revenues and incur expenses 

b) whose operating results are reviewed regularly by the entity's chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance

c) for which discrete financial information is available

d) all of the above

e) none of the above

23. Which of the following information is required to be disclosed under reportable segments:

a) Financial information and descriptive information

b) Financial information only

c) Descriptive information only

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d) Both B and C

e) None of the above

24. If the revenue of a segment exceeds _____ percent of the total revenue of the entity then it
becomes a separately reportable segment:

a) 10

b) 5

c) 2

d) 1

e) 20
25. If the assets of a segment exceeds _____ percent of the total assets of the entity then it becomes a
separately reportable segment:

a) 10

b) 5

c) 2

d) 1

e) 20
26. If the total external revenue reported by operating segments constitutes ___________ of the entity’s
revenue then further segments need to be identified:

a) More than 75%

b) More than 50%

c) Less than 75%

d) Less than 50%

e) More than 25%

27. The total revenue of an entity is $1,000,000. Segment A had revenues of $200,000, Segment B had
revenues of $20,000 and Segment C had revenues of $500,000. Which of the following segments are to
be reported separately:

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a) Segment A

b) Segment B

c) Segment C

d) Segment A & C

e) Segment A & B
28. If an entity has a segment which is yet to start earning revenues, then:

a) It is still considered as an operating segment

b) It must not be considered as an operating segment

c) It may be considered as an operating segment if its revenues exceed $100,000

d) It may be considered as an operating segment if its assets exceed $100,000

e) None of the above

29. For the purpose of IFRS 2, post-employment benefit plans are:

a) Operating segments

b) Operating segments if its revenues exceed $100,000

c) Operating segments if its assets exceed $100,000

d) Not considered as operating segments

e) None of the above

30. Two or more operating segments may be aggregated if they have similar economic characteristics
are similar in which of the following respects:

a) the nature of the products and services;

b) the nature of the production processes;

c) the type or class of customer for their products and services;

d) the methods used to distribute their products or provide their services;

e) all of the above

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 De La Salle Araneta University
College of Business
Salvador Araneta Campus, Victoneta Avenue, Potrero, Malabon City

31. If an operating segment does not meet the quantitative threshold (revenue, assets), then:

a) It should not be reported separately

b) It should be aggregated with other operating segments

c) It can be separately reported if the management believes that it would be useful for the users of
the financial statements

d) It must be reported separately

e) None of the above

32. If a segment is reported separately for the first time in the current period, then:

a) It should be restated for the previous period also even if it did not qualify for reporting as a
segment in the previous year

b) It should be restated in all the previous years of existence of the enterprise

c) It should not be restated for the previous years

d) It should not be considered as a separate segment for the current year

e) None of the above

33. There may be a practical limit to the number of reportable segments that an entity separately
discloses beyond which segment information may become too detailed. Although no precise limit has
been determined, as the number of segments that are reportable in accordance increases above
______, the entity should consider whether a practical limit has been reached.

a) 5

b) 10

c) 3

d) 2

e) 1

Nos. 34 to 37 (Source: http://www.cpaexcel.com/popquiz/popquiz227-FAR.html)

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 De La Salle Araneta University
College of Business
Salvador Araneta Campus, Victoneta Avenue, Potrero, Malabon City

34. Which of the following factors determines whether an identified segment of an enterprise should be
reported in the enterprise's financial statements under SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information? 

I. The segment's assets constitute more than 10% of the combined assets of all operating segments.
II. The segment's liabilities constitute more than 10% of the combined liabilities of all operating
segments.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

35. Which of the following qualifies as an operating segment?

A. Corporate headquarters, which oversees $1 billion in sales for the entire company. 
B. North American segment, whose assets are 12% of the company's assets of all segments, and
management reports to the chief operating officer. 
C. South American segment, whose results of operations are reported directly to the chief operating
officer, and has 5% of the company's assets, 9% of revenues, and 8% of the profits.
D. Eastern Europe segment, which reports its results directly to the manager of the European division,
and has 20% of the company's assets, 12% of revenues, and 11% of profits.

36.Which of the following is not a source of risk and uncertainty for which disclosures are required by
GAAP.

A. Nature of a firm's operations

B. Effect of changes in government regulations
C. Use of estimates in financial statements
D. Vulnerability to significant concentrations

37. Which of the following types of entities are required to report on business segments?

A. Nonpublic business enterprises.

B. Publicly-traded enterprises.
C. Not-for-profit enterprises.
D. Joint ventures.

Nos. 38 to 43 (Source: CPA Examination Reviewer by Wiley-2000 Edition)

38. Enterprise wide disclosure include disclosures about

Geographic Area Allocated Costs
a. Yes Yes

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b. Yes No
c. No Yes
d. No No
39. Enterprise wide disclosures are required by publicly held companies with
Only one More than one
Reportable Segment reportable Segment
a. Yes Yes
b. Yes No
c. No Yes
d. No No
40. An enterprise must disclose all of the following about each reportable segment if the amount
are used by the chief operating decision maker, except
a. Depreciation Expense
b. Allocated Expense
c. Interest Expense
d. Income Tax Expense
41. In Financial Reporting for segment of business, an enterprise shall disclose all of the following
except
a. Types of products and services from which each reportable segment derives its revenues.
b. The title of the chief operating decision maker of each reportable segment.
c. Factor used to identify the enterprises reportable segments.
d. The basis of measurement of segment profit or loss and segment assets.
42. In financial reporting for segments of a business enterprise, segment data may be aggregated
a. Before performing the 10% tests if majority of the aggregation criteria are met
b. If the segment do not meet the 10% test but meet all of the aggregation criteria
c. Before performing the 10% tests if all of the aggregation criteria are met
d. If any one of the aggregation criteria are met
43. The method used to determine what information to report for business segments is referred to
as the
a. Segment approach
b. Operating approach
c. Enterprise approach
d. Management approach

Nos. 44 to 78 (Source: Theory of Accounts by Valix- 2010 Edition)

44. What is the “core principle” of PFRS 8 on Operating Segments?

a. An Entity shall disclose significant financial information by business segments and
geographical segments.

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b. An Entity shall disclose information to enable users of its financial statements to evaluate
the nature and financial effects of the business activities in which it engages.
c. An Entity shall disclose information to enable users to evaluate the nature and financial
effects of the economic environments in which it operates.
d. An Entity shall disclose Information to enable users to evaluate the nature and financial
effects of the business activities in which it engages and the economic environments in
which it operates.
45. PFRS 8 shall apply to
a. Separate financial statements of an entity only
b. Consolidated financial statements of a group only
c. Both the separate financial statements of an entity and the consolidated financial
statements of a group
d. Neither the separate financial statements of an entity nor the consolidated financial
statement of the group
46. PFRS 8 shall apply to the separate financial statement of an entity, and to the consolidated
financial statements of a group with a parent
I. Whose debt and equity instruments are traded in a public market.
II. That files or is in the process of filing the consolidated financial statements with a
securities commission for the purpose of issuing any class of instruments in a public
market.
a.I only
b.II only
c.Both I and II
d.Neither I nor II

47. If Ia financial report contains both the consolidated financial statements of a parent and the
parent’s separate financial statement,segment information is required in.

a.the separate financial statements only

b.the consolidated financial statements only
c.both the separate and consolidated financial statement
d.neither the separate nor the consolidated financial statements

48. An operating segment is a component of an entity.

I.that engages in business activities from which it may earn revenue an incur expenses relating to
Transactions with other components of the same entity.
II.whose operating results are regularly reviewed by the entity’s chief operating decisions about
resources to be allocated to the segment and assess its performance.
III.For which discrete information is available.

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a.I only
b.II only
c.I and III only
d.I,II,and III

49. which may be considered an operating segment?

a.start-up operations before earning revenue

b.corporate headquarters that earn revenue
c.functional department
d.postemployment benefit plans

50.what is the function of the chief operating decision maker?

a.to allocate resources to the operating segment only

b.to assess to performance of the operating segments only
c.to provide general information to financial statement users about operating segments
d.to allocate resources to the operating segments and assess their performance

51. Who could be the chief operating decision maker?

a. Chief operating officer

b. Chief executive officer
c. Group of executive directors
d. All those mentioned depending on who within the organization is responsible for the allocation
of resouce3s and assessing the performance of operating segments.

52. What is the approach prescribed by PRFS 8 in identifying an operating segment?

a. Management approach
b. Risks and rewards approach
c. Matrix approach
d. Geographical segment approach

53. What is the “management approach” of identifying operating segments?

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I. Operating segments are identified on the basis of internal reports about components of an
entity that are regularly reviewed by a chief operating decision maker in order to allocate
resources to the segment and assess its performance.
II. Operating segments are identified on the basis of the dominant sorce and nature of rthe
entity’s risks and rewards.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

54. An entity shall disclose information about an operating segment when

a. Its reported external and internal revenue is 10% or more of the combined external revenue of
all operating segments.
b. Its reported external revenue is 10% or more of the combined external and internal revenue of
all operating segments.
c. Its reported external revenue is 10% or more of the combined external revenue of all operating
segments.
d. Its reported external and internal revenue is 10% or more of the combined external and internal
revenue of all operating segments.

55. An entity shall be disclose information about an operating segment when the absolute amount of
the profit or loss is

a. 10% or more of the absolute amount of the combined profit or loss af all operating segments.
b. 10% or more of the absolute amount of the combined profit of all operating segments that
reported a profit.
c. 10% or more of the absolute amount of the combined loss of all operating segments that
reported a loss.
d. 10% or more of the greater in absolute amount between the combined profit of all operating
segments that reported a profit, and the combined loss of all operating segments that reported
a loss.

56. An entity shall disclose information about an operating segment when

a. Its assets are 10% or more of the combined assets of all operating segments.
b. Its net assets are 10% or more of the combined assets of all operating segments.

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c. Its net assets are 10% or more of the combined net assets of all operating segments.
d. Its assets are 10% or more of the total assts of the entity.
57. Operating segments that do not meet any of the quantitative thresholds

a. Cannot be considered reportable.

b. May be considered reportable and separately disclosed if management believes that
information about the segment would be useful to the users of the financial statements.
c. May be considered reportable and separately disclosed if the information is for internal use
only.
d. May be considered reportable and separately disclosed if this is the practice within the
economic environmet in which the entity operates.

58. What is the quantitative requirement for the revenue that must be reported by reportable operating
segments?

a. The total external and internal revenue of all reportable segments is 75% or more of the entity
external revenue.
b. The total external revenue of all reportable segments is 75% or more of the entity external
revenue.
c. The total external revenue of all reportable segments is 75% or more of the entity external
revenue.
d. The total internal revenue of all reportable segments is 75% or more of the entity internal
revenue.

59. Two or more operating segments may be aggregated into a single operating segment if (choose the
incorrect one)

a. The aggregation is consistent with the core priciple of segment reporting.

b. The segments have similar characteristics.
c. The segments re similar in the nature of product or service, nature of production process, class
of customer, method of product distribution and regulatory environment.
d. The segments have dissimilar characteristics.

60. What is the practical limit to the number of reportable operating segments?

a. Five segments
b. Ten segments
c. No precise limit but if the number increases above five, the entity shall consider whether a
practical limit has been reached.

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61. Which is correct concerning segment reporting?

I. n operating segment identified as a reportable segment in the immediately preceding period

shall continue to be reported separately in the current period even if it no longer meets any of
the quantitative thresholds, if management judges the segment to be of continuing significance.
II. If an operating segment is identified as reportable segment in the current period in accordance
with the quantitative thresholds, prior segment data presented for comparative purposes shall
be restated to reflect the newly reportable segment even if that segment did not satisfy any of
the quantitative thresholds in the prior period.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

62. Under PFRS 8, an entity shall disclose for each period

I. General informationb about the operating segment

II. Information about segment profit or loss, including specified revenue and expenses included
in profit or loss, segmnt assets and segment liabilities.
III. Reconciliations of total segment revenue, total segment profit or loss, total segment assets
and total segment liabilities to the corresponding amounts in the entity’s financial
statements.

a. I only
b. I and II only
c. I and III only
d. I, II and III

63. An entity shall disclose which of the following general information?

I. Factors used to identify the entity’s reportable segments, including the basis of organization.
II. Types of products and services from which each reportable segment derives its revenue.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

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64. An entity shall disclose for each reportable segmet a measure of all of the following, except

a. Profit or loss
b. Total assets if such amount is regularly provided to the chief operating decision maker
c. Total liabilities if such amount is regularly to the chief operating decision maker
d. Net assets

65. An entity shall disclose for each reportable segment all of the following specified amounts included
in the measure of profit or loss, except

a. Revenue from external customers

b. Revenue from transactions with other operating segments of the same entity
c. Interest revenue
d. Gain on disposal of investment

66. An entity shall disclose for each reportable segment all of the following specified amounts included
in the measure of profit or loss, except

a. Depreciation and amortization

b. The entity’s interest in the profit or loss of associate and joint ventures acounted for by the
equity method
c. Income tax expense
d. Gain on disposal of investment

67. An entity shall disclose for each reportable segment which of the following specified amounts that
are included in the measure of segment assets?

a. The amount of investment in associates and joint ventures accounted for by the equity method
b. Financial instruments
c. Deferred tax assets
d. Postemployment benefit assets

68. Which of the following statements in relation to segments reporting is true?

I. If an entity changes the way it is structured internally so that its reportablr segments
change, the comparative information for earlier periods must be restated.
II. Disclosure is always required of the profit or loss of each reportable segment.

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a. I only
b. II only
c. Both I and II
d. Neither I nor II
69. Which of the following statements in relation to information about profit or loss of a reportable
operating segment is true?

i. The measurement of profit or loss to be disclosed for each reportable segment is defined in
PFRS 8.
ii. The profit or loss disclosed for a reportable segment shall relate to the total assets
attributed to that segment.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

70. Entity-wide disclosures include all of the following, except

a. Information about products and services

b. Information about geographical areas
c. Information about major customers
d. Information about intersegment sales or transfers

71. Information about geographical areas includes all of the following except

a. Revenue from external customers for each product or service.

b. Revenue from external customers in the entity’s country of domicile and in all foreign
operations in total.
c. Separate disclosurenof material revenue from external customers attributed to an individual
foreign country.
d. Noncurrent assts other than financial instruments, deferred tax assets and postemployment
benefit assets in the entity’s country of domicile and in all foreign countries in total.

72. The “major customer” disclosure includes all of the following, except

a. The fact of the entity’s reliance on major customers.

b. The total amount of revenue from each such customer.
c. The identity of the segment or segments reporting the revenue from major customers.

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d. The identity of the major customer.

73. Under PFRS 8, which of the following statements is true about major customer disclosure?

I. A major customer is defined as one providing revenue which amounts to 10% or more of
combined external revenue of all operating segments.
II. The identities of major customers need to be disclosed.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

74. What is the definition of “major customers”?

a. Those customers that individually account for revenue of 10% or more of the entity external
revenue.
b. Those customers that individually account for revenue of 10% or more of the entity external and
internal revenue.
c. Those customers that individually account for revenue of at least 90% of the entity revenue.
d. Those customers who have been dealing with the entity for at least 5 years regardless of the
volume of revenue.

75. A chemical entity has no overseas sales. The entity produces different products from the process.
The entity sells its product to small businesses, larger national business and multinational entities.
Internal reports are reviewed by the chief operating decision maker on this basis. The management of
the entity proposed to disclose just one business segment. Can the entity disclose just one business
segment because it sells all of its products nationally?

a. Yes, PFRS 8 will allow the entity to disclose a single business segment.
b. No, the entity can identify three different sets of customers and shall therefore disclose
information on that basis.
c. Yes, even though there are three different groups of customers, they all present the same risks
to the entity.
d. PRFS 8 on “segment reporting” is silent on this matter.

76. An entity is in the entertainment industry and organizes outdoor concerts in four different areas of
the world: Europe, North America<,Australia and Japan. The entity reports on board of directors on the
basis of each of the four regions. The records show the profitability for each of the four regions. The

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concerts are two types: popular music and classical music. What is the appropriate basis for segment
reporting in this entity?

a. The segments shall be reported by class of business, that is popular and classical music.
b. The segments shall be reported by region, so Australia and Japan would be combined.
c. The segment information shall be reported as North America and the rest of the world.
d. Segment information shall be reported for each of the four different regions.

77. An entity is engaged in the manufacturing industry and has recently purchased an 80% holding in a
small financial services group. This group does not meet any of the threshold criteria for a reportable
segment. Can the entity disclose the financial services group as a separate operating segment?

a. No, because it does not meet any of the criteria for a reportable segment.
b. Yes, even though it does not meet the criteria for a reportable segment, an entity can disclose
operating segments separately if management believes that information about the segment
would be useful to the users of the financial statements.
c. The entity can disclose only 80% of the results and net assets of the financial services group.
d. Because of the disparity in type of business, the entity shall disclose its segmental information
on a geographical basis.

78. An entity manufacturers suits, cloth, bed linen, and various cotton and manmade fiber products. The
entity has several segments which are reported internally as follows:

Segments Sales Profit Segment assets

Suits 40% 45% 50%
Shirts 30% 35% 33%
Bed linen 15% 10% 7%
Blinds 8% 6% 5%
Cloth 7% 4% 5%
100% 100% 100%

The table represents the percentages of sales, profit and segment assets are attributable to the different
segments. The entity wants to present bed linen and cloth as a single segment but is wondering
whether the information can be aggregated. How would the segmental information be presented in the
financial statements?

a. Bed linen and cloth, suits, and shirts, would all be shown as separate segments with blinds in the
other category.
b. All of the segments shall be presented separately.

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c. Suits, shirts, and bed linen would be separate segments with blinds and cloth shown as a single
segment.
d. Suits and cloth would be one segment with shirts, bed linen, and blinds shown as other separate
segments.

Brines, Christian Joseph C.

Practical Accounting 1
(Operating Segment, Consolidated Financial Statement, Business Combination and Long Term
Liabilities)

Note: Correct answers are in RED FONT COLOR (69 Items)

PART 1: Operating Segment

Nos. 1 to 14 (Source: Practical Accounting 1 by Valix - 2011 edition)

Correy Company and its division are engaged solely in manufacturing operations. The following data
(consistent with prior year’s data) pertain to the industries in which operations were conducted for the
current year ended December 31:

Industry Total Revenue Operating Profit Identifiable Asset

A 10000000 1750000 20000000
B 8000000 1400000 17500000
C 6000000 1200000 12500000
D 3000000 550000 7500000
E 4250000 675000 7000000
F 1500000 225000 3000000
32750000 5800000 67500000

1.In its segment information for the current year, how many reportable segments does correy have?

A. Three

B. Four

C. Five

D. Six

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Solution:

Under PFRS 8, an entity shall disclose information about an operating segment that meets any of the
quantitative thresholds:

1. The segment revenue, including both sales to external customers and intersegment sales or
transfers, is 10% or more of the combined revenue, internal and external, of all operating segments.

2. The segment profit or loss is 10% or more of the greater of the following:

a. The combined profit of all the operating segments with profit

b. The combined loss of all the operating segments with loss

3. The asset of the segment are 10% or more of the combined assets of all operating
segments.

Accordingly, A, B, C, D and E are reportable segments because their revenue or profit if asset is at least
10% of the combined amount.

Aroma Company and its divisions are engaged solely in manufacturing. The following data pertains to
the industries in which operations were conducted for the current year:

Segment Profit (Loss)

V 3400000
W 1000000
X (2000000)
Y 400000
Z (200000)
2600000

2. In the segment information for the current year, what are the reportable segments?

A. X, W, X and Z

B. V, W and X

C. V and W

D. V, W, X, Y and Z

Solution:

Operating Profit Operating Loss

X 3,400,000
W 1,000,000

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X 2,000,000
Y 400,000
Z 200,000
4,800,000 2,200,900
The total profit figure is the basis for identifying the reportabke segments because it is higher than the
total loss figure

Accordingly, those segments with a profit or loss od atleast 10% of 4,800,000 or 480,000 are
reportable. Thus V, W and X are reportable.

Macbeth Company, an entity listed on a recognized stock exchange, reports operating results from its
North American division to its chief operating decision maker. The segment information for the current
year is as follows:

Revenue 3,675,000
Profit 970,000
Assets 1,700,000
Number of employees 2,500

Macbeth’s result for all of its operating segments in total are:

Revenue 39,250,000
Profit 9,600,000
Assets 17,500,000
Number of employees 18,500

3. Which piece of information determines for Macbeth that the North American division is a reportable
operating segment?

A. Revenue

B. Profit

C. Assets

D. Number of employees

Solution:

Profit threshold (970,000/9,600,000) = 10.10%

The revenue of the North American segment is less than 10% of the total revenue of all the operating
segments. The assets of the North American segments are also less than 10% of the total assets of all
operating segments.

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The following information pertains to Aria Company and its divisions for the current year:

Sales to unaffiliated customers 20,000,000

Intersegment sales of products similar to those sold to 6,000,000
unaffiliated customers
Interest earned on loans to other operating segments 400,000

Aria and all of its divisions are engaged solely in manufacturing operations.

4. What is the minimum amount of segment revenue in order that a division can be considered a
reportable segment?

A. 2,640,000

B. 2,600,000

C. 2,040,000

D. 2,000,000

Solution:

Sales to unaffiliate customers 20,000,000

Intersegments sales 6,000,000
COMBINED REVENUE 26,000,000
Total of reportable segments(10% of 26,000,000) 2,600,000

The following information pertains to revenue earned by Timmy Company’s operating segments for the
current year:

Segment Sales to unaffiliated Intersegment sales Total revenue

customers
Alo 5,000 3,000 8,000
Bix 8,000 4,000 12,000
Cee 4,000 -- 4,000
Dil 43,000 16,000 59,000
Combined 60,000 23,000 83,000
Elimination -- (23,000) (23,000)
Consolidated 60,000 -- 60,000

5. In conformity with the revenue test, what is the total revenue of the reportable segments?

A. 83,000

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B. 71,000

C. 51,000

D. 60,000

Solution:

Total Revenue Percent

Alo 8,000 9.64%
Bix (reportable) 12,000 14.46%
Cee 4,000 4.82%
Dil (reportable) 59,000 71.08%
83,000 100.00%

Grum Company, a publicly owned entity, is subject to the requirements of PFRS 8. In its income
statement for the year ended December 31, 2011, Grum reported revenue of P50,000,000, excluding
intersegment sales of P10,000,000, expenses of P47,000,000 and net income of P3,000,000. Expenses
include payroll costs of P15,000,000. Grum’s combined identifiable assets of all operating segments on
December 31, 2011 totaled P40,000,000.

6. In its financial statement, Grum should disclose major customer data if sales to any single customer
amount to at least

A. 5,000,000

B. 4,000,000

C. 6,000,000

D. 4,700,000

Solution:

10% x 50,000,000 = 5,000,000

PFRS 8, paragraph 34, provides that a major customer disclosure is required if an entity derives 10% or
more of its external revenue from a single customer of group of entities under common control.

7. External revenue of reportable operating segments must be at least

A. 22,500,000

B. 30,000,000

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C. 33,750,000

D. 37,500,000

Solution:

75% x 50,000,000 = 37,500,000

Under PRFS 8, paragraph 15, the total external revenue attributable to reportable opearating
segments must be atleast 75% of the total entity external revenue.

Graf Company discloses supplemental operating segment information. The following informationis
available for the current year.

Segment Sales Traceable expenses

X 5,000,000 3,000,000
Y 4,000,000 2,500,000
Z 3,000,000 500,000
12,000,000 7,000,000

Additional expenses, not included above, are as follows:

Indirect expenses 1,800,000

General corporate expenses 1,200,000
Interest expense 600,000
Income tax expense 400,000

8. The interest expense and income tax expense are regularly reviewed by the chief operating decision
maker as a measure of profit or loss. Appropriate common expenses are allocated to segments based on
the ratio of a segment’s sales to the total sales. What is Segment Z’s profit for the current year?

A. 900,000

B. 950,000

C. 800,000

D. 500,000

Solution:

Sales- Segment Z 3,000,000

Expenses:
Traceable Expenses 1,500,000
Indirect Expenses 450,000

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(3/12 * 1,800,000)
Interest Expense
150,000
(3/12 * 600,000)
Income Tax
100,000 2,200,000
(3/12 * 400,000)
800,000

Clay Company has three lines of business, each of which was determined to be reportable segment. Clay
Company sales aggregated P7,500,000 in the current year, of which Segment No. 1 contributed 40%.
Traceable costs were P1,750,000 for Segment No. 1 out of a total of P5,000,000 for the entity as a
whole. For external reporting, Clay allocates common costs of P1,500,000 based on the ratio of a
segment’s income before common costs to the total income before common costs.

9. In its financial statements for the current year, what amount should Clay report as profit for Segment
No.1?

A. 1,250,000

B. 1,000,000

C. 650,000

D. 500,000

Solution:

Segment 1 Total Revenue

Sales (40% * 7,500,000) 3,000,000 7,500,000
Traceable Cost 1,750,000 5,000,000
Segment Profit before common 1,250,000 2,500,000
cost
Common Cost 750,000 1,500,000
(1,250,000/2,500,000 *
1,500,000)
Segment Profit 500,000 1,000,000

Colt Company has four manufacturing divisions, each of which has been determined to be a reportable
segment. Common costs are appropriately allocated on the basis of each division’s sales in relation to
Colt’s aggregate sales. Colt’s Delta division accounted for 40% of Colt’s total sales in the current year.
For the current year ended December 31, Delta had sales of P8,000,000 and traceable costs of
P4,800,000. In the current year, Colt incurred costs of P800,000 that were not directly traceable to any
of the divisions. In addition, the Delta division incurred interest expense of P640,000.

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It is an entity policy that interest expense is included in the measure of profit or loss that is reviewed by
the chief operating decision maker.

10. In reporting supplementary segment information, what amount should be disclosed as Delta’s profit
for the current year?

A. 3,200,000

B. 3,000,000

C. 2,880,000

D. 2,240,000

Solution:

Sales-Delta Division 8,000,000

Expenses:
Traceable Cost 4,800,000
Allocation Indirect Costs (40% 320,000
* 800,000)
Interest Expense 640,000 5,760,000
Segment Profit 2,240,000

Taylor Company, a publicly owned entity, assesses performance and makes operating decisions using
the following information for it’s reportable segments:

Total revenue 7,680,000

Total profit and loss 406,000

The total profit and loss included intersegment profit of P61,000. In addition, Taylor has P5,000 of
common costs for its reportable segments that are not allocated in reports reviewed by the chief
operating decision maker.

11. What amount should Taylor report as segment profit?

A. 350,000

B. 345,000

C. 411,000

D. 406,000

Solution:

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PFRS 8 does not define anymore segment revenue and segment expense. As a consequence, an
entity shall have a very wide discretion in measuring segment profit or loss.

Eagle company operates in several different industries. Total sales for Eagle Company totaled
P14,000,000 and total common costs amounted to P6,500,000 fot the current year. For internal
reporting purposes, Eagle Company allocates common costs based on the ratio of a segment’s sales to
total sales. Additional information regarding the different segment follows:

Contribution to total sales Costs specific to the segment

Segment 1 25% 1,100,000
2 12% 1,000,000
3 31% 1,300,000
4 23% 880,000
5 9% 400,000
12. What is the profit of Segment 1?

A. 3,500,000

B. 1,875,000

C. 2,400,000

D. 775,000

Solution:

Sales – Segment 1 (25% * 14,000,000) 3,500,000

Specific Costs – Segment 1 (1,100,000)
Allocated Common Cost (25% * 6,500,000) (1,625,000)
Segment Profit 775,000

Congo Company does business in several different industries. The income statement for 2011 is as
follows:

Sales 60,000,000
Cost of good sold (28,000,000)
Gross income 32,000,000
Expenses (14,000,000)
Depreciation (4,000,000)
Income tax expense (4,000,000)

Net income 10,000,000

Congo has two major reportable segments, X and Y. an analysis reveals that P1,000,000 of the total
depreciation expense and P2,000,000 of the expenses are related to general corporate activities. The

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remaining expenses and sales are directly allocable to segment activities according to the following
percentages:

Segment X Segment Y Others

Sales 40% 45% 15%
Cost of goods sold 35 50 15
Expenses 40 40 20
Depreciation 40 45 15

13. What amount should Congo Company disclose as profit of Segment X?

A. 8,200,000

B. 6,600,000

C. 7,000,000

D. 5,400,000

Solution:

Sales (40% * 60,000,000) 24,000,000

Cost of good Sold (35% * 28,000,000) (9,800,000)
Gross Income 14,200,000
Expenses ( 40% * 12,000,000) (4,800,000)
Depreciation (40% * 3,000,000) (1,200,000)
Segment Profit – Segment X 8,200,000

Revlon Company has expanded rapidly and segment reporting is now required. The entity has no
tersegment sales. The following data are for the year ended December 11, 2011:

Operating segment Segment revenue Operating profit (loss) Identifiable assets

1 620,000 200,000 400,000
2 100,000 20,000 80,000
3 340,000 70,000 300,000
4 190,000 (30,000) 140,000
5 180,000 (25,000) 180,000
6 70,000 10,000 120,000
7 120,000 (20,000) 140,000
others 380,000 (25,000) 140,000

* The “others” category includes five operating segments, non of which has revenue or assets greater
than P80,000 and non with an operating profit.

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* Operating Segmetns 1 and 2 produce very similar products and use very similar production processes,
but serve different customer types and use quite different product distribution system. These
differences are due in part to the fact that Segment 2 operates in a regulated environment while
Segment 1 does not.

* Operating Segments 6 and 7 have very similar products, production processes, product distribution
systems, but are organized as separate divisions since they serve substantially different types of
customers. Neither Segments 6 and 7 operate in a regulated environment.

14. What are the reportable segments for the year ended Decembr 31, 2011?

A. Segments 1,3,4 and 7

B. Segments 1,3,4,5 and 7

C. Segments 1,2,3,4 and 5

D. Segments 1,3,4,5 and Segments 6 and 7 combined as one segment

Solution:

Operating segment Segment revenue Operating profit (loss) Identifiable assets

1 620,000 200,000 400,000
2 100,000 20,000 80,000
3 340,000 70,000 300,000
4 190,000 (30,000) 140,000
5 180,000 (25,000) 180,000
6 70,000 10,000 120,000
7 120,000 (20,000) 140,000
others 380,000 (25,000) 140,000
TOTAL 2,000,000 200,000 1,500,000

1. The information above shows that any operating segment with revenue equal or greater than
200,000 is a reportable segment (segments 1 and 3). Any segment with identifiable asset
greater than 150,000 is a reportable segment (segment 1,3 and 5). The total operating profit
for all segments with operating profit totals 300,000. As a result, any segment with an
operating profit of loss equal to a greater than an absolute amount of 30,000 is a reportable
segment(segment 1,3 and 4). Thus Segment 1, 3, 4, and 5 are reportable segments.

2. The segment Revenue of the reportable segments is as follows:

Segment 1 620,000
Segment 3 340,000

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Segment 4 190,000
Segment 5 180,000
TOTAL REVENUE 1,330,000

Percentage (1,330,000/2,000,000) 66.5%

If the total external revenue attributable to reportable segments constitutes less than 75% of the
entity external revenue, additional segments shall be identified even if they do not meet the 10%
quantitative thresholds until at least 75% of the entity external revenue is included in reportable
segments.

Moreover, reportable segments that are below the 10% threshold can be aggregated as one segment
if they have similar economic character and share a majority of the five aggregation criteria as follows.

a. Nature of product

b. Nature of production process

c. Class of customers

d. Method of distributing Product

e. Regulated Environment

Since segment 6 and 7 are similar in four or five criteria, they can be aggregated as one reportable
segment.

Segment 6 Segment 7 TOTAL

Revenue 70,000 120,000 190,000
Profit (Loss) 10,000 (20,000) (10,000)
Segment Assets 120,000 140,000 260,000

With segment 6 and 7 considered as one reportable segment, the total segment revenue increases to
1,520,000 or 76% of the total. The 75% requirement has been met.

Revenue of reportable segments before aggregation 1,330,000

Revenue of additional reportable segments 190,000
TOTAL 1,520,000

Percentage (1,520,000/2,000,000) = 76%

3. In conclusion, Segments 1, 3, 4 ,5 and Segment 6 and 7(combined) shall be considered

reportable segments.

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Nos. 15 to 20 (Source: Uberita)

Tail Company and its division are engaged solely in manufacturing operations. The following data pertain
to the industries in which operations were conducted for the year ended December 31, 2014:

Segments Total Revenue Operating Profit Identifiable Assets

A 20,000,000 3,600,000 40,000,000
B 16,000,000 2,800,000 36,000,000
C 12,000,000 2,400,000 28,000,000
D 6,000,000 1,200,000 16,000,000
E 9,000,000 1,400,000 14,000,000
F 3,000,000 600,000 6,000,000
TOTAL 66,000,000 12,000,000 140,000,000

15. In its segment information 2014, how many reportable segments does tail have?

a. Three
b. Four
c. Five
d. Six

Solution:

Based on the above application, segments A, B, C, D and E are considered reportable segments since
they meet the above criteria, while segment F did not meet any of the above criteria.

Buddy Company and its division are engaged solely in manufacturing operations. The following data
pertains to industries in which operations were conducted for the year ended December 31, 2014:

Segments Revenue From Revenue from Operating Profit Identifiable Asset

Outsiders within
A 18,000,000 2,000,000 3,600,000 40,000,000
B 13,000,000 3,000,000 2,800,000 36,000,000
C 5,000,000 7,000,000 2,400,000 28,000,000
D 4,500,000 1,500,000 1,200,000 16,000,000
E 5,400,000 3,600,000 1,400,000 14,000,000
F 3,000,000 0 600,000 6,000,000
TOTAL 48,900,000 17,100,000 12,000,000 140,000,000

16. In its segment information for 2014, how many reportable segments does Buddy Company Have?

a. 6

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b. 5

c. 4

d. 3

Solution:

As to Revenue Recognition- 48,900,000 + 17,100,000 * 10% = 6,600,000

As to Operating Profit Criterion- 12,000,000 * 10%= 1,200,000

As to Identifiable asset criterion- 140,000,000 * 10%= 14,000,000

Only segment F did not pass any of the 10% thresholds.

Operating Profit and loss figures for seven segments of Helium Company are as follows:

Segments Amount
K 13,000,000
L 1,200,000
M 7,800,000
N (2,400,000)
O (600,000)
P 600,000
Q (1,800,000)
17,800,000

17. What segment are reportable based on the operating profit of loss criterion?

a. Segment K, L, M and P

b. Segment K, M and N

c. Segment N, O and Q

d. None is reportable

Solution:

Segments Operating Profit Operating Loss

K 13,000,000
L 1,200,000
M 7,800,000
N (2,400,000)

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O (600,000)
P 600,000
Q (1,800,000)
22,600,000 4,800,000
The minimum amount of profit or loss is 2,260,000 (10% * 22,600,000) for a segment to be reportable.
Only segments K, M and N meet the above criteria.

Horn Company discloses supplemental industry segment information. The following information is
available for year 2014:

Segments Sales Traceable Operating Expense

B 4,000,000 2,000,000
C 3,200,000 2,000,000
D 2,400,000 1,400,000
9,600,000 5,400,000
Additional Expenses not included above are as follows:

Indirect Operating Expenses 1,440,000

General and Administrative Expenses 960,000

Appropriate common expenses are allocated to segments based on the ratio of segments sales to total
sales.

18. Segment D’s operating profit was

a. 400,000

b. 640,000

c. 1,000,000

d. 1,500,000

Solution:

Revenue 2,400,000

Traceable operating expense (1,400,000)

Indirect cost (1,440,000 * 2,400,000/9,600,000) (360,000)

Operating profit 640,000

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19. Bumper Company has three lines of business, each of which was determined to be reportable
segments. Bumper company sales aggregated 15,000,000 in 2014 of which segment #1 contributed 40%.
Traceable costs were 3,500,000 for September to November out of a total of 10,000,000 for the
company as a whole. For internal reporting, Bumper allocates common costs of 3,000,000 based on the
ration of a segment’s income before common costs.

In its 2014 financial statement, how much should bumper report as operating profit for segment no. 1?

a. 750,000
b. 1,000,000
c. 1,500,000
d. 2,000,000

Solution:

Revenue of segment #1 (15,000,000 * 40%) 6,000,000

Traceable operating expenses (3,200,000)
Operating profit before common cost 2,500,000
Indirect cost-segment 1 (3,000,000 * 50%) 1,500,000
OPERATING PROFIT-SEGMENT 1 1,000,000

Total Revenue of all segments 15,000,000

Less: Total traceable cost of all segments 10,000,000
OPERATING PROFIT BEFORE COMMON COST-ALL 5,000,000
SEGMENTS

Ratio of segment 1 operating profit = 2,500,000/5,000,000

=50%

20. Holy Company has three division, each of which has determined to be reportable segment. Common
costs are appropriately allocated on the Basis of each division’s in relation to holy’s aggregated sales. In
2014, segment 1 had sales of 6,000,000, which was 25% of holy’s total sales and had traceable operating
costs of 3,800,000. In 2010, Holy incurred operating costs of 1,000,000 that were not directly traceable
to any of the segments. In reporting segment information, what amount should be shown as segment
1’s operating profit for 2014?

a. 1,500,000
b. 1,750,000
c. 1,800,000
d. 1,950,000

Solution:

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Revenue of Segment 1 6,000,000

Traceable Cost – Segment 1 (3,800,000)
Indirect cost – Segment 1 (1,000,000 * 25%) (250,000)
Operating Profit 1,950,000

21. Mugs Corporation, a publicly owned Corporation, is subject to the requirements for segment
reporting. In its income statement for the year ended December 31,2014, Mugs reported revenue of
50,000,000, operating expenses of 47,000,000, and net income of 3,000,000, Operating expenses
include payroll costs of 15,000,000. Mugs combined identifiable assets of all industry segments at
December 31, 2014 were 40,000,000.

In its 2014 financial statement, Mugs should disclose major customer data if sales to any single customer
data if sales to any single customer amount to at least-

a. 300,000
b. 1,000,000
c. 4,000,000
d. 5,000,000

Solution:

A major customer disclosure is required if a company derives 10% or more of its revenue from a single
customer or group of entities under common control. (50,000,000 * 10%)

Nos. 22 to 26 (Source: http://highered.mcgraw-

hill.com/sites/0078136628/student_view0/chapter8/chapter_quiz.html)

22. Kaycee Corporation's revenues for the year ended December 31, 2004, were as follows:

Kaycee has a reportable segment if that segment's revenues exceed:

a) $ 9,000
b) $12,000
c) $60,000
d) $72,000
e) $63,000

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Solution:

23. Reed Inc. has three operating segments with the following information:

Using the revenue test, what is the minimum amount of revenue that a segment must have and still
be considered significant?

a) $ 955,000
b) $1,142,500
c) $1,065,000
d) $1,155,300
e) $3,650,000

Solution:

24. Masten Inc. has four identifiable industry segments:

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What is the minimum operating profit or loss that a segment must have in order to be considered
significant?

a) $2,850
b) $3,450
c) $4,000
d) $4,500
e) $5,000

Solution

25. Masten Inc. has four identifiable industry segments:

What is the minimum amount of revenue that each of the segments must have in order to be
considered separately reportable?

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a) $1,900
b) $6,000
c) $7,200
d) $8,100
e) $10,000

Solution:

10% of the total revenues of $100,000

26. Masten Inc. has four identifiable industry segments:

What amount of revenues must be generated from one customer before that party must be identified
as a major customer?

a) $1,900
b) $6,000
c) $7,200
d) $8,100
e) $10,000
Solution:

10% of the $81,000 of revenue to external customers.

PART 2: Consolidated Financial Statement

Nos. 27 to 31 (Source: http://highered.mcgraw-

hill.com/sites/0078136628/student_view0/chapter4/chapter_quiz.html)

27. Parks, Inc. paid $10 for 80,000 of the 100,000 shares of KO, Inc, when KO's net assets had a total
fair value of $950,000. During the weeks before and after this acquisition, the shares of KO, Inc. have
traded for $9 per share. What is the total acquisition business fair value of KO, Inc.?

a) $800,000
b) $900,000
c) $980,000
d) $1.000,000
e) $950,000
Solution:

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 De La Salle Araneta University
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Salvador Araneta Campus, Victoneta Avenue, Potrero, Malabon City

28. Parks, Inc. paid $10 for 80,000 of the 100,000 shares of KO, Inc, when KO's net assets had a total
fair value of $950,000. During the weeks before and after this acquisition, the shares of KO, Inc. have
traded for $9 per share. How much goodwill should Parks report in its post-combination consolidated
balance sheet?

a) $24,000
b) $30,000
c) $50,000
d) $120,000
e) $150,000
Solution:

29. On January 1 in the year of acquisition, Cobb Enterprises purchased 80% of Bob's Bricks Inc.'s
outstanding common shares. In acquiring this interest, Cobb paid a total of $1,500,000. Bob's Bricks'
net assets had a book value of $1,300,000 at the time. A building with a ten-year life and a book
value of $100,000 was worth $175,000. Any other excess amount was attributed to goodwill. Cobb
reports net income for the first year of $350,000 (without regard for its ownership in Bob's Bricks),
while Bob's Bricks has $175,000 in earnings.
Using the acquisition method, what is the amount of goodwill?

a) $515,000
b) $500,000
c) $775,000
d) $400,000
e) $320,000
Solution:

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Salvador Araneta Campus, Victoneta Avenue, Potrero, Malabon City

30. On January 1 in the year of acquisition, Cobb Enterprises purchased 80% of Bob's Bricks Inc.'s
outstanding common shares. In acquiring this interest, Cobb paid a total of $1,500,000. Bob's Bricks'
net assets had a book value of $1,300,000 at the time. A building with a ten-year life and a book
value of $100,000 was worth $175,000. Any other excess amount was attributed to goodwill. Cobb
reports net income for the first year of $350,000 (without regard for its ownership in Bob's Bricks),
while Bob's Bricks has $175,000 in earnings.
What is the amount of consolidated net income?

a) $436,000
b) $490,000
c) $457,500
d) $484,000
e) $492,500
Solution:

31. On January 1 in the year of acquisition, Cobb Enterprises purchased 80% of Bob's Bricks Inc.'s
outstanding common shares. In acquiring this interest, Cobb paid a total of $1,500,000. Bob's Bricks'

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net assets had a book value of $1,300,000 at the time. A building with a ten-year life and a book
value of $100,000 was worth $175,000. Any other excess amount was attributed to goodwill. Cobb
reports net income for the first year of $350,000 (without regard for its ownership in Bob's Bricks),
while Bob's Bricks has $175,000 in earnings.
What value should be attributed to the building in a consolidated balance sheet at the date of the
business combination?

a) $140,000
b) $128,000
c) $155,000
d) $160,000
e) $175,000
Solution:

PART 3: Business Combination

Nos. 32 to 36 (Source: http://highered.mcgraw-

hill.com/sites/0078136628/student_view0/chapter2/chapter_quiz.html)

32. On March 31, Jumbo purchases 100% of Larz for $7,500,000 cash and 2,200,000 shares of Jumbo
voting common stock (par value of $1). Jumbo's stock had a fair value on March 31 of $40. Jumbo got
12,000,000 shares of Larz's voting common stock (par value $4) having a fair value of $50 per share.
Jumbo incurs $5,000,000 in direct combination costs and $3,500,000 in stock issuance costs. Using
the purchase method, what is Jumbo's COST for this acquisition?

a) $100,500,000
b) $ 95,500,000
c) $ 99,000,000
d) $ 90,500,000
e) $ 97,000,000
Solution:

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33. Brooks Company obtains all of the outstanding shares of Shaw for $750,000 cash. In the financial
statements prepared immediately after the business combination, what is the amount of goodwill
using the purchase method?

a) $ 75,000
b) $100,000
c) $125,000
d) $250,000
e) $ 65,000

Solution:

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34. Brooks company acquires Shaw Company on December 31, by issuing 5,000 shares of $5 par
value common stock valued at $150 per share. Direct combination costs of $20,000 are paid to third
parties and Brooks Company has estimated a $40,000 contingent performance liability. In the financial
statements prepared immediately after the business combination, what is the amount of goodwill
using the acquisition method?

a) $ 75,000
b) $100,000
c) $ 95,000
d) $115,000
e) $155,000
Solution:

35. On December 31 of the current year, Sam Company was merged into Paul Company. In carrying
out the business combination, Paul Company issued 60,000 shares of its $10 par value common stock,
with a fair value of $15 per share, for all of Sam Company's outstanding common stock. The
stockholders' equity section of the two companies immediately before the business combination was:

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Assume that the transaction is accounted for using the acquisition method. In the consolidated
balance sheet at the end of the next year, the Additional Paid-In Capital account should be reported
at:

a) $400,000.
b) $300,000.
c) $500,000.
d) $200,000.
e) $100,000.
Solution:

 [($15 - $10) x 60,000] + $200,000 = $500,000

36. To settle a difference of opinion regarding R. Obin's fair values, B. Atman promises to pay an
additional $100,000 to the former owners if R. Obin's earnings exceed $500,000 during the next
annual period. B. Atman estimates a 30% probability that the $100,000 contingent payment will be
required. Assuming a discount rate of 4%, the present value factor is .961538. Under the acquisition
method, what is the contingent liability?

a) No contingent liability is recorded.

b) $ 28,846
c) $ 30,000
d) $ 96,154
e) $100,000
Solution:

PART 4: Long-Term Liabilities

Nos. 37 to 69 (Source: Intermediate Accounting by Kieso)

37. On July 1, 2010, Spear Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The
bonds are dated April 1, 2010 and mature on April 1, 2020. Interest is payable semiannually on
April 1 and October 1. What amount did Spear receive from the bond issuance?

a. $1,015,000

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b. $1,000,000
c. $990,000
d. $965,000
Solution:

($1,000,000 × .99) + ($1,000,000 × .10 × 3/12) = $1,015,000.

38.On January 1, 2010, Solis Co. issued its 10% bonds in the face amount of $3,000,000, which mature
on January 1, 2020. The bonds were issued for $3,405,000 to yield 8%, resulting in bond premium of
$405,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable
annually on December 31. At December 31, 2010, Solis's adjusted unamortized bond premium should be

a. $405,000.
b. $377,400.
c. $364,500.
d. $304,500.

Solution:
$405,000 – [($3,000,000 × .10) – ($3,405,000 × .08)] = $377,400.

39. On July 1, 2009, Noble, Inc. issued 9% bonds in the face amount of $5,000,000, which mature on
July 1, 2015. The bonds were issued for $4,695,000 to yield 10%, resulting in a bond discount of
$305,000. Noble uses the effective-interest method of amortizing bond discount. Interest is
payable annually on June 30. At June 30, 2011, Noble's unamortized bond discount should be

a. $264,050.
b. $255,000.
c. $244,000.
d. $215,000.
Solution:

2009–2010: $4,695,000 + [($4,695,000 × .1) – ($5,000,000 × .09)]

= $4,714,500.

2010–2011: $4,714,500 + ($471,450 – $450,000) = $4,735,950

$5,000,000 – $4,735,950 = $264,050.

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40. On January 1, 2010, Huff Co. sold $1,000,000 of its 10% bonds for $885,296 to yield 12%.
Interest is payable semiannually on January 1 and July 1. What amount should Huff report as
interest expense for the six months ended June 30, 2010?

a. $44,266
b. $50,000
c. $53,118
d. $60,000
Solution:

$885,296 × .06 = $53,118.

41. On January 1, 2011, Doty Co. redeemed its 15-year bonds of $2,500,000 par value for 102. They
were originally issued on January 1, 1999 at 98 with a maturity date of
January 1, 2014. The bond issue costs relating to this transaction were $150,000. Doty amortizes
discounts, premiums, and bond issue costs using the straight-line method. What amount of loss
should Doty recognize on the redemption of these bonds (ignore taxes)?

a. $90,000
b. $60,000
c. $50,000
d. $0
Solution:

  $200, 000 
 $2, 300, 000    12 
  15  
($2,500,000 × 1.02) – = $90,000.

42. On its December 31, 2010 balance sheet, Emig Corp. reported bonds payable of $6,000,000 and
related unamortized bond issue costs of $320,000. The bonds had been issued at par. On
January 2, 2011, Emig retired $3,000,000 of the outstanding bonds at par plus a call premium of
$70,000. What amount should Emig report in its 2011 income statement as loss on
extinguishment of debt (ignore taxes)?

a. $0
b. $70,000
c. $160,000
d. $230,000
Solution:

($3,000,000 + $70,000) – [($6,000,000 – $320,000) × 1/2] = $230,000.

43.On January 1, 2006, Goll Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds
were to mature on January 1, 2016 but were callable at 101 any time after December 31, 2009. Interest
was payable semiannually on July 1 and January 1. On

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 De La Salle Araneta University
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July 1, 2011, Goll called all of the bonds and retired them. Bond premium was amortized on a straight-
line basis. Before income taxes, Goll's gain or loss in 2011 on this early extinguishment of debt was

a. $30,000 gain.
b. $12,000 gain.
c. $10,000 loss.
d. $8,000 gain.
Solution:

  $40, 000 
 $1, 040, 000    11 
  20  
– ($1,000,000 × 1.01) = $8,000.

44. On June 30, 2011, Omara Co. had outstanding 8%, $3,000,000 face amount, 15-year bonds
maturing on June 30, 2021. Interest is payable on June 30 and December 31. The unamortized
balances in the bond discount and deferred bond issue costs accounts on June 30, 2011 were
$105,000 and $30,000, respectively. On June 30, 2011, Omara acquired all of these bonds at 94
and retired them. What net carrying amount should be used in computing gain or loss on this
early extinguishment of debt?

a. $2,970,000.
b. $2,895,000.
c. $2,865,000.
d. $2,820,000.
Solution:

$3,000,000 – ($105,000 + $30,000) = $2,865,000.

45. A ten-year bond was issued in 2009 at a discount with a call provision to retire the bonds. When
the bond issuer exercised the call provision on an interest date in 2011, the carrying amount of
the bond was less than the call price. The amount of bond liability removed from the accounts in
2011 should have equaled the

a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount.
Solution:

Conceptual.

46. Paige Co. took advantage of market conditions to refund debt. This was the fourth refunding
operation carried out by Paige within the last three years. The excess of the carrying amount of
the old debt over the amount paid to extinguish it should be reported as a

a. gain, net of income taxes.

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b. loss, net of income taxes.

c. part of continuing operations.
d. deferred credit to be amortized over the life of the new debt.
Solution:

Conceptual

47. Eddy Co. is indebted to Cole under a $400,000, 12%, three-year note dated
December 31, 2009. Because of Eddy's financial difficulties developing in 2011, Eddy owed
accrued interest of $48,000 on the note at December 31, 2011. Under a troubled debt
restructuring, on December 31, 2011, Cole agreed to settle the note and accrued interest for a
tract of land having a fair value of $360,000. Eddy's acquisition cost of the land is $290,000.
Ignoring income taxes, on its 2011 income statement Eddy should report as a result of the
troubled debt restructuring

Gain on Disposal Restructuring Gain

a. $158,000 $0

b. $110,000 $0

c. $70,000 $40,000

d. $70,000 $88,000

Solution:

$360,000 – $290,000 = $70,000

($400,000 + $48,000) – $360,000 = $88,000.

48.At the beginning of 2010, Winston Corporation issued 10% bonds with a face value of $600,000.
These bonds mature in five years, and interest is paid semiannually on June 30 and December
31. The bonds were sold for 555,840 to yield 12%. Winston uses a calendar-year reporting
period. Using the effective-interest method of amortization, what amount of interest expense
should be reported for 2010? (Round your answer to the nearest dollar.)

a. $66,500

b. $66,700

c. $66,901

d. $68,832

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Solution:

($555,840 × .06) = $33,350; [$33,350 – ($600,000 × .05)] = $3,350

($555,840 + $3,350) × .06 = $33,551

$33,350 + $33,551 = $66,901.

49. Kant Corporation retires its $100,000 face value bonds at 102 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is $96,250. The
entry to record the redemption will include a

a. credit of $3,750 to Loss on Bond Redemption.

b. credit of $3,750 to Discount on Bonds Payable.

c. debit of $5,750 to Gain on Bond Redemption.

d. debit of $2,000 to Premium on Bonds Payable.

Solution:

$100,000 – $96,250 = $3,750 discount.

50. Carr Corporation retires its $100,000 face value bonds at 105 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is $103,745. The
entry to record the redemption will include a

a. credit of $3,745 to Loss on Bond Redemption.

b. debit of $3,745 to Premium on Bonds Payable.

c. credit of $1,255 to Gain on Bond Redemption.

d. debit of $5,000 to Premium on Bonds Payable.

Solution:

$103,745 – $100,000 = $3,745 premium.

51. At December 31, 2010 the following balances existed on the books of Foxworth Corporation:

Bonds Payable $2,000,000

Discount on Bonds Payable 160,000

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Interest Payable 50,000

Unamortized Bond Issue Costs 120,000

If the bonds are retired on January 1, 2011, at 102, what will Foxworth report as a loss on
redemption?

a. $370,000

b. $320,000

c. $270,000

d. $200,000

Solution:

($2,000,000 × 1.02) – ($2,000,000 – $160,000 – $120,000) = $320,000.

52. At December 31, 2010 the following balances existed on the books of Rentro Corporation:

Bonds Payable $1,500,000

Discount on Bonds Payable 120,000

Interest Payable 37,000

Unamortized Bond Issue Costs 90,000

If the bonds are retired on January 1, 2011, at 102, what will Rentro report as a loss on
redemption?

a. $150,000

b. $202,500

c. $240,000

d. $277,500

Solution:

($1,500,000 × 1.02) – ($1,500,000 – $120,000 – $90,000) = $240,000.

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53. The December 31, 2010, balance sheet of Hess Corporation includes the following items:

9% bonds payable due December 31, 2019 $1,000,000

Unamortized premium on bonds payable 27,000

The bonds were issued on December 31, 2009, at 103, with interest payable on July 1 and
December 31 of each year. Hess uses straight-line amortization. On March 1, 2011, Hess retired
$400,000 of these bonds at 98 plus accrued interest. What should Hess record as a gain on
retirement of these bonds? Ignore taxes.

a. $18,800.
b. $10,800.
c. $18,600.
d. $20,000.
Solution:

  $27, 000 2  
 $1, 027, 000      .4
  18 6  
= $410,600 (CV of retired bonds)
$410,600 – ($400,000 × .98) = $18,600.

54. On January 1, 2004, Hernandez Corporation issued $4,500,000 of 10% ten-year bonds at 103.
The bonds are callable at the option of Hernandez at 105. Hernandez has recorded amortization
of the bond premium on the straight-line method (which was not materially different from the
effective-interest method).

On December 31, 2010, when the fair market value of the bonds was 96, Hernandez
repurchased $1,000,000 of the bonds in the open market at 96. Hernandez has recorded
interest and amortization for 2010. Ignoring income taxes and assuming that the gain is
material, Hernandez should report this reacquisition as

a. a loss of $49,000.
b. a gain of $49,000.
c. a loss of $61,000.
d. a gain of $61,000.
Solution:

  $135,000 
$4,500,000x1.03   10
 7   2/9

 = $1,009,000 (CV of retired bonds)

$1,009,000 – ($1,000,000  .96) = $49,000.

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55.The 10% bonds payable of Nixon Company had a net carrying amount of $570,000 on December 31,
2010. The bonds, which had a face value of $600,000, were issued at a discount to yield 12%. The
amortization of the bond discount was recorded under the effective-interest method. Interest was paid
on January 1 and July 1 of each year. On
July 2, 2011, several years before their maturity, Nixon retired the bonds at 102. The interest payment
on July 1, 2011 was made as scheduled. What is the loss that Nixon should record on the early
retirement of the bonds on July 2, 2011? Ignore taxes.

a. $12,000.
b. $37,800.
c. $33,600.
d. $42,000.
Solution:
$570,000 + [($570,000 × .06) – ($600,000 × .05)] = $574,200 (CV of bonds)

$574,200 – ($600,000 × 1.02) = $37,800.

56. A corporation called an outstanding bond obligation four years before maturity. At that time
there was an unamortized discount of $300,000. To extinguish this debt, the company had to
pay a call premium of $100,000. Ignoring income tax considerations, how should these amounts
be treated for accounting purposes?

a. Amortize $400,000 over four years.

b. Charge $400,000 to a loss in the year of extinguishment.
c. Charge $100,000 to a loss in the year of extinguishment and amortize $300,000
over four years.
d. Either amortize $400,000 over four years or charge $400,000 to a loss
immediately, whichever management selects.
Solution:

$300,000 + $100,000 = $400,000.

57. The 12% bonds payable of Nyman Co. had a carrying amount of $832,000 on
December 31, 2010. The bonds, which had a face value of $800,000, were issued at a premium to
yield 10%. Nyman uses the effective-interest method of amortization. Interest is paid on June 30
and December 31. On June 30, 2011, several years before their maturity, Nyman retired the bonds
at 104 plus accrued interest. The loss on retirement, ignoring taxes, is

a. $0.
b. $6,400.
c. $9,920.
d. $32,000.
Solution:

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$832,000 – [($800,000 × .06) – ($832,000 × .05)] = $825,600 (CV of bonds)

($800,000 × 1.04) – $825,600 = $6,400.

58. Didde Company issues $10,000,000 face value of bonds at 96 on January 1, 2009. The bonds are
dated January 1, 2009, pay interest semiannually at 8% on June 30 and December 31, and
mature in 10 years. Straight-line amortization is used for discounts and premiums. On
September 1, 2012, $6,000,000 of the bonds are called at 102 plus accrued interest. What gain
or loss would be recognized on the called bonds on September 1, 2012?

a. $600,000 loss
b. $272,000 loss
c. $360,000 loss
d. $453,333 loss
Solution:
{$9,600,000 + [$400,000 × (3 2/3 ÷ 10)]} × .60 = $5,848,000

$6,120,000 – $5,848,000 = $272,000.

59. Cortez Company issues $5,000,000 face value of bonds at 96 on January 1, 2009. The bonds are
dated January 1, 2009, pay interest semiannually at 8% on June 30 and December 31, and mature in 10
years. Straight-line amortization is used for discounts and premiums. On September 1, 2012, $3,000,000
of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called
bonds on September 1, 2012?

a. $300,000 loss
b. $136,000 loss
c. $180,000 loss
d. $226,667 loss
Solution:

{$4,800,000 + [$200,000 × (3 2/3 ÷ 10)]} × .60 = $2,924,000

$3,060,000 – $2,924,000 = $136,000.

60. On January 1, 2010, Ann Price loaned $45,078 to Joe Kiger. A zero-interest-bearing note (face
amount, $60,000) was exchanged solely for cash; no other rights or privileges were exchanged.
The note is to be repaid on December 31, 2012. The prevailing rate of interest for a loan of this
type is 10%. The present value of $60,000 at 10% for three years is $45,078. What amount of
interest income should Ms. Price recognize in 2010?

a. $4,508.
b. $6,000.
c. $18,000.

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d. $13,524.
Solution:

$45,078 × .10 = $4,508.

61. On January 1, 2010, Jacobs Company sold property to Dains Company which originally cost
Jacobs $760,000. There was no established exchange price for this property. Danis gave Jacobs a
$1,200,000 zero-interest-bearing note payable in three equal annual installments of $400,000
with the first payment due December 31, 2010. The note has no ready market. The prevailing
rate of interest for a note of this type is 10%. The present value of a $1,200,000 note payable in
three equal annual installments of $400,000 at a 10% rate of interest is $994,800. What is the
amount of interest income that should be recognized by Jacobs in 2010, using the effective-
interest method?

a. $0.
b. $40,000.
c. $99,480.
d. $120,000.
Solution:

$994,800 × .10 = $99,480.

62. On January 1, 2010, Crown Company sold property to Leary Company. There was no established
exchange price for the property, and Leary gave Crown a $2,000,000 zero-interest-bearing note
payable in 5 equal annual installments of $400,000, with the first payment due December 31,
2010. The prevailing rate of interest for a note of this type is 9%. The present value of the note
at 9% was $1,442,000 at January 1, 2010. What should be the balance of the Discount on Notes
Payable account on the books of Leary at December 31, 2010 after adjusting entries are made,
assuming that the effective-interest method is used?

a. $0
b. $428,220
c. $446,400
d. $558,000
Solution:
$2,000,000 – $1,442,000 – ($1,442,000 × .09) = $428,220.
63. Putnam Company’s 2010 financial statements contain the following selected data:
Income taxes $40,000

Interest expense 20,000

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 De La Salle Araneta University
College of Business
Salvador Araneta Campus, Victoneta Avenue, Potrero, Malabon City

Net income 60,000

Putnam’s times interest earned for 2010 is

a. 3 times
b. 4 times.
c. 5 times.
d. 6 times.
Solution:

$60,000 + $40,000 + $20,000

————————————— = 6 times.
$20,000

64. In the recent year Hill Corporation had net income of $140,000, interest expense of $40,000,
and tax expense of $20,000. What was Hill Corporation's times interest earned ratio for the
year?

a. 5.0

b. 4.0

c. 3.5

d. 3.0

Solution:
($140,000 + $40,000 + $20,000) ÷ $40,000 = 5.0.

65. In recent year Cey Corporation had net income of $250,000, interest expense of $50,000, and a
times interest earned ratio of 9. What was Cey Corporation's income before taxes for the year?

a. $500,000

b. $450,000

c. $400,000

d. None of the above.

Solution:
($250,000 + $50,000 + X) ÷ $50,000 = 9
($300,000 + X) = 9 × $50,000
X = $150,000; IBT = $400,000 ($250,000 + $150,000).

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 De La Salle Araneta University
College of Business
Salvador Araneta Campus, Victoneta Avenue, Potrero, Malabon City

66. The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2010, contained the
following accounts.

5-year Bonds Payable 8% $1,500,000

Bond Interest Payable 50,000

Premium on Bonds Payable 100,000

Notes Payable (3 mo.) 40,000

Notes Payable (5 yr.) 165,000

Mortgage Payable ($15,000 due currently) 200,000

Salaries Payable 18,000

Taxes Payable (due 3/15 of 2011) 25,000

The total long-term liabilities reported on the balance sheet are

a. $1,865,000.

b. $1,850,000.

c. $1,965,000.

d. $1,950,000.

Solution:

$1,500,000 + $100,000 + $165,000 + ($200,000 – $15,000) = $1,950,000.

On December 31, 2008, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a
$600,000 note with $60,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte
equipment that has a fair value of $290,000, an original cost of $480,000, and accumulated depreciation
of $230,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2011,
reduces the face amount of the note to $250,000, and reduces the interest rate to 6%, with interest
payable at the end of each year.

67. Nolte should recognize a gain or loss on the transfer of the equipment of

a. $0.
b. $40,000 gain.
c. $60,000 gain.

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 De La Salle Araneta University
College of Business
Salvador Araneta Campus, Victoneta Avenue, Potrero, Malabon City

d. $190,000 loss.
Solution:

$290,000 – ($480,000 – $230,000) = $40,000.

68. Nolte should recognize a gain on the partial settlement and restructure of the debt of

a. $0.
b. $15,000.
c. $55,000.
d. $75,000.
Solution:

($600,000 + $60,000) – [$290,000 + $250,000 + ($250,000 × 06 × 3)]

= $75,000

69. Nolte should record interest expense for 2011 of

a. $0.
b. $15,000.
c. $30,000.
d. $45,000.
Solution:

The effective-interest rate is 0%.

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