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ACC 401 Advanced Accounting – Strayer – A+ Graded

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Chapter 1

Introduction to Business Combinations and the Conceptual Framework

Multiple Choice
1. Stock given as consideration for a business combination is valued at
a. fair market value
b. par value
c. historical cost
d. None of the above

2. Which of the following situations best describes a business combination to be accounted for as a statutory merger?
a. Both companies in a combination continue to operate as separate, but related, legal entities.
b. Only one of the combining companies survives and the other loses its separate identity.
c. Two companies combine to form a new third company, and the original two companies are dissolved.
d. One company transfers assets to another company it has created.

3. A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?
a. Cash
b. Issuing Debt
c. Issuing Stock
d. All of the above

4. The objectives of FASB 141R (Business Combinations) and FASB 160 (NonControlling Interests in Consolidated Financial Statements) are as follows:
a. to improve the relevance, comparibility, and transparency of financial information related to business combinations.
b. to eliminate the amortization of Goodwill.
c. to facilitate the convergence project of the FASB and the International Accounting Standards Board.
d. a and b only

5. A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n)
a. agreeable combination.
b. friendly combination.
c. hostile combination.
d. unfriendly combination.

6. A merger between a supplier and a customer is a(n)
a. friendly combination.
b. horizontal combination.
c. unfriendly combination.
d. vertical combination.

7. When a business acquisition is financed using debt, the interest payments are tax deductible and create
a. operating synergy.
b. international synergy.
c. financial synergy.
d. diversification synergy.

8. The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called
a. poison pill.
b. pac-man defense.
c. greenmail.
d. white knight.

9. The third period of business combinations started after World War II and is called
a. horizontal integration.
b. merger mania.
c. operating integration.
d. vertical integration.

10. A statutory ______________ results when one company acquires all the net assets of another company and the acquired company ceases to exist as a separate legal entity.
a. acquisition.
b. combination.
c. consolidation.
d. merger.

11. When a new corporation is formed to acquire two or more other corporations and the acquired corporations cease to exist as separate legal entities, the result is a statutory
a. acquisition.
b. combination.
c. consolidation.
d. merger.

12. The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the
a. bonus.
b. goodwill.
c. implied offering price.
d. takeover premium.

13. The difference between normal earnings and expected future earnings is
a. average earnings.
b. excess earnings.
c. ordinary earnings.
d. target earnings.

14. The first step in estimating goodwill in the excess earnings approach is to
a. determine normal earnings.
b. identify a normal rate of return for similar firms.
c. compute excess earnings.
d. estimate expected future earnings.

15. A potential offering price for a company is computed by adding the estimated goodwill to the
a. book value of the company’s net assets.
b. book value of the company’s net identifiable assets.
c. fair value of the company’s net assets.
d. fair value of the company’s net identifiable assets.

16. Estimated goodwill is determined by computing the present value of the
a. average earnings.
b. excess earnings.
c. expected future earnings.
d. normal earnings.

17. Which of the following statements would not be a valid or logical reason for entering into a business combination?
a. to increase market share.
b. to avoid becoming a takeover target.
c. to reduce risk by acquiring established product lines.
d. the operating costs of the combined entity would be more than the sum of the separate entities.

18. The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is:
a. to provide information relevant to the controlling stockholders.
b. to represent the view that the affiliated companies are a separate, identifiable economic entity.
c. to emphasis control of the whole by a single management.
d. to include only a portion of the subsidiary’s assets, liabilities, revenues, expenses, gains, and losses.

19. Which of the following statements is correct?
a. Total elimination is consistent with the parent company concept.
b. Partial elimination is consistent with the economic unit concept.
c. Past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies.
d. none of these.

20. Under the parent company concept, consolidated net income __________ the consolidated net income under the economic unit concept.
a. is the same as
b. is higher than
c. is lower than
d. can be higher or lower than

21. Under the economic unit concept, noncontrolling interest in net assets is treated as
a. a liability.
b. an asset.
c. stockholders’ equity.
d. an expense.

22. The parent company concept adjusts subsidiary net asset values for the
a. differences between cost and fair value.
b. differences between cost and book value.
c. total fair value implied by the price paid by the parent.
d. total cost implied by the price paid by the parent.

23. According to the economic unit concept, the primary purpose of consolidated financial statements is to provide information that is relevant to
a. majority stockholders.
b. minority stockholders.
c. creditors.
d. both majority and minority stockholders.

24. Which of the following statements is correct?
a. The economic unit concept suggests partial elimination of unrealized intercompany profits.
b. The parent company concept suggests partial elimination of unrealized intercompany profits.
c. The economic unit concept suggests no elimination of unrealized intercompany profits.
d. The parent company concept suggests total elimination of unrealized intercompany profits.

25. When following the parent company concept in the preparation of consolidated financial statements, noncontrolling interest in combined income is considered a(n)
a. prorated share of the combined income.
b. addition to combined income to arrive at consolidated net income.
c. expense deducted from combined income to arrive at consolidated net income.
d. deduction from current assets in the balance sheet.

26. When following the economic unit concept in the preparation of consolidated financial statements, the basis for valuing the noncontrolling interest in net assets is the
a. book values of subsidiary assets and liabilities.
b. fair values of subsidiary assets and liabilities.
c. general price level adjusted values of subsidiary assets and liabilities.
d. fair values of parent company assets and liabilities.

27. The view that consolidated financial statements represent those of a single economic entity with several classes of stockholder interest is consistent with the
a. parent company concept.
b. current practice concept.
c. historical cost company concept.
d. economic unit concept.

28. The view that the noncontrolling interest in income reflects the noncontrolling stockholders’ allocated share of consolidated income is consistent with the
a. economic unit concept.
b. parent company concept.
c. current practice concept.
d. historical cost company concept.

29. The view that only the parent company’s share of the unrealized intercompany profit recognized by the selling affiliate that remains in assets should be eliminated in the preparation of consolidated financial statements is consistent with the
a. economic unit concept.
b. current practice concept.
c. parent company concept.
d. historical cost company concept.

Problems

1-1 Perkins Company is considering the acquisition of Barkley, Inc. To assess the amount it might be willing to pay, Perkins makes the following computations and assumptions.
A. Barkley, Inc. has identifiable assets with a total fair value of $6,000,000 and liabilities of $3,700,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Barkley, Inc.
B. Barkley, Inc.’s pretax incomes for the years 2009 through 2011 were $470,000, $570,000, and $370,000, respectively. Perkins believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings:

Depreciation on Buildings (each year) 380,000
Depreciation on Equipment (each year) 30,000
Extraordinary Loss (year 2011) 130,000
Salary Expense (each year) 170,000

C. The normal rate of return on net assets for the industry is 15%.

Required:
A. Assume that Perkins feels that it must earn a 20% return on its investment, and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Barkley, Inc. Indicate how much of the price consists of goodwill.
B. Assume that Perkins feels that it must earn a 15% return on its investment, but that average excess earnings are to be capitalized for five years only. Based on these assumptions, calculate a reasonable offering price for Barkley, Inc. Indicate how much of the price consists of goodwill.

1-2 Pierce Company is trying to decide whether to acquire Hager Inc. The following balance sheet for Hager Inc. provides information about book values. Estimated market values are also listed, based upon Pierce Company’s appraisals.

Hager Inc. Hager Inc.
Book Values Market Values

Current Assets $ 450,000 $ 450,000
Property, Plant & Equipment (net) 1,140,000 1,300,000
Total Assets $1,590,000 $1,750,000

Total Liabilities $700,000 $700,000
Common Stock, $10 par value 280,000
Retained Earnings 610,000
Total Liabilities and Equities $1,590,000

Pierce Company expects that Hager will earn approximately $290,000 per year in net income over the next five years. This income is higher than the 14% annual return on tangible assets considered to be the industry “norm.”

Required:
A. Compute an estimation of goodwill based on the information above that Pierce might be willing to pay (include in its purchase price), under each of the following additional assumptions:
(1) Pierce is willing to pay for excess earnings for an expected life of 4 years (undiscounted).
(2) Pierce is willing to pay for excess earnings for an expected life of 4 years, which should be capitalized at the industry normal rate of return.
(3) Excess earnings are expected to last indefinitely, but Pierce demands a higher rate of return of 20% because of the risk involved.
B. Determine the amount of goodwill to be recorded on the books if Pierce pays $1,300,000 cash and assumes Hager’s liabilities.

1-3 Pope Company acquired an 80% interest in the common stock of Simon Company for $1,540,000 on July 1, 2011. Simon Company’s stockholders’ equity on that date consisted of:

Common stock $800,000
Other contributed capital 400,000
Retained earnings 330,000

Required:
Compute the total noncontrolling interest to be reported in the consolidated balance sheet assuming the:
(1) parent company concept.
(2) economic unit concept.

1-4 The following balances were taken from the records of S Company:

Common stock (1/1/11 and 12/31/11) $720,000
Retained earnings 1/1/11 $160,000
Net income for 2011 180,000
Dividends declared in 2011 (40,000)
Retained earnings, 12/31/11 300,000
Total stockholders’ equity on 12/31/11 $1,020,000

P Company purchased 75% of S Company’s common stock on January 1, 2011 for $900,000. The difference between implied value and book value is attributable to assets with a remaining useful life on January 1, 2011 of ten years.

Required:

A. Compute the difference between cost/(implied) and book value applying:
1. Parent company theory.
2. Economic unit theory.

B. Assuming the economic unit theory:
1. Compute noncontrolling interest in consolidated income for 2011.
2. Compute noncontrolling interest in net assets on December 31, 2011.

Short Answer

1. Estimating the value of goodwill to be included in an offering price can be done under several alternative methods. The excess earnings approach is frequently used. Identify the steps used in this approach to estimate goodwill.

2. The two alternative views of consolidated financial statements are the parent company concept and the economic entity concept. Briefly explain the differences between the concepts.

Short Answer Questions in Textbook

1. Distinguish between internal and external expansion of a firm.

2. List four advantages of a business combination as compared to internal expansion.

3. What is the primary legal constraint on business combinations? Why does such a constraint exist?

4. Business combinations may be classified into three types based upon the relationships among the combining entities (e.g., combinations with suppliers, customers, competitors, etc.). Identify and define these types.

5. Distinguish among a statutory merger, a statutory consolidation, and a stock acquisition.

6. Define a tender offer and describe its use.

7. When stock is exchanged for stock in a business combination, how is the stock exchange ratio generally expressed?

8. Define some defensive measures used by target firms to avoid a takeover. Are these measures beneficial for shareholders?

9. Explain the potential advantages of a stock acquisition over an asset acquisition.

10. Explain the difference between an accretive and a dilutive acquisition.

11. Describe the difference between the economic entity concept and the parent company concept approaches to the reporting of subsidiary assets and liabilities in the consolidated financial statements on the date of the acquisition.

12. Contrast the consolidated effects of the parent company concept and the economic entity con-cept in terms of:
(a)The treatment of noncontrolling interests.
(b)The elimination of intercompany profits.
(c)The valuation of subsidiary net assets in the consolidated financial statements.
(d)The definition of consolidated net income.

13. Under the economic entity concept, the net as-sets of the subsidiary are included in the consolidated financial statements at the total fair value that is implied by the price paid by the parent company for its controlling interest. What practical or conceptual problems do you see in this approach to valuation?

14. Is the economic entity or the parent concept more consistent with the principles addressed in the FASB’s conceptual framework? Explain your answer.

15. How does the FASB’s conceptual framework influence the development of new standards?

16. What is the difference between net income, or earnings, and comprehensive income?

Business Ethics Questions from the Textbook

From 1999 to 2001, Tyco’s revenue grew approximately24% and it acquired over 700 companies. It was widely rumored that Tyco executives aggressively managed the performance of the companies that they acquired by suggesting that before the acquisition, they should accelerate the payment of liabilities, delay recording the collections of revenue, and increase the estimated amounts in reserve accounts.

1. What effect does each of the three items have on the reported net income of the acquired company before the acquisition and on the reported net income of the combined company in the first year of the acquisition and future years?

2. What effect does each of the three items have on the cash from operations of the acquired company before the acquisition and on the cash from operations of the combined company in the first year of the acquisition and future years?

3. If you are the manager of the acquired company, how do you respond to these suggestions?

4. Assume that all three items can be managed within the rules provided by GAAP but would be regarded by many as pushing the limits of GAAP.Is there an ethical issue? Describe your position as: (A) an accountant for the target company and (B) as an accountant for Tyco.

ANSWER KEY (Chapter 1)

Chapter 2

Accounting for Business Combinations

Multiple Choice

1. SFAS 141R requires that all business combinations be accounted for using
a. the pooling of interests method.
b. the acquisition method.
c. either the acquisition or the pooling of interests methods.
d. neither the acquisition nor the pooling of interests methods.

2. Under the acquisition method, if the fair values of identifiable net assets exceed the value implied by the purchase Pratt of the acquired company, the excess should be
a. accounted for as goodwill.
b. allocated to reduce current and long-lived assets.
c. allocated to reduce current assets and classify any remainder as an extraordinary gain.
d. allocated to reduce any previously recorded goodwill and classify any remainder as an ordinary gain.

3. In a period in which an impairment loss occurs, SFAS No. 142 requires each of the following note disclosures except
a. a description of the facts and circumstances leading to the impairment.
b. the amount of goodwill by reporting segment.
c. the method of determining the fair value of the reporting unit.
d. the amounts of any adjustments made to impairment estimates from earlier periods, if significant.

4. Once a reporting unit is determined to have a fair value below its carrying value, the goodwill impairment loss is computed by comparing the
a. fair value of the reporting unit and the fair value of the identifiable net assets.
b. carrying value of the goodwill to its implied fair value.
c. fair value of the reporting unit to its carrying amount (goodwill included).
d. carrying value of the reporting unit to the fair value of the identifiable net assets.

5. SFAS 141R requires that the acquirer disclose each of the following for each material business combination except the
a. name and a description of the acquiree.
b. percentage of voting equity instruments acquired.
c. fair value of the consideration transferred.
d. Each of the above is a required disclosure

6. In a leveraged buyout, the portion of the net assets of the new corporation provided by the management group is recorded at
a. appraisal value.
b. book value.
c. fair value.
d. lower of cost or market.

7. When the acquisition price of an acquired firm is less than the fair value of the identifiable net assets, all of the following are recorded at fair value except
a. Assumed liabilities.
b. Current assets.
c. Long-lived assets.
d. Each of the above is recorded at fair value.

8. Under SFAS 141R,
a. both direct and indirect costs are to be capitalized.
b. both direct and indirect costs are to be expensed.
c. direct costs are to be capitalized and indirect costs are to be expensed.
d. indirect costs are to be capitalized and direct costs are to be expensed.

9. A business combination is accounted for properly as an acquisition. Which of the following expenses related to effecting the business combination should enter into the determination of net income of the combined corporation for the period in which the expenses are incurred?

Security Overhead allocated
issue costs to the merger
a. Yes Yes
b. Yes No
c. No Yes
d. No No

10. In a business combination, which of the following costs are assigned to the valuation of the security?

Professional or Security
consulting fees issue costs
a. Yes Yes
b. Yes No
c. No Yes
d. No No

11. Par Company and Sub Company were combined in an acquisition transaction. Par was able to acquire Sub at a bargain Pratt. The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Par. After eliminating previously recorded goodwill, there was still some “negative goodwill.” Proper accounting treatment by Par is to report the amount as
a. paid-in capital.
b. a deferred credit, which is amortized.
c. an ordinary gain.
d. an extraordinary gain.

12. With an acquisition, direct and indirect expenses are
a. expensed in the period incurred.
b. capitalized and amortized over a discretionary period.
c. considered a part of the total cost of the acquired company.
d. charged to retained earnings when incurred.

13. In a business combination accounted for as an acquisition, how should the excess of fair value of net assets acquired over the consideration paid be treated?
a. Amortized as a credit to income over a period not to exceed forty years.
b. Amortized as a charge to expense over a period not to exceed forty years.
c. Amortized directly to retained earnings over a period not to exceed forty years.
d. Recorded as an ordinary gain.

14. P Corporation issued 10,000 shares of common stock with a fair value of $25 per share for all the outstanding common stock of S Company in a business combination properly accounted for as an acquisition. The fair value of S Company’s net assets on that date was $220,000. P Company also agreed to issue an additional 2,000 shares of common stock with a fair value of $50,000 to the former stockholders of S Company as an earnings contingency. Assuming that the contingency is expected to be met, the $50,000 fair value of the additional shares to be issued should be treated as a(n)
a. decrease in noncurrent liabilities of S Company that were assumed by P Company.
b. decrease in consolidated retained earnings.
c. increase in consolidated goodwill.
d. decrease in consolidated other contributed capital.

15. On February 5, Pryor Corporation paid $1,600,000 for all the issued and outstanding common stock of Shaw, Inc., in a transaction properly accounted for as an acquisition. The book values and fair values of Shaw’s assets and liabilities on February 5 were as follows

Book Value Fair Value
Cash $ 160,000 $ 160,000
Receivables (net) 180,000 180,000
Inventory 315,000 300,000
Plant and equipment (net) 820,000 920,000
Liabilities (350,000) (350,000)
Net assets $1,125,000 $1,210,000

What is the amount of goodwill resulting from the business combination?
a. $-0-.
b. $475,000.
c. $85,000.
d. $390,000.

16. P Company purchased the net assets of S Company for $225,000. On the date of P’s purchase, S Company had no investments in marketable securities and $30,000 (book and fair value) of liabilities. The fair values of S Company’s assets, when acquired, were

Current assets $ 120,000
Noncurrent assets 180,000
Total $300,000

How should the $45,000 difference between the fair value of the net assets acquired ($270,000) and the consideration paid ($225,000) be accounted for by P Company?
a. The noncurrent assets should be recorded at $ 135,000.
b. The $45,000 difference should be credited to retained earnings.
c. The current assets should be recorded at $102,000, and the noncurrent assets should be recorded at $153,000.
d. An ordinary gain of $45,000 should be recorded.
17. If the value implied by the purchase price of an acquired company exceeds the fair values of identifiable net assets, the excess should be
a. allocated to reduce any previously recorded goodwill and classify any remainder as an ordinary gain.
b. allocated to reduce current and long-lived assets.
c. allocated to reduce long-lived assets.
d. accounted for as goodwill.

18. P Co. issued 5,000 shares of its common stock, valued at $200,000, to the former shareholders of S Company two years after S Company was acquired in an all-stock transaction. The additional shares were issued because P Company agreed to issue additional shares of common stock if the average post combination earnings over the next two years exceeded $500,000. P Company will treat the issuance of the additional shares as a (decrease in)
a. consolidated retained earnings.
b. consolidated goodwill.
c. consolidated paid-in capital.
d. non-current liabilities of S Company assumed by P Company.

19. In a business combination in which the total fair value of the identifiable assets acquired over liabilities assumed is greater than the consideration paid, the excess fair value is:
a. classified as an extraordinary gain.
b. allocated first to eliminate any previously recorded goodwill, and any remaining excess over the consideration paid is classified as an ordinary gain.
c. allocated first to reduce proportionately non-current assets then to non-monetary current assets, and any remaining excess over cost is classified as a deferred credit.
d. allocated first to reduce proportionately non-current, depreciable assets to zero, and any remaining excess over cost is classified as a deferred credit.

20. The first step in determining goodwill impairment involves comparing the
a. implied value of a reporting unit to its carrying amount (goodwill excluded).
b. fair value of a reporting unit to its carrying amount (goodwill excluded).
c. implied value of a reporting unit to its carrying amount (goodwill included).
d. fair value of a reporting unit to its carrying amount (goodwill included).

21. If an impairment loss is recorded on previously recognized goodwill due to the transitional goodwill impairment test, the loss should be treated as a(n):
a. loss from a change in accounting principles.
b. extraordinary loss
c. loss from continuing operations.
d. loss from discontinuing operations.

22. P Company acquires all of the voting stock of S Company for $930,000 cash. The book values of S Company’s assets are $800,000, but the fair values are $840,000 because land has a fair value above its book value. Goodwill from the combination is computed as:
a. $130,000.
b. $90,000.
c. $40,000.
d. $0.

23. Under SFAS 141R, what value of the assets and liabilities are reflected in the financial statements on the acquisition date of a business combination?
a. Carrying value
b. Fair value
c. Book value
d. Average value

Use the following information to answer questions 24 & 25.

Pratt Company issued 24,000 shares of its $20 par value common stock for the net assets of Sele Company in business combination under which Sele Company will be merged into Pratt Company. On the date of the combination, Pratt Company common stock had a fair value of $30 per share. Balance sheets for Pratt Company and Sele Company immediately prior to the combination were as follows:

Pratt Sele

Current Assets $1,314,000 $192,000
Plant and Equipment (net) 1,725,000 408,000
Total $3,039,000 $600,000

Liabilities $ 900,000 $150,000
Common Stock, $20 par value 1,650,000 240,000
Other Contributed Capital 218,000 60,000
Retained Earnings 271,000 150,000
Total $3,039,000 $600,000

24. If the business combination is treated as an acquisition and Sele Company’s net assets have a fair value of $686,400, Pratt Company’s balance sheet immediately after the combination will include goodwill of
a. $30,600.
b. $38,400.
c. $33,600.
d. $56,400.

25. If the business combination is treated as an acquisition and the fair value of Sele Company’s current assets is $270,000, its plant and equipment is $726,000, and its liabilities are $168,000, Pratt Company’s financial statements immediately after the combination will include
a. Negative goodwill of $108,000.
b. Plant and equipment of $2,133,000.
c. Plant and equipment of $2,343,000.
d. An ordinary gain of $108,000.

26. On May 1, 2011, the Phil Company paid $1,200,000 for 80% of the outstanding common stock of Sage Corporation in a transaction properly accounted for as an acquisition. The recorded assets and liabilities of Sage Corporation on May 1, 2011, follow:

Cash $100,000
Inventory 200,000
Property & equipment (Net of accumulated depreciation) 800,000
Liabilities (160,000)

On May 1, 2011, it was determined that the inventory of Sage had a fair value of $220,000 and the property and equipment (net) has a fair value of $1,200,000. What is the amount of goodwill resulting from the business combination?
a. $0.
b. $112,000.
c. $140,000.
d. $28,000.

Use the following information to answer questions 27 & 28.

Posch Company issued 12,000 shares of its $20 par value common stock for the net assets of Sato Company in a business combination under which Sato Company will be merged into Posch Company. On the date of the combination, Posch Company common stock had a fair value of $30 per share. Balance sheets for Posch Company and Sato Company immediately prior to the combination were as follows:

Posch Sato

Current Assets $ 657,000 $ 96,000
Plant and Equipment (net) 863,000 204,000
Total $1,520,000 $300,000

Liabilities $ 450,000 $ 75,000
Common Stock, $20 par value 825,000 120,000
Other Contributed Capital 109,000 30,000
Retained Earnings 136,000 75,000
Total $1,520,000 $300,000

27. If the business combination is treated as an acquisition and Sato Company’s net assets have a fair value of $343,200, Posch Company’s balance sheet immediately after the combination will include goodwill of
a. $15,300.
b. $19,200.
c. $16,800.
d. $28,200.

28. If the business combination is treated as an acquisition and the fair value of Sato Company’s current assets is $135,000, its plant and equipment is $363,000, and its liabilities are $84,000, Posch Company’s financial statements immediately after the combination will include
a. Negative goodwill of $54,000.
b. Plant and equipment of $1,226,000.
c. Plant and equipment of $1,172,000.
d. An extraordinary gain of $54,000.

29. Following its acquisition of the net assets of Sandy Company, Potter Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Carrying Amount Fair Value
Cash $ 20,000 $20,000
Inventory 35,000 40,000
Equipment 125,000 160,000
Goodwill 60,000
Accounts Payable 30,000 30,000

Based on the preceding information, what amount of goodwill will be reported for this division if its fair value is determined to be $200,000?
a. $0
b. $60,000
c. $30,000
d. $10,000

30. The fair value of net identifiable assets exclusive of goodwill of a reporting unit of X Company is $300,000. On X Company’s books, the carrying value of this reporting unit’s net assets is $350,000, including $60,000 goodwill. If the fair value of the reporting unit is $335,000, what amount of goodwill impairment will be recognized for this unit?
a. $0
b. $10,000
c. $25,000
d. $35,000

31. The fair value of net identifiable assets of a reporting unit exclusive of goodwill of Y Company is $270,000. The carrying value of the reporting unit’s net assets on Y Company’s books is $320,000, including $50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be the fair value of the reporting unit?
a. $320,000
b. $310,000
c. $270,000
d. $290,000

32. Potter Corporation acquired Sims Company through an exchange of common shares. All of Sims’ assets and liabilities were immediately transferred to Potter. Potter Company’s common stock was trading at $20 per share at the time of exchange. The following selected information is also available:
Potter Company
Before Acquisition After Acquisition
Par value of shares outstanding $200,000 $250,000
Additional Paid in Capital 350,000 550,000

What number of shares was issued at the time of the exchange?
a. 5,000
b. 17,500
c. 12,500
d. 10,000

Problems

2-1 Balance sheet information for Seitz Corporation at January 1, 2011, is summarized as follows:
Current assets $ 920,000 Liabilities $ 1,200,000
Plant assets 1,800,000 Capital stock $10 par 800,000
Retained earnings 720,000
$2,720,000 $ 2,720,000

Seitz’s assets and liabilities are fairly valued except for plant assets that are undervalued by $200,000. On January 2, 2011, Pell Corporation issues 80,000 shares of its $10 par value common stock for all of Seitz’s net assets and Seitz is dissolved. Market quotations for the two stocks on this date are:

Pell common: $28
Seitz common: $19

Pell pays the following fees and costs in connection with the combination:

Finder’s fee $10,000
Costs of registering and issuing stock 5,000
Legal and accounting fees 6,000

Required:
A. Calculate Pell’s investment cost of Seitz Corporation.

B. Calculate any goodwill from the business combination.

2-2 Peterson Corporation purchased the net assets of Scarberry Corporation on January 2, 2011 for $560,000 and also paid $20,000 in direct acquisition costs. Scarberry’s balance sheet on January
1, 2011 was as follows:

Accounts receivable-net $ 180,000 Current liabilities $ 70,000
Inventory 360,000 Long term debt 160,000
Land 40,000 Common stock ($1 par) 20,000
Building-net 60,000 Paid-in capital 430,000
Equipment-net 80,000 Retained earnings 40,000
Total assets $ 720,000 Total liab. & equity $ 720,000

Fair values agree with book values except for inventory, land, and equipment, which have fair values of $400,000, $50,000 and $70,000, respectively. Scarberry has patent rights valued at $20,000.

Required:
A. Prepare Peterson’s general journal entry for the cash purchase of Scarberry’s net assets.

B. Assume Peterson Corporation purchased the net assets of Scarberry Corporation for $500,000 rather than $560,000, prepare the general journal entry.

2-3 Pyle Company acquired the assets (except cash) and assumed the liabilities of Sand Company on January 1, 2011, paying $2,600,000 cash. Immediately prior to the acquisition, Sand Company’s balance sheet was as follows:

BOOK VALUE FAIR VALUE
Accounts receivable (net) $ 240,000 $ 220,000
Inventory 290,000 320,000
Land 960,000 1,508,000
Buildings (net) 1,020,000 1,392,000
Total $2,510,000 $3,440,000

Accounts payable $ 270,000 $ 270,000
Note payable 600,000 600,000
Common stock, $5 par 420,000
Other contributed capital 640,000
Retained earnings 580,000
Total $2,510,000

Pyle Company agreed to pay Sand Company’s former stockholders $200,000 cash in 2012 if post- combination earnings of the combined company reached $1,000,000 during 2011.

Required:
A. Prepare the journal entry necessary for Pyle Company to record the acquisition on January 1, 2011. It is expected that the earnings target is likely to be met.

B. Prepare the journal entry necessary for Pyle Company in 2012 assuming the earnings contingency was not met.

2-4 Condensed balance sheets for Payne Company and Sigle Company on January 1, 2011 are as follows:

Payne Sigle
Current Assets $ 440,000 $200,000
Plant and Equipment (net) 1,080,000 340,000
Total Assets $1,520,000 $540,000

Total Liabilities $ 230,000 $ 80,000
Common Stock, $10 par value 840,000 240,000
Other Contributed Capital 300,000 130,000
Retained Earnings 150,000 90,000
Total Equities $1,520,000 $540,000

On January 1, 2011 the stockholders of Payne and Sigle agreed to a consolidation whereby a new corporation, Lawson Company, would be formed to consolidate Payne and Sigle. Lawson Company issued 70,000 shares of its $20 par value common stock for the net assets of Payne and Sigle. On the date of consolidation, the fair values of Payne’s and Sigle’s current assets and liabilities were equal to their book values. The fair value of plant and equipment for each company was: Payne, $1,270,000; Sigle, $360,000.
An investment banking house estimated that the fair value of Lawson Company’s common stock was $35 per share. Payne will incur $45,000 of direct acquisition costs and $15,000 in stock issue costs.

Required:
Prepare the journal entries to record the consolidation on the books of Lawson Company assuming that the consolidation is accounted for as an acquisition.

2-5 The stockholders’ equities of P Corporation and S Corporation were as follows on January 1, 2011:

P Corp. S Corp.
Common Stock, $1 par $1,000,000 $ 600,000
Other Contributed Capital 2,800,000 1,100,000
Retained Earnings 600,000 340,000
Total Stockholders’ Equity $4,400,000 $2,040,000

On January 2, 2011 P Corp. issued 100,000 of its shares with a market value of $14 per share in exchange for all of S’s shares, and S Corp. was dissolved. P Corp. paid $10,000 to register and issue the new common shares.

Required:
Prepare the stockholders’ equity section of P Corp. balance sheet after the business combination on January 2, 2011.

2-6 The managers of Petty Company own 10,000 of its 100,000 outstanding common shares. Swann Company is formed by the managers of Petty Company to take over Petty Company in a leveraged buyout. The managers contribute their shares in Petty Company and Swann Company then borrows $675,000 to purchase the remaining 90,000 shares of Petty Company for $600,000; the remaining $75,000 is used for working capital. Petty Company is then merged into Swann Company effective January 1, 2011. Data relevant to Petty Company immediately prior to the leveraged buyout follow:

Book Value Fair Value
Current Assets $ 90,000 $ 90,000
Plant Assets 255,000 525,000
Liabilities (45,000) (45,000)
Stockholders’ Equity $300,000 $570,000

Required:
A. Prepare journal entries on Swann Company’s books to reflect the effects of the leveraged buyout.
B. Determine the balance of each of the following immediately after the merger:
1. Current Assets
2. Plant Assets
3. Note Payable
4. Common Stock

2-7 On January 1, 2010, Presley Company acquired the net assets of Sill Company for $1,580,000 cash. The fair value of Sill’s identifiable net assets was $1,310,000 on his date. Presley Company decided to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit (Sill). The information for these subsequent years is as follows:

Carrying value of Fair Value
Present value Sill’s Identifiable Sill’s Identifiable
Year of Future Cash Flows Net Assets* Net Assets
2011 $1,400,000 $1,160,000 $1,190,000
2012 $1,400,000 $1,120,000 $1,210,000
* Identifiable net assets do not include goodwill.
Required:
A: For each year determine the amount of goodwill impairment, if any.
B: Prepare the journal entries needed each year to record the goodwill impairment (if any) on Presley’s books.

2-8 The following balance sheets were reported on January 1, 2011, for Piper Company and Sieler Company:

Piper Sieler
Cash $ 150,000 $ 30,000
Inventory 450,000 150,000
Equipment (net) 1,320,000 570,000
Total $1,920,000 $750,000

Total liabilities $ 450,000 $150,000
Common stock, $20 par value 600,000 300,000
Other contributed capital 375,000 105,000
Retained earnings 495,000 195,000
Total $1,920,000 $750,000

Required:
Appraisals reveal that the inventory has a fair value $180,000, and the equipment has a current value of $615,000. The book value and fair value of liabilities are the same. Assuming that Piper Company wishes to acquire Sieler for cash in an asset acquisition, determine the following cutoff amounts:
A. The purchase price above which Piper would record goodwill.
B. The purchase price at which Piper would record a $50,000 gain.
C. The purchase price below which Piper would obtain a “bargain.”
D. The purchase price at which Piper would record $75,000 of goodwill.

Short Answer

1. SFAS No. 142 requires that goodwill impairment be tested annually for each reporting unit. Discuss the necessary steps of the goodwill impairment test.

2. Briefly describe the different treatment under SFAS 141 vs. SFAS 141R for the following issues:
a. Business definition
b. Acquisitions costs
c. In-process R&D
d. Contingent consideration

Short Answer Questions from the Textbook

1. When contingent consideration in an acquisition is based on security prices, how should this contingency be reflected on the acquisition date? If the estimate changes during the measurement period, how is this handled? If the estimate changes after the end of the measurement period, how is this adjustment handled? Why?

2. What are pro forma financial statements? What is their purpose?

3. How would a company determine whether goodwill has been impaired?

4. AOL announced that because of an accounting change (FASB Statements Nos. 141R [ASC 805] and142 [ASC 350]), earnings would be increasing 2002, Veritas Software Corporation’s CFO resigned after claiming to have an MBA from Stanford University. On the other hand, Bausch & Lomb Inc.’s board re-fused the CEO’s offer to resign following a questionable claim to have an MBA. Suppose you have been retained by the board of a company where the CEO has ‘overstated’ credentials. This company has a code of ethics and conduct which over the next 25 years by $5.9 billion a year. What change(s) required by FASB (in SFAS Nos. 141Rand 142) resulted in an increase in AOL’s in-come? Would you expect this increase in earnings to have a positive impact on AOL’s stock price? Why or why not?

Business Ethics Question from Textbook
There have been several recent cases of a CEO or CFO resigning or being ousted for misrepresenting academic credentials. For instance, during February 2006,the CEO of RadioShack resigned by ‘mutual agreement’ for inflating his educational background. During states that the employee should always do “the right thing.”(a) What is the board of directors’ responsibility in such matters?(b) What arguments would you make to ask the CEO to resign? What damage might be caused if the decision is made to retain the current CEO?

ANSWER KEY (Chapter 2)

Chapter 3

Consolidated Financial Statements—Date of Acquisition

Multiple Choice

1. A majority-owned subsidiary that is in legal reorganization should normally be accounted for using
a. consolidated financial statements.
b. the equity method.
c. the market value method.
d. the cost method.

2. Under the acquisition method, indirect costs relating to acquisitions should be
a. included in the investment cost.
b. expensed as incurred.
c. deducted from other contributed capital.
d. none of these.

3. Eliminating entries are made to cancel the effects of intercompany transactions and are made on the
a. books of the parent company.
b. books of the subsidiary company.
c. workpaper only.
d. books of both the parent company and the subsidiary.

4. One reason a parent company may pay an amount less than the book value of the subsidiary’s stock acquired is
a. an undervaluation of the subsidiary’s assets.
b. the existence of unrecorded goodwill.
c. an overvaluation of the subsidiary’s liabilities.
d. none of these.

5. In a business combination accounted for as an acquisition, registration costs related to common stock issued by the parent company are
a. expensed as incurred.
b. deducted from other contributed capital.
c. included in the investment cost.
d. deducted from the investment cost.

6. On the consolidated balance sheet, consolidated stockholders’ equity is
a. equal to the sum of the parent and subsidiary stockholders’ equity.
b. greater than the parent’s stockholders’ equity.
c. less than the parent’s stockholders’ equity.
d. equal to the parent’s stockholders’ equity.

7. Majority-owned subsidiaries should be excluded from the consolidated statements when
a. control does not rest with the majority owner.
b. the subsidiary operates under governmentally imposed uncertainty.
c. a foreign subsidiary is domiciled in a country with foreign exchange restrictions or controls.
d. any of these circumstances exist.

8. Under the economic entity concept, consolidated financial statements are intended primarily for the benefit of the
a. stockholders of the parent company.
b. creditors of the parent company.
c. minority stockholders.
d. all of the above.

9. Reasons a parent company may pay more than book value for the subsidiary company’s stock include all of the following except
a. the fair value of one of the subsidiary’s assets may exceed its recorded value because of appreciation.
b. the existence of unrecorded goodwill.
c. liabilities may be overvalued.
d. stockholders’ equity may be undervalued.

10. What is the method of presentation required by SFAS 160 of “non-controlling interest” on a consolidated balance sheet?
a. As a deduction from goodwill from consolidation.
b. As a separate item within the long-term liabilities section.
c. As a part of stockholders’ equity.
d. As a separate item between liabilities and stockholders’ equity.

11. Which of the following is a limitation of consolidated financial statements?
a. Consolidated statements provide no benefit for the stockholders and creditors of the parent company.
b. Consolidated statements of highly diversified companies cannot be compared with industry standards.
c. Consolidated statements are beneficial only when the consolidated companies operate within the same industry.
d. Consolidated statements are beneficial only when the consolidated companies operate in different industries.

12. Pine Corp. owns 60% of Sage Corp.’s outstanding common stock. On May 1, 2011, Pine advanced Sage $90,000 in cash, which was still outstanding at December 31, 2011. What portion of this advance should be eliminated in the preparation of the December 31, 2011 consolidated balance sheet?
a. $90,000.
b. $54,000.
c. $36,000.
d. $-0-.

Use the following information for questions 13-15.

On January 1, 2011, Polk Company and Sigler Company had condensed balance sheets as follows:
Polk Sigler
Current assets $ 280,000 $ 80,000
Noncurrent assets _360,000 __160,000
Total assets $ 640,000 $240,000

Current liabilities $ 120,000 $ 40,000
Long-term debt 200,000 -0-
Stockholders’ equity __320,000 200,000
Total liabilities & stockholders’ equity $ 640,000 $240,000
On January 2, 2011 Polk borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sigler. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2011. Any difference between book value and the value implied by the purchase price relates to land.

On Polk’s January 2, 2011 consolidated balance sheet,

13. Noncurrent assets should be
a. $520,000.
b. $536,000.
c. $544,000.
d. $586,667.

14. Current liabilities should be
a. $200,000.
b. $184,000.
c. $160,000.
d. $120,000.

15. Noncurrent liabilities should be
a. $440,000.
b. $416,000.
c. $240,000.
d. $216,000.

16. A newly acquired subsidiary has pre-existing goodwill on its books. The parent company’s consolidated balance sheet will:
a. treat the goodwill the same as other intangible assets of the acquired company.
b. will always show the pre-existing goodwill of the subsidiary at its book value.
c. not show any value for the subsidiary’s pre-existing goodwill.
d. do an impairment test to see if any of it has been impaired.

17. The Difference between Implied and Book Value account is:
a. an account necessary for the preparation of consolidated working papers.
b. used in allocating the amounts paid for recorded balance sheet accounts that are different than
their fair values.
c. the excess implied value assigned to goodwill.
d. the unamortized excess that cannot be assigned to any related balance sheet accounts

18. The main evidence of control for purposes of consolidated financial statements involves
a. possessing majority ownership
b. having decision-making ability that is not shared with others.
c. being the sole shareholder
d. having the parent company and the subsidiary participating in the same industry.

19. In which of the following cases would consolidation be inappropriate?
a. The subsidiary is in bankruptcy.
b. Subsidiary’s operations are dissimilar from those of the parent.
c. The parent owns 90 percent of the subsidiary’s common stock, but all of the subsidiary’s nonvoting preferred stock is held by a single investor.
d. Subsidiary is foreign.

20. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 2011. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and fair value of $500,000. What amount would land be reported in the consolidated balance sheet prepared immediately after the combination?
a. $650,000
b. $500,000
c. $550,000
d. $375,000

Use the following information to answer questions 21 – 23.

On January 1, 2011, Pena Company and Shelby Company had condensed balanced sheets as follows:

Pena Shelby

Current assets $ 210,000 $ 60,000
Noncurrent assets 270,000 120,000
Total assets $480,000 $180,000

Current liabilities $ 90,000 $ 30,000
Long-term debt 150,000 -0-
Stock holders’ equity 240,000 150,000
Total liabilities & stockholders’ equity $ 480,000 $ 180,000

On January 2, 2011 Pena borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelby. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2011. Any difference between book value and the value implied by the purchase price relates to land.

On Pena’s January 2, 2011 consolidated balance sheet,

21. Noncurrent assets should be
a. $390,000.
b. $402,000.
c. $408,000.
d. $440,000.

22. Current liabilities should be
a. $150,000.
b. $138,000.
c. $120,000.
d. $90,000.

23. Noncurrent liabilities should be
a. $330,000.
b. $312,000.
c. $180,000.
d. $162,000.

24. On January 1, 2011, Primer Corporation acquired 80 percent of Sutter Corporation’s voting common stock.
Sutters’s buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of
acquisition. At what amount will Sutter’s buildings and equipment will be reported in the consolidated
statements ?
a. $350,000
b. $340,000
c. $280,000
d. $300,000

Problems

3-1 On December 31, 2011, Page Company purchased 80% of the outstanding common stock of Snead Company for cash. At the time of acquisition, Snead Company’s balance sheet was as follows:

Current assets $ 1,680,000
Plant and equipment 1,580,000
Land 280,000
Total assets $3,540,000

Liabilities $ 1,320,000
Common stock, $10 par value 1,440,000
Other contributed capital 700,000
Retained earnings 240,000
Total $3,700,000
Treasury stock at cost, 5,000 shares 160,000
Total equities $3,540,000

Required:

Prepare the elimination entry(s) required for the preparation of a consolidated balance sheet workpaper on December 31, 2011, assuming the purchase price of the stock was $1,670,000. Any difference between the value implied by the purchase price of the investment and the book value of net assets acquired relates to subsidiary land.

3-2 P Company purchased 80% of the outstanding common stock of S Company on January 2, 2011, for $380,000. Balance sheets for P Company and S Company immediately after the stock acquisition were as follows:

P Company S Company
Current assets $ 166,000 $ 96,000
Investment in S Company 380,000 -0-
Plant and equipment (net) 560,000 224,000
Land 40,000 120,000
$1,146,000 $440,000

Current liabilities $ 120,000 $ 44,000
Long-term notes payable -0- 36,000
Common stock 480,000 160,000
Other contributed capital 244,000 64,000
Retained earnings 302,000 136,000
$1,146,000 $440,000

S Company owed P Company $16,000 on open account on the date of acquisition.

Required:

Prepare a consolidated balance sheet for P and S Companies on the date of acquisition. Any difference between the value implied by the purchase price of the investment and the book value of net assets acquired relates to subsidiary land. The book values of S Company’s other assets and liabilities are equal to their fair values.

3-3 P Company acquired 54,000 shares of the common stock of S Company on January 1, 2011, for $950,000 cash. The stockholders’ equity section of S Company’s balance sheet on that date was as follows:

Common stock, $10 par value $600,000
Other contributed capital 80,000
Retained earnings 320,000
Total $1,000,000

On the date of acquisition, S Company owed P Company $10,000 on open account.

Required:
Present, in general journal form, the elimination entries for the preparation of a consolidated balance sheet workpaper on January 1, 2011. The difference between the value implied by the purchase price of the investment and the book value of the net assets acquired relates to subsidiary land.

3-4 On January 2, 2011, Potter Company acquired 90% of the outstanding common stock of Smiley Company for $480,000 cash. Just before the acquisition, the balance sheets of the two companies were as follows:

Potter Smiley
Cash $ 650,000 $ 160,000
Accounts Receivable (net) 360,000 60,000
Inventory 290,000 140,000
Plant and Equipment (net) 970,000 240,000
Land 150,000 80,000
Total Assets $2,420,000 $680,000

Accounts Payable $ 260,000 $ 120,000
Mortgage Payable 180,000 100,000
Common Stock, $2 par value 1,000,000 170,000
Other Contributed Capital 520,000 50,000
Retained Earnings 460,000 240,000
Total Equities $2,420,000 $680,000

The fair values of Smiley’s assets and liabilities are equal to their book values with the exception of land.

Required:

A. Prepare the journal entry necessary to record the purchase of Smiley’s common stock.
B. Prepare a consolidated balance sheet at the date of acquisition.

3-5 P Corporation paid $420,000 for 70% of S Corporation’s $10 par common stock on December 31, 2011, when S Corporation’s stockholders’ equity was made up of $300,000 of Common Stock, $90,000 of Other Contributed Capital and $60,000 of Retained Earnings. S’s identifiable assets and liabilities reflected their fair values on December 31, 2011, except for S’s inventory which was undervalued by $60,000 and their land which was undervalued by $25,000. Balance sheets for P and S immediately after the business combination are presented in the partially completed work-paper below.

Eliminations
P S Debit Credit
Noncontrolling Interest Consolidated Balances
ASSETS
Cash $40,000 $30,000
Accounts
receivable-net 30,000 45,000
Inventories 185,000 165,000
Land 45,000 120,000
Plant assets-
net 480,000 240,000
Investment in
S Corp. 420,000
Difference between implied and book value
Goodwill
Total Assets $1,200,000 $600,000
EQUITIES
Current
liabilities $170,000 $150,000
Capital stock 600,000 300,000
Additional paid-in capital 150,000 90,000
Retained earnings 280,000 60,000
Noncontrolling interest
Total Equities $1,200,000 $600,000

Required:
Complete the consolidated balance sheet workpaper for P Corporation and Subsidiary.

3-6 Prepare in general journal form the workpaper entries to eliminate Porter Company’s investment in Sewell Company in the preparation of a consolidated balance sheet at the date of acquisition for each of the following independent cases:

Sewell Company Equity Balances
Cash Percent of Stock Owned Investment Cost Common Stock Other Contributed Capital Retained Earnings
a. 90 $675,000 $450,000 $180,000 $75,000
b. 80 318,000 620,000 140,000 20,000

Any difference between book value of net assets acquired and the value implied by the purchase price relates to subsidiary property, plant, and equipment except for case (b). In case (b) assume that all book values and fair values are the same.

3-7 On December 31, 2011, Pryor Company purchased a controlling interest in Shelby Company for $1,060,000. The consolidated balance sheet on December 31, 2011 reported noncontrolling interest in Shelby Company of $265,000.

On the date of acquisition, the stockholders’ equity section of Shelby Company’s balance sheet was as follows:

Common stock $520,000
Other contributed capital 380,000
Retained earnings 280,000
Total 1,180,000

Required:

A. Compute the noncontrolling interest percentage on December 31, 2011.
B. Prepare the investment elimination entry made to prepare a consolidated balance sheet workpaper. Any difference between book value and the value implied by the purchase price relates to subsidiary land.

3-8 On January 1, 2011, Primer Company issued 1,500 of its $20 par value common shares with a fair value of $50 per share in exchange for 2,000 outstanding common shares of Swartz Company in a purchase transaction. Registration costs amounted to $1,700 paid in cash. Just prior to the acquisition, the balance sheets of the two companies were as follows:

Primer Swartz

Cash $ 73,000 $13,000
Accounts Receivable (net) 95,000 19,000
Inventory 58,000 25,000
Plant and Equipment (net) 95,000 43,000
Land 26,000 20,000
Total Assets $ 347,000 $ 120,000

Accounts Payable $ 66,000 16,000
Notes Payable 82,000 21,000
Common Stock, $20 par value 100,000 40,000
Other Contributed Capital 60,000 24,000
Retained Earnings 39,000 19,000
Total Liabilities and Equities $ 347,000 $ 120,000

Any differences between the book value of equity and the value implied by the purchase price relates to Land.

Required:
A. Prepare the journal entry on Primer’s books to record the exchange of stock.
B. Prepare a Computation and Allocation Schedule for the Difference between book value and value implied by the purchase price.
C. Calculate the consolidated balance for each of the following accounts as of December 31, 2011:
1. Cash
2. Land
3. Common Stock
4. Other Contributed Capital

Short Answer

1. There are several reasons why a company would acquire a subsidiary’s voting common stock rather than its net assets. Identify at least two advantages to acquiring a controlling interest in the voting stock of another company rather than its assets.

2. A useful first step in the consolidating process is to prepare a Computation and Allocation of Difference (CAD) Schedule. Identify the steps involved in preparing the CAD schedule.

Short Answer Questions from the Textbook

1. What are the advantages of acquiring the majority of the voting stock of another company rather than acquiring all its voting stock?

2. What is the justification for preparing consolidated financial statements when, in fact, it is ap-parent that the consolidated group is not a legal entity?

3. Why is it often necessary to prepare separate financial statements for each legal entity in a consolidated group even though consolidated statements provide a better economic picture of the combined activities?

4. What aspects of control must exist before a subsidiary is consolidated?

5. Why are consolidated work papers used in pre-paring consolidated financial statements?

6. Define noncontrolling (minority) interest. List three methods that might be used for reporting the noncontrolling interest in a consolidated balance sheet, and state which is preferred under the SFAS No. 160[topic 810].

7. Give several reasons why a parent company would be willing to pay more than book value for subsidiary stock acquired.

8. What effect do subsidiary treasury stock holdings have at the time the subsidiary is acquired? How should the treasury stock be treated on consolidated work papers?

9. What effect does a noncontrolling interest have on the amount of intercompany receivables and payables eliminated on a consolidated balance sheet?

10 A.SFAS No. 109and SFAS No. 141R[ASC 740 and805] require that a deferred tax asset or liability be recognized for likely differences between the reported values and tax bases of assets and liabilities recognized in business combinations (for example, in exchanges that are nontaxable to the selling shareholders). Does this decision change the amount of consolidated net income reported in years subsequent to the business combination? Explain.

Business Ethics Question from the Textbook

Part I. You are working on the valuation of accounts receivable, and bad debt reserves for the current year’s annual report. The CFO stops by and asks you to reduce the reserve by enough to increase the current year’s EPS by 2 cents a share. The company’s policy has always been to use the previous year’s actual bad debt percentage adjusted for a specific economic index. The CFO’s suggested change would still be within acceptable GAAP. However, later, you learn that with the increased EPS, the CFO would qualify for a significant bonus. What do you do and why?

Part II. Consider the following: Accounting firm KPMG created tax shelters called BLIPS, FLIP, OPIS, and SOS that were based largely in the Cayman Islands and allowed wealthy clients (there were 186) to create $5 billion in losses, which were then deducted from their income for IRS tax purposes. BLIPS (Bond Linked Issue Premium Structures) had clients borrow from an offshore bank for purposes of purchasing currency. The client would then sell the currency back to the lender for a loss. However, the IRS contends the losses were phony and that there was never any risk to the client in the deals. The IRS has indicted eight former KPMG partners and an outside lawyer alleging that the transactions were shams, illegal methods for avoiding taxes. KPMG has agreed to pay a$456 million fine, no longer to do tax shelters, and to cooperate with the government in its prosecution of the nine individuals involved in the tax shelter scheme. Many argue that the courts have not always held that such tax avoidance schemes show criminal intent because the tax laws permit individuals to minimize taxes. However, the IRS argues that these shelters evidence intent because of the lack of risk.

Question
In this case, the IRS contends that the losses generated by the tax shelters were phony and that the clients never incurred any risk. Do tax avoidance schemes indicate criminal intent if the tax laws permit individuals to minimize taxes? Justify your answer.

ANSWER KEY (Chapter 3)

Chapter 4

Consolidated Financial Statements after Acquisition

1. An investor adjusts the investment account for the amortization of any difference between cost and book value under the
a. cost method.
b. complete equity method.
c. partial equity method.
d. complete and partial equity methods.

2. Under the partial equity method, the entry to eliminate subsidiary income and dividends includes a debit to
a. Dividend Income.
b. Dividends Declared – S Company.
c. Equity in Subsidiary Income.
d. Retained Earnings – S Company.

3. On the consolidated statement of cash flows, the parent’s acquisition of additional shares of the subsidiary’s stock directly from the subsidiary is reported as
a. an investing activity.
b. a financing activity.
c. an operating activity.
d. none of these.

4. Under the cost method, the workpaper entry to establish reciprocity
a. debits Retained Earnings – S Company.
b. credits Retained Earnings – S Company.
c. debits Retained Earnings – P Company.
d. credits Retained Earnings – P Company.

5. Under the cost method, the investment account is reduced when
a. there is a liquidating dividend.
b. the subsidiary declares a cash dividend.
c. the subsidiary incurs a net loss.
d. none of these.

6. The parent company records its share of a subsidiary’s income by
a. crediting Investment in S Company under the partial equity method.
b. crediting Equity in Subsidiary Income under both the cost and partial equity methods.
c. debiting Equity in Subsidiary Income under the cost method.
d. none of these.

7. In years subsequent to the year of acquisition, an entry to establish reciprocity is made under the
a. complete equity method.
b. cost method.
c. partial equity method.
d. complete and partial equity methods.

8. A parent company received dividends in excess of the parent company’s share of the subsidiary’s earnings subsequent to the date of the investment. How will the parent company’s investment account be affected by those dividends under each of the following accounting methods?

Cost Method Partial Equity Method
a. No effect No effect
b. Decrease No effect
c. No effect Decrease
d. Decrease Decrease

9. P Company purchased 80% of the outstanding common stock of S Company on May 1, 2011, for a cash payment of $1,272,000. S Company’s December 31, 2010 balance sheet reported common stock of $800,000 and retained earnings of $540,000. During the calendar year 2011, S Company earned $840,000 evenly throughout the year and declared a dividend of $300,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2012?
a. $208,000
b. $260,000
c. $248,000
d. $432,000

10. P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997. S Company’s stockholders’ equity at various dates was:
1/1/97 1/1/11 12/31/11
Common stock $400,000 $400,000 $400,000
Retained earnings 120,000 380,000 460,000
Total $520,000 $780,000 $860,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2011 should include a credit to P Company’s retained earnings of
a. $80,000.
b. $234,000.
c. $260,000.
d. $306,000.

11. Consolidated net income for a parent company and its partially owned subsidiary is best defined as the parent company’s
a. recorded net income.
b. recorded net income plus the subsidiary’s recorded net income.
c. recorded net income plus the its share of the subsidiary’s recorded net income.
d. income from independent operations plus subsidiary’s income resulting from transactions with outside parties.

12. In the preparation of a consolidated statements workpaper, dividend income recognized by a parent company for dividends distributed by its subsidiary is
a. included with parent company income from other sources to constitute consolidated net income.
b. assigned as a component of the noncontrolling interest.
c. allocated proportionately to consolidated net income and the noncontrolling interest.
d. eliminated.

13. In the preparation of a consolidated statement of cash flows using the indirect method of presenting cash flows from operating activities, the amount of the noncontrolling interest in consolidated income is
a. combined with the controlling interest in consolidated net income.
b. deducted from the controlling interest in consolidated net income.
c. reported as a significant noncash investing and financing activity in the notes.
d. reported as a component of cash flows from financing activities.

14. On October 1, 2011, Parr Company acquired for cash all of the voting common stock of Stein Company. The purchase price of Stein’s stock equaled the book value and fair value of Stein’s net assets. The separate net income for each company, excluding Parr’s share of income from Stein was as follows:
Parr Stein
Twelve months ended 12/31/11 $4,500,000 $2,700,000
Three months ended 12/31/11 495,000 450,000

During September, Stein paid $150,000 in dividends to its stockholders. For the year ended December 31, 2011, Parr issued parent company only financial statements. These statements are not considered those of the primary reporting entity. Under the partial equity method, what is the amount of net income reported in Parr’s income statement?
a. $7,200,000.
b. $4,650,000.
c. $4,950,000.
d. $1,800,000.

15. A parent company uses the partial equity method to account for an investment in common stock of its subsidiary. A portion of the dividends received this year were in excess of the parent company’s share of the subsidiary’s earnings subsequent to the date of the investment. The amount of dividend income that should be reported in the parent company’s separate income statement should be
a. zero.
b. the total amount of dividends received this year.
c. the portion of the dividends received this year that were in excess of the parent’s share of subsidiary’s earnings subsequent to the date of investment.
d. the portion of the dividends received this year that were NOT in excess of the parent’s share of subsidiary’s earnings subsequent to the date of investment.

16. Masters, Inc. owns 40% of Fields Corporation. During the year, Fields had net earnings of $200,000 and paid dividends of $50,000. Masters used the cost method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively?
a. understate, overstate, overstate.
b. overstate, understate, understate
c. overstate, overstate, overstate
d. understate, understate, understate

Use the following information in answering questions 17 and 18.

17. Prior Industries acquired a 70 percent interest in Stevenson Company by purchasing 14,000 of its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2010. Stevenson reported net income in 2010 of $90,000 and in 2011 of $120,000 earned evenly throughout the respective years. Prior received $24,000 dividends from Stevenson in 2010 and $36,000 in 2011. Prior uses the equity method to record its investment.

Prior should record investment income from Stevenson during 2011 of:
a. $36,000
b. $120,000
c. $84,000
d. $48,000

18. The balance of Prior’s Investment in Stevenson account at December 31, 2011 is:
a. $210,000
b. $285,000
c. $297,000
d. $315,000

19. Parkview Company acquired a 90% interest in Sutherland Company on December 31, 2010, for $320,000. During 2011 Sutherland had a net income of $22,000 and paid a cash dividend of $7,000. Applying the cost method would give a debit balance in the Investment in Stock of Sutherland Company account at the end of 2011 of:
a. $335,000
b. $333,500
c. $313,700
d. $320,000

20. Hall, Inc., owns 40% of the outstanding stock of Gloom Company. During 2011, Hall received a $4,000 cash dividend from Gloom. What effect did this dividend have on Hall’s 2011 financial statements?
a. Increased total assets.
b. Decreased total assets.
c. Increased income.
d. Decreased investment account.

21. P Company purchased 80% of the outstanding common stock of S Company on May 1, 2011, for a cash payment of $318,000. S Company’s December 31, 2010 balance sheet reported common stock of $200,000 and retained earnings of $180,000. During the calendar year 2011, S Company earned $210,000 evenly throughout the year and declared a dividend of $75,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2011?
a. $52,000
b. $65,000
c. $62,000
d. $108,000

22. P Company purchased 90% of the outstanding common stock of S Company on January 1, 1997. S Company’s stockholders’ equity at various dates was:
1/1/97 1/1/11 12/31/11
Common stock $200,000 $200,000 $200,000
Retained earnings 60,000 190,000 230,000
Total $260,000 $390,000 $430,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2011 should include a credit to P Company’s retained earnings of
a. $40,000.
b. $117,000.
c. $130,000.
d. $153,000.

Use the following information in answering questions 23 and 24.

23. Prior Industries acquired an 80 percent interest in Sanderson Company by purchasing 24,000 of its 30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2010. Sanderson reported net income in 2010 of $45,000 and in 2011 of $60,000 earned evenly throughout the respective years. Prior received $12,000 dividends from Sanderson in 2010 and $18,000 in 2011. Prior uses the equity method to record its investment.

Prior should record investment income from Sanderson during 2011 of:
a. $18,000.
b. $60,000.
c. $48,000.
d. $33,600.

24. The balance of Prior’s Investment in Sanderson account at December 31, 2011 is:
a. $105,000.
b. $138,600.
c. $159,000.
d. $165,000.

25. Pendleton Company acquired a 70% interest in Sunflower Company on December 31, 2010, for $380,000. During 2011 Sunflower had a net income of $30,000 and paid a cash dividend of $10,000. Applying the cost method would give a debit balance in the Investment in Stock of Sunflower Company account at the end of 2011 of:
a. $400,000.
b. $394,000.
c. $373,000.
d. $380,000.

Use the following information to answer questions 26 and 27

On January 1, 2011, Rotor Corporation acquired 30 percent of Stator Company’s stock for $150,000. On the acquisition date, Stator reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value. The difference was due to the increased value of buildings with a remaining life of 10 years. During 2011 Stator reported net income of $25,000 and paid dividends of $10,000. Rotor uses the equity method.

26. What will be the balance in the Investment account as of Dec 31, 2011?
a. $150,000
b. $157,500
c. $154,500
d. $153,000

27. What amount of investment income will be reported by Rotor for the year 2011?
a. $7,500
b. $6,000
c. $4,500
d. $25,000

28. On January 1, 2011, Potter Company purchased 25 % of Smith Company’s common stock; no goodwill resulted from the acquisition. Potter Company appropriately carries the investment using the equity method of accounting and the balance in Potter’s investment account was $190,000 on December 31, 2011. Smith reported net income of $120,000 for the year ended December 31, 2011 and paid dividends on its common stock totaling $48,000 during 2011. How much did Potter pay for its 25% interest in Smith?
a. $172,000
b. $202,000
c. $208,000
d. $232,000

Use the following information to answer questions 29 and 30.

29. On January 1, 2011, Paterson Company purchased 40% of Stratton Company’s 30,000 shares of voting common stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton Company was $1,740,000. The payment in excess of the net book value was attributed to depreciable assets with a remaining useful life of six years. As a result of this transaction Paterson has the ability to exercise significant influence over Stratton Company’s operating and financial policies. Stratton’s net income for the ended December 31, 2011 was $600,000. During 2011, Stratton paid $325,000 in dividends to its shareholders. The income reported by Paterson for its investment in Stratton should be:
a. $120,000
b. $130,000
c. $230,000
d. $240,000

30. What is the ending balance in Paterson’s investment account as of December 31, 2011?
a. $1,800,000
b. $1,900,000
c. $1,910,000
d. $2,030,000
Problems

4-1 On January 1, 2011, Price Company purchased an 80% interest in the common stock of Stahl Company for $1,040,000, which was $60,000 greater than the book value of equity acquired. The difference between implied and book value relates to the subsidiary’s land.

The following information is from the consolidated retained earnings section of the consolidated statements workpaper for the year ended December 31, 2011:

STAHL CONSOLIDATED
COMPANY BALANCES
1/01/11 retained earnings $300,000 $1,400,000
Net income 220,000 680,000
Dividends declared (80,000) (140,000)
12/31/11 retained earnings $440,000 $1,940,000

Stahl’s stockholders’ equity includes only common stock and retained earnings.

Required:

A. Prepare the workpaper eliminating entries for a consolidated statements workpaper on December 31, 2011. Price uses the cost method.

B. Compute the total noncontrolling interest to be reported on the consolidated balance sheet on December 31, 2011.

4-2 On October 1, 2011, Packer Company purchased 90% of the common stock of Shipley Company for $290,000. Additional information for both companies for 2011 follows:

PACKER SHIPLEY
Common stock $300,000 $90,000
Other contributed capital 120,000 40,000
Retained Earnings, 1/1 240,000 50,000
Net Income 260,000 160,000
Dividends declared (10/31) 40,000 8,000

Any difference between implied and book value relates to Shipley’s land. Packer uses the cost method to record its investment in Shipley. Shipley Company’s income was earned evenly throughout the year.

Required:

A. Prepare the workpaper entries that would be made on a consolidated statements workpaper on December 31, 2011. Use the full year reporting alternative.

B. Calculate the controlling interest in consolidated net income for 2011.

4-3 On January 1, 2011, Pierce Company purchased 80% of the common stock of Stanley Company for $600,000. At that time, Stanley’s stockholders’ equity consisted of the following:

Common stock $220,000
Other contributed capital 90,000
Retained earnings 320,000

During 2011, Stanley distributed a dividend in the amount of $120,000 and at year-end reported a $320,000 net income. Any difference between implied and book value relates to subsidiary goodwill. Pierce Company uses the equity method to record its investment. No impairment of goodwill is observed in the first year.

Required:

A. Prepare on Pierce Company’s books journal entries to record the investment related activities for 2011.

B. Prepare the workpaper eliminating entries for a workpaper on December 31, 2011.

4-4 Pratt Company purchased 80% of the outstanding common stock of Selby Company on January 2, 2004, for $680,000. The composition of Selby Company’s stockholders’ equity on January 2, 2004, and December 31, 2011, was:
1/2/04 12/31/11
Common stock $540,000 $540,000
Other contributed capital 325,000 325,000
Retained earnings (deficit) (60,000) 295,000
Total stockholders’ equity $805,000 $1,160,000

During 2011, Selby Company earned $210,000 net income and declared a $60,000 dividend. Any difference between implied and book value relates to land. Pratt Company uses the cost method to record its investment in Selby Company.

Required:

A. Prepare any journal entries that Pratt Company would make on its books during 2011 to record the effects of its investment in Selby Company.

B. Prepare, in general journal form, all workpaper entries needed for the preparation of a consolidated statements workpaper on December 31, 2011.

4-5 P Company purchased 90% of the common stock of S Company on January 2, 2011 for $900,000. On that date, S Company’s stockholders’ equity was as follows:

Common stock, $20 par value $400,000
Other contributed capital 100,000
Retained earnings 450,000

During 2011, S Company earned $200,000 and declared a $100,000 dividend. P Company uses the partial equity method to record its investment in S Company. The difference between implied and book value relates to land.

Required:

Prepared, in general journal form, all eliminating entries for the preparation of a consolidated statements workpaper on December 31, 2011.

4-6 Pair Company acquired 80% of the outstanding common stock of Sax Company on January 2, 2010 for $675,000. At that time, Sax’s total stockholders’ equity amounted to $1,000,000. Sax Company reported net income and dividends for the last two years as follows:

2010 2011
Reported net income $45,000 $60,000
Dividends distributed 35,000 75,000

Required:

Prepare journal entries for Pair Company for 2010 and 2011 assuming Pair uses:
A. The cost method to record its investment
B. The complete equity method to record its investment. The difference between implied value and the book value of equity acquired was attributed solely to a building, with a 20-year expected life.

4-7 Pell Company purchased 90% of the stock of Silk Company on January 1, 2007, for $1,860,000, an amount equal to $60,000 in excess of the book value of equity acquired. All book values were equal to fair values at the time of purchase (i.e., any excess payment relates to subsidiary goodwill). On the date of purchase, Silk Company’s retained earnings balance was $200,000. The remainder of the stockholders’ equity consists of no-par common stock. During 2011, Silk Company declared dividends in the amount of $40,000, and reported net income of $160,000. The retained earnings balance of Silk Company on December 31, 2010 was $640,000. Pell Company uses the cost method to record its investment. No impairment of goodwill was recognized between the date of acquisition and December 31, 2011.

Required:

Prepare in general journal form the workpaper entries that would be made in the preparation of a consolidated statements workpaper on December 31, 2011.

4-8 On January 1, 2011, Pitt Company purchased 85% of the outstanding common stock of Small Company for $525,000. On that date, Small Company’s stockholders’ equity consisted of common stock, $150,000; other contributed capital, $60,000; and retained earnings, $210,000. Pitt Company paid more than the book value of net assets acquired because the recorded cost of Small Company’s land was significantly less than its fair value.

During 2011 Small Company earned $222,000 and declared and paid a $75,000 dividend. Pitt Company used the partial equity method to record its investment in Small Company.

Required:

A. Prepare the investment related entries on Pitt Company’s books for 2011.

B. Prepare the workpaper eliminating entries for a workpaper on December 31, 2011.

4-9

Picture Company purchased 40% of Stuffy Corporation on January 1, 2011 for $150,000. Stuffy Corporation’s balance sheet at the time of acquisition was as follows:

Cash $30,000 Current Liabilities $40,000
Accounts Receivable 120,000 Bonds Payable 200,000
Inventory 80,000 Common Stock 200,000
Land 150,000 Additional Paid in Capital 40,000
Buildings & Equipment 300,000 Retained Earnings 80,000
Less: Acc. Depreciation (120,000)

Total Assets $560,000
Total Liabilities and Equities $560,000

During 2011, Stuffy Corporation reported net income of $30,000 and paid dividends of $9,000. The fair values of Stuffy’s assets and liabilities were equal to their book values at the date of acquisition, with the exception of Building and Equipment, which had a fair value of $35,000 above book value. All buildings and equipment had a remaining useful life of five years at the time of the acquisition. The amount attributed to goodwill as a result of the acquisition in not impaired.

Required:

A. What amount of investment income will Picture record during 2011 under the equity method of accounting?

B. What amount of income will Picture record during 2011 under the cost method of accounting?

C. What will be the balance in the investment account on December 31, 2011 under the cost and equity method of accounting?

Short Answer

1. There are three levels of influence or control by an investor over an investee, which determine the appropriate accounting treatment. Identify and briefly describe the three levels and their accounting treatment.

2. Two methods are available to account for interim acquisitions of a subsidiary’s stock at the end of the first year. Describe the two methods of accounting for interim acquisitions.

Short Answer Questions from the Textbook

1. How should nonconsolidated subsidiaries be re-ported in consolidated financial statements?

2. How are liquidating dividends treated on the books of an investor, assuming the investor uses the cost method? Assuming the investor uses the equity method?

3. How are dividends declared and paid by a subsidiary during the year eliminated in the consolidated work papers under each method of ac-counting for investments?

4. How is the income reported by the subsidiary reflected on the books of the investor under each of the methods of accounting for investments?

5. Define: Consolidated net income; consolidated retained earnings.

6. At the date of an 80% acquisition, a subsidiary had common stock of $100,000 and retained earnings of $16,250. Seven years later, at December 31, 2010, the subsidiary’s retained earnings had increased to $461,430. What adjustment will be made on the consolidated work paper at December 31, 2011, to recognize the parent’s share of the cumulative undistributed profits (losses)of its subsidiary? Under which method(s) is this adjustment needed? Why?

7. On a consolidated work paper for a parent and its partially owned subsidiary, the noncontrolling interest column accumulates the non controlling interests’ share of several account balances. What are these accounts?

8. If a parent company elects to use the partial equity method rather than the cost method to record its investments in subsidiaries, what effect will this choice have on the consolidated financial statements? If the parent company elects the complete equity method?

9. Describe two methods for treating the preacquisition revenue and expense items of a subsidiary purchased during a fiscal period.

10. A principal limitation of consolidated financial statements is their lack of separate financial in-formation about the assets, liabilities, revenues, and expenses of the individual companies included in the consolidation. Identify some problems that the reader of consolidated financial statements would encounter as a result of this limitation.

11. In the preparation of a consolidated statement of cash flows, what adjustments are necessary because of the existence of a noncontrolling interest? (AICPA adapted)

12. What do potential voting rights refer to, and how do they affect the application of the equity method for investments under IFRS? Under U.S.GAAP? What is the term generally used for equity method investments under IFRS?

13B. Is the recognition of a deferred tax asset or deferred tax liability when allocating the difference between book value and the value implied by the purchase price affected by whether or not the affiliates file a consolidated income tax re-turn?

14B. What assumptions must be made about the realization of undistributed subsidiary income when the affiliates file separate income tax returns? Why? (Appendix)

15B. The FASB elected to require that deferred tax effects relating to unrealized intercompany profits be calculated based on the income tax paid by the selling affiliate rather than on the future tax benefit to the purchasing affiliate. Describe circumstances where the amounts calculated under these approaches would be different. (Appendix)

16B. Identify two types of temporary differences that may arise in the consolidated financial statements when the affiliates file separate income tax returns.

Business Ethics Question from the Textbook
On April 5, 2006, the New York State Attorney sued a New York online advertising firm for surreptitiously installing spyware advertising programs on consumers’ computers. The Attorney General claimed that con-sumers believed they were downloading free games or ‘browser’ enhancements. The company claimed that the spyware was identified as ‘advertising-supported’ and that the software is easy to remove and doesn’t collect personal data. Is there an ethical issue for the company? Comment on and justify your position.

ANSWER KEY (Chapter 4)

Chapter 5

Allocation and Depreciation of Differences Between Implied and Book Value

Multiple Choice

1. When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference is accounted for as
a. excess of implied over fair value.
b. a deferred credit.
c. difference between implied and fair value.
d. goodwill.

2. Long-term debt and other obligations of an acquired company should be valued for consolidation purposes at their
a. book value.
b. carrying value.
c. fair value.
d. face value.

3. On January 1, 2010, Lester Company purchased 70% of Stork Corporation’s $5 par common stock for $600,000. The book value of Stork net assets was $640,000 at that time. The fair value of Stork’s identifiable net assets were the same as their book value except for equipment that was $40,000 in excess of the book value. In the January 1, 2010, consolidated balance sheet, goodwill would be reported at
a. $152,000.
b. $177,143.
c. $80,000.
d. $0.

4. When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable net assets, the workpaper entry to allocate the difference between implied and book value includes a
1. debit to Difference Between Implied and Book Value.
2. credit to Excess of Implied over Fair Value.
3. credit to Difference Between Implied and Book Value.
a. 1
b. 2
c. 3
d. Both 1 and 2

5. If the fair value of the subsidiary’s identifiable net assets exceeds both the book value and the value implied by the purchase price, the workpaper entry to eliminate the investment account
a. debits Excess of Fair Value over Implied Value.
b. debits Difference Between Implied and Fair Value.
c. debits Difference Between Implied and Book Value.
d. credits Difference Between Implied and Book Value.

6. The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible is recorded
1. on the subsidiary’s books.
2. on the parent’s books.
3. on the consolidated statements workpaper.
a. 1
b. 2
c. 3
d. Both 2 and 3

7. The excess of fair value over implied value must be allocated to reduce proportionally the fair values initially assigned to
a. current assets.
b. noncurrent assets.
c. both current and noncurrent assets.
d. none of the above.

8. The SEC requires the use of push down accounting when the ownership change is greater than
a. 50%
b. 80%
c. 90%
d. 95%

9. Under push down accounting, the workpaper entry to eliminate the investment account includes a
a. debit to Goodwill.
b. debit to Revaluation Capital.
c. credit to Revaluation Capital.
d. debit to Revaluation Assets.

10. In a business combination accounted for as an acquisition, how should the excess of fair value of identifiable net assets acquired over implied value be treated?
a. Amortized as a credit to income over a period not to exceed forty years.
b. Amortized as a charge to expense over a period not to exceed forty years.
c. Amortized directly to retained earnings over a period not to exceed forty years.
d. Recognized as an ordinary gain in the year of acquisition.

11. On November 30, 2010, Pulse Incorporated purchased for cash of $25 per share all 400,000 shares of the outstanding common stock of Surge Company. Surge ‘s balance sheet at November 30, 2010, showed a book value of $8,000,000. Additionally, the fair value of Surge’s property, plant, and equipment on November 30, 2010, was $1,200,000 in excess of its book value. What amount, if any, will be shown in the balance sheet caption “Goodwill” in the November 30, 2010, consolidated balance sheet of Pulse Incorporated, and its wholly owned subsidiary, Surge Company?
a. $0.
b. $800,000.
c. $1,200,000.
d. $2,000,000.

12. Goodwill represents the excess of the implied value of an acquired company over the
a. aggregate fair values of identifiable assets less liabilities assumed.
b. aggregate fair values of tangible assets less liabilities assumed.
c. aggregate fair values of intangible assets less liabilities assumed.
d. book value of an acquired company.

13. Scooter Company, a 70%-owned subsidiary of Pusher Corporation, reported net income of $240,000 and paid dividends totaling $90,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Scooter’s identifiable net assets at the date of the business combination was $45,000. The noncontrolling interest in net income of Scooter for Year 3 was
a. $58,500.
b. $13,500.
c. $27,000.
d. $72,000.

14. Porter Company acquired an 80% interest in Strumble Company on January 1, 2010, for $270,000 cash when Strumble Company had common stock of $150,000 and retained earnings of $150,000. All excess was attributable to plant assets with a 10-year life. Strumble Company made $30,000 in 2010 and paid no dividends. Porter Company’s separate income in 2010 was $375,000. Controlling interest in consolidated net income for 2010 is:
a. $405,000.
b. $399,000.
c. $396,000.
d. $375,000.

15. In preparing consolidated working papers, beginning retained earnings of the parent company will be adjusted in years subsequent to acquisition with an elimination entry whenever:
a. a noncontrolling interest exists.
b. it does not reflect the equity method.
c. the cost method has been used only.
d. the complete equity method is in use.

16. Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under the
a. partial equity method.
b. equity method.
c. cost method.
d. equity and partial equity methods.

Use the following information to answer questions 17 through 20.

On January 1, 2010, Pandora Company purchased 75% of the common stock of Saturn Company. Separate balance sheet data for the companies at the combination date are given below:

Saturn Co. Saturn Co.
Pandora Co. Book Values Fair Values

Cash $ 18,000 $155,000 $155,000
Accounts receivable 108,000 20,000 20,000
Inventory 99,000 26,000 45,000
Land 60,000 24,000 45,000
Plant assets 525,000 225,000 300,000
Acc. depreciation (180,000) (45,000)
Investment in Saturn Co. 330,000
Total assets $960,000 $405,000 $565,000

Accounts payable $156,000 $105,000 $105,000
Capital stock 600,000 225,000
Retained earnings 204,000 75,000
Total liabilities & equities $960,000 $405,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010.

17. What amount of inventory will be reported?
a. $125,000
b. $132,750
c. $139,250
d. $144,000

18. What amount of goodwill will be reported?
a. ($20,000)
b. ($25,000)
c. $25,000
d. $0

19. What is the amount of consolidated retained earnings?
a. $204,000
b. $209,250
c. $260,250
d. $279,000

20. What is the amount of total assets?
a. $921,000
b. $1,185,000
c. $1,525,000
d. $1,195,000

21. Sensible Company, a 70%-owned subsidiary of Proper Corporation, reported net income of $600,000 and paid dividends totaling $225,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Sensible’s identifiable net assets at the date of the business combination was $112,500. The noncontrolling interest in consolidated net income of Sensible for Year 3 was
a. $146,250.
b. $33,750.
c. $67,500.
d. $180,000.

22. Primer Company acquired an 80% interest in SealCoat Company on January 1, 2010, for $450,000 cash when SealCoat Company had common stock of $250,000 and retained earnings of $250,000. All excess was attributable to plant assets with a 10-year life. SealCoat Company made $50,000 in 2010 and paid no dividends. Primer Company’s separate income in 2010 was $625,000. The controlling interest in consolidated net income for 2010 is:
a. $675,000.
b. $665,000.
c. $660,000.
d. $625,000.

Use the following information to answer questions 23 through 25.

On January 1, 2010, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below:

Swimmer Co. Swimmer Co.
Poole Co. Book Values Fair Values
Cash $ 24,000 $206,000 $206,000
Accounts receivable 144,000 26,000 26,000
Inventory 132,000 38,000 60,000
Land 78,000 32,000 60,000
Plant assets 700,000 300,000 350,000
Acc. depreciation (240,000) (60,000)
Investment in Swimmer Co. 440,000
Total assets $1,278,000 $542,000 $702,000

Accounts payable $206,000 $142,000 $142,000
Capital stock 800,000 300,000
Retained earnings 272,000 100,000
Total liabilities & equities $1,278,000 $542,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2010.

23. What amount of inventory will be reported?
a. $170,000.
b. $177,000.
c. $186,500.
d. $192,000.

24. What amount of goodwill will be reported?
a. $26,667.
b. $20,000.
c. $42,000.
d. $86,667.

25. What is the amount of total assets?
a. $1,626,667.
b. $1,566,667
c. $1,980,000.
d. $2,006,667.

Problems

5-1 Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1, 2010. Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings on that date.

The following values were determined for Standards Corporation on the date of purchase:

Book Value Fair Value
Inventory $240,000 $300,000
Land 2,400,000 2,700,000
Equipment 1,620,000 1,800,000

Required:
A. Prepare a computation and allocation schedule for the difference between the implied and book value in the consolidated statements workpaper.

B. Prepare the January 1, 2010, workpaper entries to eliminate the investment account and allocate the difference between implied and book value.

5-2 Pullman Corporation acquired a 90% interest in Sleeper Company for $6,500,000 on January 1 2010. At that time Sleeper Company had common stock of $4,500,000 and retained earnings of $1,800,000. The balance sheet information available for Sleeper Company on January 1, 2010, showed the following:

Book Value Fair Value
Inventory (FIFO) $1,300,000 $1,500,000
Equipment (net) 1,500,000 1,900,000
Land 3,000,000 3,000,000

The equipment had a remaining useful life of ten years. Sleeper Company reported $240,000 of net income in 2010 and declared $60,000 of dividends during the year.

Required:
Prepare the workpaper entries assuming the cost method is used, to eliminate dividends, eliminate the investment account, and to allocate and depreciate the difference between implied and book value for 2010.

5-3 On January 1, 2010, Preston Corporation acquired an 80% interest in Spiegel Company for $2,400,000. At that time Spiegel Company had common stock of $1,800,000 and retained earnings of $800,000. The book values of Spiegel Company’s assets and liabilities were equal to their fair values except for land and bonds payable. The land’s fair value was $120,000 and its book value was $100,000. The outstanding bonds were issued on January 1, 2005, at 9% and mature on January 1, 2015. The bond principal is $600,000 and the current yield rate on similar bonds is 8%.

Required:
Prepare the workpaper entries necessary on December 31, 2010, to allocate, amortize, and depreciate the difference between implied and book value.

Present Value
Present value of 1 of Annuity of 1
9%, 5 periods .64993 3.88965
8%, 5 periods .68058 3.99271

5-4 Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for $3,200,000 cash on January 1, 2010. On this date the book values and fair values of Stafford Corporation’s assets and liabilities were as follows:
Book Value Fair Value
Cash $ 70,000 $ 70,000
Receivables 240,000 240,000
Inventories 600,000 700,000
Other Current Assets 340,000 405,000
Land 600,000 720,000
Buildings – net 1,050,000 1,920,000
Equipment – net 850,000 750,000
$3,750,000 $4,805,000

Accounts Payable $ 250,000 $250,000
Other Liabilities 740,000 670,000
Capital Stock 2,400,000
Retained Earnings 360,000
$3,750,000

Required:
Prepare a schedule showing how the difference between Stafford Corporation’s implied value and the book value of the net assets acquired should be allocated.

5-5 Perez Corporation acquired a 75% interest in Schmidt Company on January 1, 2010, for $2,000,000. The book value and fair value of the assets and liabilities of Schmidt Company on that date were as follows:
Book Value Fair Value
Current Assets $ 600,000 $ 600,000
Property & Equipment (net) 1,400,000 1,800,000
Land 700,000 900,000
Deferred Charge 300,000 300,000
Total Assets $3,000,000 $3,600,000
Less Liabilities 600,000 600,000
Net Assets $2,400,000 $3,000,000

The property and equipment had a remaining life of 6 years on January 1, 2010, and the deferred charge was being amortized over a period of 5 years from that date. Common stock was $1,500,000 and retained earnings was $900,000 on January 1, 2010. Perez Company records its investment in Schmidt Company using the cost method.

Required:
Prepare, in general journal form, the December 31, 2010, workpaper entries necessary to:

A. Eliminate the investment account.
B. Allocate and amortize the difference between implied and book value.

5-6 On January 1, 2010, Page Company acquired an 80% interest in Schell Company for $3,600,000. On that date, Schell Company had retained earnings of $800,000 and common stock of $2,800,000. The book values of assets and liabilities were equal to fair values except for the following:

Book Value Fair Value
Inventory $ 50,000 $ 85,000
Equipment (net) 540,000 720,000
Land 300,000 660,000

The equipment had an estimated remaining useful life of 8 years. One-half of the inventory was sold in 2010 and the remaining half was sold in 2011. Schell Company reported net income of $240,000 in 2010 and $300,000 in 2011. No dividends were declared or paid in either year. Page Company uses the cost method to record its investment in Schell Company.

Required:
Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated statements workpaper for the year ending December 31, 2011.

5-7 Paddock Company acquired 90% of the stock of Spector Company for $6,300,000 on January 1, 2010. On this date, the fair value of the assets and liabilities of Spector Company was equal to their book value except for the inventory and equipment accounts. The inventory had a fair value of $2,300,000 and a book value of $1,900,000. The equipment had a fair value of $3,300,000 and a book value of $2,800,000.

The balances in Spector Company’s capital stock and retained earnings accounts on the date of acquisition were $3,700,000 and $1,900,000, respectively.

Required:
In general journal form, prepare the entries on Spector Company’s books to record the effect of the pushed down values implied by the acquisition of its stock by Paddock Company assuming that:

A values are allocated on the basis of the fair value of Spector Company as a whole imputed from the transaction.

B values are allocated on the basis of the proportional interest acquired by Paddock Company.

5-8 Pruitt Corporation acquired all of the voting stock of Soto Corporation on January 1, 2010, for $210,000 when Soto had common stock of $150,000 and retained earnings of $24,000. The excess of implied over book value was allocated $9,000 to inventories that were sold in 2010, $12,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill.

Financial statements for Pruitt and Soto Corporations at the end of the fiscal year ended December 31, 2011 (two years after acquisition), appear in the first two columns of the partially completed consolidated statements workpaper. Pruitt Corp. has accounted for its investment in Soto using the partial equity method of accounting.

Required:
Complete the consolidated statements workpaper for Pruitt Corporation and Soto Corporation for December 31, 2011.
Pruitt Corporation and Soto Corporation
Consolidated Statements Workpaper
at December 31, 2011

Eliminations
Pruitt Corp. Soto Corp. Debit Credit Consolidated Balances
INCOME STATEMENT
Sales 618,000 180,000
Equity from Subsidiary Income 36,000
Cost of Sales (450,000) (90,000)
Other Expenses (114,000) (54,000)
Net Income to Ret. Earn. 90,000 36,000
Pruitt Retained Earnings 1/1 72,000
Soto Retained Earnings 1/1 3,000
Add: Net Income 90,000 36,000
Less: Dividends (60,000) (12,000)
Retained Earnings 12/31 102,000 54,000
BALANCE SHEET
Cash 42,000 21,000
Inventories 63,000 45,000
Land 33,000 18,000
Equipment and Buildings-net 192,000 165,000
Investment in Soto Corp. 240,000

Total Assets 570,000 249,000
LIA & EQUITIES Liabilities 168,000 45,000
Common Stock 300,000 150,000
Retained Earnings 102,000 54,000
Total Equities 570,000 249,000

5-9 On January 1, 2010, Prescott Company acquired 80% of the outstanding capital stock of Sherlock Company for $570,000. On that date, the capital stock of Sherlock Company was $150,000 and its retained earnings were $450,000.

On the date of acquisition, the assets of Sherlock Company had the following values:

Fair Market
Book Value Value
Inventories $ 90,000 $165,000
Plant and equipment 150,000 180,000

All other assets and liabilities had book values approximately equal to their respective fair market values. The plant and equipment had a remaining useful life of 10 years from January 1, 2010, and Sherlock Company uses the FIFO inventory cost flow assumption.

Sherlock Company earned $180,000 in 2010 and paid dividends in that year of $90,000.
Prescott Company uses the complete equity method to account for its investment in S Company.

Required:

A. Prepare a computation and allocation schedule.
B. Prepare the balance sheet elimination entries as of December 31, 2010.
C. Compute the amount of equity in subsidiary income recorded on the books of Prescott Company on December 31, 2010.
D. Compute the balance in the investment account on December 31, 2010.

Short Answer

1. When the value implied by the acquisition price is below the fair value of the identifiable net assets the residual amount will be negative (bargain acquisition). Explain the difference in accounting for bargain acquisition between past accounting and proposed accounting requirements.

2. Push down accounting is an accounting method required for the subsidiary in some instances such as the banking industry. Briefly explain the concept of push down accounting.

Questions from the Textbook

1. Distinguish among the following concepts:(a)Difference between book value and the value implied by the purchase price.(b)Excess of implied value over fair value.(c)Excess of fair value over implied value.(d)Excess of book value over fair value.

2. In what account is the difference between book value and the value implied by the purchase
price recorded on the books of the investor? In what account is the “excess of implied over fair value” recorded?

3. How do you determine the amount of “the difference between book value and the value implied by the purchase price” to be allocated to a specific asset of a less than wholly owned subsidiary?

4. The parent company’s share of the fair value of the net assets of a subsidiary may exceed acquisition cost. How must this excess be treated in the preparation of consolidated financial statements?

5. What are the arguments for and against the alternatives for the handling of bargain acquisitions? Why are such acquisitions unlikely to occur with great frequency?

6. P Company acquired a 100% interest in S Company. On the date of acquisition the fair value of the assets and liabilities of S Company was equal to their book value except for land that had a fair value of $1,500,000 and a book value of $300,000.
At what amount should the land of S Company be included in the consolidated balance sheet?
At what amount should the land of S Company be included in the consolidated balance sheet if P Company acquired an80% interest in S Company rather than a 100%interest?

Business Ethics Question from the Textbook

Consider the following: Many years ago, a student in a consolidated financial statements class came to me and said that Grand Central (a multi-store grocery and variety chain in Salt Lake City and surrounding towns and cities) was going to be acquired and that I should try to buy the stock and make lots of money. I asked him how he knew and he told me that he worked part-time for Grand Central and heard that Fred Meyer was going to acquire it. I did not know whether the student worked in the accounting department at Grand Central or was a custodian at one of the stores. I thanked him for the information but did not buy the stock. Within a few weeks, the announcement was made that Fred Meyer was acquiring Grand Central and the stock price shot up, almost doubling. It was clear that I had missed an opportunity to make a lot of money … I don’t know to this day whether or not that would have been insider trading. How-ever, I have never gone home at night and asked my wife if the SEC called. From “Don’t go to jail and other good advice for accountants,” by Ron Mano, Accounting Today, October 25, 1999.
Question: Do you think this individual would have been guilty of insider trading if he had purchased the stock in Grand Central based on this advice? Why or why not? Are there ever instances where you think it would be wise to miss out on an opportunity to reap benefits simply because the behavior necessitated would have been in a gray ethical area, though not strictly illegal? Defend your position.

ANSWER KEY (Chapter 5)

Chapter 6

Elimination of Unrealized Profit on Intercompany Sales of Inventory

Multiple Choice

1. Sales from one subsidiary to another are called
a. downstream sales.
b. upstream sales.
c. intersubsidiary sales.
d. horizontal sales.

2. Noncontrolling interest in consolidated income is never affected by
a. upstream sales.
b. downstream sales.
c. horizontal sales.
d. Noncontrolling interest is affected by all sales.

3. Failure to eliminate intercompany sales would result in an overstatement of consolidated
a. net income.
b. gross profit.
c. cost of sales.
d. all of these.

4. Pratt Company owns 80% of Storey Company’s common stock. During 2011, Storey sold $400,000 of merchandise to Pratt. At December 31, 2011, one-fourth of the merchandise remained in Pratt’s inventory. In 2011, gross profit percentages were 25% for Pratt and 30% for Storey. The amount of unrealized intercompany profit that should be eliminated in the consolidated statements is
a. $80,000.
b. $24,000.
c. $30,000.
d. $25,000.

5. The noncontrolling interest’s share of the selling affiliate’s profit on intercompany sales is considered to be realized under
a. partial elimination.
b. total elimination.
c. 100% elimination.
d. both total and 100% elimination.

6. The workpaper entry in the year of sale to eliminate unrealized intercompany profit in ending inventory includes a
a. credit to Ending Inventory (Cost of Sales).
b. credit to Sales.
c. debit to Ending Inventory (Cost of Sales).
d. debit to Inventory – Balance Sheet.

7. Perez Company acquired an 80% interest in Seaman Company in 2010. In 2011 and 2012, Sutton reported net income of $400,000 and $480,000, respectively. During 2011, Seaman sold $80,000 of merchandise to Perez for a $20,000 profit. Perez sold the merchandise to outsiders during 2012 for $140,000. For consolidation purposes, what is the noncontrolling interest’s share of Seaman’s 2011 and 2012 net income?
a. $90,000 and $96,000.
b. $100,000 and $76,000.
c. $84,000 and $92,000.
d. $76,000 and $100,000.

8. A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2010. Under the partial equity method, the workpaper entry in 2011 to recognize the intercompany profit in beginning inventory realized during 2011 includes a debit to
a. Retained Earnings – P.
b. Noncontrolling interest.
c. Cost of Sales.
d. both Retained Earnings – P and Noncontrolling Interest.

9. The noncontrolling interest in consolidated income when the selling affiliate is an 80% owned subsidiary is calculated by multiplying the noncontrolling minority ownership percentage by the subsidiary’s reported net income
a. plus unrealized profit in ending inventory less unrealized profit in beginning inventory.
b. plus realized profit in ending inventory less realized profit in beginning inventory.
c. less unrealized profit in ending inventory plus realized profit in beginning inventory.
d. less realized profit in ending inventory plus realized profit in beginning inventory.

10. In determining controlling interest in consolidated income in the consolidated financial statements, unrealized intercompany profit on inventory acquired by a parent from its subsidiary should:
a. not be eliminated.
b. be eliminated in full.
c. be eliminated to the extent of the parent company’s controlling interest in the subsidiary.
d. be eliminated to the extent of the noncontrolling interest in the subsidiary.

11. P Company sold merchandise costing $240,000 to S Company (90% owned) for $300,000. At the end of the current year, one-third of the merchandise remains in S Company’s inventory. Applying the lower-of- cost-or-market rule, S Company wrote this inventory down to $92,000. What amount of intercompany profit should be eliminated on the consolidated statements workpaper?
a. $20,000.
b. $18,000.
c. $12,000.
d. $10,800.

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

13. A parent company regularly sells merchandise to its 80%-owned subsidiary. Which of the following statements describes the computation of noncontrolling interest income?
a. the subsidiary’s net income times 20%.
b. (the subsidiary’s net income x 20%) + unrealized profits in the beginning inventory – unrealized profits in the ending inventory.
c. (the subsidiary’s net income + unrealized profits in the beginning inventory – unrealized profits in the ending inventory) × 20%.
d. (the subsidiary’s net income + unrealized profits in the ending inventory – unrealized profits in the beginning inventory) × 20%.

14. P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to fair value. During 2011, P sold merchandise that cost $135,000 to S for $189,000. One-third of this merchandise remained in S’s inventory at December 31, 2011. S reported net income of $120,000 for 2011. P’s income from S for 2011 is:
a. $36,000.
b. $50,400.
c. $54,000.
d. $61,200.

Use the following information for Questions 15 & 16:

P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2010, P sold merchandise that cost $240,000 to S for $300,000. Half of this merchandise remained in S’s December 31, 2010 inventory. During 2011, P sold merchandise that cost $375,000 to S for $468,000. Forty percent of this merchandise inventory remained in S’s December 31, 2011 inventory. Selected income statement information for the two affiliates for the year 2011 is as follows:

P _ S _
Sales Revenue $2,250,000 $1,125,000
Cost of Goods Sold 1,800,000 937,500
Gross profit $450,000 $187,500

15. Consolidated sales revenue for P and Subsidiary for 2011 are:
a. $2,907,000.
b. $3,000,000.
c. $3,205,500.
d. $3,375,000.

16. Consolidated cost of goods sold for P Company and Subsidiary for 2011 are:
a. $2,260,500.
b. $2,268,000.
c. $2,276,700.
d. $2,737,500.

Use the following information for Questions 17 & 18:

P Company owns an 80% interest in S Company. During 2011, S sells merchandise to P for $200,000 at a profit of $40,000. On December 31, 2011, 50% of this merchandise is included in P’s inventory. Income statements for P and S are summarized below:

P __ S __
Sales $1,200,000 $600,000
Cost of Sales (600,000) (400,000)
Operating Expenses (300,000) ( 80,000)
Net Income (2011) $300,000 $120,000

17. Controlling interest in consolidated net income for 2011 is:
a. $300,000.
b. $380,000.
c. $396,000.
d. $420,000.

18. Noncontrolling interest in income for 2011 is:
a. $4,000.
b. $19,200.
c. $20,000.
d. $24,000.

19. The amount of intercompany profit eliminated is the same under total elimination and partial elimination in the case of
1. upstream sales where the selling affiliate is a less than wholly owned subsidiary.
2. all downstream sales.
3. horizontal sales where the selling affiliate is a wholly owned subsidiary.
a. 1.
b. 2.
c. 3.
d. both 2 and 3.

20. Paige, Inc. owns 80% of Sigler, Inc. During 2011, Paige sold goods with a 40% gross profit to Sigler. Sigler sold all of these goods in 2011. For 2011 consolidated financial statements, how should the summation of Paige and Sigler income statement items be adjusted?
a. Sales and cost of goods sold should be reduced by the intercompany sales.
b. Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
c. Net income should be reduced by 80% of the gross profit on intercompany sales.
d. No adjustment is necessary.

21. P Corporation acquired a 60% interest in S Corporation on January 1, 2011, at book value equal to fair value. During 2011, P sold merchandise that cost $225,000 to S for $315,000. One-third of this merchandise remained in S’s inventory at December 31, 2011. S reported net income of $200,000 for 2011. P’s income from S for 2011 is:
a. $60,000.
b. $90,000.
c. $120,000.
d. $102,000.

Use the following information for Questions 22 & 23:

P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2010, P sold merchandise that cost $192,000 to S for $240,000. Half of this merchandise remained in S’s December 31, 2010 inventory. During 2011, P sold merchandise that cost $300,000 to S for $375,000. Forty percent of this merchandise inventory remained in S’s December 31, 2011 inventory. Selected income statement information for the two affiliates for the year 2011 is as follows:

P _ S _
Sales Revenue $1,800,000 $900,000
Cost of Goods Sold 1,440,000 750,000
Gross profit $ 360,000 $150,000

22. Consolidated sales revenue for P and Subsidiary for 2011 are:
a. $2,325,000.
b. $2,400,000.
c. $2,565,000.
d. $2,700,000.

23. Consolidated cost of goods sold for P Company and Subsidiary for 2011 are:
a. $1,809,000.
b. $1,815,000.
c. $1,821,000.
d. $2,190,000.

Use the following information for Questions 24 & 25:

P Company owns an 80% interest in S Company. During 2011, S sells merchandise to P for $150,000 at a profit of $30,000. On December 31, 2011, 50% of this merchandise is included in P’s inventory. Income statements for P and S are summarized below:

P __ S __
Sales $900,000 $450,000
Cost of Sales (450,000) (300,000)
Operating Expenses (225,000) ( 60,000)
Net Income (2011) $225,000 $ 90,000

24. Controlling interest in consolidated net income for 2011 is:
a. $225,000.
b. $285,000.
c. $297,000.
d. $315,000.

25. Noncontrolling interest in income for 2011 is:
a. $3,000.
b. $14,400.
c. $15,000.
d. $18,000.

Problems

6-1 On January 1, 2011, Palmer Company purchased a 90% interest in Sauder Company for $2,800,000. At that time, Sauder had $1,840,000 of common stock and $360,000 of retained earnings. The difference between implied and book value was allocated to the following assets of Sauder Company:

Inventory $ 80,000
Plant and equipment (net) 240,000
Goodwill 591,111

The plant and equipment had a 10-year remaining useful life on January 1, 2011.

During 2011, Palmer sold merchandise to Sauder at a 20% markup above cost. At December 31, 2011, Sauder still had $180,000 of merchandise in its inventory that it had purchased from Palmer. In 2011, Palmer reported net income from independent operations of $1,600,000, while Sauder reported net income of $600,000.

Required:
A. Prepare the workpaper entry to allocate, amortize, and depreciate the difference between implied and book value for 2011.

B. Calculate controlling interest in consolidated net income for 2011.

6-2 Percy Company owns 80% of the common stock of Smyth Company. Percy sells merchandise to Smyth at 20% above cost. During 2011 and 2012, intercompany sales amounted to $1,080,000 and $1,200,000 respectively. At the end of 2011, Smyth had one-fifth of the goods purchased that year from Percy in its ending inventory. Smyth’s 2012 ending inventory contained one-fourth of that year’s purchases from Percy. There were no intercompany sales prior to 2011.

Percy reported net income from its own operations of $720,000 in 2011 and $760,000 in 2012. Smyth reported net income of $400,000 in 2011 and $460,000 in 2012. Neither company declared dividends in either year.

Required:

A. Prepare in general journal form all entries necessary on the consolidated statements workpapers to eliminate the effects of the intercompany sales for both 2011 and 2012.

B. Calculate controlling interest in consolidated net income for 2012.

6-3 Payton Company owns 90% of the common stock of Sanders Company. Sanders Company sells merchandise to Payton Company at 25% above cost. During 2010 and 2011 such sales amounted to $800,000 and $1,020,000, respectively. At the end of each year, Payton Company had in its inventory one-fourth of the amount of goods purchased from Sanders Company during that year. Payton Company reported income of $1,500,000 from its independent operations in 2010 and $1,720,000 in 2011. Sanders Company reported net income of $600,000 in each year and did not declare any dividends in either year. There were no intercompany sales prior to 2010.

Required:
A. Prepare, in general journal form, all entries necessary on the 2011 consolidated statements workpaper to eliminate the effects of intercompany sales.

B. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement in 2011.

C. Calculate controlling interest in consolidated net income for 2011.

6-4 Powers Company owns an 80% interest in Smiley Company and a 90% interest in Toro Company. During 2010 and 2011, intercompany sales of merchandise were made by all three companies. Total sales amounted to $2,400,000 in 2010, and $2,700,000 in 2011. The companies sold their merchandise at the following percentages above cost.
Powers 15%
Smiley 20%
Toro 25%

The amount of merchandise remaining in the 2011 beginning and ending inventories of the companies from these intercompany sales is shown below.

Merchandise Remaining in Beginning Inventory
Powers Smiley Toro Total
Sold by
Powers $225,000 $189,000 $414,000
Smiley $180,000 216,000 396,000
Toro 180,000 135,000 315,000

Merchandise Remaining in Ending Inventory
Powers Smiley Toro Total
Sold by
Powers $207,000 $138,000 $345,000
Smiley $144,000 198,000 342,000
Toro 195,000 150,000 345,000

Reported net incomes (from independent operations including sales to affiliates) of Powers, Smiley, and Toro for 2011 were $3,600,000, $1,500,000, and $2,400,000, respectively.

Required:
A. Calculate the amount noncontrolling interest to be deducted from consolidated income in the consolidated income statement for 2011.

B. Calculate the controlling interest in consolidated net income for 2011.

6-5 The following balances were taken from the records of S Company:
Common stock $2,500,000
Retained earnings, 1/1/11 $1,450,000
Net income for 2011 3,000,000
Dividends declared in 2011 (1,550,000)
Retained earnings, 12/31/11 2,900,000
Total stockholders’ equity, 12/31/11 $5,400,000

P Company owns 80% of the common stock of S Company. During 2011, P Company purchased merchandise from S Company for $4,000,000. S Company sells merchandise to P Company at cost plus 25% of cost. On December 31, 2011, merchandise purchased from S Company for $1,250,000 remains in the inventory of P Company. On January 1, 2011, P Company’s inventory contained merchandise purchased from S Company for $525,000. The affiliated companies file a consolidated income tax return. There was no difference between the implied value and the book value of net assets acquired.

Required:
A. Prepare all workpaper entries necessitated by the intercompany sales of merchandise.

B. Compute noncontrolling interest in consolidated income for 2011.

C. Compute noncontrolling interest in consolidated net assets on December 31, 2011.

6-6
P Corporation acquired 80% of S Corporation on January 1, 2011 for $240,000 cash when S’s stockholders’ equity consisted of $100,000 of Common Stock and $30,000 of Retained Earnings. The difference between the price paid by P and the underlying equity acquired in S was allocated solely to a patent amortized over 10 years.
P sold merchandise to S during the year in the amount of $30,000. $10,000 worth of inventory is still on hand at the end of the year with an unrealized profit of $4,000. The separate company statements for P and S appear in the first two columns of the partially completed consolidated workpaper.

Required:
Complete the consolidated workpaper for P and S for the year 2011.

P Corporation and Subsidiary
Consolidated Statements Workpaper
P S Eliminations Noncontrolling Consolidated
Corp. Corp. Dr. Cr. Interest Balances
Income Statement
Sales 200,000 150,000
Dividend Income 16,000
Cost of Sales (92,000) (47,000)
Other Expenses (23,000) (40,000)
Noncontrolling Interest in Income
Net Income 101,000 63,000
Retained Earnings Statement
Retained Earnings 1/1 110,000 30,000
Add: Net Income 101,000 63,000
Less: Dividends ( 30,000) (20,000)
Retained Earnings 12/31 181,000 73,000
Balance Sheet
Cash 20,000 19,000
Accounts Receivable-net 120,000 55,000
Inventories 140,000 80,000
Patent
Land 270,000 420,000
Equipment and Buildings-net 600,000 430,000
Investment in S Corporation 240,000
Total Assets 695,000 1,004,000
Equities
Accounts Payable 909,000 831,000
Common Stock 300,000 100,000
Retained Earnings 181,000 73,000
1/1 Noncontrolling Interest in Net Assets
12/31 Noncontrolling Interest in Net Assets
Total Equities 1,390,000 1,004,000
at December 31, 2011

6-7 On January 1, 2011, Porter Company purchased an 80% interest in the capital stock of Shilo Company for $3,400,000. At that time, Shilo Company had common stock of $2,200,000 and retained earnings of $620,000. Porter Company uses the cost method to record its investment in Shilo Company. Differences between the fair value and the book value of the identifiable assets of Shilo Company were as follows:

Fair Value in Excess of Book Value

Equipment $400,000
Land 200,000
Inventory 80,000

The book values of all other assets and liabilities of Shilo Company were equal to their fair values on January 1, 2011. The equipment had a remaining life of five years on January 1, 2011; the inventory was sold in 2011.

Shilo Company’s net income and dividends declared in 2011 were as follows:

Year 2011 Net Income of $400,000; Dividends Declared of $100,000

Required:

Prepare a consolidated statements workpaper for the year ended December 31, 2012 using the partially completed worksheet.

PORTER COMPANY AND SUBSIDIARY
Consolidated Statements Workpaper
For the Year Ended December 31, 2012
Porter Shilo Eliminations Noncontrolling Consolidated
Company Company Dr. Cr. Interest Balances
Income Statement
Sales 4,400,000 1,800,000
Dividend Income 192,000
Total Revenue 4,592,000 1,800,000
Cost of Goods Sold 3,600,000 800,000
Depreciation Expense 160,000 120,000
Other Expenses 240,000 200,000
Total Cost & Expenses 4,000,000 1,120,000
Net/Consolidated Income 592,000 680,000
Noncontrolling Interest in Income
Net Income to Retained Earnings 592,000 680,000
Retained Earnings Statement
1/1 Retained Earnings
Porter Company 2,000,000
Shilo Company 920,000
Net Income from above 592,000 680,000
Dividends Declared
Porter Company (360,000)
Shilo Company (240,000)
12/31 Retained Earnings to
Balance Sheet 2,232,000 1,360,000
Porter Shilo Eliminations Noncontrolling Consolidated
Company Company Dr. Cr. Interest Balances
Balance Sheet
Cash 280,000 260,000
Accounts Receivable 1,040,000 760,000
Inventory 960,000 700,000
Investment in Shilo Company 3,400,000
Difference between Implied and Book Value
Land 1,280,000
Plant and Equipment 1,440,000 1,120,000
Total Assets 7,120,000 4,120,000
Accounts Payable 528,000 440,000
Notes Payable 360,000 120,000
Common Stock:
Porter Company 4,000,000
Shilo Company 2,200,000
Retained Earnings from above 2,232,000 1,360,000
1/1 Noncontrolling Interest in Net Assets
12/31 Noncontrolling Interest in Net Assets
Total Liabilities & Equity 7,120,000 4,120,000
6-8 Pool Company owns a 90% interest in Slater Company. The consolidated income statement drafted by the controller of Pool Company appeared as follows:

Pool Company and Subsidiary
Consolidated Income Statement
for Year Ended December 31, 2011

Sales $13,800,000
Cost of Sales $9,000,000
Operating Expenses 1,800,000 10,800,000
Consolidated Income 3,000,000
Less Noncontrolling Interest in Consolidated Income 190,000
Controlling Interest in Consolidated Net Income $2,810,000

During your audit you discover that intercompany sales transactions were not reflected in the controller’s draft of the consolidated income statement. Information relating to intercompany sales and unrealized intercompany profit is as follows:

Selling Unsold at
Cost Price Year-End
2010 Sales—Slater to Pool $1,500,000 $1,800,000 1/4
2011 Sales—Pool to Slater 900,000 1,350,000 2/5

Required:
Prepare a corrected consolidated income statement for Pool Company and Slocum Company for the year ended December 31, 2011.

Short Answer

1. Past and proposed GAAP agree that unrealized intercompany profit should not be included in consolidated net income or assets. Briefly explain the preferred approach of eliminating intercompany profit.

2. Determination of the noncontrolling interest in consolidated net income differs depending on whether intercompany sales are downstream or upstream. Explain the difference in calculating noncontrolling interest for downstream and upstream sales.

Short Answer Questions from the Textbook

1. Does the elimination of the effects of intercompany sales of merchandise always affect the amount of reported consolidated net income? Explain.

2. Why is the gross profit on intercompany sales, rather than profit after deducting selling and administrative expenses, ordinarily eliminated from consolidated inventory balances?

3. P Company sells inventory costing $100,000 to its subsidiary, S Company, for $150,000. At the end of the current year, one-half of the goods re-mains in S Company’s inventory. Applying the lower of cost or market rule, S Company writes down this inventory to $60,000. What amount of intercompany profit should be eliminated on the consolidated statements workpaper?

4. Are the adjustments to the noncontrolling interest for the effects of intercompany profit eliminations illustrated in this text necessary for fair presentation in accordance with generally accepted accounting principles? Explain.

5. Why are adjustments made to the calculation of the noncontrolling interest for the effects of intercompany profit in upstream but not in down-stream sales?

6. What procedure is used in the consolidated statements workpaper to adjust the noncontrolling interest in consolidated net assets at the be-ginning of the year for the effects of intercompany profits?

7. What is the essential procedural difference between workpaper eliminating entries for unrealized intercompany profit made when the selling affiliate is a less than wholly owned subsidiary and those made when the selling affiliate is the parent company or a wholly owned subsidiary?

8. Define the controlling interest in consolidated net income using the t-account or analytical approach.

9. Why is it important to distinguish between up-stream and downstream sales in the analysis of intercompany profit eliminations?

ANSWER KEY (Chapter 6)

Chapter 7

Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment

Multiple Choice

1. In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debiting
1. Retained Earnings – P Company.
2. Retained Earnings – S Company.
3. Gain on Sale of Land.
a. 1
b. 2
c. 3
d. both 1 and 2.

2. In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is computed by multiplying the noncontrolling interest percentage by the subsidiary’s reported net income
a. minus the net amount of unrealized gain on the intercompany sale.
b. plus the net amount of unrealized gain on the intercompany sale.
c. minus intercompany gain considered realized in the current period.
d. plus intercompany gain considered realized in the current period.

3. Company S sells equipment to its parent company (P) at a gain. In years subsequent to the year of the intercompany sale, a workpaper entry is made under the cost method debiting
a. Retained Earnings – P.
b. Noncontrolling interest.
c. Equipment.
d. all of these.

4. Pinick Corp. owns 90% of the outstanding common stock of Shell Company. On December 31, 2011, Shell sold equipment to Pinick for an amount greater than the equipment’s book value but less than its original cost. The equipment should be reported on the December 31, 2011 consolidated balance sheet at
a. Pinick’s original cost less 90% of Shell’s recorded gain.
b. Pinick’s original cost less Shell’s recorded gain.
c. Shell’s original cost.
d. Pinick’s original cost.

5. Pratt Company owns 100% of Sage Corporation. On January 1, 2011 Pratt sold equipment to Sage at a gain. Pratt had owned the equipment for four years and used a ten-year straight-line rate with no residual value. Sage is using an eight-year straight-line rate with no residual value. In the consolidated income statement, Sage’s recorded depreciation expense on the equipment for 2011 will be reduced by
a. 10% of the gain on sale.
b. 12 1/2% of the gain on sale.
c. 80% of the gain on sale.
d. 100% of the gain on sale.

6. Pratt Corporation owns 100% of Stone Company’s common stock. On January 1, 2011, Pratt sold equipment with a book value of $210,000 to Stone for $300,000. Stone is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2011 and 2012 consolidated income would be an increase (decrease) of
2011 2012
a. ($90,000) $0
b. ($90,000) $9,000
c. ($81,000) $0
d. ($81,000) $9,000

7. In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is calculated by multiplying the noncontrolling interest percentage by the subsidiary’s reported net income
a. plus the intercompany gain considered realized in the current period.
b. plus the net amount of unrealized gain on the intercompany sale.
c. minus the net amount of unrealized gain on the intercompany sale.
d. minus the intercompany gain considered realized in the current period.

8. The amount of the adjustment to the noncontrolling interest in consolidated net assets is equal to the noncontrolling interest’s percentage of the
a. unrealized intercompany gain at the beginning of the period.
b. unrealized intercompany gain at the end of the period.
c. realized intercompany gain at the beginning of the period.
d. realized intercompany gain at the end of the period.

9. In January 2008, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $1,980,000. S Company’s original cost for this equipment was $2,000,000 and had accumulated depreciation of $200,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2011 for $1,440,000. What amount of gain should P Company record on its books in 2011?
a. $60,000.
b. $120,000.
c. $240,000.
d. $360,000.

10. In years subsequent to the upstream intercompany sale of nondepreciable assets, the necessary consolidated workpaper entry under the cost method is to debit the
a. Noncontrolling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable asset.
b. Retained Earnings (Parent) account and credit the nondepreciable asset.
c. Nondepreciable asset, and credit the Noncontrolling interest and Investment in Subsidiary accounts.
d. No entries are necessary.

11. When preparing consolidated financial statement workpapers, unrealized intercompany gains, as a result of equipment or inventory sales by affiliates, are allocated proportionately by percent of ownership between parent and subsidiary only when the selling affiliate is
a. the parent and the subsidiary is less than wholly owned.
b. a wholly owned subsidiary.
c. the subsidiary and the subsidiary is less than wholly owned.
d. the parent of a wholly owned subsidiary.

12. Gain or loss resulting from an intercompany sale of equipment between a parent and a subsidiary is
a. recognized in the consolidated statements in the year of the sale.
b. considered to be realized over the remaining useful life of the equipment as an adjustment to depreciation in the consolidated statements.
c. considered to be unrealized in the consolidated statements until the equipment is sold to a third party.
d. amortized over a period not less than 2 years and not greater than 40 years.

13. In 2011, P Company sells land to its 80% owned subsidiary, S Company, at a gain of $50,000. What is the effect of this sale of land on consolidated net income assuming S Company still owns the land at the end of the year?
a. consolidated net income will be the same as if the sale had not occurred.
b. consolidated net income will be $50,000 less than it would had the sale not occurred.
c. consolidated net income will be $40,000 less than it would had the sale not occurred.
d. consolidated net income will be $50,000 greater than it would had the sale not occurred.

14. Several years ago, P Company bought land from S Company, its 80% owned subsidiary, at a gain of $50,000 to S Company. The land is still owned by P Company. The consolidated working papers for this year will require:
a. no entry because the gain happened prior to this year.
b. a credit to land for $50,000.
c. a debit to P’s retained earnings for $50,000.
d. a debit to Noncontrolling interest for $50,000.

15. On January 1, 2010 S Corporation sold equipment that cost $120,000 and had a book value of $48,000 to P Corporation for $60,000. P Corporation owns 100% of S Corporation and the equipment has a 4-year remaining life. What is the effect of the sale on P Corporation’s Equity from Subsidiary Income account for 2011?
a. no effect
b. increase of $12,000.
c. decrease of $12,000.
d. increase of $3,000.

16. P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S. On January 2, 2011, S sold equipment with a five-year remaining life to P for a gain of $120,000. S reports net income of $600,000 for 2011 and pays dividends of $200,000. P’s Equity from Subsidiary Income for 2011 is:
a. $480,000.
b. $384,000.
c. $403,200.
d. $576,000

17. P Company purchased land from its 80% owned subsidiary at a cost of $100,000 greater than it subsidiary’s book value. Two years later P sold the land to an outside entity for $50,000 more than it’s cost. In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of:
a. $50,000.
b. $120,000.
c. $130,000.
d. $150,000.

18. On January 1, 2010, P Corporation sold equipment with a 3-year remaining life and a book value of $40,000 to its 70% owned subsidiary for a price of $46,000. In the consolidated workpapers for the year ended December 31, 2011, an elimination entry for this transaction will include a:
a. debit to Equipment for $6,000.
b. debit to Gain on Sale of Equipment for $6,000.
c. credit to Depreciation Expense for $6,000.
d. debit to Accumulated Depreciation for $4,000.

19. Parks Corporation owns 100% of Starr Company’s common stock. On January 1, 2011, Parks sold equipment with a book value of $350,000 to Starr for $500,000. Starr is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2011 and 2012 consolidated income would be an increase (decrease) of
2011 2012
a. ($150,000) $0
b. ($150,000) $15,000
c. ($135,000) $0
d. ($135,000) $15,000

20. In January 2008, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $990,000. S Company’s original cost for this equipment was $1,000,000 and had accumulated depreciation of $100,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2011 for $720,000. What amount of gain should P Company record on its books in 2011?
a. $30,000.
b. $60,000.
c. $120,000.
d. $180,000.

21. P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S. On January 2, 2011, S sold equipment with a five-year remaining life to P for a gain of $180,000. S reports net income of $900,000 for 2011 and pays dividends of $300,000. P’s Equity from Subsidiary Income for 2011 is:
a. $720,000.
b. $576,000.
c. $604,800.
d. $864,000

22. P Company purchased land from its 80% owned subsidiary at a cost of $30,000 greater than it subsidiary’s book value. Two years later P sold the land to an outside entity for $15,000 more than it’s cost. In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of:
a. $15,000.
b. $36,000.
c. $39,000.
d. $45,000.

23. On January 1, 2010, P Corporation sold equipment with a 3-year remaining life and a book value of $100,000 to its 70% owned subsidiary for a price of $115,000. In the consolidated workpapers for the year ended December 31, 2011, an elimination entry for this transaction will include a:
a. debit to Equipment for $15,000.
b. debit to Gain on Sale of Equipment for $15,000.
c. credit to Depreciation Expense for $15,000.
d. debit to Accumulated Depreciation for $10,000.
Problems

7-1 Parker Company, a computer manufacturer, owns 90% of the outstanding stock of Santo Company. On January 1, 2011, Parker sold computers to Santo for $500,000. The computers, which are inventory to Parker, had a cost to Parker of $350,000. Santo Company estimated that the computers had a useful life of six years from the date of purchase.

Santo Company reported net income of $310,000, and Parker Company reported net income of $870,000 from its independent operations (including sales to affiliates) for the year ended December 31, 2011.

Required:
A. Prepare in general journal form the workpaper entries necessary because of the intercompany sales in the consolidated statements workpaper for both 2011 and 2012.

B. Calculate controlling interest in consolidated net income for 2011.

7-2 On January 1, 2008, Penny Company purchased a 90% interest in Stein Company for $800,000, the same as the book value on that date. On January 1, 2011, Stein sold new equipment to Penny for $16,000. The equipment cost $11,000 and had a five year estimated life as of January 1, 2011.

During 2012, Penny sold merchandise to Stein at 20% above cost in the amount (selling price) of $126,000. At the end of the year, Stein had one-third of this merchandise in its ending inventory. At the beginning of 2012, Stein had $48,000 of inventory purchased in 2011 from Penny

Required:
A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the consolidated financial statements for 2012.

B. Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the consolidated income statement for 2012. Stein Company reported $40,000 of net income in 2012.

7-3 Pringle Company owns 104,000 of the 130,000 shares outstanding of Seely Corporation. Seely Corporation sold equipment to Pringle Company on January 1, 2011 for $740,000. The equipment was originally purchased by Seely Corporation on January 1, 2010 for $1,280,000 and at that time its estimated depreciable life was 8 years. The equipment is estimated to have a remaining useful life of four years on January 1, 2011. Both companies use the straight-line method to depreciate equipment. In 2012 Pringle Company reported net income from its independent operations of $3,270,000, and Seely Corporation reported net income of $820,000 and declared dividends of $60,000. Pringle Company uses the cost method to record the investment in Seely Company.

Required:
A. Prepare, in general journal form, the workpaper entries relating to the intercompany sale of equipment that are necessary in the December 31, 2012 consolidated financial statements workpapers.

B. Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the consolidated income statement for 2012.

C. Calculate controlling interest in consolidated net income for 2012.

7-4 P Company bought 60% of the common stock of S Company on January 1, 2011. On January 1, 2011 there was an intercompany sale of equipment at a gain of $63,000. The equipment had an estimated remaining life of six years. Net incomes of the two companies from their own operations (including sales to affiliates) were as follows:
2011 2012
P Company $280,000 $210,000
S Company 70,000 105,000

A. If S Company sold the equipment to P Company, fill in the following matrix:
2011 2012
Noncontrolling interest in consolidated net income

Controlling Interest in Consolidated net income

B. If P Company sold the equipment to S Company, fill in the following matrix:
2011 2012
Noncontrolling interest in consolidated net income

Controlling interest in consolidated net income

7-5 On January 1, 2011, Pinkel Company purchased equipment from its 80%-owned subsidiary for $2,400,000. On the date of the sale, the carrying value of the equipment on the books of the subsidiary company was $1,800,000. The equipment had a remaining useful life of six years on January 2011. On January 1, 2012, Pinkel Company sold the equipment to an outside party for $2,200,000.

Required:
A. Prepare, in general journal form, the entries necessary in 2011 and 2012 on the books of Pinkel Company to account for the purchase and sale of the equipment.

B. Determine the consolidated gain or loss on the sale of the equipment and prepare, in general journal form, the entry necessary on the December 31, 2012 consolidated statements workpaper to properly reflect this gain or loss.

7-6 P Corporation acquired 80% of the outstanding voting stock of S Corporation when the fair values equaled the book values.

On July 1, 2010, P sold land to S for $300,000. The land originally cost P $200,000. S recently resold the land on October 30, 2011 for $350,000.

On October 1, 2011, S Corporation sold equipment to P Corporation for $80,000. S originally paid $100,000 for this equipment and had accumulated depreciation of $40,000 thus far. The equipment has a five-year remaining life.

Required:
A. Complete the consolidated income statement for P Corporation and subsidiary for the year ended December 31, 2011.

P S Elimination Entries
Dr. Cr. Noncontrolling Interest Consolidated Balances
Sales 1,200,000 600,000
Dividend Income from S 80,000
Gain on Sale of
Equipment 20,000
Gain on Sale of Land 50,000
Cost of Sales (800,000) (300,000)
Depreciation Expense (160,000) (80,000)
Other Expenses (200,000) (160,000)
Noncontrolling Interest
in Income
Net Income 120,000 130,000

7-7 Pike Company owns 90% of the outstanding common stock of Sanka Company. On January 1, 2011, Sanka Company sold equipment to Pike Company for $300,000. Sanka Company had purchased the equipment for $450,000 on January 1, 2006 and has been depreciating it over a 10 year life by the straight-line method. The management of Pike Company estimated that the equipment had a remaining life of 5 years on January 1, 2011. In 2011, Pike Company reported $225,000 and Sanka Company reported $150,000 in net income from their independent operations.

Required:
A. Prepare in general journal form the workpaper entries relating to the intercompany sale of equipment that are necessary in the December 31, 2011 and 2012 consolidated statements workpapers. Pike Company uses the cost method to record its investment in Sanka Company.

B. Calculate equity in subsidiary income for 2011 and noncontrolling interest in net income for 2011.

7-8 On January 1, 2010, Peine Company acquired an 80% interest in the common stock of Stine Company on the open market for $3,000,000, the book value at that date.

On January 1, 2011, Peine Company purchased new equipment for $58,000 from Stine Company. The equipment cost $36,000 and had an estimated life of five years as of January 1, 2011.

During 2012, Peine Company had merchandise sales to Stine Company of $400,000; the merchandise was priced at 25% above Peine Company’s cost. Stine Company still owes Peine Company $70,000 on open account and has 20% of this merchandise in inventory at December 31, 2012. At the beginning of 2012, Stine Company had in inventory $100,000 of merchandise purchased in the previous period from Peine Company.

Required:
A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the consolidated financial statements for the year ended December 31, 2012.

B. Assume that Stine Company reports net income of $160,000 for the year ended December 31, 2012. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement for the year ended December 31, 2012.

Short Answer

1. When there have been intercompany sales of depreciable property, workpaper entries are necessary to accomplish several financial reporting objectives. Identify three of these financial reporting objectives for depreciable property.

2. An eliminating entry is needed to adjust the consolidated financial statements when the purchasing affiliate sells a depreciable asset that was acquired from another affiliate. Describe the necessary eliminating entry.

Short Answer Questions from the Textbook

1. From a consolidated point of view, when should profit be recognized on intercompany sales of depreciable assets? Nondepreciable assets?

2. In what circumstances might a consolidated gain be recognized on the sale of assets to a nonaffiliate when the selling affiliate recognizes a loss?

3. What is the essential procedural difference between workpaper eliminating entries for un-realized intercompany profit when the selling affiliate is a less than wholly owned subsidiary and such entries when the selling affiliate is the parent company or a wholly owned subsidiary?

4. Define the controlling interest in consolidated net income using the t-account approach.

5. Why is it important to distinguish between up-stream and downstream sales in the analysis of intercompany profit eliminations?

6. In what period and in what manner should profits relating to the intercompany sale of depreciable property and equipment be recognized in the consolidated financial statements?

7. Define consolidated retained earnings using the analytical approach.

Business Ethics Question from the Textbook
Some people believe that the use of executive stock options is directly related to the increased number of earnings restatements. For each of the following items, discuss the potential ethical issues that might be related to earnings management within the firm.
1. Should stock options be expensed on the Income Statement?
2. Should the CEO or CFO be a past employee of the firm’s audit firm?
3. Should the firm’s audit committee be com-posed entirely of outside members and be solely responsible for hiring the firm’s auditors?

ANSWER KEY (Chapter 7)

Chapter 8

Changes in Ownership Interest

Multiple Choice

1. When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to adjust for the current year’s income sold to noncontrolling stockholders includes a
a. debit to Subsidiary Income Sold.
b. debit to Equity in Subsidiary Income.
c. credit to Equity in Subsidiary Income.
d. credit to Subsidiary Income Sold.

2. A parent company may increase its ownership interest in a subsidiary by
a. buying additional subsidiary shares from third parties.
b. buying additional subsidiary shares from the subsidiary.
c. having the subsidiary purchase its shares from third parties.
d. all of these.

3. If a portion of an investment is sold, the value of the shares sold is determined by using the:
1. first-in, first-out method.
2. average cost method.
3. specific identification method.
a. 1
b. 2
c. 3
d. 1 and 3

4. If a parent company acquires additional shares of its subsidiary’s stock directly from the subsidiary for a price less than their book value:
1. total noncontrolling book value interest increases.
2. the controlling book value interest increases.
3. the controlling book value interest decreases.
a. 1
b. 2
c. 3
d. 1 and 3

5. If a subsidiary issues new shares of its stock to noncontrolling stockholders, the book value of the parent’s interest in the subsidiary may
a. increase.
b. decrease.
c. remain the same.
d. increase, decrease, or remain the same.

6. The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the parent company’s share of the subsidiary’s net assets
a. increasing.
b. decreasing.
c. remaining unchanged.
d. increasing, decreasing, or remaining unchanged.

7. The computation of noncontrolling interest in net assets is made by multiplying the noncontrolling interest percentage at the
a. beginning of the year times subsidiary stockholders’ equity amounts.
b. beginning of the year times consolidated stockholders’ equity amounts.
c. end of the year times subsidiary stockholders’ equity amounts.
d. end of the year times consolidated stockholders’ equity amounts.

8. Under the partial equity method, the workpaper entry that reverses the effect of subsidiary income for the year includes a:
1. credit to Equity in Subsidiary Income.
2. debit to Subsidiary Income Sold.
3. debit to Equity in Subsidiary Income.
a. 1
b. 2
c. 3
d. both 1 and 2

9. Polk Company owned 24,000 of the 30,000 outstanding common shares of Sloan Company on January 1, 2010. Polk’s shares were purchased at book value when the fair values of Sloan’s assets and liabilities were equal to their book values. The stockholders’ equity of Sloan Company on January 1, 2010, consisted of the following:
Common stock, $15 par value $ 450,000
Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000

Sloan Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2010. If Polk Company purchased all 7,500 shares, the book entry to record the purchase should increase the Investment in Sloan Company account by
a. $562,500.
b. $590,625.
c. $675,000.
d. $150,000.
e. Some other account.

10. Polk Company owned 24,000 of the 30,000 outstanding common shares of Sloan Company on January 1, 2010. Polk’s shares were purchased at book value when the fair values of Sloan’s assets and liabilities were equal to their book values. The stockholders’ equity of Sloan Company on January 1, 2010, consisted of the following:
Common stock, $15 par value $ 450,000
Other contributed capital 337,500
Retained earnings 712,500
Total $1,500,000
Sloan Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2010. If all 7,500 shares were sold to noncontrolling stockholders, the workpaper adjustment needed each time a workpaper is prepared should increase (decrease) the Investment in Sloan Company by
a. ($140,625).
b. $140,625.
c. ($112,500).
d. $192,000.
e. None of these.

11. On January 1, 2006, Parent Company purchased 32,000 of the 40,000 outstanding common shares of Sims Company for $1,520,000. On January 1, 2010, Parent Company sold 4,000 of its shares of Sims Company on the open market for $90 per share. Sims Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $400,000 $ 400,000
Other contributed capital 400,000 400,000
Retained earnings 800,000 1,400,000
$1,600,000 $2,200,000

The difference between implied and book value is assigned to Sims Company’s land. The amount of the gain on sale of the 4,000 shares that should be recorded on the books of Parent Company is
a. $68,000.
b. $170,000.
c. $96,000.
d. $200,000.
e. None of these.

12. On January 1, 2006, Patterson Corporation purchased 24,000 of the 30,000 outstanding common shares of Stewart Company for $1,140,000. On January 1, 2010, Patterson Corporation sold 3,000 of its shares of Stewart Company on the open market for $90 per share. Stewart Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $ 300,000 $ 300,000
Other contributed capital 300,000 300,000
Retained earnings 600,000 1,050,000
$1,200,000 $1,650,000

The difference between implied and book value is assigned to Stewart Company’s land. As a result of the sale, Patterson Corporation’s Investment in Stewart account should be credited for
a. $165,000.
b. $206,250.
c. $120,000.
d. $142,500.
e. None of these.

13. On January 1, 2006, Peterson Company purchased 16,000 of the 20,000 outstanding common shares of Swift Company for $760,000. On January 1, 2010, Peterson Company sold 2,000 of its shares of Swift Company on the open market for $90 per share. Swift Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000

The difference between implied and book value is assigned to Swift Company’s land. Assuming no other equity transactions, the amount of the difference between implied and book value that would be added to land on a workpaper for the preparation of consolidated statements on December 31, 2010, would be
a. $120,000.
b. $115,000.
c. $105,000.
d. $84,000.
e. None of these.

14. On January 1 2010, Paulson Company purchased 75% of Shields Corporation for $500,000. Shields’ stockholders’ equity on that date was equal to $600,000 and Shields had 60,000 shares issued and outstanding on that date. Shields Corporation sold an additional 15,000 shares of previously unissued stock on December 31, 2010.

Assume that Paulson Company purchased the additional shares what would be their current percentage ownership on December 31, 2010?
a. 92%
b. 87%
c. 80%
d. 100%

15. On January 1 2010, Powder Mill Company purchased 75% of Selfine Company for $500,000. Selfine Company’s stockholders’ equity on that date was equal to $600,000 and Selfine Company had 60,000 shares issued and outstanding on that date. Selfine Company Corporation sold an additional 15,000 shares of previously unissued stock on December 31, 2010.

Assume Selfine Company sold the 15,000 shares to outside interests, Powder Mill Company’s percent ownership would be:
a. 33 1/3%
b. 60%
c. 75%
d. 80%

16. P Corporation purchased an 80% interest in S Corporation on January 1, 2010, at book value for $300,000. S’s net income for 2010 was $90,000 and no dividends were declared. On May 1, 2010, P reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What will be the Consolidated Gain on Sale and Subsidiary Income Sold for 2010?
Consolidated Gain on Sale Subsidiary Income Sold
a. $9,000 $6,000
b. $9,000 $15,000
c. $15,000 $6,000
d. $15,000 $15,000

17. P Corporation purchased an 80% interest in S Corporation on January 1, 2010, at book value for $300,000. S’s net income for 2010 was $90,000 and no dividends were declared. On May 1, 2010, P reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What would be the balance in the Investment of S Corporation account on December 31, 2010?
a. $300,000.
b. $225,000.
c. $279,000.
d. $261,000.

18. The purchase by a subsidiary of some of its shares from the noncontrolling stockholders results in an increase in the parent’s percentage interest in the subsidiary. The parent company’s share of the subsidiary’s net assets will increase if the shares are purchased:
a. at a price equal to book value.
b. at a price below book value.
c. at a price above book value.
d. will not show an increase.

Use the following information for Questions 19-21.

On January 1, 2006, Perk Company purchased 16,000 of the 20,000 outstanding common shares of Self Company for $760,000. On January 1, 2010, Perk Company sold 2,000 of its shares of Self Company on the open market for $90 per share. Self Company’s stockholders’ equity on January 1, 2006, and January 1, 2010, was as follows:
1/1/06 1/1/10
Common stock, $10 par value $ 200,000 $ 200,000
Other contributed capital 200,000 200,000
Retained earnings 400,000 700,000
$800,000 $1,100,000

The difference between implied and book value is assigned to Self Company’s land.

19. The amount of the gain on sale of the 2,000 shares that should be recorded on the books of Perk Company is
a. $34,000.
b. $85,000.
c. $48,000.
d. $100,000.
e. None of these.

20. As a result of the sale, Perk Company’s Investment in Self account should be credited for
a. $110,000.
b. $137,500.
c. $80,000.
d. $95,000.
e. None of these.

21. Assuming no other equity transactions, the amount of the difference between implied and book value that would be added to land on a work paper for the preparation of consolidated statements on December 31, 2010 would be
a. $120,000.
b. $115,000.
c. $105,000.
d. $84,000.

22. On January 1, 2010, P Corporation purchased 75% of S Corporation for $500,000. S’s stockholders’ equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date. S Corporation sold an additional 8,000 shares of previously unissued stock on December 31, 2010.

Assume that P Corporation purchased the additional shares what would be their current percentage ownership on December 31, 2010?
a. 62 1/2%.
b. 75%
c. 79 1/6%
d. 100%

23. On January 1, 2010, P Corporation purchased 75% of S Corporation for $500,000. S’s stockholders’ equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date. S Corporation sold an additional 8,000 shares of previously unissued stock on December 31, 2010.

Assume S sold the 8,000 shares to outside interests, P’s percent ownership would be:
a. 56 1/4%
b. 62 1/2%
c. 75%
d. 79 1/6%

Problems

8-1 Piper Company purchased Snead Company common stock through open-market purchases as follows:
Acquired
Date Shares Cost
1/1/09 1,500 $ 50,000
1/1/10 3,300 $ 90,000
1/1/11 6,600 $250,000

Snead Company had 12,000 shares of $20 par value common stock outstanding during the entire period. Snead had the following retained earnings balances on the relevant dates:

January 1, 2009 $ 90,000
January 1, 2010 30,000
January 1, 2011 150,000
December 31, 2011 300,000

Snead Company declared no dividends in 2009 or 2010 but did declare $60,000 of dividends in 2011. Any difference between cost and book value is assigned to subsidiary land. Piper uses the equity method to account for its investment in Snead.

Required:
A. Prepare the journal entries Piper Company will make during 2010 and 2011 to account for its investment in Snead Company.
B. Prepare workpaper eliminating entries necessary to prepare a consolidated statements workpaper on December 31, 2011.

8-2 On January 1, 2008, Patel Company acquired 90% of the common stock of Seng Company for $650,000. At that time, Seng had common stock ($5 par) of $500,000 and retained earnings of $200,000.

On January 1, 2010, Seng issued 20,000 shares of its unissued common stock, with a market value of $7 per share, to noncontrolling stockholders. Seng’s retained earnings balance on this date was $300,000. Any difference between cost and book value relates to Seng’s land. No dividends were declared in 2010.

Required:
A. Prepare the entry on Patel’s books to record the effect of the issuance assuming the cost method.
B. Prepare the elimination entries for the preparation of a consolidated statements workpaper on December 31, 2010 assuming the cost method.

8-3 Pratt Company purchased 40,000 shares of Silas Company’s common stock for $860,000 on January 1, 2010. At that time Silas Company had $500,000 of $10 par value common stock and $300,000 of retained earnings. Silas Company’s income earned and increase in retained earnings during 2010 and 2011 were:

2010 2011
Income earned $260,000 $360,000
Increase in Retained Earnings 200,000 300,000

Silas Company income is earned evenly throughout the year.

On September 1, 2011, Pratt Company sold on the open market, 12,000 shares of its Silas Company stock for $460,000. Any difference between cost and book value relates to Silas Company land. Pratt Company uses the cost method to account for its investment in Silas Company.

Required:
A. Compute Pratt Company’s reported gain (loss) on the sale.
B. Prepare all consolidated statements workpaper eliminating entries for a workpaper on December 31, 2011.

8-4 Pelky made the following purchases of Stark Company common stock:

Date Shares Cost
1/1/10 70,000 (70%) $1,000,000
1/1/11 10,000 (10%) 160,000

Stockholders’ equity information for Stark Company for 2010 and 2011 follows:

2010 2011
Common stock, $10 par value $1,000,000 $1,000,000

1/1 Retained earnings 300,000 380,000
Net income 110,000 140,000
Dividends declared, 12/15 (30,000) (40,000)
Retained earnings, 12/31 380,000 480,000
Total stockholders’ equity, 12/31 $1,380,000 $1,480,000

On July 1, 2011, Pelky sold 14,000 shares of Stark Company common stock on the open market for $22 per share. The shares sold were purchased on January 1, 2010. Stark notified Pelky that its net income for the first six months was $70,000. Any difference between cost and book value relates to subsidiary land. Pelky uses the cost method to account for its investment in Stark Company.

Required:
A. Prepare the journal entry made by Pelky to record the sale of the 14,000 shares on July 1, 2011.
B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December 31, 2011.
C. Compute the amount of noncontrolling interest that would be reported on the consolidated balance sheet on December 31, 2011.

8-5 P Company purchased 96,000 shares of the common stock of S Company for $1,200,000 on January 1, 2007, when S’s stockholders’ equity consisted of $5 par value, Common Stock at $600,000 and Retained Earnings of $800,000. The difference between cost and book value relates to goodwill.

On January 2, 2010, S Company purchased 20,000 of its own shares from noncontrolling interests for cash of $300,000 to be held as treasury stock. S Company’s retained earnings had increased to $1,000,000 by January 2, 2010. S Company uses the cost method in regards to its treasury stock and P Company uses the equity method to account for its investment in S Company.

Required:
Prepare all determinable workpaper entries for the preparation of consolidated statements on December 31, 2010.

8-6 Penner Company acquired 80% of the outstanding common stock of Solk Company on January 1, 2008, for $396,000. At the date of purchase, Solk Company had a balance in its $2 par value common stock account of $360,000 and retained earnings of $90,000. On January 1, 2010, Solk Company issued 45,000 shares of its previously unissued stock to noncontrolling stockholders for $3 per share. On this date, Solk Company had a retained earnings balance of $152,000. The difference between cost and book value relates to subsidiary land. No dividends were paid in 2010. Solk Company reported income of $30,000 in 2010.

Required:
A. Prepare the journal entry on Penner’s books to record the effect of the issuance assuming the equity method.
B. Prepare the eliminating entries needed for the preparation of a consolidated statements workpaper on December 31, 2010, assuming the equity method.

8-7 Petty Company acquired 85% of the common stock of Selmon Company in two separate cash transactions. The first purchase of 108,000 shares (60%) on January 1, 2009, cost $735,000. The second purchase, one year later, of 45,000 shares (25%) cost $330,000. Selmon Company’s stockholders’ equity was as follows:

December 31 December 31
2009 2010

Common Stock, $5 par $ 900,000 $ 900,000
Retained Earnings, 1/1 262,000 302,000
Net Income 69,000 90,000
Dividends Declared, 9/30 (30,000) (38,000)
Retained Earnings, 12/31 301,000 354,000
Total Stockholders’ Equity, 12/31 $1,201,000 $1,254,000

On April 1, 2010, after a significant rise in the market price of Selmon Company’s stock, Petty Company sold 32,400 of its Selmon Company shares for $390,000. Selmon Company notified Petty Company that its net income for the first three months was $22,000. The shares sold were identified as those obtained in the first purchase. Any difference between cost and book value relates to goodwill. Petty uses the partial equity method to account for its investment in Selmon Company.

Required:
A. Prepare the journal entries Petty Company will make on its books during 2009 and 2010 to account for its investment in Selmon Company.
B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December 31, 2010.

Short Answer
1. A parent’s ownership percentage in a subsidiary may change for several reasons. Identify three reasons the ownership percentage may change.

2. A parent company’s equity interest in a subsidiary may change as the result of the issuance of additional shares of stock by the subsidiary. Describe the affect on the parent’s investment account when the new shares are (a) purchased ratably by the parent and noncontrolling shareholders or (b) entirely by the noncontrolling shareholders.

Short Answer Question from the Textbook

1. Identify three types of transactions that result in a change in a parent company’s ownership interest in its subsidiary.

2. Why is the date of acquisition of subsidiary stock important under the purchase method?

3. When a parent company has obtained control of a subsidiary through several purchases and subsequently sells a portion of its shares in the subsidiary, how is the carrying value of the shares sold determined?

4. When a parent company that records its investment using the cost method during a fiscal year sells a portion of its investment, explain the correct accounting for any differences between selling price and recorded values.

5. ABC Corporation purchased 10,000 shares(80%) of EZ Company at $35 per share and sold them several years later for $35 per share. The consolidated income statement reports a loss on the sale of this investment. Explain.

6. Explain how a parent company that owns less than100% of a subsidiary can purchase an entire new is-sue of common stock directly from the subsidiary.

7. When a subsidiary issues additional shares of stock to noncontrolling stockholders and such issuance results in an increase in the book value of the parent’s share of the subsidiary’s equity, how should the increase be reflected in the financial statements? What if it results in a decrease?

8. P Company holds an 80% interest in S Company. Determine the effect (that is, increase, decrease, no change, not determinable) on both the total book value of the noncontrolling interest and the noncontrolling interest’s percentage of ownership in the net assets of S Company for each of the following situations:
a. P Company acquires additional shares directly from S Company at a price equal to the book value per share of the S Company stock immediately prior to the issuance.
b. S Company acquires its own shares on the open market. The cost of these shares is less than their book value.
c. Assume the same situation as in (b) except that the cost of the shares is greater than their book value.
d. P Company and a noncontrolling stockholder each acquire 100 shares directly from S Com-pany at a price below the book value per share.

Business Ethics Question from Textbook

During a recent review of the quarterly financial statements and supporting ledgers, you noticed several un-usual journal entries. While the dollar amounts of the journal entries were not large, there did not appear to be supporting documentation. You decide to bring the matter to the attention of your immediate supervisor. After you mentioned the issue, the supervisor calmly stated that the matter would be looked into and that you should not worry about it.1.You feel a bit uncomfortable about the situation. What is your responsibility and what action, if any, should you take?

ANSWER KEY (Chapter 8)

Chapter 9

Intercompany Bond Holdings and Miscellaneous Topics-Consolidated Financial Statements

Multiple Choice

1. Which of the following methods of allocating the gain or loss on an intercompany bond retirement is the soundest conceptually?
a. The gain (loss) is allocated to the company that issued the bonds.
b. The gain (loss) is allocated to the company that purchased the bonds.
c. The gain (loss) is allocated to the parent company.
d. The gain (loss) is allocated between the purchasing and issuing companies.

2. The constructive gain or loss on an intercompany bond retirement is recognized in the consolidated income statement _________ the recognition of the gain or loss on the individual companies’ books.
a. after
b. before
c. at the same time as
d. before or after

3. The constructive gain or loss to the purchasing company is the difference between the
a. book value of the bonds and their par value.
b. book value of the bonds and their purchase price.
c. cost of the bonds and their par value.
d. cost of the bonds and their purchase price.

4. The workpaper eliminating entry for a stock dividend declared by the subsidiary includes a
a. debit to Stock Dividends Declared – S Co.
b. debit to Noncontrolling interest.
c. credit to Stock Dividends Declared – S Co.
d. debit to Dividend Income.

5. The parent company records the receipt of shares from a subsidiary’s stock dividend as
a. dividend income.
b. a reduction of the investment account.
c. an increase in the investment account.
d. none of these.

6. If the book value of preferred stock is greater than its implied value, the difference is accounted for as an increase in
a. consolidated retained earnings.
b. consolidated net income.
c. other contributed capital.
d. investment in subsidiary preferred stock.

7. If a subsidiary has both common and preferred stock outstanding, a parent must own a controlling interest in
a. both the subsidiary’s common and preferred stock to justify consolidation.
b. the subsidiary’s common stock to justify consolidation.
c. the subsidiary’s common stock and at least 20% of the subsidiary’s preferred stock to justify consolidation.
d. the subsidiary’s common stock and more than 50% of the subsidiary’s preferred stock to justify consolidation.

Use the following information to answer Questions 8, 9, and 10.

Pollard Corporation owns 90% of the outstanding common stock of Steele Company. On January 1, 2008, Steele Company issued $500,000, 12%, ten-year bonds.

On January 1, 2010, Pollard Corporation paid $412,000 for Steele Company bonds with a par value of $400,000 and a carrying value of $393,600. Both companies use the straight-line method to amortize bond premiums and discounts. Pollard Corporation accounts for the investment using the cost method of accounting.

8. The total gain or loss on the constructive retirement of the debt to be reported in the 2010 consolidated income statement is
a. $12,000 loss.
b. $12,000 gain.
c. $18,400 loss.
d. $18,400 gain.
e. $6,400 loss.

9. Pollard Corporation would report a balance in the Investment in Steele Company Bonds account on December 31, 2010, of
a. $412,000.
b. $393,600.
c. $410,500.
d. $400,000.
e. none of these.

10. Compute the noncontrolling interest in the 2010 consolidated income assuming that Pollard Corporation reported a net income of $300,000 (includes dividend income from Steele Company). Steele Company reported net income of $180,000 and declared and paid cash dividends of $100,000.
a. $18,000
b. $17,440
c. $17,360
d. $18,560
e. none of these.

11. Sousa Corporation is an 80% owned subsidiary of Phillips Company. Sousa purchased bonds of Phillips Company for $103,000. Phillips Company reported the bond liability on the date of purchase at $100,000 less unamortized discount of $5,000. Assuming that the constructive gain or loss is material, the consolidated income statement should report an
a. ordinary loss of $8,000.
b. ordinary gain of $8,000.
c. extraordinary loss of $8,000 adjusted for income tax effects.
d. extraordinary gain of $8,000 adjusted for income tax effects.

12. From a consolidated entity point of view, the constructive gain or loss on the open market purchase of a parent company’s bonds by a subsidiary company is
a. considered realized at the date of the open market purchase.
b. realized in future periods through discount and premium amortization on the books of the individual companies.
c. realized only to the extent of the parent company’s interest in the subsidiary.
d. deferred and recognized in the consolidated income statement when the bonds are retired.

13. Stage Company is a 90% owned subsidiary of Princeton Company. On January 1, 2010, Stage Company purchased for $680,000 bonds of Princeton Company that had a carrying value of $725,000 (par value $700,000). The bonds mature on December 31, 2014. Both companies use the straight-line method of amortization and have a December 31 year-end. The increase in 2010 consolidated income (i.e., income before subtracting noncontrolling interest) is
a. $45,000.
b. $44,000.
c. $54,000.
d. $36,000.
e. $46,000.

Use the following information to answer Questions 14 and 15.

Parkes Company acquired 90% of Stanton Company’s common stock for $780,000 and 40% of its preferred stock for $180,000. On January 1, 2010, the date of acquisition, the companies reported the following account balances:
Parkes Company Stanton Company
Preferred stock, $100 par value $ 500,000 $ 360,000
Common stock, $10 par value 1,200,000 600,000
Other contributed capital 190,000 140,000
Retained earnings 210,000 110,000
Total stockholders’ equity $2,100,000 $1,200,000

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par value. Dividends were not paid during 2009. During 2010, Stanton Company reported net income of $120,000 and declared and paid cash dividends in the amount of $70,000.

14. The difference between the implied value of the preferred stock and its book value is
a. $40,000.
b. $39,600.
c. $34,400.
d. $26,000.
e. 15,840.

15. Noncontrolling interest in the 2010 reported net income of Stanton Company is
a. $29,500.
b. $12,000.
c. $34,000.
d. $21,000.
e. $30,000.

16. Constructive gains and losses from intercompany bond transactions are:
a. treated as extraordinary items on the consolidated income statement
b. included as other revenues and expenses on the consolidated income statement.
c. excluded from the consolidated income statement until realized.
d. eliminated from the consolidated income statement.

17. Pittsford Company purchased bonds from Shay Company on the open market at a premium. Shay Company is a 100% owned subsidiary of Pittsford Company. Pittsford intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying values in the two companies would be:
a. included as a decrease to retained earnings.
b. included as an increase to retained earnings.
c. reported as a deferred debit to be amortized over the remaining life of the bonds.
d. reported as a deferred credit to be amortized over the remaining life of the bonds.

18. On January 1, 2010, Plueger Company has $700,000 of 6%, 10-year bonds with an unamortized discount of $28,000. Steiner Company, an 80% subsidiary, purchased $350,000 of these bonds at 102. The gain or (loss) on the retirement of Plueger’s bonds is:
a. $14,000 loss.
b. $14,000 gain.
c. $21,000 loss.
d. $21,000 gain.

19. On a consolidated balance sheet, subsidiary preferred stock will be shown:
a. as part of consolidated stockholder’s equity.
b. combined with any preferred stock of the parent.
c. as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by the parent.
d. as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by outside interests.

20. Pettijohn Company has total stockholders’ equity of $2,000,000 consisting of $400,000 of $1 par value common stock, $400,000 of other contributed capital, and $1,200,000 of retained earnings. Pettijohn owns 80% of Spencer Company purchased at book value. Spencer has $800,000 of 5% cumulative preferred stock outstanding. Pettijohn acquired 40% of the preferred stock of Spencer for $200,000. After this transaction the balances in Pettijohn’s retained earnings and other contributed capital accounts are:
a. $1,200,000 and $400,000.
b. $1,200,000 and $520,000.
c. $1,320,000 and $400,000.
d. $1,080,000 and $400,000.

Use the following information to answer Questions 21-23.

Parkinson Company owns 90% of the outstanding common stock of Staggs Company. On January 1, 2008, Staggs Company issued $500,000, 12%, ten-year bonds.

On January 1, 2010, Parkinson Company paid $315,000 for Staggs Company bonds with a par value of $300,000 and a carrying value of $297,600. Both companies use the straight-line method to amortize bond premiums and discounts. Parkinson Company accounts for the investment using the cost method of accounting.

21. The total gain or loss on the constructive retirement of the debt to be reported in the 2010 consolidated income statement is
a. $15,000 loss.
b. $15,000 gain.
c. $17,400 loss.
d. $17,400 gain.
e. $ 2,400 loss.

22. Parkinson Company would report a balance in the Investment in Staggs Company Bonds account on December 31, 2010, of
a. $315,000.
b. $297,600.
c. $313,125.
d. $300,000
e. None of these.

23. Compute the noncontrolling interest in the 2010 consolidated income assuming that Parkinson Company reported a net income of $240,000 (includes dividend income from Staggs Company). Staggs Company reported net income of $150,000 and declared and paid cash dividends of $90,000.
a. $15,000.
b. $14,790.
c. $14,760.
d. $15,210.
e. None of these.

Use the following information to answer Questions 24 and 25.

Penner Company acquired 90% of Skulley Company’s common stock for $1,300,000 and 40% of its preferred stock for $300,000. On January 1, 2010, the date of acquisition, the companies reported the following account balances:
Penner Company Skulley Company
Preferred stock, $100 par value $ 800,000 $ 600,000
Common stock, $10 par value 2,000,000 1,000,000
Other contributed capital 320,000 230,000
Retained earnings 350,000 180,000
Total stockholders’ equity $3,470,000 $2,010,000

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 102% of par value. Dividends were not paid during 2009. During 2010, Skulley Company reported net income of $200,000 and declared and paid cash dividends in the amount of $120,000.

24. The difference between the implied value of the preferred stock and its book value is
a. $60,000.
b. $78,000
c. $55,200.
d. $36,000.
e. none of these.

25. Noncontrolling interest in the 2010 reported net income of Skulley Company is
a. $50,000.
b. $20,000.
c. $80,000.
d. $56,000.
e. none of these.

Problems

9-1 On January 1, 2010, Page Company acquired an 80% interest in Sterling Company for $1,070,000. Sterling reported common stock of $1,000,000 and retained earnings of $400,000 on this date. Any difference between implied value and the book value interest acquired is attributable to land.

Other information available for Sterling Company is shown below:

Net Income Cash Dividends
2010 $130,000 $160,000

Page Company uses the cost method to account for its investment in Sterling Company.

Required:
A. Prepare the general journal entries for 2010 to record the receipt of the cash dividends.

B. Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year end December 31, 2010.

9-2 Steinberger Company issued 10-year, 8% bonds with a par value of $1,000,000 on January 2, 2009, for $1,040,000. Interest is payable semiannually on June 30 and December 31. On December 31, 2010, Potts Company purchased $700,000 of Steinberger par value bonds for $670,000. Steinberger is an 80% owned subsidiary of Potts. Both companies use the straight-line method to amortize bond discounts and premiums. Steinberger declared cash dividends of $100,000 in 2010 and reported net income of $220,000 for the year.

Potts reported net income of $350,000 for 2010 and paid dividends of $160,000 during 2010.

Required:
A. Compute the total gain or loss on the constructive retirement of the debt.

B. Allocate the total gain or loss between Steinberger Company and Potts Company.

C. Compute the controlling interest in consolidated net income for 2010.

D. Prepare in general journal form the intercompany bond elimination entries for the consolidated statements workpaper prepared on December 31, 2010.

9-3 Prentice Company, who owns an 80% interest in Steffey Company, purchased $2,000,000 of Steffey’s 8% bonds at 106 on December 31, 2010. The bonds pay interest on January 1 and July 1 and mature on December 31, 2013. Prentice Company uses the cost method to account for its investment in Steffey. Selected balances from December 31, 2010 accounts of the two companies are as follows:

Prentice _____Steffey____

Investment in Steffey 8% bonds $2,120,000 $ —-
Bond discount —- 300,000
Interest payable —- 800,000
8% bonds payable —- 20,000,000
Interest expense —- 1,700,000
Gain or loss on constructive
retirement of bonds —- —-

Required:
Prepare in general journal form the workpaper eliminations related to the bonds to consolidated the financial statements of Prentice and its subsidiary for the year ended December 31, 2010 and 2011.

9-4 On January 1, 2010, Powell Company purchased 80% of the common stock of Southern Company for $400,000. Southern Company reported common stock of $200,000 ($10 par value), other contributed capital of $60,000, and retained earnings of $120,000 on this date. The difference between implied value and the book value interest acquired is attributable to the under-valuation of land held by Southern Company. Southern Company reported net income for 2010 of $100,000. During 2010 Southern Company declared and paid a 20% stock dividend and a $24,000 cash dividend. Southern Company stock had a market value of $30 per share on the date the stock dividend was declared. Powell Company uses the cost method to account for its investment in Southern Company.

Required:
A. Prepare the journal entries required in the books of Powell Company to account for the investment in Southern Company.

B. Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year ended December 31, 2010.

C. Prepare the workpaper entry to establish reciprocity in the 2011 consolidated statements workpaper.

9-5 On January 1, 2010, Proctor Company acquired 90% of the common stock of Styles Company for $720,000 and 20% of the preferred stock for $70,000. On this date, Styles Company reported the following account balances:

Common stock ($10 par value) $600,000
Preferred stock ($100 par value, 8%,
cumulative, nonparticipating, liquidation
value equal to par value) 300,000
Other contributed capital – premium on
common stock 120,000
Retained earnings 80,000

Styles Company did not declare a cash dividend during 2009. Proctor Company uses the cost method.

Required:
A. During 2010 Styles Company reported net income of $360,000 and declared cash dividends of $160,000. Calculate the 2010 noncontrolling interest in net income and the amount of the cash dividends Proctor Company should have received during the year from each of the stock investments.

B. Prepare, in general journal form, the workpaper entries that would be made in the preparation of the December 31, 2010, consolidated statements workpaper. The difference between the implied value of the common stock and the book value interest acquired is attributable to an undervaluation in the land of Styles Company. Any difference between the implied value of the preferred stock and its book value is allocated to other contributed capital.

9-6 On January 1, 2010, Pippin Company acquired 80% of Skylark Company’s common stock for $210,000 and 70% of Skylark’s preferred stock for $80,000. Skylark Company reported the following stockholders’ equity on this date:

Preferred stock, 8%, Par value $20 $ 100,000
Common stock, Par value $50 200,000
Premium on common stock 30,000
Retained earnings 80,000
Total $410,000

The preferred stock is cumulative, nonparticipating, and callable at 104% of par value plus dividends in arrears. On January 1, 2010, dividends were in arrears for one year. Any difference between the implied value of the preferred stock and its book value interest is to be allocated to other contributed capital.

Changes in Skylark Company’s retained earnings during 2010 and 2011 were as follows:

January 1, 2010 Balance $ 80,000
2010 net income 20,000
2011 net income 16,000
2011 cash dividends (30,000)
December 31, 2011 Balance $ 86,000

Required:
A. Compute the difference between the implied value and book value interest acquired for the investment in preferred stock.

B. Compute the balance in the Investment in Preferred Stock account on December 31, 2011.

C. Compute the amount of Skylark Company’s net income that will be included in the controlling interest in consolidated net income for 2011.

9-7 On January 2, 2010, Preston, Inc. acquired an 80% interest in Simpson Corporation for $2,250,000. Simpson reported total stockholders’ equity of $2,500,000 on this date. An examination of Simpson’s books revealed that book value was equal to fair value for all assets and liabilities except for inventory, which was undervalued by $150,000. All of the undervalued inventory was sold during 2010.

Preston also purchased 30% of the $1,250,000 par value outstanding bonds of Simpson Corporation for $350,000 on January 2, 2010. The bonds mature in 10 years, carry an 11% annual interest rate payable on June 30 and December 31, and had a carrying value of $1,270,000 on the date of purchase. Both companies use the straight-line method to amortize bond discounts and premiums.

Preston reported net income of $750,000 for 2010 and paid dividends of $325,000 during 2010. Simpson Corporation reported net income of $800,000 for 2010 and paid dividends of $225,000 during the year.

Required:
Compute the following items at December 31, 2010.
1. Carrying value of the debt.
2. Interest revenue reported by Preston, Inc.
3. Interest expense reported by Simpson Corporation.
4. Balance in the Investment in Simpson Bonds account.
5. Controlling interest in consolidated net income for 2010 using the t-account approach.
6. Noncontrolling interest in consolidated income for 2010.

9-8 On January 2, 2010, Palmer Corporation purchased 80% of the outstanding common stock and 30% of the outstanding cumulative, nonparticipating, preferred stock of Sears Company for $800,000 and $140,000, respectively. At this date, Sears Company reported account balances of $800,000 in common stock, $400,000 in preferred stock and $200,000 in retained earnings. No other contributed capital accounts exist. The difference between implied and book value of the common stock is attributable to under- or overvalued land. Dividends on the 12% cumulative preferred stock (par $10) were not paid during 2009.

Palmer Sears
Corporation Company
1/2/2010 Retained Earnings $ 90,000 $200,000
2010 Reported Net Income 169,200 180,000
2010 Dividends Declared 50,000 100,000

Required:
A. Prepare the journal entries made by Palmer Corporation in 2010 to account for the investments assuming the partial equity method is used.
B. Compute the noncontrolling interest in Sears Company’s net income.
C. Prepare the 2010 workpaper entries related to the foregoing investments assuming the partial equity method is used to account for the investment.

Short Answer Questions from Textbook

1. Define “constructive retirement of debt.” How is the total constructive gain or loss computed?

2. The gain or loss on the constructive retirement of debt is recognized subsequently by the individual companies. Explain.

3. Allocating the gain or loss on constructive bond retirement between the purchasing and issuing companies is preferred conceptually. Describe how this allocation would be made.

4. Give the primary argument(s) in favor of assigning the total gain or loss on constructive bond retirement to the company that issued the bonds.

5. Under the allocation method followed in this text, how is the noncontrolling interest in consolidated income affected by intercompany bondholdings?

6. Investor Company purchased 70% of the$500,000 par value outstanding bonds of Investee Company, a 70% owned subsidiary. The bonds cost $338,000 and had a carrying value of$360,000 on the date of purchase. a.What portion of the gain or loss resulting from the constructive bond retirement should be allocated to Investor Company? b. What portion of the constructive gain or loss should be allocated to Investee Company?

7. An outside party issued a note to Affiliate X, who then sold the note to Affiliate Y. Y discounted the note at an unaffiliated bank, endorsing it with recourse. Which party is primarily liable and which party is contingently liable for the note?

8. Cash dividends are viewed as a distribution of the most recent earnings. How are stock dividends viewed?

9. Explain how the reciprocity calculation is modified in periods after the declaration of a stock dividend for firms using the cost method.

10. What journal entry, if any, would the parent company make to record the receipt of a stock dividend?

11. What effect does a stock dividend have on the consolidated statements work paper in the year of declaration? In subsequent periods?

12. How does the existence of preferred stock affect the calculation of noncontrolling interest?

13. Explain how to account for the difference between implied and book value interest of an in-vestment in preferred stock of a subsidiary.

14. What effect would cumulative preferred stock have on the allocation of a net loss to the common stockholders?

Business Ethics Question from the Textbook

The company that you work for is a subsidiary of a larger company. At the beginning of each year, the subsidiary prepares a budget for the year that includes a forecast of revenues for the coming year. The subsidiary sells a significant amount of inventory to the parent to be used in the manufacture of another product. The subsidiary’s revenues for the current year are short of the budgeted amount. An error in the books has misclassified an intercompany sale as an ordinary sale. The manager of the subsidiary asks you not to fix the error until after the books are closed. What is your responsibility? What action, if any, should you take? Why?

ANSWER KEY (Chapter 9)

Chapter 10

Insolvency – Liquidation and Reorganization

Multiple Choice

1. A corporation that is unable to pay its debts as they become due is:
a. bankrupt.
b. overdrawn.
c. insolvent.
d. liquidating.

2. When a business becomes insolvent, it generally has three possible courses of action. Which of the following is not one of the three possible courses of action?
a. The debtor and its creditors may enter into a contractual agreement, outside of formal bankruptcy proceedings.
b. The debtor continues operating the business in the normal course of the day-to-day operations.
c. The debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under Chapter 7.
d. The debtor or its creditors may file a petition for reorganization under Chapter 11.

3. Assets transferred by the debtor to a creditor to settle a debt are transferred at:
a. book value of the debt.
b. book value of the transferred assets.
c. fair market value of the debt.
d. fair market value of the transferred assets.

4. A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to:
a. accept less than the full amount of their claims.
b. delay settlement of the claim until a latter date.
c. force the debtor into a liquidation.
d. accrue interest at a higher rate.

5. In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring:
a. will equal the creditor’s gain on restructuring.
b. will equal the creditor’s loss on restructuring.
c. may not equal the creditor’s gain on restructuring.
d. may not equal the creditor’s loss on restructuring.

6. A bankruptcy petition filed by a firm is a:
a. chapter petition.
b. involuntary petition.
c. voluntary petition.
d. chapter 11 petition.

7. When a bankruptcy court enters an “order for relief” it has:
a. accepted the petition.
b. dismissed the petition.
c. appointed a trustee.
d. started legal action against the debtor by its creditors.

8. An involuntary petition filed by a firm’s creditors whereby there are twelve or more creditors must be signed by at least:
a. two creditors.
b. three creditors.
c. five creditors.
d. six creditors.

9. The duties of the trustee include:
a. appointing creditors’ committees in liquidation cases.
b. approving all payments for debts incurred before the bankruptcy filing.
c. examining claims and disallowing any that are improper.
d. calling a meeting of the debtor’s creditors.

10. Which of the following items is not a specified priority for unsecured creditors in a bankruptcy petition?
a. Administration fees incurred in administering the bankrupt’s estate.
b. Unsecured claims for wages earned within 90 days and are less than $4,650 per employee.
c. Unsecured claims of governmental units for unpaid taxes.
d. Unsecured claims on credit card charges that do not exceed $3,000.

11. Which statement with respect to gains and losses on troubled debt restructuring is correct?
a. Creditors losses on restructuring are extraordinary.
b. Debtor’s gains and losses on asset transfers and debtor’s gains on restructuring are combined and treated as extraordinary.
c. Debtor gains and creditor losses on restructuring are extraordinary, if material in amount.
d. Debtor losses on asset transfers and debtor gains on restructuring are reported as a component of net income.

12. When fresh-start reporting is used according to Statement of Position (SOP) 90-7, the implication is that a new firm exists. Which of the following statements is not correct about fresh-start accounting?
a. Assets are reported at fair values.
b. Beginning retained earnings is reported at zero.
c. The fair value of the assets must be less than the post liabilities and allowed claims.
d. The original owners must own less than 50% of the voting stock after reorganization.

13. A Statement of Affairs is a report designed to show:
a. an estimated amount that would be received by each class of creditor’s claims in the event of liquidation.
b. a balance sheet prepared on the going-concern assumption.
c. assets and liabilities classified as current and noncurrent.
d. assets and liabilities reported at their current book values.

14. When a secured claim is not fully settled by the selling of the underlying collateral, the remaining portion:
a. of the claim cannot be collected by the creditor.
b. remains as a secured claim.
c. is classified as an unsecured priority claim.
d. is classified as an unsecured nonpriority claim.

15. Layne Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying amount of $360,000 and a fair value of $540,000 in exchange for a note with a carrying amount of $765,000. Ignoring income taxes, what amount should Layne report as a gain on its income statement?
a. $0.
b. $180,000.
c. $225,000.
d. $405,000.

16. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Nen Co. to Baker Co. in full settlement of Nen’s liability to Baker:

Carrying amount of liability settled $450,000
Carrying amount of real estate transferred $300,000
Fair value of real estate transferred $330,000

What amount should Nen report as ordinary gain (loss) on transfer of real estate?
a. $(30,000).
b. $30,000.
c. $120,000.
d. $150,000.

17. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Nen Co. to Baker Co. in full settlement of Nen’s liability to Baker:

Carrying amount of liability settled $450,000
Carrying amount of real estate transferred $300,000
Fair value of real estate transferred $330,000

What amount should Baker report as a gain or (loss) on restructuring?
a. $120,000 ordinary loss.
b. $120,000 extraordinary loss.
c. $150,000 ordinary loss.
d. $150,000 extraordinary loss.

18. Dobler Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Carson holds a note receivable from Dobler for $75,000 collateralized by an asset with a book value of $50,000 and a liquidation value of $25,000. The amount to be realized by Carson on this note is:
a. $25,000.
b. $40,000.
c. $50,000.
d. $75,000.

19. Bad Company filed a voluntary bankruptcy petition, and the statement of affairs reflected the following amounts:
Estimated
Assets Book Value Current Value
Assets pledged with fully secured creditors $ 900,000 $ 1,110,000
Assets pledged partially secured creditors 540,000 360,000
Free assets 1,260,000 960,000
$2,700,000 $2,430,000
Liabilities
Liabilities with priority $ 210,000
Fully secured creditors 780,000
Partially secured creditors 600,000
Unsecured creditors 1,620,000
$3,210,000

Assume the assets are converted to cash at their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims?

a. $720,000.
b. $840,000.
c. $960,000.
d. $1,080,000.

20. The final settlement with unsecured creditors is computed by dividing:
a. total net realizable value by total unsecured creditor claims.
b. net free assets by total secured creditor claims.
c. total net realizable value by total secured creditor claims.
d. net free assets by total unsecured creditor claims.

21. Dodge Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying value of $200,000 and a fair value of $300,000 in exchange for a note with a carrying amount of $425,000. Ignoring income taxes, what amount should Dodge report as a gain on its income statement?
a. $0.
b. $100,000.
c. $125,000.
d. $225,000.

22. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Drier Co. to Cole Co. in full settlement of Drier’s liability to Cole:

Carrying amount of liability settled $375,000
Carrying amount of real estate transferred $250,000
Fair value of real estate transferred $275,000

What amount should Drier report as ordinary gain (loss) on transfer of real estate?
a. $(25,000).
b. $25,000.
c. $100,000.
d. $125,000.

23. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by Drier Co. to Cole Co. in full settlement of Drier’s liability to Cole:

Carrying amount of liability settled $375,000
Carrying amount of real estate transferred $250,000
Fair value of real estate transferred $275,000

What amount should Cole report as a gain or (loss) on restructuring?
a. $100,000 ordinary loss.
b. $100,000 extraordinary loss.
c. $125,000 ordinary loss.
d. $125,000 extraordinary loss.

24. Poor Company filed a voluntary bankruptcy petition, and the settlement of affairs reflected the following amounts:

Estimated
Assets Book Value Current Value
Assets pledged with fully secured creditors $ 450,000 $ 555,000
Assets pledged partially secured creditors 270,000 180,000
Free assets 630,000 480,000
$1,350,000 $1,215,000

Liabilities
Liabilities with priority $ 105,000
Fully secured creditors 390,000
Partially secured creditors 300,000
Unsecured creditors 810,000
$1,605,000

Assume the assets are converted to cash to their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims?
a. $360,000.
b. $420,000.
c. $480,000.
d. $540,000.

25. Dooley Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Cerner holds a note receivable from Dooley for $90,000 collateralized by an asset with a book value of $60,000 and a liquidation value of $30,000. The amount to be realized by Cerner on this note is:
a. $30,000.
b. $48,000.
c. $60,000.
d. $90,000.

Problems

10-1 On January 1, 2011, Bargain Mart owed City Bank $1,600,000, under an 8% note with three years remaining to maturity. Due to financial difficulties, Bargain Mart was unable to pay the previous year’s interest. City Bank agreed to settle Bargain Mart’s debt in exchange for land having a fair market value of $1,310,000. Bargain Mart purchased the land in 2003 for $1,000,000.

Required:
Prepare the journal entries to record the restructuring of the debt by Bargain Mart.

10-2 On January 1, 2010, Gannon, Inc. owed BancCorp $12 million on a 10% note due December 31, 2011. Interest was last paid on December 31, 2008. Gannon was experiencing severe financial difficulties and asked BancCorp to modify the terms of the debt agreement. After negotiation BancCorp agreed to:
– Forgive the interest accrued for the year just ended,
– Reduce the remaining two years interest payments to $900,000 each and delay the first payment until December 31, 2011, and
– Reduce the unpaid principal amount to $9,600,000.

Required:
Prepare the journal entries for Gannon, Inc. necessitated by the restructuring of the debt at (1) January 1, 2010, (2) December 31, 2011, and (3) December 31, 2012.

10-3 On January 2, 2011 Stevens, Inc. was indebted to First Bank under a $12 million, 10% unsecured note. The note was signed January 2, 2005, and was due December 31, 2014. Annual interest was last paid on December 31, 2009. Stevens negotiated a restructuring of the terms of the debt agreement due to financial difficulties.

Required:
Prepare all journal entries for Stevens, Inc. to record the restructuring and any remaining transactions relating to the debt under each independent assumption.
A. First Bank agreed to settle the debt in exchange for land which cost Stevens $8,500,000 and has a fair market value of $10,000,000.
B. First Bank agreed to (1) forgive the accrued interest from last year (2) reduce the remaining four interest payments to $600,000 each, and (3) reduce the principal to $9,000,000.

10-4 On December 31, 2011, Community Bank agreed to restructure a $900,000, 8% loan receivable from Neer Corporation because of Neer’s financial problems. At December 31 there was $36,000 of accrued interest for a six-month period. Terms of the restructuring agreement are as follows:
– Reduce the loan from $900,000 to $600,000;
– Extend the maturity date by 2 years from December 31, 2011 to December 31, 2013;
– Reduce the interest rate on the loan from 8% to 6%.

Present value assumptions:
Present value of $1 for 2 years at 6% = 0.8900
Present value of $1 for 2 years at 8% = 0.8573
Present value of an ordinary annuity of $1 for 2 years at 6% = 1.8334
Present value of an ordinary annuity of $1 for 2 years at 8% = 1.7833

Required:
Compute the gain or loss that will be reported by Community Bank.

10-5 Donnelly Corporation incurred major losses in 2010 and entered into voluntary Chapter 7 bankruptcy in the early part of 2011. By June 1, all assets were converted into cash, the secured creditors were paid, and $150,000 in cash was left to pay the remaining claims as follows.

Accounts payable $ 48,000
Claims prior to the trustee’s appointment 21,000
Property taxes payable 18,000
Wages payable (all under $4,650 per employee) 54,000
Unsecured note payable 60,000
Accrued interest on the note payable 6,000
Administrative expenses of the trustee 30,000
Total $237,000

Required:
Classify the claims by their Chapter 7 priority ranking, and analyze which amounts will be paid and which amounts will be written off.

10-6 Davis Corporation filed a petition under Chapter 7 of the U.S. Bankruptcy Act on June 30, 2011. Data relevant to its financial position as of this date are:
Estimated Net
Book Value Realizable Values
Cash $ 3,000 $ 3,000
Accounts receivable-net 72,000 48,000
Inventories 60,000 72,000
Equipment-net 165,000 87,000
Total assets $300,000 $210,000

Accounts payable $ 72,000
Rent payable 21,000
Wages payable 45,000
Note payable plus accrued interest 96,000
Capital stock 180,000
Retained earnings (deficit) (120,000)
Total liabilities and equity $300,000

Required:
A. Prepare a statement of affairs assuming that the note payable and interest are secured by
a mortgage on the equipment and that wages are less than $4,650 per employee.
B. Estimate the amount that will be paid to each class of claims if priority liquidation expenses including trustee fees are $24,000 and estimated net realizable values are actually realized.

10-7 The following data are taken from the statement of affairs of Mitchell Company.

Assets pledged with fully secured creditors
(Realizable value, $635,000) $800,000
Assets pledged with partially secured creditors
(realizable value, $300,000) 365,000
Free assets (Realizable value, $340,000) 535,000
Fully secured creditor claims 316,000
Partially secured creditor claims 400,000
Unsecured creditor claims with priority 100,000
General unsecured creditor claims 1,165,000

Required:
Compute the amount that will be paid to each class of creditor.

10-8 On February 1, 2011, Hilton Company filed a petition for reorganization under the bankruptcy statutes. The court approved the plan on September 1, 2011, including the following provisions:

1. Accrued expenses of $21,930, representing priority items, are to be paid in full.
2. Hilton Company is to exchange accounts receivable in the face amount of $138,000 and an allowance for uncollectible accounts of $29,200 for the full settlement of $198,600 owed on open account to one of its major unsecured creditors. The estimated fair value of the receivables is $104,000.
3. Unsecured creditors of open accounts amounting to $91,600 and paid 40 cents on the dollar in full settlement.
4. Hilton Company’s only other major unsecured creditor agreed to a five-year extension of the $500,000 principal owed him on a 10% note payable. Accrued interest on the note on September 1, 2011, amounts to $45,000, one-third of which is to be paid in cash and the remainder canceled. In addition, no interest is to be charged during the remaining five years to maturity of the note.

Required:
Prepare journal entries on the books of Hilton Company to give effect to the preceding provisions.

Short Answer

1. The Bankruptcy Reform Act assigns priorities to certain unsecured claims, and each rank must be satisfied in full before the next–lower rank is paid. Identify the five categories of unsecured creditor claims.

2. Creditors are classified by law as either secured or unsecured. Distinguish among fully secured, partially secured, and unsecured creditors.

Short Answer Questions from the Textbook

1. List the primary types of contractual agreements between a debtor company and its creditors and briefly explain what is involved in each of them.

2. Distinguish between a voluntary and involuntary bankruptcy petition.

3. Distinguish among fully secured, partially se-cured, and unsecured claims of creditors.

4. Five priority categories of unsecured claims must be paid before general unsecured creditors are paid. Briefly describe what makes up each category.

5. What are “dividends” in a bankruptcy proceeding?

6. For each of the following debt restructurings, indicate whether a gain is recognized and, if so, how the gain is measured and reported. (a)Transfer of assets by the debtor to the creditor.(b)Grant of an equity interest by the debtor to the creditor.(c)Modification of the terms of the payable.

7. What is the purpose of a Statement of Affairs?

8. One of the officers of a corporation that had just received a discharge in bankruptcy said, “Good, now we don’t owe anyone.” Is he correct?

9. What are the duties of a trustee in a liquidation proceeding?

10. What is the purpose of a combining work paper prepared by a trustee?

11. What is the purpose of a realization and liquidation account?

Business Ethics Question from Textbook

From an ethical perspective, some believe that it is never justifiable for an individual or business to declare bankruptcy. Others believe that some actions are appropriate only in extreme circumstances. Without question, as stated in the Journal of Accountancy, November 2005,page 51, “the ease with which debtors have been able to walk away from debt has frustrated creditors for years.”
1. Describe the differences between Chapter 7 (liquidations) and Chapter 11 (reorganizations)from an ethical standpoint. Who is most likely to be hurt by a Chapter 7 bankruptcy?
2. Discuss the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Do you believe the changes wrought by this act will serve to protect creditors?
3. The Protection Act of 2005 requires individuals, but not businesses, to undergo a “means” test before they can seek Chapter 7 relief. Do you believe this change should be applied to businesses as well? Why or why not?
4. Do you think that you would ever resort to filing for bankruptcy relief yourself? Why or why not?

ANSWER KEY (Chapter 10)

Chapter 11

International Financial Reporting Standards

Multiple Choice—Conceptual

1. The goals of the International Accounting Standards Committee include all of the following except
a. To improve international accounting.
b. To formulate a single set of auditing standards to be applied in all countries.
c. To promote global acceptance of its standards.
d. To harmonize accounting practices between countries.

2. Which of the following is true about the FASB after the mandatory adoption of IFRS by US companies?
a. The FASB will serve in an advisory capacity to the IASB.
b. The FASB will remain the designated standard-setter for US companies, but incorporate IFRS into US GAAP.
c. The role of the FASB post-IFRS adoption has not been determined.
d. The FASB will cease to exist.

3. Milestones in the transition plan for mandatory adoption of IFRS by US companies include all of the following except:
a. Improvements in accounting standards.
b. Limited early adoption of IFRS in an effort to enhance comparability for US investors
c. Mandatory use of IFRS by US entities.
d. All of the above are milestones in the transition plan for mandatory adoption of IFRS by US companies.

4. The roles of the IASC Foundation include
a. establishing global standards for financial reporting.
b. coordinating the filing requirements of stock exchange regulatory agencies.
c. financing IASB operations.
d. all of the above are roles of the IASC Foundation.

5. Which of the following statements is true regarding the IASC?
a. The IASC is a public-sector, not-for-profit organization.
b. The IASC is accountable to an international securities regulator.
c. The IASC is a stand-alone, private-sector organization.
d. The IASC funds the operations of the IASB through filing fees paid to national securities regulators.

6. . Concerns of the SEC with regard to the mandatory adoption of IFRS by US entities include all of the following except:
a. the extent to which the standard-setting process addresses emerging issues in a timely manner.
b. the security and stability of IASC funding.
c. the enhancement of IASB independence through a system of voluntary contributions from firms in the accounting profession.
d. the degree to which due process is integrated into the standard-setting process .

7. . Under the staged transition to mandatory adoption of IFRS being considered by the SEC,
a. large, accelerated filers would begin IFRS filings for fiscal years beginning on or after December 31, 2011.
b. non-accelerated filers would begin IFRS filings for fiscal years beginning on or after December 31, 2015.
c. large non-accelerated filers would have until fiscal years beginning on or after December 15, 2017 to adopt IFRS.
d. smaller reporting companies would begin IFRS filings for fiscal years beginning on or after December 15, 2016.
.
8. In order to complete its first IFRS filing, including three years of audited financial statements, according to the staged transition to mandatory adoption of IFRS considered by the SEC, a large accelerated filer would need to adopt IFRS beginning in fiscal year
a. 2011.
b. 2012.
c. 2013.
d. 2014.

9. Benefits of the FASB Accounting Standards Codification (ASC) include all of the following except
a. increases the independence of the FASB.
b. aids in the convergence of US GAAP with IFRS.
c. reduces time and effort required to research accounting issues.
d. clearly distinguishes between authoritative and non-authoritative guidance.

10. SFAS No.162, the Accounting Standards Codification, is directed to
a. auditors.
b. Boards of Directors.
c. securities regulators.
d. entities.

11. IFRS and US GAAP differ with regard to financial statement presentation in all of the following except
a. IFRS generally requires that assets be listed in order of increasing liquidity while US GAAP requires that assets be listed in order of decreasing liquidity.
b. US GAAP requires expenses to be listed by function while IFRS requires expenses to be listed by nature.
c. IFRS prohibits extraordinary items which are allowed by US GAAP.
d. IFRS requires two years of comparative income statements while under US GAAP, three years of income statements are required.

12. The major difference between IFRS and US GAAP in accounting for inventories is that
a. US GAAP prohibits the use of specific identification.
b. IFRS requires the use of the LIFO cost flow assumption.
c. US GAAP prohibits the use of the LIFO cost flow assumption
d. US GAAP allows the use of the LIFO cost flow assumption.

13. One difference between IFRS and GAAP in valuing inventories is that
a. IFRS, but not GAAP, allows reversals so that inventories written down under lower-of-cost-or-market can be written back up to the original cost .
b. GAAP defines market value as replacement cost where IFRS defines market as the selling price.
c. GAAP strictly adheres to the historical cost concept and does not allow for write-downs of inventory values while IFRS embraces fair value.
d. IFRS, but not GAAP, requires that inventories be valued at the lower of cost or market.

14. In accounting for research and development costs.
a. the general rule under both US GAAP and IFRS is that research and development costs should be expensed as incurred .
b. IFRS generally expenses all research and development costs while US GAAP expenses research costs as incurred but capitalizes development costs once technological and economic feasibility has been demonstrated.
c. US GAAP generally expenses all research and development costs while IFRS expenses research costs as incurred but capitalizes development costs once technological and economic feasibility has been demonstrated.
d. both US GAAP and IFRS expense research costs as incurred but capitalize development costs once technological and economic feasibility has been demonstrated.
.
15. Property, plant and equipment are valued at
a. historical cost under both IFRS and US GAAP.
b. historical cost or revalued amounts under both IFRS and US GAAP.
c. revalued amounts under IFRS.
d. historical cost under US GAAP while IFRS allows the assets to be valued at either historical cost or revalued amounts.

16. The amount of a long-lived asset impairment loss is generally determined by comparing
a. the asset’s carrying amount and its fair value under US GAAP.
b. the asset’s carrying amount and its discounted future cash flows less cost to sell under IFRS.
c. the asset’s carrying amount and its undiscounted future cash flows under US GAAP.
d. the asset’s carrying amount and its undiscounted future cash flows less disposal cost under IFRS.

17. In accounting for liabilities, IFRS interprets “probable” as
a. likely.
b. more likely than not.
c. somewhat possible.
d. possible and not remote.

18. Accounting under IFRS and US GAAP is similar for all of the following topics except
a. changes in estimates.
b. related party transactions.
c. research and development costs.
d. changes in methods.

Use the following information to answer the next three questions.

On January 1, 2010, AirFrance purchases an airplane for €14,400,000. The components of the airplane and their useful lives are as follows:

Component Cost Useful life
Frame €7,200,000 24 years
Engine 4,800,000 20 years
Other 2,400,000 10 years

AirFrance uses the straight-line method of depreciation. The asset is assumed to have no salvage value.

19. Under IFRS, the entry to record the acquisition of the airplane would include
a. a debit to Asset/ Airplane of €14,400,000.
b. a debit to Asset/ Airplane frame of €14,400,000.
c. a debit to Asset/ Airplane engine of €4,800,000.
d. cannot be determined from the information given.

20. Under US GAAP, the entry to record depreciation expense on the asset at December 31, 2011 will include
a. a credit to accumulated depreciation of €1,200,000.
b. a debit to depreciation expense of €1,440,000
c. a debit to depreciation expense of €800,000.
d. a credit to accumulated depreciation of €600,000.

21. Under IFRS, the entry to record depreciation expense on the asset at December 31, 2011 will include a credit to accumulated depreciation of
a. €1,440,000.
b. €1,200,000
c. €800,000.
d. €600,000.

22. Accounting terminology that differs between IFRS and US GAAP include all of the following except
a. the use by IFRS of “turnover” for revenue.
b. the use by IFRS of “share premium” for additional paid-in-capital.
c. the use by IFRS of “other capital reserves” for retained earnings.
d. the use by IFRS of “issued capital” for common stock.

23. New terminology introduced under the joint IFRS- US GAAP Customer Consideration (Allocation) Model includes all of the following except
a. revenue recognition voids.
b. contract rights.
c. net contract asset/ liability.
d. performance obligations.

24. Under IFRS, the criteria to determine whether a lease should be capitalized include
a. the present value of the minimum lease payments is 90% or more of the fair value of the asset at the inception of the lease.
b. the term of the lease is 75% or more of the economic life of the asset.
c. the term of the lease is equal to substantially all of the economic life of the asset.
d. the present value of the minimum lease payments is equal to substantially all of the fair value of the asset at the inception of the lease.

Use the following information to answer the next three questions.

Bellingham Electronics Inc. offers one model of laptop computer for £1000 and a two-year warranty for £250. The retailer, as part of a Boxing Day promotion, offers a limited-time offer for the laptop, including delivery and the two-year warranty for £1,180. The cost of the computer to Bellingham is £700. Any warranty repairs are assumed to be done ratably over time. Bellingham accounts for transactions using the customer consideration model.

In the first twelve months following the sale, Bellingham incurred £980 of costs servicing the computers under warranty.

25. Bellingham sells ten laptops to Bertram Inc. under the limited-time promotion. Upon delivery of the laptops to Bertram, Bellingham will recognize revenue of
a. £9,300.
b. £9,440
c. £10,000.
d. £11,800.

26. In the first twelve months following the sale, Bellingham would reduce the Contract liability – warranty account by
a. £784.
b. £980
c. £1,180.
d. £1,380.

27. In the first twelve months, Bellingham would record warranty expense of
a. £784.
b. £980
c. £1,180.
d. £1,380.

28. Significant differences between IFRS and Chinese GAAP include all of the following except
a. Chinese GAAP allows the use of LIFO while IFRS prohibits it.
b. Chinese GAAP has different related party disclosure requirements.
c. Chinese GAAP follows the cost principle while IFRS allows for revaluations and recoveries of impairment losses.
d. Chinese GAAP uses the equity method of accounting for jointly controlled entities while IFRS also allows proportionate consolidation.

29. All of the following are options for non-US companies who wish to list securities on a US exchange except
a. The company can use either IFRS or their local GAAP.
b. If a company uses their local GAAP they must reconcile net income and shareholders’ equity or fully disclose all financial information required of US companies.
c. If a company uses their local GAAP they must reconcile net income and shareholders’ equity and fully disclose all financial information required of US companies
d. The company must file a form 20-F with the SEC.

30. All of the following are true regarding American Depository Receipts (ADRs) except
a. Most ADRs are unsponsored, meaning that the DR bank creates a DR program without a formal agreement with the issuing non-US company.
b. An ADR is a derivative instrument traded in the US that usually represents a fixed number of publicly traded shares of a non-US company.
c. ADRs are denominated in US dollars.
d. A Level 1 sponsored ADR is the easiest way for a non-US company to access US markets.

Exercise from the Textbook

Exercise 11-1

Component Depreciation SMC Company purchases a building for $100,000. Included in this cost are $12,000 for electrical systems and $15,000 for the roof. The building is expected to have a 40 year useful life, but the electrical system will last for 20 years and the roof will last 15 years.

Required: Part A: Assuming that straight-line depreciation is used, compute depreciation expense assuming that U.S. GAAP is used.

Part B: Assuming that straight line depreciation is used, compute depreciation expense for year one assuming IFRS is used (assume component depreciation).

Problem from the Textbook

Problem 11-4

Prepare a statement of financial position using the proposed new format as described in the chapter.

Questions from the Textbook

1. As mentioned in Chapter 1, the project on business combinations was the first of several joint projects undertaken by the FASB and the IASB in their move to converge standards globally. Nonetheless, complete convergence has not yet occurred, and there are those who believe it to be a poor idea. Discuss the reasons for and against global convergence.

2. In recent months, virtually every topic that has come to the attention of the standard setters has been undertaken as a joint effort of the FASB and the IASB rather than as an individual effort by one of the two boards. List and discuss some of the joint projects that fall into this category.
3. What is the rationale for the harmonization of international accounting standards?

4. Why is the SEC, once so reluctant to accept IAS, now very willing to allow firms using IFRS to is-sue securities in the U.S. stock market without reconciling to U.S. GAAP?

5. Discuss the types of ADRs that non-U.S. companies might use to access the U.S. markets.

6. Describe the attitude of the FASB toward the IASB (International Accounting Standards Board).

7. How does the FASB view its role in the development of an international accounting system? Currently, two members of the IASB board were affiliated with the FASB. Comment on what effect this might have on the likelihood that the U.S. standard setters will accept the new IASB statements, if any?

8. List some of the major differences in accounting between IFRS and U.S. GAAP.

Business Ethics Question from the Textbook

A vice president of marketing for your company has been charged with embezzling nearly $100,000 from the company. The vice president allegedly submitted fraudulent vendor invoices in order to receive payments. As the vice president of marketing for the company, the vice president is authorized to approve the payment of invoices submitted by third-party vendors who did work for the company. After the activities were uncovered, the company responded by stating: “All employees are accountable to our ethics guidelines and procedures. We do not tolerate violations of our ethics policy and will consistently enforce these policies and procedures.”

1. How would you evaluate the internal controls of the company?

2. Do you think there are companies that develop comprehensive ethics and compliance pro-grams for mid- and lower-level employees and ignore upper-level executives and managers?

3. Is it an ethical issue if companies are not forth-coming concerning fraudulent activities of top executives in an effort to minimize negative publicity?

Answer Key (Chapter 11)

Chapter 12

Accounting for Foreign Currency Transactions And Hedging Foreign Exchange Risk

Multiple Choice

1. A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a:
a. hedge of a net investment in a foreign entity.
b. hedge of an exposed asset or liability position.
c. hedge of an identifiable foreign currency commitment.
d. contract acquired to speculate in the movement of exchange rates.

2. The discount or premium on a forward contract entered into as a hedge of an exposed asset or liability position should be:
a. included as a separate component of stockholders’ equity.
b. amortized over the life of the forward contract.
c. deferred and included in the measurement of related foreign currency transaction.
d. none of these.

3. An indirect exchange rate quotation is one in which the exchange rate is quoted:
a. in terms of how many units of the domestic currency can be converted into one unit of foreign currency.
b. for the immediate delivery of currencies exchanged.
c. in terms of how many units of the foreign currency can be converted into one unit of domestic currency.
d. for the future delivery of currencies exchanged.

4. A transaction gain is recorded when there is an:
a. importing transaction and the exchange rate increases.
b. exporting transaction and the exchange rate increases.
c. exporting transaction and the exchange rate decreases.
d. none of these.

5. During 2011, a U.S. company purchased inventory from a foreign supplier. The transaction was denominated in the local currency of the seller. The direct exchange rate increased from the date of the transaction to the balance sheet date. The exchange rate decreased from the balance sheet date to the settlement date in 2012. For the years 2011 and 2012, transaction gains or losses should be recognized as:
2011 2012
a. gain gain
b. gain loss
c. loss loss
d. loss gain

6. A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to:
a. hedge a net investment in a foreign entity.
b. hedge an identifiable foreign currency commitment.
c. speculate in foreign currency.
d. none of these.

7. On November 1, 2011, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $500,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit of
Date Foreign Currency
November 1 $0.73
December 31 0.71
March 1 0.74

The entry to record the forward contract is
a. FCU Receivable 350,000
Premium on Forward Contract 15,000
Dollars Payable 365,000

b. Dollars Receivable 365,000
Discount on Forward Contract 15,000
FCU Payable 350,000

c. FCU Receivable 365,000
Discount on Forward Contract 15,000
Dollars Payable 350,000

d. Dollars Receivable 350,000
Discount on Forward Contract 15,000
FCU Payable 365,000

8. On November 1, 2011, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $450,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit of
Date Foreign Currency
November 1 $0.73
December 31 0.71
March 1 0.74

What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment?

Receivable Balance Gain/Loss Recorded
a. $319,500 $9,000 gain
b. $319,500 $9,000 loss
c. $333,000 $4,500 gain
d. $333,000 $18,000 gain

9. A transaction gain or loss at the settlement date is:
a. a change in the exchange rate quoted by a foreign exchange trader.
b. synonymous with the translation of foreign currency financial statements into dollars.
c. the difference between the recorded dollar amount of an account receivable denominated in a foreign currency and the amount of dollars received.
d. the difference between the buying and selling rate quoted by a foreign exchange trader at the settlement date.

10. From the viewpoint of a U.S. company, a foreign currency transaction is a transaction:
a. measured in a foreign currency.
b. denominated in a foreign currency.
c. measured in U.S. currency.
d. denominated in U.S. currency.

11. The exchange rate quoted for future delivery of foreign currency is the definition of a(n):
a. direct exchange rate.
b. indirect exchange rate.
c. spot rate.
d. forward exchange rate.

12. A transaction loss would result from:
a. an increase in the exchange rate applicable to an asset denominated in a foreign currency.
b. a decrease in the exchange rate applicable to a liability denominated in a foreign currency.
c. the import of merchandise when the transaction is denominated in a foreign currency.
d. a decrease in the exchange rate applicable to an asset denominated in a foreign currency.

13. The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract:
a. extends beyond one year or the current operating cycle.
b. is a hedge of an identifiable foreign currency commitment.
c. is a hedge of an exposed net liability position.
d. was acquired to speculate in foreign currency.

14. A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign currency commitment may be:
a. included as a separate item in the stockholders’ equity section of the balance sheet.
b. recognized currently in the determination of net income.
c. deferred and included in the measurement of the related foreign currency transaction.
d. none of these.

15. Craiger, Inc. a U.S. corporation, bought machine parts from Reinsch Company of Germany on March 1, 2011, for 70,000 marks, when the spot rate for marks was $0.5395. Craiger’s year-end was March 31, 2011, when the spot rate for marks was $0.5445. Craiger bought 70,000 marks and paid the invoice on April 20, 2011, when the spot rate was $0.5495. How much should be shown in Craiger’s income statements as foreign exchange (transaction) gain or loss for the years ended March 31, 2011 and 2012?

2011 2012
a. $0 $0
b. $0 $350 loss
c. $350 loss $0
d. $350 loss $350 loss

16. A forward exchange contract is transacted at a discount if the current forward rate is:
a. less than the expected spot rate.
b. more than the expected spot rate.
c. less than the current spot rate.
d. more than the current spot rate.

17. Stuart Corporation a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due one month after delivery. Between the delivery date and the time of payment, the exchange rate changed in Stuart’s favor. The resulting gain should be reported in the financial statements as a(n):
a. component of other comprehensive income.
b. component of income from continuing operations.
c. extraordinary income.
d. deferred income.

18. Jackson Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7, 2011. Payment in British pounds is due on Sept. 7, 2011. The exchange rates to purchase one pound is as follows:
July 7 August 31, (year end) September 7
Spot-rate 2.08 2.05 2.04
30-day rate 2.07 2.03 —
60-day rate 2.06 1.99 —

On its August 31, 2011 income statement, what amount should Jackson Paving report as a foreign exchange transaction gain:
a. $14,000.
b. $7,000.
c. $10,500.
d. $0.

19. On September 1, 2011, Swash Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward Rate
Spot rate For Dec. 1, 2011
September 1, 2011 1.46 1.47
September 30, 2011 (year-end) 1.50 1.48

The first forward contract was to hedge a purchase of inventory on September 1, payable on December 1. On September 30, what amount of foreign currency transaction loss should Swash Plating report in income?
a. $0.
b. $2,500.
c. $5,000.
d. $10,000.

20. On September 1, 2011, Swash Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward Rate
Spot rate For Dec. 1, 2011
September 1, 2011 1.46 1.47
September 30, 2011 (year-end) 1.50 1.48

The second forward contract was strictly for speculation. On September 30, 2011, what amount of foreign currency transaction gain should Swash Plating report in income?
a. $0.
b. $2,500.
c. $5,000.
d. $10,000.

21. On November 1, 2011, Prism Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of 250,000 foreign currency units (FCU). On November 1, Prism also entered into a forward contract to hedge the exposed asset. The forward rate is $0.90 per unit of foreign currency. Prism has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit of
Date Foreign Currency
November 1 $0.93
December 31 0.91
March 1 0.94

The entry to record the forward contract is
a. FCU Receivable 225,000
Premium on Forward Contract 7,500
Dollars Payable 232,500

b. Dollars Receivable 232,500
Discount on Forward Contract 7,500
FCU Payable 225,000

c. FCU Receivable 232,500
Discount on Forward Contract 7,500
Dollars Payable 225,000

d. Dollars Receivable 225,000
Discount on Forward Contract 7,500
FCU Payable 232,500

22. On November 1, 2011, National Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of 200,000 foreign currency units (FCU). On November 1, National also entered into a forward contract to hedge the exposed asset. The forward rate is $0.80 per unit of foreign currency. National has a December 31 fiscal year-end. Spot rates on relevant dates were:

Per Unit of
Date Foreign Currency
November 1 $0.83
December 31 0.81
March 1 0.84

What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment?

Receivable Balance Gain/Loss Recorded
a. $170,000 $4,000 gain
b. $162,000 $4,000 loss
c. $168,000 $2,000 gain
d. $164,000 $2,000 loss

23. Caldron Company purchased equipment for 375,000 British pounds from a supplier in London on July 3, 2011. Payment in British pounds is due on Sept. 3, 2011. The exchange rates to purchase one pound is as follows:
July 3 August 31, (year end) September 3
Spot-rate 1.58 1.55 1.54
30-day rate 1.57 1.53 —
60-day rate 1.56 1.49 —

On its August 31, 2011, income statement, what amount should Caldron report as a foreign exchange transaction gain:
a. $18,750.
b. $3,750.
c. $11,250.
d. $0.

24. On April 1, 2011, Trent Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward Rate
Spot rate For Aug. 1, 2011
April 1, 2011 1.16 1.17
April 30, 2011 (year-end) 1.20 1.18

The first forward contract was to hedge a purchase of inventory on April 1, payable on December 1. On April 30, what amount of foreign currency transaction loss should Trent report in income?
a. $0.
b. $3,000.
c. $9,000.
d. $12,000.

25. On April 1, 2011, Trent Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows:

Forward Rate
Spot rate For Aug. 1, 2011
April 1, 2011 1.16 1.17
April 30, 2011 (year-end) 1.20 1.18

The second forward contract was strictly for speculation. On April 30, 2011, what amount of foreign currency transaction gain should Trent report in income.
a. $0.
b. $3,000.
c. $9,000.
d. $12,000.

Problems

12-1 On November 1, 2010, Dorsey Company sold inventory to a company in England. The sale was for 600,000 British pounds and payment will be received on February 1, 2011. On November 1, Dorsey entered into a forward contract to sell 600,000 British pounds on February 1 at the forward rate of $1.65. Spot rates for the British pound are as follows:
November 1 $1.61
December 31 1.67
February 1 1.62

Dorsey has a December 31 fiscal year-end.

Required:
Compute each of the following:

1. The dollars to be received on February 1, 2011, from selling the 600,000 pounds to the exchange dealer.

2. The dollars that would have been received from the account receivable if Dorsey had not hedged the sale contract with the forward contract.

3. The discount or premium on the forward contract.

4. The transaction gain or loss on the exposed asset related to the sale in 2010 and 2011.

5. The transaction gain or loss on the forward contract in 2010 and 2011.

6. The amount of the discount or premium on the forward contract amortized in 2010 and 2011.

12-2 On December 1, 2010, Derrick Corporation agreed to purchase a machine to be manufactured by a company in Brazil. The purchase price is 1,150,000 Brazilian reals. To hedge against fluctuations in the exchange rate, Derrick entered into a forward contract on December 1 to buy 1,150,000 reals on April 1, the agreed date of machine delivery, for $0.375 per real. The following exchange rates were quoted:
Forward Rate
Date Spot Rate (Delivery on 4/1)
December 1 0.390 0.375
December 31 0.370 0.373
April 1 0.385 —

Required:
Prepare journal entries necessary for Derrick during 2010 and 2011 to account for the transactions described above.

12-3 Colony Corp., a U.S. corporation, entered into a contract on November 1, 2010, to sell two machines to Crown Company, for 95,000 foreign currency units (FCU). The machines were to be delivered and the amount collected on March 1, 2011.

In order to hedge its commitment, Colony entered into a forward contract for 95,000 FCU delivery on March 1, 2011. The forward contract met all conditions for hedging an identifiable foreign currency commitment.

Selected exchange rates for FCU at various dates were as follows:

November 1, 2010 – Spot rate $1.3076
Forward rate for delivery on March 1, 2011 1.2980
December 31, 2010 – Spot rate 1.3060
Forward rate for delivery on March 1, 2011 1.3150
March 1, 2011 – Spot rate 1.2972

Required:
Prepare all journal entries relative to the above on the books of Colony Corp. on the following dates:
1. November 1, 2010.
2. Year-end adjustments on December 31, 2010.
3. March 1, 2011. (Include all adjustments related to the forward contract.)

12-4 On October 1, 2010, Nance Company purchased inventory from a foreign customer for 750,000 units of foreign currency (FCU) due on January 31, 2011. Simultaneously, Nance entered into a forward contract for 750,000 units of FC for delivery on January 31, 2011, at the forward rate of $0.75. Payment was made to the foreign customer on January 31, 2011. Spot rates on October 1, December 31, and January 31, were $0.72, $0.73, and $0.76, respectively. Nance amortizes all premiums and discounts on forward contracts and closes its books on December 31.

Required:

A. Prepare all journal entries relative to the above to be made by Nance on October 1, 2010.
B. Prepare all journal entries relative to the above to be made by Nance on December 31, 2010.
C. Compute the transaction gain or loss on the forward contract that would be recorded in 2011. Indicate clearly whether the amount is a gain or loss.

12-5 On October 1, 2010, Kline Company shipped equipment to a foreign customer for a foreign currency (FC) price of FC 3,000,000 due on January 31, 2011. All revenue realization criteria were satisfied and accordingly the sale was recorded by Kline Company on October 1. Simultaneously, Kline entered into a forward contract to sell 3,000,000 FCU on January 31, 2011 for $1,200,000. Payment was received from the foreign customer on January 31, 2011. Spot rates on October 1, December 31, and January 31 were $0.42, $0.425, and $0.435, respectively. Kline amortizes all premiums and discounts on forward contracts and closes its books on December 31.

Required:
Prepare all journal entries relative to the above to be made by Kline during 2010 and 2011.

12-6 On July 15, Worth, Inc. purchased 88,500,000 yen worth of parts from a Tokyo company paying 20% down, and the balance is due in 90 days. Interest is payable at a rate of 8% on the unpaid balance. The exchange rate on July 15, was $1.00 = 118 Japanese yen. On October 13, the exchange rate was $1.00 = 114 Japanese yen.

Required:
Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S. dollars.

12-7 On November 1, 2010, Bisk Corporation, a calendar-year U.S. Corporation, invested in a speculative contract to purchase 700,000 euros on January 31, 2011, from a German brokerage firm. Bisk agreed to buy 700,000 euros at a fixed price of $1.46 per euro. The brokerage firm agreed to send 700,000 euros to Bisk on January 31, 2011. The spot rates for euros are:

November 1, 2010 1 euro = 1.45
December 31, 2010 1 euro = 1.43
January 31, 2011 1 euro = 1.44
Required:
Prepare the journal entries that Bisk would record on November 1, December 31, and January 31.

12-8 Consider the following information:

1. On November 1, 2011, a U.S. firm contracts to sell equipment (with an asking price of 500,000 pesos) in Mexico. The firm will take delivery and will pay for the equipment on February 1, 2012.

2. On November 1, 2011, the company enters into a forward contract to sell 500,000 pesos for $0.0948 on February 1, 2012.

3. Spot rates and the forward rates for February 1, 2012, settlement were as follows (dollars per peso):

Forward Rate
Spot Rate for 2/1/12
November 1, 2011 $0.0954 $0.0948
Balance sheet date (12/31/11) 0.0949 0.0944
February 1, 2012 0.0947

4. On February 1, the equipment was sold for 500,000 pesos. The cost of the equipment was $20,000.

Required:
Prepare all journal entries needed on November 1, December 31, and February 1 to account for the forward contract, the firm commitment, and the transaction to sell the equipment.

Short Answer

1. Accounting for a foreign currency transaction involves the terms measured and denominated. Describe a foreign currency transaction and distinguish between the terms measured and denominated.
2. There are a number of business situations in which a firm may acquire a forward exchange contract. Identify three common situations in which a forward exchange contract can be used as a hedge.

Short Answer Questions from the Textbook

1. Define currency exchange rates and distinguish between “direct” and “indirect” quotations.

2. Explain why a firm is exposed to an added risk when it enters into a transaction that is to be settled in a foreign currency.

3. Name the three stages of concern to the accountant in accounting for import–export transactions. Briefly explain the accounting for each stage.

4. How should a transaction gain or loss be reported that is related to an unsettled receivable recorded when the firm’s inventory was exported?

5. A U.S. firm carried a receivable for 100,000 yen. Assuming that the direct exchange rate declined from $.009 at the date of the transaction to $.006at the balance sheet date, compute the transaction gain or loss. What balance would be reported for the receivable in the firm’s balance sheet?

6. Explain what is meant by the “two-transaction method” in recording exporting or importing trans-actions. What support is given for this method?

7. Describe a forward exchange contract.

8. Explain the effects on income from hedging a foreign currency exposed net asset position or net liability position.

9. What criteria must be satisfied for a foreign currency transaction to be considered a hedge of an identifiable foreign currency commitment?

10. The FASB classifies forward contracts as those acquired for the purpose of hedging and those acquired for the purpose of speculation. What main differences are there in accounting for these two classifications?

11. How are foreign currency exchange gains and losses from hedging a forecasted transaction handled?

12. What is a put option, and how might it be used to hedge a forecasted transaction?

13. Define a derivative instrument, and describe the keystones identified by the FASB for the ac-counting for such instruments.

14. Differentiate between forward-based derivatives and option-based derivatives.

15. List some of the criteria laid out by the FASB that are required for a gain or loss on forecasted trans-actions (a cash flow hedge) to be excluded from the income statement. If these criteria are satisfied, where are the gains or losses reported, and when (if ever) are they shown in the income statement? What is the rationale for this treatment?

Business Ethics Question from Textbook

Executive stock options (ESOs) are used to provide incentives for executives to improve company performance. ESOs are usually granted “at-the-money,” meaning that the exercise price of the options is set to equal the market price of the underlying stock on the grant date. Clearly, executives would prefer to be granted options when the stock price (and thus the exercise price) is at its lowest. Backdating options is the practice of choosing a past date when the market price was particularly low. Backdating has not, in the past, been illegal if no documents are forged, if communicated to the shareholders, and if properly reflected in earnings and in taxes.

1. Since backdating gives the executive an “instant” profit, why wouldn’t the firm simply grant an option with the exercise price lower than the cur-rent market price?

2. Suppose the executive was not involved in back-dating the ESOs. Does the executive face any ethical issues?

ANSWER KEY (Chapter 12)

Chapter 13

Translation of Financial Statements of Foreign Affiliates

Multiple Choice

1. When translating foreign currency financial statements for a company whose functional currency is the U.S. dollar, which of the following accounts is translated using historical exchange rates?

Notes Payable Equipment
a. Yes Yes
b. Yes No
c. No No
d. No Yes

2. Under the temporal method, monetary assets and liabilities are translated by using the exchange rate existing at the:
a. beginning of the current year.
b. date the transaction occurred.
c. balance sheet date.
d. None of these.

3. The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called:
a. verification.
b. translation.
c. remeasurement.
d. None of these.

4. Which of the following would be restated using the average exchange rate under the temporal method?
a. cost of goods sold
b. depreciation expense
c. amortization expense
d. None of these

5. Paid-in capital accounts are translated using the historical exchange rate under:
a. the current rate method only.
b. the temporal method only.
c. both the current rate and temporal methods.
d. neither the current rate nor temporal methods.

6. Which of the following would be restated using the current exchange rate under the temporal method?
a. Marketable securities carried at cost.
b. Inventory carried at market.
c. Common stock.
d. None of these.

7. The translation adjustment that results from translating the financial statements of a foreign subsidiary using the current rate method should be:
a. included as a separate item in the stockholders’ equity section of the balance sheet.
b. included in the determination of net income for the period it occurs.
c. deferred and amortized over a period not to exceed forty years.
d. deferred until a subsequent year when a loss occurs and offset against that loss.

8. Average exchange rates are used to translate certain items from foreign financial statements into U.S. dollars. Such averages are used in order to:
a. smooth out large translation gains and losses.
b. eliminate temporary fluctuation in exchange rates that may be reversed in the next fiscal period.
c. avoid using different exchange rates for some revenue and expense accounts.
d. approximate the exchange rate in effect when the items were recognized.

9. When the functional currency is identified as the U.S. dollar, land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated using the:
a. historical rate in effect when the land was purchased.
b. current rate in effect at the balance sheet date.
c. forward rate.
d. average exchange rate for the current period.

10. The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the U.S. dollar is the:
a. current exchange rate.
b. average exchange rate for the current year.
c. historical exchange rate in effect when the plant asset was acquired or the date of acquisition, whichever is later.
d. forward rate.

11. The following balance sheet accounts of a foreign subsidiary at December 31, 2011, have been translated into U.S. dollars as follows:
Translated at
Current Rates Historical Rates
Accounts receivable, current $ 600,000 $ 660,000
Accounts receivable, long-term 300,000 324,000
Inventories carried at market 180,000 198,000
Goodwill 190,000 220,000
$1,270,000 $1,402,000

What total should be included in the translated balance sheet at December 31, 2011, for the above items? Assume the U.S. dollar is the functional currency.
a. $1,270,000
b. $1,288,000
c. $1,300,000
d. $1,354,000

12. A foreign subsidiary’s functional currency is its local currency which has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating

Wages expense Sales to customers
a. Yes Yes
b. Yes No
c. No No
d. No Yes

13. A wholly owned subsidiary of a U.S. parent company has certain expense accounts for the year ended December 31, 2011, stated in local currency units (LCU) as follows:
LCU
Depreciation of equipment (related assets
were purchased January 1, 2009) 375,000
Provision for doubtful accounts 250,000
Rent 625,000

The exchange rates at various dates are as follows:
Dollar equivalent
of 1 LCU
December 31, 2011 $0.50
Average for year ended December 31, 2011 0.55
January 1, 2009 0.40

Assume that the LCU is the subsidiary’s functional currency and that the charges to the expense accounts occurred approximately evenly during the year. What total dollar amount should be included in the translated income statement to reflect these expenses?

a. $687,500
b. $625,000
c. $550,000
d. $500,000

14. If the functional currency is determined to be the U.S. dollar and its financial statements are prepared in the local currency, SFAS 52, requires which of the following procedures to be followed?
a. Translate the financial statements into U.S. dollars using the current rate method.
b. Remeasure the financial statements into U.S. dollars using the temporal method.
c. Translate the financial statements into U.S. dollars using the temporal method.
d. Remeasure the financial statements into U.S. dollars using the current rate method.

15. P Company acquired 90% of the outstanding common stock of S Company which is a foreign company. The acquisition was accounted for using the purchase method. In preparing consolidated statements, the paid-in capital of S Company should be converted at the:
a. exchange rate effective when S Company was organized.
b. exchange rate effective on the date of purchase of the stock of S Company by P Company.
c. average exchange rate for the period S Company stock has been upheld by P Company.
d. current exchange rate.

16. In preparing consolidated financial statements of a U.S. parent company and a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:
a. of the country the parent is located.
b. of the country the subsidiary is located.
c. in which the subsidiary primarily generates and spends cash.
d. in which the subsidiary maintains its accounting records.

17. Gains from remeasuring a foreign subsidiary’s financial statements from the local currency, which is not the functional currency, into the parent company’s currency should be reported as a(n):
a. other comprehensive income item.
b. extraordinary item (net of tax).
c. part of continuing operations.
d. deferred credit.

18. Assuming no significant inflation, gains resulting from the process of translating a foreign entity’s financial statements from the functional currency to U.S. dollars should be included as a(n):
a. other comprehensive income item.
b. extraordinary item (net of tax).
c. part of continuing operations.
d. deferred credit.

19. A foreign subsidiary’s functional currency is its local currency and inflation of over 100 percent has been experienced over a three-year period. For consolidation purposes, SFAS No. 52 requires the use of:
a. the current rate method only.
b. the temporal method only
c. both the current rate and temporal methods.
d. neither the current rate or the temporal method.

20. The objective of remeasurement is to:
a. produce the same results as if the books were maintained in the currency of the foreign entity’s largest customer.
b. produce the same results as if the books were maintained solely in the local currency.
c. produce the same results as if the books were maintained solely in the functional currency.
d. None of the above.

Problems

13-1 Ramsey, Inc. owns a company that operates in France. Account balances in francs for the subsidiary are shown below:

2011
January 1 December 31
Cash and Receivables 24,000 26,000
Supplies 1,000 500
Property, Plant, and Equipment 52,500 49,000
Accounts Payable (11,500) (5,500)
Long-term Notes Payable (19,000) (11,000)
Common Stock (30,000) (30,000)
Retained Earnings (17,000) (17,000)
Dividends-Declared & Paid on Dec 31 —- 3,000
Revenues —- (30,000)
Operating Expenses —- 15,000
Totals -0- -0

Exchange rates for 2011 were as follows:
January 1 $0.22
Average for the year 0.19
December 31 0.18

Revenues were earned and operating expenses, except for depreciation and supplies used, were incurred evenly throughout the year. No purchases of supplies or plant assets were made during the year.

Required:
A. Prepare a schedule to compute the translation adjustment for the year, assuming the subsidiary’s functional currency is the franc.

B. Prepare a schedule to compute the translation gain or loss, assuming the subsidiary’s functional currency is the U.S. dollar.

13-2 Sloop Sails Corporation, a U.S. company, operates a 100%-owned British subsidiary, Sewart Corporation. The U.S. dollar is the functional currency of the subsidiary. Financial statements for the subsidiary for the fiscal year-end December 31, 2011, are as follows:

Sewart Corporation
Income Statement
Pounds
Sales 650,000
Cost of Goods Sold
Beginning Inventory 310,000
Purchases 265,000
Goods Available For Sale 575,000
Less: Ending Inventory 285,000
Cost of Goods Sold 290,000
Depreciation 79,000
Selling and Admin. Expenses 155,000
Income Taxes 32,000 556,000
Net Income 94,000

Sewart Corporation
Partial Balance Sheet

Current Assets Current Liabilities
Cash 155,000 Notes Payable 78,000
Accts. Rec. 171,000 Accts. Payable 165,000
Inventories 285,000 Other Current Liab. 51,000
611,000 294,000
Long-term Liab. 250,000
(issued July 1, 2009)

Other Information:
1. Equipment costing 340,000 pounds was acquired July 1, 2009, and 38,000 was acquired June 30, 2011. Depreciation for the period was as follows:
Equipment – 2009 acquisitions 66,000
– 2011 acquisitions 6,000

2. The beginning inventory was acquired when the exchange rate was $1.77. The inventory is valued on a FIFO basis. Purchases and the ending inventory were acquired evenly throughout the period.

3. Dividends were paid by the subsidiary on June 30 amounting to 156,000 pounds.

4. Sales were made and all expenses were incurred uniformly throughout the year.

5. Exchange rates for the pound on various dates were:

July 1, 2009 $1.79
Jan. 1, 2011 1.75
June 30, 2011 1.74
Dec. 31, 2011 1.71
Average for 2011 1.73
13-2 (Continued)
Required:
A. Prepare a schedule to determine the translation gain or loss for 2010, assuming the net monetary liability position on January 1, 2011, was 180,000 pounds.

B. Compute the dollar amount that each of the following would be reported at in the 2011 financial statements:
1. Cost of Goods Sold.
2. Depreciation Expense.
3. Equipment.

13-3 Accounts are listed below for a foreign subsidiary that maintains its books in its local currency. The equity interest in the subsidiary was acquired in a purchase transaction. In the space provided, indicate the exchange rate that would be used to translate the accounts into dollars assuming the functional currency was identified (a) as the U.S. dollar and (b) as the foreign entity’s local currency. Use the following letters to identify the exchange rate:
H – Historical exchange rate
C – Current exchange rate
A – Average exchange rate for the current period

Exchange rate if the
functional currency is:
Account U.S. Dollar Local currency

1. Bonds Payable (issued 01/01/08) ___________ ______________
2. Office Supplies ___________ ______________
3. Dividends Declared ___________ ______________
4. Common Stock ___________ ______________
5. Additional Paid-In Capital ___________ ______________
6. Inventory Carried at Cost ___________ ______________
7. Short-term Notes Payable ___________ ______________
8. Accumulated Depreciation ___________ ______________
9. Cash ___________ ______________
10. Marketable Securities (carried
at market) ___________ ______________
11. Cost of Goods Sold ___________ ______________
12. Sales ___________ ______________
13. Accounts Receivable ___________ ______________
14. Depreciation Expense ___________ ______________
15. Income Tax Expense ___________ ______________

Use the following information to answer Problems 13-4 and 13-5.

On January 2, 2011, Promo Inc., a U.S. parent company, purchased a 100% interest in Spot Company, a subdivision located in Switzerland. The purchase method of accounting was used to account for the acquisition. The 2011 financial statements for Spot Company, the subsidiary, in Swiss francs were as follows:

Comparative Balance Sheets
Jan. 2 Dec. 31
Cash 15,000 33,000
Accounts receivable 45,000 49,500
Plant and equipment (net) (purchased 6/30/08) 75,000 67,500
Land (purchased 6/30/08) 45,000 45,000
Total 180,000 195,000

Accounts payable 13,500 18,000
Long-term notes payable (issued 6/30/08) 31,500 27,000
Common stock (issued 6/30/08) 90,000 90,000
Retained earnings 45,000 60,000
Total 180,000 195,000

Income Statement
Revenues 180,000
Operating expenses including depreciation
of 7,500 francs 135,000
Net income 45,000
Beginning retained earnings 45,000
90,000
Dividends declared and paid 30,000
Ending retained earnings 60,000

Sales were earned and operating expenses were incurred evenly during the year.

Exchange rates for the franc at various dates are:
January 2, 2011 0.8600
December 31, 2011 0.8830
Average for 2011 0.8715
December 10, 2011, dividend payment date 0.8810
June 30, 2008 0.8316

13-4 Use the above information to answer the following question:

Required:
Translate the year-end financial statements of Spot Company, the foreign subsidiary, using the temporal method. Round numbers to the nearest dollar.

13-5 Use the above information to answer the following question:

Required:
Prepare a schedule to compute the translation gain or loss for Spot Company, assuming the temporal method of translation. Round numbers to the nearest dollar.

13-6 Bass Corporation, a U.S. Company, formed a subsidiary with a new company in London on January 1, 2011, by investing 500,000 British pounds in exchange for all of the subsidiary’s common stock. The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1, 2011. The building is being depreciated over a 40-year life by the straight-line method. The inventory is valued on an average cost basis. The British pound is the subsidiary’s functional currency and its reporting currency and has not experienced any abnormal inflation. Exchange rates for the pound on various dates were:

January 1, 2011 1 pound = 1.81
July 1, 2011 1 pound = 1.86
December 31, 2011 1 pound = 1.83
2011 average rate 1 pound = 1.82

The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2011.

Debits In Pounds
Cash 200,000
Accounts receivable 60,000
Inventory 80,000
Land 100,000
Building 300,000
Depreciation expense 3,750
Cost of goods sold 213,750
Other expenses 90,000
Total debits 1,047,500

Credits
Accumulated depreciation 3,750
Accounts payable 84,000
Accrued liabilities 16,750
Common stock 500,000
Retained earnings – 0 –
Sales revenue 443,000
Total credits 1,047,500

Required: Prepare the subsidiary’s:
A. Translated workpapers (round to the nearest dollar)
B. Translated income statement
C. Translated balance sheet

13-7 Using the information provided in Problem 13-6, use the temporal method instead of the current rate method.

Required: Prepare the subsidiary’s:
A. Translated workpapers (round to the nearest dollar)
B. Translated income statement
C. Translated balance sheet

13-8

On January 1, 2011, Roswell Systems, a U.S.-based company, purchased a controlling interest in Swiss Management Consultants located in Zurich, Switzerland. The acquisition was treated as a purchase transaction. The 2011 financial statements stated in Swiss francs are given below.

SWISS MANAGEMENT CONSULTANTS
Comparative Balance Sheets
January 1 and December 31, 2011
Jan. 1 Dec. 31

Cash and Receivables 30,000 84,000
Net Property, Plant, and Equipment 60,000 56,000
Totals 90,000 140,000

Accounts and Notes Payable 45,000 50,000
Common Stock 30,000 30,000
Retained Earnings 15,000 60,000
Totals 90,000 140,000

SWISS MANAGEMENT CONSULTANTS
Consolidated Income and Retained Earnings Statement
For the Year Ended December 31, 2011

Revenues 112,000
Operating Expenses including depreciation of 5,000 francs 45,000
Net income 67,000
Dividends Declared and Paid 22,000
Increase in Retained Earnings 45,000

Direct exchange rates for Swiss franc are:

U.S. Dollars per Franc
January 1, 2011 $0.9987
December 31, 2011 0.9321
Average for 2011 0.9654
Dividend declaration and payment date 0.9810

Required:
A. Translate the year-end balance sheet and income statement of the foreign subsidiary using the current rate method of translation.
B. Prepare a schedule to verify the translation adjustment.

Short Answer
1. To accomplish the objectives of translation, two translation methods are used depending on the functional currency of the foreign entity. Describe the two translation methods.

2. The translation process can be done using either the current rate method or the temporal method. Explain under what circumstances each of the methods is appropriate.

Short Answer Questions from the Textbook

1. What requirements must be satisfied if a foreign subsidiary is to be consolidated?

2. What is meant by an entity’s functional currency and what are the economic indicators identified by the FASB to provide guidance in selecting the functional currency?

3. The __________is the functional currency of a foreign subsidiary with operations that are relatively self-contained and integrated within the country in which it is located. In such cases, the__________ method of translation would be used to translate the accounts into dollars.

4. The __________is the functional currency of a foreign subsidiary that is a direct and integral component or extension of a U.S. parent company. In such cases, the __________method of translation is used to translate (remeasure) the accounts into dollars.

5. Which method of translation is used to convert the financial statements when a foreign subsidiary operates in a highly inflationary economy?

6. Define remeasurement.

7. Under the current rate method, how are assets and liabilities that are stated in a foreign currency translated?

8. Under the current rate method, describe how the various balance sheet accounts are translated (including the equity accounts) and how this translation affects the computation of various ratios (such as debt to equity or the current ratio). In particular, discuss whether or not the ratios will change when computed in local currencies and compared to their calculations (after translation) using the parent’s currency.

9. What is the objective of the temporal method of translation?

10. Assuming that the temporal method is used, how are revenue and expense items in foreign currency financial statements converted?

11. A translation adjustment results from the process of translating financial statements of a foreign subsidiary from its functional currency into dollars. Where is the translation adjustment reported in the financial statements if the current rate method is used to translate the accounts?

Business Ethics Question from the Textbook

The Shady Tree Company is preparing to announce their quarterly earnings numbers. The company expectsto beat the analysts’ forecast of earnings by at least5cents a share. In anticipation of the increase instockvalue and before the release of the earnings numbers, the company issued stock options to the top executives in the firm, with the option price equal to today’s market price.
1. This type of executive stock option is often re-ferred to as “spring-loading.” Do you think this practice should be allowed? Does it provide in-formation about the integrity of the firm or is this just good business practice?
2. Do you think this practice violates the insider trading rules?

ANSWER KEY (Chapter 13)

Chapter 14

Reporting for Segments and for Interim Financial Periods

1. A component of an enterprise that may earn revenues and incur expenses, and about which management evaluates separate financial information in deciding how to allocate resources and assess performance is a(n)
a. identifiable segment.
b. operating segment.
c. reportable segment.
d. industry segment.

2. An entity is permitted to aggregate operating segments if the segments are similar regarding the
a. nature of the production processes.
b. types or class of customers.
c. methods used to distribute products or provide services.
d. all of these.

3. Which of the following is not a segment asset of an operating segment?
a. Assets used jointly by more than one segment.
b. Assets directly associated with a segment.
c. Assets maintained for general corporate purposes.
d. Assets used exclusively by a segment.

4. SFAS No. 131 requires the disclosure of information on an enterprise’s operations in different industries for
1. each annual period presented.
2. each interim period presented.
3. the current period only.
a. 1
b. 2
c. 3
d. both 1 and 2

5. Which of the following is not required to be disclosed by SFAS No. 131?
a. Information concerning the enterprise’s products.
b. Information related to an enterprise’s foreign operations.
c. Information related to an enterprise’s major suppliers.
d. All of the above are required disclosures.

6. To determine whether a substantial portion of a firm’s operations are explained by its segment information, the combined revenue from sales to unaffiliated customers of all reportable segments must constitute at least
a. 10% of the combined revenue of all operating segments.
b. 75% of the combined revenue of all operating segments.
c. 10% of the combined revenue from sales to unaffiliated customers of all operating segments.
d. 75% of the combined revenue from sales to unaffiliated customers of all operating segments.

7. A segment is considered to be significant if its
1. reported profit is at least 10% of the combined profit of all operating segments.
2. reported profit (loss) is at least 10% of the combined reported profit of all operating segments not reporting a loss.
3. reported profit (loss) is at least 10% of the combined reported loss of all operating segments that reported a loss.
a. 1
b. 2
c. 3
d. both 2 and 3

8. Which of the following disclosures is not required to be presented for a firm’s reportable segments?
a. Information about segment assets
b. Information about the bases for measurement
c. Reconciliation of segment amounts and consolidated amounts for revenue, profit or loss, assets, and other significant items.
d. All of these must be presented.

9. Current authoritative pronouncements require the disclosure of segment information when certain criteria are met. Which of the following reflects the type of firm and type of financial statement for which this disclosure is required?
a. Annual financial statements for publicly held companies.
b. Annual financial statements for both publicly held and nonpublicly held companies.
c. Annual and interim financial statements for publicly held companies.
d. Annual and interim financial statements for both publicly held and nonpublicly held companies.

10. An enterprise determines that it must report segment data in annual reports for the year ended December 31, 2011. Which of the following would not be an acceptable way of reporting segment information?
a. Within the body of the financial statements, with appropriate explanatory disclosures in the footnotes
b. Entirely in the footnotes to the financial statements.
c. As a special report issued separately from the financial statements.
d. In a separate schedule that is included as an integral part of the financial statements.

11. Selected data for a segment of a business enterprise are to be separately reported in accordance with SFAS No. 131 when the revenues of the segment is 10% or more of the combined
a. net income of all segments reporting profits.
b. external and internal revenue of all reportable segments.
c. external revenue of all reportable segments.
d. revenues of all segments reporting profits.

12. Long Corporation’s revenues for the year ended December 31, 2011, were as follows
Consolidated revenue per income statement $800,000
Intersegment sales 105,000
Intersegment transfers 35,000
Combined revenues of all operating segments $940,000

Long has a reportable segment if that segment’s revenues exceed
a. $80,000.
b. $90,500.
c. $94,000.
d. $14,000.

13. Revenue test
(dollars in thousands)
Wholesale Retail Finance
Segment Segment Segment
Sales to unaffiliated customers $3,600 $1,500 $-0-
Sales – intersegment 400 240 -0-
Loan interest income – intersegment -0- 120 900
Loan interest income – unaffiliated -0- 240 80
Income from equity method investees -0- 280 -0-

Determine the amount of revenue for each of the three segments that would be used to identify the reportable industry segments in accordance with the revenues test specified by SFAS 131.

Wholesale Retail Finance
a. $3,600 $1,500 $ -0-
b. 4,000 1,740 -0-
c. 4,000 1,980 980
d. 4,000 2,380 980

14. Which of the following is not part of the information about foreign operations that is required to be disclosed?
a. Revenues from external customers
b. Operating profit or loss, net income, or some other common measure of profitability
c. Capital expenditures
d. Long-lived assets

15. Eaton, Inc., discloses supplemental industry segment information. The following data are available for 2011.
Traceable
Segment Sales operating expenses
A $420,000 $255,000
B 480,000 300,000
C 300,000 165,000
$1,200,000 $720,000

Additional 2011 expenses, not included above, are as follows:

Indirect operating expenses $240,000
General corporate expenses 180,000

Appropriate common expenses are allocated to segments based on the ratio of a segment’s sales to total sales. What should be the operating profit for Segment C for 2011?
a. $135,000
b. $ 75,000
c. $ 105,000
d. $ 30,000

16. Gant Company has four manufacturing divisions, each of which has been determined to be a reportable segment. Common operating costs are appropriately allocated on the basis of each division’s sales in relation to Gant’s aggregate sales. Gant’s Delta division accounted for 40% of Gant’s total sales in 2011. For the year ended December 31, 2011, Delta had sales of $5,000,000 and traceable costs of $3,600,000. In 2011, Gant incurred operating costs of $350,000 that were not directly traceable to any of the divisions. In addition, Gant incurred interest expense of $360,000 in 2011. In reporting supplementary segment information, how much should be shown as Delta’s operating profit for 2011?
a. $1,400,000
b. $1,256,000
c. $1,260,000
d. $1,116,000

17. For external reporting purposes, it is appropriate to use estimated gross profit rates to determine the ending inventory value for

Interim Annual
Reporting Reporting
a. No No
b. No Yes
c. Yes No
d. Yes Yes

18. Inventory losses from market declines that are expected to be temporary
a. should be recognized in the interim period in which the decline occurs.
b. should be recognized in the last (fourth) quarter of the year in which the decline occurs.
c. should not be recognized.
d. none of these.

19. Gains and losses that arise in an interim period should be
a. recognized in the interim period in which they arise.
b. recognized in the last quarter of the year in which they arise.
c. allocated equally among the remaining interim periods.
d. deferred and included only in the annual income statement.

20. If a cumulative effect type accounting change is made during the first interim period of a year
a. no cumulative effect of the change should be included in net income of the period of change.
b. the cumulative effect of the change on retained earnings at the beginning of the year should be included in net income of the first interim period.
c. the cumulative effect of the change should be allocated to the current and remaining interim periods of the year.
d. none of these.

21. Which of the following does not have to be disclosed in interim reports?
a. Seasonal costs or expenses.
b. Significant changes in estimates.
c. Disposal of a segment of a business.
d. All of these must be disclosed.

22. For interim financial reporting, the effective tax rate should reflect

Anticipated Extraordinary
Tax Credits Items
a. Yes Yes
b. Yes No
c. No Yes
d. No No

23. Companies using the LIFO method may encounter a liquidation of base period inventories at an interim date that is expected to be replaced by the end of the year. In these cases, cost of goods sold should be charged with the
a. cost of the most recent purchases.
b. average cost of the liquidated LIFO base.
c. expected replacement cost of the liquidated LIFO base.
d. none of these.

24. In considering interim financial reporting, how did the Accounting Principles Board conclude that each reporting should be viewed?
a. As a “special” type of reporting that need not follow generally accepted accounting principles.
b. As useful only if activity is evenly spread throughout the year so that estimates are unnecessary.
c. As reporting for a basic accounting period.
d. As reporting for an integral part of an annual period.

25. When a company issues interim financial statements, extraordinary items should be
a. allocated to the current and remaining interim periods of the current year on a pro rata basis.
b. deferred and included only in the annual income statement.
c. included in the determination of net income in the interim period in which they occur.
d. charged or credited directly to retained earnings so that comparisons of interim results of operations will not be distorted.

26. If annual major repairs made in the first quarter and paid for in the second quarter clearly benefit the entire year, when should they be expensed?
a. An allocated portion in each of the last three quarters
b. An allocated portion in each quarter of the year
c. In full in the first quarter
d. In full in the second quarter

27. During the second quarter of 2011, Dodge Company sold a piece of equipment at a gain of $90,000. What portion of the gain should Dodge report in its income statement for the second quarter of 2011?
a. $90,000
b. $45,000
c. $30,000
d. $ -0-

28. In January 2011, Abel Company paid $200,000 in property taxes on its plant for the calendar year 2011. Also in January 2011, Abel estimated that its year-end bonuses to executives for 2011 would be $800,000. What is the amount of expenses related to these two items that should be reflected in Abel’s quarterly income statement for the three months ended June 30, 2011 (second quarter)?
a. $ -0-
b. $250,000
c. $ 50,000
d. $200,000

29. For interim financial reporting, a company’s income tax provision for the second quarter of 2011 should be determined using the
a. statutory tax rate for 2011.
b. effective tax rate expected to be applicable for the full year of 2011 as estimated at the end of the first quarter of 2011.
c. effective tax rate expected to be applicable for the full year of 2011 as estimated at the end of the second quarter of 2011.
d. effective tax rate expected to be applicable for the second quarter of 2011.

30. Which of the following reporting practices is permissible for interim financial reporting?
a. Use of the gross profit method for interim inventory pricing.
b. Use of the direct costing method for determining manufacturing inventories.
c. Deferral of unplanned variances under a standard cost system until year-end.
d. Deferral of inventory market declines until year-end.

31. Which of the following statements most accurately describes interim period tax expense?
a. The best estimate of the annual tax rate times the ordinary income (loss) for the quarter.
b. The best estimate of the annual tax rate times income (loss) for the year to date less tax expense (benefit) recognized in previous interim periods.
c. Average tax rate for each quarter, including the current quarter, times the current income (loss).
d. The previous year’s actual effective tax rate times the current quarter’s income.

32. The computation of a company’s third quarter provision for income taxes should be based upon earnings
a. for the quarter at an expected annual effective income tax rate.
b. for the quarter at the statutory rate.
c. to date at an expected annual effective income tax rate less prior quarters’ provisions.
d. to date at the statutory rate less prior quarters’ provisions.

33. Finney, a calendar year company, has the following income before income tax provision and estimated effective annual income tax rates for the first three quarters of 2011:

Income Before Estimated Effective
Income Tax Annual Tax Rate
Quarter Provision at the End of Quarter
First $120,000 25%
Second 160,000 25%
Third 200,000 30%

Finney’s income tax provision in its interim income statement for the third quarter should be
a. $74,000.
b. $60,000.
c. $50,000.
d. $144,000.

34. An inventory loss from a market price decline occurred in the first quarter. The loss was not expected to be restored in the fiscal year. However, in the third quarter the inventory had a market price recovery that exceeded the market decline that occurred in the first quarter. For interim reporting, the dollar amount of net inventory should
a. decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the market price recovery.
b. decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter.
c. not be affected in the first quarter and increase in the third quarter by the amount of the market price recovery that exceeded the amount of the market price decline.
d. not be affected in either the first quarter or the third quarter.

35. Advertising costs may be accrued or deferred to provide an appropriate expense in each period for
Interim Annual
Reporting Reporting
a. Yes No
b. Yes Yes
c. No No
d. No Yes

Problems

14-1 The following information is available for Torrey Company for 2011:

a. In early April Torrey made major repairs to its equipment at a cost of $90,000. These repairs will benefit the remainder of 2011 operations.

b. At the end of May, Torrey sold machinery with a book value of $35,000 for $45,000.

c. An inventory loss of $60,000 from market decline occurred in July. In the fourth quarter the inventory had a market value recovery that exceeded the market decline by $30,000.

Required:
Compute the amount of expense/loss that would appear in Torrey Company’s June 30, September 30, and December 31, 2011, quarterly financial statements.

14-2 Stein Corporation’s operations involve three industry segments, X, Y, and Z. During 2011, the operating profit (loss) of each segment was:
Operating
Segment Profit (Loss)
X $ 600
Y 8,100
Z (6,300)

Required:
Determine which of the segments are reportable segments.

14-3 Bass Industries operates in four different industries. Information concerning the operations of these industries for the year 2011 is:

Revenue
Industry Operating Segment
Segment Total Intersegment Profit (Loss) Assets
A $ 24,000 $4,200 $ 2,700 $ 22,400
B 18,000 2,200 (2,000) 25,200
C 90,000 14,000 3,600 70,000
D 168,000 -0- 23,700 162,400
$300,000 $28,000 $280,000

Required:
Complete the following schedule to determine which of the above segments must be treated as reportable segments.
10% Test For
Segment Revenue Op. Profit (Loss) Segment Assets Reportable?
A

B

C

D

14-4 Logan Company prepares quarterly financial statements. The following information is available concerning calendar year 2011:

Estimated full-year earnings $3,000,000
Full-year permanent differences:
Penalty for pollution 150,000
Estimated dividend income exclusion 60,000
Actual pretax earnings, 1/1/11 to 3/31/11 480,000
Nominal income tax rate 40%

Required:
Compute the income tax provision for the first quarter of 2011.

14-5 XYZ Corporation has eight industry segments with sales, operating profit and loss, and identifiable assets at and for the year ended December 31, 2011, as follows:

Sales to Unaffiliated Customers Sales to Affiliated Customers Profit or (Loss) Segment
Assets
Steel $1,350,000 $150,000 $265,000 $2,250,000
Auto Parts 1,200,000 — 450,000 1,430,000
Coal Mine 600,000 450,000 (300,000) 1,200,000
Textiles 530,000 220,000 150,000 750,000
Paint 1,120,000 380,000 300,000 1,050,000
Lumber 710,000 — (75,000) 600,000
Leisure Time 690,000 — 110,000 450,000
Electronics 600,000 — 300,000 670,000
Total $6,800,000 $1,200,000 $1,200,000 $8,400,000

Required:
A. Identify the segments, which are reportable segments under one or more of the 10 percent revenue, operating profit, or assets tests.
B. After reportable segments are determined under the 10 percent tests, they must be reevaluated under a 75 percent revenue test before a final determination of reportable segments can be made. Under this 75 percent test, identify if any other segments may have to be reported.

14-6 Ace Company, which uses the FIFO inventory method, had 508,000 units in inventory at the beginning of the year at a FIFO cost per unit of $20. No purchases were made during the year. Quarterly sales information and end-of-quarter replacement cost figures follow:

End-of- Quarter
Quarter Unit Sales Replacement Cost
1 200,000 $17
2 60,000 18
3 85,000 13
4 61,000 18
The market decline in the first quarter was expected to be nontemporary. Declines in other quarters were expected to be permanent.

Required:
Determine cost of goods sold for the four quarters and verify the amounts by computing cost of goods sold using the lower-of-cost-or-market method applied on an annual basis.

14-7 Barr Company’s actual earnings for the first two quarters of 2011 and its estimate during each quarter of its annual earnings are:

Actual first-quarter earnings $ 800,000
Actual second-quarter earnings 1,020,000
First-quarter estimate of annual earnings 2,700,000
Second-quarter estimate of annual earnings 2,830,000

Barr Company estimated its permanent differences between accounting income and taxable income for 2011 as:

Environmental violation penalties $ 45,000
Dividend income exclusion 320,000

These estimates did not change during the second quarter. The combined state and federal tax rate for Barr Company for 2011 is 40%.

Required:
Prepare journal entries to record Barr Company’s provisions for income taxes for each of the first two quarters of 2011.

Short Answer
1. In SFAS No. 131, the FASB requires all public companies to report a variety of information for reportable segments. Define a reportable segment and identify the information to be reported for each reportable segment.

2. Publicly owned companies are usually required to file some type of quarterly (interim) report as part of the agreement with the stock exchanges that list their stock. Indicate two problems with interim reporting and GAAP’s position on this reporting.

Short Answer Questions from the Textbook

1. For what types of companies would segmented financial reports have the most significance? Why?

2. Why do financial statement users (financial analysts, for example) need information about seg- ments of a firm?

3. Define the following: (a)Operating segment.(b)Reportable segment.

4. Describe the guidelines to be used in determining (a) what constitutes an operating segment, and (b) whether a specific operating segment is a significant segment.

5. List the three major types of enterprise wide information disclosures required by SFAS No. 131[ASC 280], and explain how the firm’s designation of reportable segments affects these disclosures.

6. What segmental disclosures are required, if any, for interim reports?

7. What type of disclosure is required of a firm when the major portion of its operations takes place within a single reportable segment?

8. List the types of information that must be presented for each reportable segment of a com-pany under the rules of SFAS No. 131 [ASC 280].

9. Describe the methods that might be used to disclose reportable segment information.

10. What types of information must be disclosed about foreign operations under SFAS No. 131[ASC 280–10–50–40]?

11. How are foreign operations defined under SFASNo. 131 [ASC 280]?

12. If the operations of a firm in some foreign countries are grouped into geographic areas, what factors should be considered in forming the groups?

13. When must a firm present segmental disclosures for major customers? What is the reason for this requirement?

14. How are common costs distinguished from general corporate expenses for segmental purposes?

15. What is the purpose of interim financial reporting?

16. Some accountants hold the view that each interim period should stand alone as a basic ac-counting period, whereas others view each interim period as essentially an integral part of the annual period. Distinguish between these views.

17.Describe the basic procedure for computing in-come tax provisions for interim financial state-ments.

18.Describe how changes in estimates should be treated in interim financial statements.

19.What are the minimum disclosure requirements established ASC 270 for interim financial reports?

20.What is the general rule regarding the treatment of costs and expenses associated directly with revenues for interim reporting purposes?

Business Ethics Question from Textbook
SMC Inc. operates restaurants based on various themes, such as Mex-delight, Chinese for the Buffet, and Steak-it and Eat-it. The Steak-it and Eat-it restaurants have not been performing well recently, but SMC prefers not to disclose these details for fear that competitors might use the information to the detriment of SMC. The restaurants are located in various geographical locations, and management currently measures profits and losses and asset allocation by restaurant concept. How-ever, when preparing the segmental disclosures under SFAS No. 131 [ASC 280], the company reports the segment information by geographical location only. The company recently hired you to review the financial statements.
1.What disclosures should the company report for segment purposes?
2.The company’s CEO believed that the rules in SFAS No. 131 [ASC 280] are vague and that the company could easily support its decision to dis-close the segment data by geographic regions. What would you recommend to the CEO and how would you approach the issues?

ANSWER KEY (Chapter 14)

Chapter 15

Partnerships: Formation, Operation, and Ownership Changes

Multiple Choice

1. When a partner retires and withdraws assets in excess of his book value, the remaining partners absorb the excess
a. equally.
b. in their profit-sharing ratio.
c. based on their average capital balances.
d. based on their ending capital balances.

2. In a partnership, interest on capital investment is accounted for as a(n)
a. return on investment.
b. expense.
c. allocation of net income.
d. reduction of capital.

3. A partnership in which one or more of the partners are general partners and one or more are not is called a(n)
a. joint venture.
b. general partnership.
c. limited partnership.
d. unlimited partnership.

4. Which of the following is an advantage of a partnership?
a. mutual agency
b. limited life
c. unlimited liability
d. none of these

5. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of operation, the partnership incurs a $20,000 loss. The partners should share the losses
a. based on their average capital balances.
b. in a 2 to 1 ratio.
c. equally.
d. based on their ending capital balances.

6. When the goodwill method is used to record the admission of a new partner, total partnership capital increases by an amount
a. equal to the new partner’s investment.
b. greater than the new partner’s investment.
c. less than the new partner’s investment.
d. that may be more or less than the new partner’s investment.

7. The bonus and goodwill methods of recording the admission of a new partner will produce the same result if the:
1. new partner’s profit-sharing ratio equals his capital interest
2. old partners’ profit-sharing ratio in the new partnership is the same relatively as it was in the old partnership.
a. 1
b. 2
c. both 1 and 2 are met.
d. none of these.

8. When the goodwill method is used and the book value acquired is less than the value of the assets invested, total implied capital is computed by
a. multiplying the new partner’s capital interest by the capital balances of existing partners.
b. dividing the total capital balances of existing partners by their collective capital interest.
c. dividing the new partner’s investment by his (her) capital interest.
d. dividing the new partner’s investment by the existing partners’ collective capital interest.

9. The partnership of Adams and Baker was formed on February 28, 2011. At that date the following assets were invested:
Adams Baker
Cash $ 120,000 $200,000
Merchandise -0- 320,000
Building -0- 840,000
Furniture and equipment 200,000 -0-

The building is subject to a mortgage loan of $280,000, which is to be assumed by the partnership. The partnership agreement provides that Adams and Baker share profits or losses 30% and 70%, respectively. Baker’s capital account at February 28, 2011, should be
a. $1,080,000.
b. $1,360,000.
c. $1,176,000.
d. $952,000.

10. The following balance sheet information is for the partnership of Abel, Ball, and Catt:

Cash $ 210,000 Liabilities $ 510,000
Other assets 1,500,000 Abel, Capital (40%) 300,000
Ball, Capital (40%) 480,000
Catt, Capital (20%) 420,000
$1,710,000 $1,710,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages.
If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dent as a new 1/5 partner without recording goodwill or bonus, Dent should invest cash or other assets of
a. $427,500.
b. $240,000.
c. $300,000.
d. $342,000.

11. The following balance sheet information is for the partnership of Abel, Ball, and Catt:

Cash $ 210,000 Liabilities $ 510,000
Other assets 1,500,000 Abel, Capital (40%) 300,000
Ball, Capital (40%) 480,000
Catt, Capital (20%) 420,000
$1,710,000 $1,710,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages.
If assets on the initial balance sheet are fairly valued, Abel and Ball consent and Dent pays Catt $225,000 for his interest; the revised capital balances of the partners would be
a. Abel, $315,000; Ball, $495,000; Dent, $450,000.
b. Abel, $315,000; Ball, $495,000; Dent, $420,000.
c. Abel, $300,000; Ball, $570,000; Dent, $450,000.
d. Abel, $300,000; Ball, $480,000; Dent, $420,000.

12. Linda desires to purchase a one-fourth capital and profit and loss interest in the partnership of Hank, Greg, and Jim. The three partners agree to sell Linda one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $100,000. The payment is made directly to the individual partners. The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Linda follow

Percentage
Capital Interests in
Accounts Profits and Losses
Hank $168,000 50%
Greg 104,000 35
Jim 48,000 15
Total $320,000

All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the acquisition by Linda. Immediately after Linda’s acquisition, what should be the capital balances of Hank, Greg, and Jim, respectively?
a. $126,000; $78,000; $36,000
b. $156,000; $99,000; $45,000
c. $178,000; $111,000; $51,000
d. $208,000; $132,000; $60,000

13. At December 31, 2011, Barb and Kim are partners with capital balances of $250,000 and $150,000, and they share profits and losses in the ratio of 2:1, respectively. On this date, Jack invests $125,000 cash for a one-fifth interest in the capital and profit of the new partnership. The partners agree that the implied partnership goodwill is to be recorded simultaneously with the admission of Jack. The total implied goodwill of the firm is
a. $25,000.
b. $20,000.
c. $45,000.
d. $100,000.

14. Pete, Joe, and Ron are partners with capital balances of $135,000, $90,000, and $60,000, respectively. The partners share profits and losses equally. For an investment of $120,000 cash, Jerry is to be admitted as a partner with a one-fourth interest in capital and profits. Based on this information, the amount of Jerry’s investment can best be justified by which of the following?
a. Jerry will receive a bonus from the other partners upon his admission to the partnership.
b. Assets of the partnership were overvalued immediately prior to Jerry’s investment.
c. The book value of the partnership’s net assets were less than their fair value immediately prior to Jerry’s investment.
d. Jerry is apparently bringing goodwill into the partnership and his capital account will be credited for the appropriate amount.

15. The partnership of Amos, Cole, and Eddy had total capital of $570,000 on December 31, 2011 as follows:

Amos, Capital (30%) $180,000
Cole, Capital (45%) 255,000
Eddy, Capital (25%) 135,000
Total $570,000

Profit and loss sharing percentages are shown in parentheses. If Flynn purchases a 25 percent interest from each of the old partners for a total payment of $270,000 directly to the old partners
a. total partnership net assets can logically be revalued to $1,080,000 on the basis of the price paid by Flynn.
b. the payment of Flynn does not constitute a basis for revaluation of partnership net assets because the capital and income interests of the old partnership were not aligned.
c. total capital of the new partnership should be $760,000.
d. total capital of the new partnership will be $840,000 assuming no revaluation.

16. The partnership of Amos, Cole, and Eddy had total capital of $570,000 on December 31, 2011 as follows:

Amos, Capital (30%) $180,000
Cole, Capital (45%) 255,000
Eddy, Capital (25%) 135,000
Total $570,000

Profit and loss sharing percentages are shown in parentheses. Assume that Flynn became a partner by investing $150,000 in the Amos, Cole, and Eddy partnership for a 25 percent interest in capital and profits and that partnership net assets are not revalued. Flynn’s capital credit should be
a. $180,000.
b. $142,500.
c. $150,000.
d. $190,000.

17. The partnership of Amos, Cole, and Eddy had total capital of $570,000 on December 31, 2011 as follows:

Amos, Capital (30%) $180,000
Cole, Capital (45%) 255,000
Eddy, Capital (25%) 135,000
Total $570,000

Profit and loss sharing percentages are shown in parentheses.
Assume that Flynn became a partner by investing $100,000 in the Amos, Cole, and Eddy partnership for a 25 percent interest in the capital and profits, and the partnership assets are revalued. Under this assumption
a. Flynn’s capital credit will be $150,000.
b. Amos’s capital will be increased to $147,000.
c. total partnership capital after Flynn’s admission to the partnership will be $600,000.
d. net assets of the partnership will increase by $190,000, including Flynn’s interest.

18. In the absence of an agreement among the partners
a. interest is allowed on capital investments.
b. interest is charged on partners’ drawings.
c. interest is allowed on advances to the firm made by partners beyond agreed investments.
d. compensation is allowed partners for extra time devoted to the partnership.

19. The profit and loss sharing ratio should be
a. in the same ratio as the percentage interest owned by each partner.
b. based on relative effort contributed to the firm by the partners.
c. a weighted average of capital and effort contributions.
d. based on any formula that the partners choose.

20. The partnership agreement of Flynn, Gant, and Hill allows Gant a bonus of 10% of income after the bonus, salaries of $30,000 per partner and interest of 6% on average capital balances of $120,000, $150,000, and $180,000 for Flynn, Gant, and Hill, respectively. The amount of Gant’s bonus, assuming income before bonus, salaries, and interest of $315,000, is
a. $18,000.
b. $22,000.
c. $19,800.
d. $31,500.

21. Steve and Robby are partners operating an electronics repair shop. For 2011, net income was $50,000. Steve and Robby have salary allowances of $90,000 and $60,000, respectively, and remaining profits and losses are shared 4:6.
The division of profits would be:
a. $20,000 and $30,000
b. $50,000 and $-0-
c. $30,000 and $20,000
d. $25,000 and $25,000

22. Steve and Robby are partners operating an electronics repair shop. For 2011, net income was $50,000. Steve and Robby have salary allowances of $90,000 and $60,000, respectively, and remaining profits and losses are shared 4:6.
If their agreement specifies that salaries are allowed only to the extent of income, based on a prorata share of their salary allowances, the division of profits would be:
a. $20,000 and $30,000
b. $50,000 and $-0-
c. $30,000 and $20,000
d. $25,000 and $25,000

23. Carter, Wynn, and Norton are partners in a janitorial service. The business reported net income of $54,000 for 2011. The partnership agreement provides that profits and losses are to be divided equally after Wynn receives a $60,000 salary, Norton receives a $24,000 salary, and each partner receives 10% interest on his beginning capital balance. Beginning capital balances were $40,000 for Carter, $48,000 for Wynn, and $32,000 for Norton. Norton’s share of partnership income for 2011 is:
e. $68,800
f. $36,000
g. $31,200
h. $27,200

24. Bell and Carson are partners who share profits and losses 3:7. The capital accounts on January 1, 2011, are $120,000 and $160,000, respectively. Elston is to be admitted as a partner with a one-fourth interest in the capital and profits and losses by investing $80,000. Goodwill is not to be recorded. The capital balances after admission should be:
a. Bell, $117,000; Carson, $153,000; Elston, $90,000
b. Bell, $120,000; Carson, $160,000; Elston, $90,000
c. Bell, $123,000; Carson, $160,000; Elston, $80,000
i. Bell, $120,000; Carson, $167,000; Elston, $80,000

25. The balance sheet for the partnership of Nen, Pap, and Sup at January 1, 2011 follows. The partners share profits and losses in the ratio of 3:2:5, respectively.

Assets at cost $480,000

Liabilities $135,000
Nen, capital 75,000
Pap, capital 120,000
Sup, capital 150,000
$480,000

Nen is retiring from the partnership. By mutual agreement, the assets are to be adjusted to their fair value of $540,000 at January 1, 2011. Pap and Sup agree that the partnership will pay Nen $135,000 cash for his partnership interest. NO goodwill is to be recorded. What is the balance of Pap’s capital account after Nen’s retirement?
a. $138,000
b. $108,000
c. $120,000
d. $132,000

26. The following balance sheet information is for the partnership of Axe, Barr, and Cole:

Cash $ 210,000 Liabilities $ 510,000
Other assets 1,500,000 Axe, Capital (40%) 300,000
Barr, Capital (40%) 480,000
Cole, Capital (20%) 420,000
$1,710,000 $1,710,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages.
If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dent as a new 1/5 partner without recording goodwill or bonus, Dent should invest cash or other assets of
a. $427,500.
b. $240,000.
c. $300,000.
d. $342,000.

27. Susan desires to purchase a one-fourth capital and profit and loss interest in the partnership of Tony, Mary, and Ron. The three partners agree to sell Susan one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $125,000. The payment is made directly to the individual partners. The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Susan follow

Percentage
Capital Interests in
Accounts Profits and Losses
Tony $210,000 50%
Mary 130,000 35
Ron 60,000 15
Total $400,000

All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the acquisition by Susan. Immediately after Susan’s acquisition, what should be the capital balances of Tony, Mary, and Ron, respectively?
a. $157,500; $97,500; $45,000
b. $195,000; $123,750; $56,250
c. $222,500; $138,750; $63,750
d. $260,000; $165,000; $75,000

28. The partnership of Carr, Eddy, and Howe had total capital of $1,140,000 on December 31, 2011, as follows:

Carr, Capital (30%) $360,000
Eddy, Capital (45%) 510,000
Howe, Capital (25%) 270,000
Total $1,140,000

Profit and loss sharing percentages are shown in parentheses.
Assume that Klein became a partner by investing $300,000 in the Carr, Eddy, and Howe partnership for a 25 percent interest in capital and profits and that partnership net assets are not revalued. Klein’s capital credit should be
a. $360,000.
b. $285,000.
c. $300,000.
d. $380,000.

29. The partnership of Carr, Eddy, and Howe had total capital of $1,140,000 on December 31, 2011, as follows:

Carr, Capital (30%) $360,000
Eddy, Capital (45%) 510,000
Howe, Capital (25%) 270,000
Total $1,140,000

Profit and loss sharing percentages are shown in parentheses.
Assume that Klein became a partner by investing $300,000 in the Carr, Eddy, and Howe partnership for a 25 percent interest in the capital and profits, and the partnership assets are revalued. Under this assumption
a. Klein’s capital credit will be $300,000.
b. Carr’s capital will be increased to $394,000.
c. total partnership capital after Klein’s admission to the partnership will be $1,200,000.
d. net assets of the partnership will increase by $380,000 including Klein interest.

30. Newlin, Vick, and Morton are partners in a plumbing service. The business reported net income of $108,000 for 2011. The partnership agreement provides that profits and losses are to be divided equally after Vick receives a $60,000 salary, Morton receives a $24,000 salary, and each partner receives 10% interest on his beginning capital balance. Beginning capital balances were $40,000 for Newlin, $48,000 for Vick, and $32,000 for Morton. Vick’s share of partnership income for 2011 is:
a. $68,800.
b. $36,000.
c. $31,200.
d. $27,200.

Problems

15-1 Unruh, Grey, and Carter are partners with capital balances of $80,000, $200,000, and $120,000, respectively. Profits and losses are shared in a 3:2:1 ratio. Grey decided to withdraw and the partnership revalued its assets. The value of inventory was decreased by $20,000 and the value of land was increased by $50,000. Unruh and Carter then agreed to pay Grey $230,000 for his withdrawal from the partnership.

Required:
Prepare the journal entry to record Grey’s withdrawal under the
A. bonus method.
B. full goodwill method.

15-2 Dell and Gore are partners in an automobile repair business. Their respective capital balances are $425,000 and $275,000, and they share profits in a 3:2 ratio. Because of growth in their repair business, they decide to admit a new partner. Mann is admitted to the partnership, after which Dell, Gore, and Mann agree to share profits in a 3:2:1 ratio.

Required:
Prepare the necessary journal entries to record the admission of Mann in each of the following independent situations:

A. Mann invests $300,000 for a one-fourth capital interest, but will not accept a capital balance of less than his investment.

B. Mann invests $150,000 for a one-fifth capital interest. The partners agree that assets and the firm as a whole should be revalued.

C. Mann purchases a 20% capital interest from each partner. Dell receives $100,000 and Gore receives $50,000 directly from Mann.

15-3 Bryant, Milton, and Pine formed a partnership and agreed to share profits in a 3:1:2 ratio after recognition of 5% interest on average capital balances and monthly salary allowances of $3,750 to Milton and $3,000 to Pine. Average capital balances were as follows:

Bryant 300,000
Milton 240,000
Pine 180,000

Required:
Compute the net income (loss) allocated to each partner assuming the partnership incurred a $27,000 net loss.

15-4 Rice and Thome formed a partnership on January 2, 2011. Thome invested $120,000 in cash. Rice invested land valued at $30,000, which he had purchased for $20,000 in 2005. In addition, Rice possessed superior managerial skills and agreed to manage the firm. The partners agreed to the following profit and loss allocation formula:
a. Interest —8% on original capital investments.
b. Salary — $5,000 a month to Rice.
c. Bonus — Rice is to be allocated a bonus of 20% of net income after subtracting the bonus, interest, and salary.
d. Remaining profit is to be divided equally.

At the end of 2011 the partnership reported net income before interest, salaries, and bonus of $168,000.

Required:
Calculate the amount of bonus to be allocated to Rice.

15-5 Wynn and Yates are partners whose capital balances are $400,000 and $300,000 and who share profits 3:2. Due to a shortage of cash, Wynn and Yates agree to admit Zaun to the firm.

Required:
Prepare the journal entries required to record Zaun’s admission under each of the following assumptions:
(a) Zaun invests $200,000 for a 1/4 interest. The total firm capital is to be $900,000.
(b) Zaun invests $300,000 for a 1/4 interest. Goodwill is to be recorded.
(c) Zaun invests $150,000 for a 1/5 interest. Goodwill is to be recorded.
(d) Zaun purchases a 1/4 interest in the firm, with 1/4 of the capital of each old partner transferred to the account of the new partner. Zaun pays the partners cash of $250,000, which they divide between themselves.

15-6 The partners in the ABC partnership have capital balances as follows:
A. $70,000; B. $70,000 C. $105,000

Profits and losses are shared 30%, 20%, and 50%, respectively.

On this date, C withdraws and the partners agree to pay him $140,000 out of partnership cash.

Required:
A. Prepare journal entries to show three acceptable methods of recording the withdrawal. (Tangible assets are already stated at values approximating their fair market values.)

B. Which alternative would you recommend if you determined that the agreement to pay C $140,000 was not the result of arms length bargaining between C and the other partners? Why?

15-7 Agler, Bates and Colter are partners who share income in a 5:3:2 ratio. Colter, whose capital balance is $150,000, retires from the partnership.

Required:
Determine the amount paid to Colter under each of the following cases:

(1) $50,000 is debited to Agler capital account; the bonus approach is used.
(2) Goodwill of $60,000 is recorded; the partial goodwill approach is used.
(3) $66,000 is credited to Bates’ capital account; the total goodwill approach is used.

15-8 The partnership agreement of Stone, Miles, and Kiney provides for annual distribution of profit and loss in the following sequence:
– Miles, the managing partner, receives a bonus of 10% of net income.
– Each partner receives 5% interest on average capital investment.
– Residual profit or loss is to be divided 4:2:4.

Average capital investments for 2011 were:

Stone $270,000
Miles $180,000
Kiney $120,000

Required:
A. Prepare a schedule to allocate net income, assuming operations for the year resulted in:
1. Net income of $75,000.
2. Net income of $15,000.
3. Net loss of $30,000.

B. Prepare the journal entry to close the Income Summary account for each situation above.

Short Answer
1. The principal types of partnerships are general partnerships, limited partnerships, and joint ventures. Describe the characteristics of each type of partnership.
2. There are two methods of recording changes in the membership of a partnership – the bonus method and the goodwill method. Describe these two methods of recording changes in partnership membership.

Short Answer from the Textbook
1. Describe the tax treatment of partnership income.

2. Distinguish between a partner’s interest in capital and his interest in the partnership’s income and losses. Also, make a general distinction between a partner’s capital account and his drawing account.

3. Explain why a partnership is viewed in accounting as a “separate economic entity.”

4. What are some of the methods commonly used in allocating income and losses to the partners?

5. Explain the distinction between the terms “withdrawals” and “salaries.”

6. List some of the alternative methods of calculating a bonus that may appear in a partnership agreement.

7. What is meant by dissolution and what are its causes?

8. Discuss the methods used to record changes in partnership membership.

9. Differentiate between the admission of a new partner through assignment of an interest andthrough investment in the partnership.

10.Under what two conditions will the bonus and goodwill methods of recording the admission ofa partner yield the same result?

11.Describe the circumstances where neither the goodwill nor the bonus method should be used to record the admission of a new partner.

12.How might a partner withdrawing in violation of the partnership agreement and without the con-sent of the other partners be treated? What about a partner who is forced to withdraw?

Business Ethics Question from Textbook
Many companies with defined benefit plans are curtailing or eliminating the plans altogether. With a defined benefit plan, the company guarantees some set amount(or formula-determined payment) when the employee retires. Because most pension assets are invested in the stock market, whether a pension plan is fully funded of-ten depends on the strength of the stock market. Be-cause of this volatility, companies often find themselves unexpectedly in a position where they must either in-crease funding or disclose significant underfunding. Because of this, many companies simply reduce or eliminate the plan. Consider the pension plan of Golden Years Company (GYC). Historically, GYC has been a great company to work for, with strong employee benefits. GYC’s pension liability is approximately $15 million. However, recently the company has been experiencing minor financial troubles in a decreasing stock market and, consequently, announced the termination of the pension plan in an effort to save costs. However, the pension plan was fully funded by$9 million (the fair value of assets exceeded the expected liability).

1.How does the firm reconcile the trade-off between financial performance and the responsibility to its employees?

ANSWER KEY (Chapter 15)

Chapter 16

Partnership Liquidation

Multiple Choice

1. Which of the following statements is correct?
1. Personal creditors have first claim on partnership assets.
2. Partnership creditors have first claim on partnership assets.
3. Partnership creditors have first claim on personal assets.
a. 1
b. 2
c. 3
d. Both 2 and 3

2. The first step in the liquidation process is to
a. convert noncash assets into cash.
b. pay partnership creditors
c. compute any net income (loss) up to the date of dissolution.
d. allocate any gains or losses to the partners.

3. A schedule prepared each time cash is to be distributed is called a(n)
a. advance cash distribution schedule.
b. marshaling of assets schedule.
c. loss absorption potential schedule.
d. safe payment schedule.

4. An advance cash distribution plan is prepared
a. each time cash is distributed to partners in an installment liquidation.
b. each time a partnership asset is sold in an installment liquidation.
c. to determine the order and amount of cash each partner will receive as it becomes available for distribution.
d. none of these.

5. The first step in preparing an advance cash distribution plan is to
a. determine the order in which partners are to participate in cash distributions.
b. compute the amount of cash each partner is to receive as it becomes available for distribution.
c. allocate any gains (losses) to the partners in their profit-sharing ratio.
d. determine the net capital interest of each partner.

6. Offsetting a partner’s loan balance against his debit capital balance is referred to as the
a. marshaling of assets.
b. right of offset.
c. allocation of assets.
d. liquidation of assets.

7. If a partner with a debit capital balance during liquidation is personally solvent, the
a. partner must invest additional assets in the partnership.
b. partner’s debit balance will be allocated to the other partners.
c. other partners will give the partner enough cash to absorb the debit balance.
d. partnership will loan the partner enough cash to absorb the debit balance.

8. The following condensed balance sheet is presented for the partnership of Jim, Bill, and Fred who share profits and losses in the ratio of 4:3:3, respectively:

Cash $ 180,000
Other assets 1,940,000
Jim, receivable 60,000
$ 2,180,000

Accounts payable $ 480,000
Bill, loan 80,000
Jim, capital 720,000
Bill, capital 440,000
Fred, capital 460,000
$2,180,000

Assume that the assets and liabilities are fairly valued on the balance sheet and that the partnership decides to admit Tom as a new partner, with a 25% interest. No goodwill or bonus is to be recorded. How much should Tom contribute in cash or other assets?
a. $270,000
b. $405,000
c. $540,000
d. $520,000

9. The partnership of Joe, Al, and Mike shares profits and losses 60%, 30%, and 10%, respectively. On January 1, 2011, the partners voted to dissolve the partnership, at which time the assets, liabilities, and capital balances were as follows:

Assets Liabilities and Capital
Cash $ 400,000 Accounts Payable $ 580,000
Other Assets 1,200,000 Joe, Capital 440,000
Al, Capital 380,000
Mike, Capital 200,000
Total assets $1,600,000 Total liabilities $1,600,000

All of the partners are personally insolvent.

Assume that all noncash assets are sold for $840,000 and all available cash is distributed in final liquidation of the partnership. Cash should be distributed to the partners as follows
a. Joe, $744,000; Al, $372,000; Mike, $124,000.
b. Joe, $440,000; Al, $380,000; Mike, $200,000.
c. Joe, $224,000; Al, $272,000; Mike, $164,000.
d. Joe, $396,000; Al, $198,000; Mike, $66,000.

10. The partnership of Pratt, Ellis, and Mack share profits and losses in the ratio of 4:4:2, respectively. The partners voted to dissolve the partnership when its assets, liabilities, and capital were as follows:
Assets
Cash $ 250,000
Other assets 1,000,000
$1,250,000

Liabilities and Capital
Liabilities $ 200,000
Pratt, Capital 300,000
Ellis, Capital 350,000
Mack, Capital 400,000
$1,250,000

The partnership will be liquidated over a prolonged period of time. As cash is available, it will be distributed to the partners. The first sale of noncash assets having a book value of $600,000 realized $475,000. How much cash should be distributed to each partner after this sale?
a. Pratt, $90,000; Ellis, $140,000; Mack, $295,000
b. Pratt, $210,000; Ellis, $290,000; Mack, $145,000
c. Pratt, $290,000; Ellis, $210,000; Mack, $105,000
d. Pratt, $150,000; Ellis, $175,000; Mack, $200,000

11. In a partnership liquidation, the final cash distribution to the partners should be made in accordance with the:
a. partners’ profit and loss sharing ratio.
b. balances of the partners’ capital accounts.
c. ratio of the capital contributions by the partners.
d. ratio of capital contributions less withdrawals by the partners.

12. In an advance plan for installment distributions of cash to partners of a liquidating partnership, each partner’s loss absorption potential is computed by
a. dividing each partner’s capital account balance by the percentage of that partner’s capital account balance to total partners’ capital.
b. multiplying each partner’s capital account balance by the percentage of that partner’s capital account balance to total partners’ capital.
c. dividing the total of each partner’s capital account less receivables from the partner plus payables to the partner by the partner’s profit and loss percentage.
d. some other method.

13. Under the Uniform Partnership Act
a. partnership creditors have first claim (Rank I) against the assets of an insolvent partnership.
b. personal creditors of an individual partner have first claim (Rank I) against the personal assets of all partners.
c. partners with credit capital balances share (Rank I) the personal assets of an insolvent partner that has a debit capital balance with personal creditors of that partner.
d. personal creditors of the partners of an insolvent partnership share partnership assets on a pro rata basis (Rank I) with partnership creditors.

14. During the liquidation of the partnership of Karr, Rice, and Long. Karr accepts, in partial settlement of his interest, a machine with a cost to the partnership of $150,000, accumulated depreciation of $70,000, and a current fair value of $110,000. The partners share net income and loss equally. The net debit to Karr’s account (including any gain or loss on disposal of the machine) is
a. $90,000.
b. $100,000.
c. $110,000.
d. $150,000.

15. X, Y, and Z have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are allocated 35% to X, 35% to Y, and 30% to Z. The partners have decided to dissolve and liquidate the partnership. After paying all creditors, the amount available for distribution is $60,000. X, Y, and Z are all personally solvent. Under the circumstances, Z will
a. receive $18,000.
b. receive $30,000.
c. personally have to contribute an additional $6,000.
d. personally have to contribute an additional $36,000.

16. The ABC partnership has the following capital accounts on its books at December 31, 2011:
Credit
A, Capital $400,000
B, Capital 240,000
C, Capital 80,000
All liabilities have been liquidated and the cash balance is zero. None of the partners have personal assets in excess of his personal liabilities. The partners share profits and losses in the ratio of 3:2:5. If the noncash assets are sold for $400,000, the partners should receive as a final payment:
a. A, $304,000; B, $176,000; C, $80,000
b. A, $256,000; B, $144,000; C, $-0-
c. A, $304,000; B, $176,000; C, $-0-
d. A, $120,000; B, $80,000; C, $200,000

17. The summarized balances of the accounts of MNO partnership on December 31, 2011, are as follows:

Assets Liabilities and Capital
Cash $ 15,000 Liabilities $ 15,000
Noncash 90,000 M, Capital 45,000
N, Capital 30,000
O, Capital 15,000
Total Assets $105,000 Total Equities $105,000

The agreed upon profit/loss ratio is 50:40:10, respectively. Using the information given above, which one of the following amounts, if any, is the loss absorption potential of partner N as of December 31, 2011?
a. $20,000
b. $35,000
c. $75,000
d. $120,000

18. Adamle, Boyer, and Clay are partners with a profit and loss ratio of 4:3:3. The partnership was liquidated and, prior to the liquidation process, the partnership balance sheet was as follows:

ADAMLE, BOYER, AND CLAY
Balance Sheet
January 1, 2011

Assets Liabilities and Equity
Cash $ 60,000 Adamle, Capital $216,000
Other assets 540,000 Boyer, Capital 240,000
Clay, Capital 144,000
Total Assets $600,000 Total Liabilities & Equities $600,000

After the partnership was liquidated and the cash was distributed, Boyer received $96,000 in cash in full settlement of his interest.

The liquidation loss must have been:
a. $360,000
b. $144,000
c. $504,000
d. $480,000

19. The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation. On July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along with residual profit sharing ratios were as follows:

Assets Liabilities & Equities
Cash $ 200,000 Liabilities $ 150,000
Receivables-net 50,000 Hall, Capital 50% 100,000
Inventories 150,000 Jones, Capital 30% 175,000
Equipment-net 100,000 Otto, Capital 20% 75,000
Total assets $ 500,000 Total Lia & Equity 500,000

Assume that the available cash is distributed immediately, except for a $25,000 contingency fund that is withheld pending complete liquidation of the partnership. How much cash should be paid to each of the partners?

Hall Jones Otto
a. $87,500 $52,500 $35,000
b. 12,500 7,500 10,000
c. – 0 – 25,000 – 0 –
d. – 0 – 15,000 10,000

20. The partnership of Hall, Jones, and Otto has been dissolved and is in the process of liquidation. On July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along with residual profit sharing ratios were as follows:

Assets Liabilities & Equities
Cash $ 200,000 Liabilities $ 150,000
Receivables-net 50,000 Hall, Capital 50% 100,000
Inventories 150,000 Jones, Capital 30% 175,000
Equipment-net 100,000 Otto, Capital 20% 75,000
Total assets $ 500,000 Total Lia & Equity 500,000

Assume that Hall takes equipment with a fair value of $40,000 and a book value of $50,000 in partial satisfaction of his equity in the partnership. If all the $200,000 cash is then distributed, the partners should receive:
Hall Jones Otto
a. $100,000 $60,000 $40,000
b. 25,000 15,000 10,000
c. – 0 45,000 5,000
d. – 0 50,000 – 0

21. The partnership of Starr, Foley, and Pele share profits and losses in the ratio of 4:4:2, respectively. The partners voted to dissolve the partnership when its assets, liabilities, and capital were as follows:

Assets Liabilities and Equity
Cash $150,000 Liabilities $120,000
Other assets 600,000 Starr, Capital 180,000
Foley, Capital 210,000
Pele, Capital 240,000
Total assets $750,000 Total Lia & Equity $750,000

The partnership will be liquidated over a prolonged period of time. As cash is available, it will be distributed to the partners. The first sale of noncash assets having a book value of $360,000 realized $285,000. How much cash should be distributed to each partner after this sale?
a. Starr, $54,000; Foley, $84,000; Pele, $177,000.
b. Starr, $174,000; Foley, $174,000; Pele, $87,000.
c. Starr, $126,000; Foley, $126,000; Pele, $63,000.
d. Starr, $90,000; Foley, $105,000; Pele, $120,000.

22. A, B, and C have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are allocated 35% to A, 35% to B and 30% to C. The partners have decided to dissolve and liquidate the partnership. After paying all creditors the amount available for distribution is $60,000. A, B, and C are all personally solvent. Under the circumstances, C will
a. receive $18,000.
b. receive $30,000.
c. personally have to contribute an additional $6,000.
d. personally have to contribute an additional $36,000.

23. The ABC partnership has the following capital accounts on its books at December 31, 2011:

Credit
A, Capital $200,000
B, Capital 120,000
C, Capital 40,000

All liabilities have been liquidated and the cash balance is zero. None of the partners have personal assets in excess of his personal liabilities. The partners share profits and losses in the ratio of 3:2:5. If the noncash assets are sold for $150,000, the partners should receive as a final payment:
a. A, $152,000; B, $88,000 C, $40,000
b. A, $128,000; B, $72,000; C, $ – 0 –
c. A, $152,000; B, $88,000; C, $ – 0 –
d. A, $60,000; B, $40,000; C, $100,000

24. The summarized balances of the accounts of RST partnership on December 31, 2011, are as follows:
Assets Liabilities and Equity
Cash $ 30,000 Liabilities $ 30,000
Noncash 180,000 R, Capital 90,000
S, Capital 60,000
T, Capital 30,000
Total Assets $210,000 Total Lia & Equities $210,000

The agreed upon profit/loss ratio is 50:40:10, respectively. Using the information given above, which one of the following amounts, if any, is the loss absorption potential of partner S as of December 31, 2011?
a. $60,000
b. $70,000
c. $150,000
d. $240,000

25. The partnership of Hill, Kiner, and Polk has been dissolved and is in the process of liquidation. On July 1, 2011, just before the second cash distribution, the assets and equities of the partnership along with residual profit sharing ratios were as follows:
Assets Liabilities and Equity
Cash $ 80,000 Liabilities $ 60,000
Receivables-net 20,000 Hill, Capital 50% 40,000
Inventories 60,000 Kiner, Capital 30% 70,000
Equipment-net 40,000 Polk, Capital 20% 30,000
Total assets $200,000 Total Lia & Equity $200,000

Assume that the available cash is distributed immediately, except for a $10,000 contingency fund that is withheld pending complete liquidation of the partnership. How much cash should be paid to each of the partners?
Hill Kiner Polk
a. $35,000 $21,000 $14,000
b. $5,000 $3,000 $4,000
c. $0 $10,000 $0
d. $0 $6,000 $4,000

Problems

16-1 The NOR Partnership is being liquidated. A balance sheet prepared prior to liquidation is presented below:

Assets Liabilities & Equities
Cash $240,000 Liabilities $ 160,000
Other Assets 300,000 Reese, Loan 60,000
Nen, Capital 180,000
Ott, Capital 60,000
Reese, Capital 80,000
Total Assets $540,000 Total Equities $540,000

Nen, Ott, and Reese share profits and losses in a 40:40:20 ratio. All partners are personally insolvent.

Required:
A. Prepare the journal entries necessary to record the distribution of the available cash.

B. Prepare the journal entries necessary to record the completion of the liquidation process, assuming the other assets are sold for $120,000.

16-2 The trial balance for the ABC Partnership is as follows just before liquidation:

OTHER BALL ADLER BALL CARL
CASH ASSETS RECEIVABLE = LIABILITIES CAPITAL CAPITAL CAPITAL
180,000 625,000 90,000 150,000 420,000 270,000 180,000

Partners share profits a 50:30:20 ratio.

Required:
Prepare an advance cash distribution plan showing how available cash would be distributed.

16-3 Lewis, Nance, and Otis operate the LNO Partnership. The partnership agreement provides that the partners share profits in the ratio of 40:40:20, respectively. Unable to satisfy the firm’s debts, the partners decide to liquidate. Account balances just prior to the start of the liquidation process are as follows:
Debit Credit
Cash $ 90,000
Other Assets 330,000
Liabilities $165,000
Otis, Loan 36,000
Lewis, Capital 165,000
Nance, Capital 36,000
Otis, Capital 39,000
Otis, Drawing 21,000 _______
Totals $441,000 $441,000

During the first month of liquidation, other assets with a book value of $150,000 are sold for $165,000, and creditors are paid. In the following month unrecorded liabilities of $12,000 are discovered and assets carried on the books at a cost of $90,000 are sold for $36,000. During the third month the remaining other assets are sold for $42,000 and all available cash is distributed.

Required:
Prepare a schedule of partnership realization and liquidation. A safe distribution of cash is to be made at the end of the second and third months. The partners agreed to hold $30,000 in cash in reserve to provide for possible liquidation expenses and/or unrecorded liabilities. All of the partners are personally insolvent.

16-4 Due to the fact that the partnership had been unprofitable for the past several years, A, B, C, and D decided to liquidate their partnership. The partners share profits and losses in the ratio of 40:30:20:10, respectively. The following balance sheet was prepared immediately before the liquidation process began:

A B C D Partnership
Balance Sheet

Cash $ 100,000 Liabilities $250,000
Other Assets 350,000 A, Capital 55,000
B, Capital 60,000
C, Capital 50,000
D, Capital 35,000
Total Assets $450,000 Total Lia & Equities $450,000

The personal status of each partner is as follows:
Personal Personal
_Assets_ Liabilities
A $165,000 $ 120,000
B 100,000 140,000
C 180,000 160,000
D 60,000 70,000

The partnership’s other assets are sold for $100,000 cash. The partnership operates in a state which has adopted the Uniform Partnership Act.

Required:
A. Complete the following schedule of partnership realization and liquidation. Assume that a partner makes additional contributions to the partnership when appropriate based on their individual status.

OTHER CAPITAL
CASH ASSETS LIABILITIES __A__ __B__ __C__ __D__
$100,000 $350,000 $250,000 55,000 60,000 50,000 35,000

B. Complete the following schedule to show the total amount that will be paid to the personal creditors.

From Distribution Total Paid
Personal from to Personal
_Assets_ _Partnership_ _Creditors_
A
B
C
D

16-5 A trial balance for the DEF partnership just prior to liquidation is given below:

Debit Credit
Cash $ 75,000
Noncash Assets 750,000
Nonpartner Liabilities $240,000
Dugan, Loan 75,000
Dugan, Capital 225,000
Elston, Capital 153,000
Flynn, Capital 132,000
Totals $825,000 $825,000

The partners share income and loss on the following basis:
Dugan 50%
Elston 30%
Flynn 20%

Required:
Prepare an advance cash distribution plan for the partners.

16-6 David, Paul, and Burt are partners in a CPA firm sharing profits and losses in a ratio of 2:2:3, respectively. Immediately prior to liquidation, the following balance sheet was prepared:

Assets Liabilities & Equities
Cash $ 100,000 Liabilities $280,000
Noncash assets 580,000 David, Capital 160,000
Paul, Capital 160,000
_______ Burt, Capital 80,000
Total Assets $680,000 Total Liabilities & Equities $680,000

Required:
Assuming the noncash assets are sold for $300,000, determine the amount of cash to be distributed to each partner. Complete the worksheet and clearly indicate the amount of cash to be distributed to each partner in the spaces provided. No cash is available from any of the three partners.

A. Noncash David Paul Burt
Cash Assets Liabilities Capital Capital Capital
Beginning Bal. 100,000 580,000 280,000 160,000 160,000 80,000

16-7 Using the information from Problem 16-6, assume the noncash assets are sold for $160,000. Determine the amount of cash to be distributed to each partner assuming all partners are personally solvent.

16-8 The December 31, 2010, balance sheet of the Deng, Danielson, and Gibson partnership, along with the partners’ residual profit and loss sharing ratios, is summarized as follows:

Assets Liabilities & Equities
Cash $ 150,000 Accounts Payable $ 225,000
Receivables 300,000 Loan from Danielson 50,000
Inventories 375,000 Deng, Capital (20%) 250,000
Other Assets 475,000 Danielson, Capital (30%) 400,000
Gibson, Capital (50%) 375,000
Total Assets $1,300,000 Total Lia & Equities $1,300,000

The partners agree to liquidate their partnership as soon as possible after January 1, 2011 and to distribute all cash as it becomes available.

Required:
Prepare an advance cash distribution plan to show how cash will be distributed as it becomes available.

Section .01 Short Answer

1. The Uniform Partnership Act specifies specific steps in distributing available partnership assets in liquidation. Describe the steps used to distribute partnership assets during the liquidation process.

2. An advance cash distribution plan specifies the order in which each partner will receive cash and the dollar amount each will receive as it becomes available for distribution. Identify the four steps in the preparation of an advance cash distribution plan.

Short Answer Questions from the Textbook

1. Why are realization gains or losses allocated to partners in their profit and loss ratios?

2. In what manner should the final cash distribution be made in partnership liquidation?

3. Why does a debit balance in a partners’ capital account create problems in the UPA order of payment for a partnership liquidation?

4. Is it important to maintain separate accounts for a partner’s outstanding loan and capital ac-counts? Explain why or why not.

5. Discuss the possible outcomes in the situation where the equity interest of one partner is inadequate to absorb realization losses.

6. During a liquidation, at which point may cash be distributed to any of the partners?

7. What is “marshaling of assets”?

8. To what extent can personal creditors seek re-covery from partnership assets?

9. In an installment liquidation, why should the partners view each cash distribution as if it were the final distribution?

10. Discuss the three basic assumptions necessary for calculating a safe cash distribution. How is this safe cash distribution computed?

11. How are unexpected costs such as liquidation expenses, disposal costs, or unrecorded liabilities covered in the safe distribution schedule?

12. What is the objective of the procedures used for the preparation of an advance cash distribution plan?

13. What is the “loss absorption potential”?

14. In what order must partnership assets be distributed?

Business Ethics Question from the Textbook
You and two of your former college friends, Freeman and Oxyman, formed a partnership called FOB, which builds and installs fabricated swimming pools. The business has been operating for 15 years and has become one of the top swimming pool companies in the area. Typically, you have been providing the on-site estimates for the pools, while your partners do most of the onsite construction. While visiting one of the sites, you hear a conversation between one of your partners and a customer. Your partner is explaining that the cost will increase by $10,000 because of unexpected rock removal. You are a bit surprised by this, since you had tested the area for rocks. Later, back at the office, you review the core-sample results done on that job, which did not reveal any rock. You decide to talk to the partner when he returns to the office. When the partner returns to the office, he is arguing with someone from a local bank concerning an outstanding personal loan.
1.What do you see as your duty with respect to the partnership?

2.What should you do? Explain your reasoning.

ANSWER KEY (Chapter 16)

Chapter 17

Introduction to Fund Accounting

Multiple Choice

1. Governmental units include all of the following except
a. counties.
b. school districts.
c. industrial development districts.
d. voluntary health and welfare organizations.

2. Which type of fund entities are used to account for the activities of nonbusiness organizations that are similar to those of business enterprises?
a. Expendable fund entities
b. Proprietary fund entities
c. Budgetary fund entities
d. Restricted fund entities

3. When budgeted expenditures are enacted into law, they are referred to as
a. estimated expenditures.
b. encumbrances.
c. appropriations.
d. expenditures.

4. The term used to describe the application of accounting to expendable fund entities is the
a. accrual method.
b. cash method.
c. modified cash method.
d. modified accrual method.

5. The entry to close appropriations, expenditures, and encumbrances accounts includes a debit to
a. Appropriations.
b. Expenditures.
c. Encumbrances.
d. both Appropriations and Encumbrances.

6. The entry to record the receipt of office equipment previously encumbered includes a debit to
a. Office Equipment.
b. Encumbrances.
c. Reserve for Encumbrances.
d. both Office Equipment and Reserve for Encumbrances.

7. In accounting for and reporting inventory in the financial statements, the “Reserve for Inventory” account is used under
a. the consumption method.
b. the purchase method.
c. both the consumption and purchase methods.
d. none of these.

8. The two basic statements prepared for expendable fund entities are a balance sheet and a(n)
a. income statement.
b. statement of revenue.
c. statement of expenditures and encumbrances.
d. none of these.

9. If a credit was made to the fund balance in the process of recording a budget for a governmental unit, it can be assumed that
a. estimated expenses exceed actual revenues.
b. actual expenses exceed estimated expenses.
c. estimated revenues exceed appropriations.
d. appropriations exceed estimated revenues.

10. The “reserve for encumbrances—prior year” account represents amounts recorded by a governmental unit for
a. anticipated expenditures in the next year.
b. expenditures for which purchase orders were made in the prior year but disbursement will be in the current year.
c. excess expenditures in the prior year that will be offset against the current-year budgeted amounts.
d. unanticipated expenditures of the prior year that become evident in the current year.

11. Which of the following requires the use of the encumbrance system?
a. Capital projects fund
b. Debt service fund
c. Internal service fund
d. Enterprise fund

12. The following related entries were recorded in sequence in the general fund of a municipality:

1. Encumbrances 15,000
Reserve for Encumbrances 15,000

2. Reserve for Encumbrances 15,000
Encumbrances 15,000

3. Expenditures 15,350
Vouchers Payable 15,350

The sequence of entries indicates that
a. an adverse event was foreseen and a reserve of $15,000 was created; later the reserve was cancelled and a liability for the item was acknowledged.
b. an order was placed for goods or services estimated to cost $15,000; the actual cost was $15,350 for which a liability was acknowledged upon receipt.
c. encumbrances were anticipated but later failed to materialize and were reversed. A liability of $15,350 was incurred.
d. the first entry was erroneous and was reversed; a liability of $15,350 was acknowledged.

13. The reserve for encumbrances account is properly considered to be a
a. current liability if payable within a year; otherwise, long-term debt.
b. fixed liability.
c. floating debt.
d. reservation of the fund’s equity.

14. Customers’ meter deposits which cannot be spent for normal operating purposes would be classified as restricted cash in the balance sheet of which fund?
a. Internal Service
b. Trust
c. Agency
d. Enterprise

15. What journal entry should be made at the end of the fiscal year to close out encumbrances for which goods and services have not been received?
a. Debit reserve for encumbrance and credit encumbrances.
b. Debit reserve for encumbrances and credit fund balance.
c. Debit fund balance and credit encumbrances.
d. Debit encumbrances and credit reserve for encumbrances.

16. The GASB has the responsibility for establishing financial accounting standards for all of the following entities except:
a. state and local government entities.
b. veterans hospitals.
c. school districts.
d. civic organizations.

17. The expendable fund entity’s measurement focus is on:
a. the flow of current financial resources.
b. the flow of economic resources.
c. the flow of revenue, expenses, and net income.
d. none of the above.

18. Under GASB Statement No. 34, a government-wide financial statement should include a:
a. statement of revenues & expenses.
b. statement of activities.
c. statement of financial position.
d. notes to the financial statements.

19. In accounting for expendable fund entities, revenue is ordinarily not recognized until:
a. it can be objectively measured and it is available to finance expenditures of the current period.
b. a transaction has taken place and the earnings process is complete.
c. it has been received in cash.
d. none of the above.

20. The Expenditures account of a governmental unit is debited when:
a. the budget is recorded.
b. supplies are ordered.
c. supplies encumbered are received.
d. the supplies invoice is paid.

Problems

17-1 During 2011, the City of Paola was involved in the following transactions:

1. A budget consisting of estimated revenues of $1,500,000 and appropriations for expenditures of $1,550,000 was approved by the city council.

2. Statements of property tax assessments totaling $1,100,000 were mailed to property owners. Experience indicates that 2% of assessed taxes will be uncollectible.

3. Equipment costing $85,000 was purchased, and old equipment was sold for $15,000 at the end of its estimated useful life.

4. The city manager signed a contract to purchase a machine costing $25,000.

5. The city received a statement from the state indicating that the city’s portion of the state sales tax is $50,000.

6. The machine ordered in (4) above is delivered and accepted. The invoice in the amount of $26,000 was approved for payment.

Required:
Prepare the journal entries needed to account for the preceding transactions.

17-2 On December 31, 2011, the following account balances, among others, were included in the preclosing trial balance of the General Fund of the City of Ottawa.

Estimated Revenue $2,960,000
Expenditures 1,950,000
Encumbrances 530,000
Expenditures—2010 300,000
Reserve for Encumbrances (1) 830,000
Appropriations 2,850,000
Revenue 3,220,000
Reserve for Supplies Inventory (2) 600,000
Supplies Inventory 600,000
Unreserved Fund Balance 300,000

(1) The balance in this account was $270,000 on January 1, 2011. Purchase orders outstanding on December 2011 total $530,000.

(2) Supplies on hand on December 31, 2011, amount to $380,000.

Required:
1. What was the balance in the Unreserved Fund Balance account on December 31, 2010? What was the total Fund Balance on December 31, 2010?
2. Prepare the necessary adjusting and closing entries for the year ended December 31, 2011. Ottawa uses the purchase method to account for supplies.

17-3 The trial balance for the General Fund of the City of Girard as of December 31, 2010, is presented below:
CITY OF GIRARD
The General Fund
Adjusted Trial Balance
December 31, 2010

Debit Credit
Cash $216,000
Property Tax Receivable 31,000
Estimated Uncollectible Taxes $ 80,000
Due from Trust Fund 41,000
Vouchers Payable 55,000
Reserve for Encumbrances 20,000
Unreserved Fund Balance 205,000
$288,000 $288,000

Transactions for the year ended December 31, 2011 are summarized as follows:

1. The City Council adopted a budget for the year with estimated revenue of $720,000 and appropriations of $710,000.

2. Property taxes in the amount of $495,000 were levied for the current year. It is estimated that $20,000 of the taxes levied will prove to be uncollectible.

3. Proceeds from the sale of equipment in the amount of $32,000 were received by the General Fund. The equipment was purchased four years ago with resources of the General Fund at a cost of $200,000. On the date it was purchased, it was estimated that the equipment had a useful life of six years.

4. Licenses and fees in the amount of $90,000 were collected.

5. The total amount of encumbrances against fund resources for the year was $595,000.

6. Vouchers in the amount of $445,000 were authorized for payment. This was $11,000 less than the amount originally encumbered for these purchases.

7. An invoice in the amount of $19,000 was received for goods ordered in 2010. The invoice was approved for payment.

8. Property taxes in the amount of $425,000 were collected.

9. Vouchers in the amount of $385,000 were paid.

10. Forty-one thousand dollars was transferred to the General Fund from the Trust Fund.

11. The City Council authorized the write-off of $15,000 in uncollected property taxes.

Required:
1. Prepare entries, in general journal form, to record the transactions for the year ended December 31, 2011.
2. Prepare the necessary closing entries for the year ending December 31, 2011.

17-4 The following information regarding the fiscal year ended June 30, 2011, was drawn from the accounts and records of the Chase County general fund:

Revenues and other asset inflows:
Property taxes $6,000,000
Licenses and permits 750,000
State grants 150,000
Collection of interfund advance to other fund 80,000
Proceeds from sale of equipment 40,000

Expenditures and other asset outflows:
General government $2,250,000
Public safety 1,130,000
Judicial system 600,000
Health 900,000
Equipment purchases 370,000
Payment to debt service fund to cover future debt
service on general government bonds 570,000
Total fund balance, July 1, 2010 $1,200,000

Required:
Prepare a statement of revenues, expenditures, and changes in fund balance for the Chase County general fund for the year ended June 30, 2011.

17-5 The unadjusted trial balance for the general fund of the City of Iola at June 30, 2011, is as follows:

Debits
Cash $170,000
Due from agency fund 25,000
Encumbrances 120,000
Estimated revenues 800,000
Expenditures 610,000
Property taxes receivable 110,000

Credits
Allowance for uncollectible taxes 8,000
Appropriations 790,000
Unreserved fund balance 30,000
Reserve for encumbrances 60,000
Revenues 840,000
Vouchers payable 107,000

Supplies on hand at June 30, 2011, totaled $8,000. The $120,000 encumbrance relates to equipment ordered but not received by fiscal year-end.

Required:
Prepare a balance sheet for the general fund of the City of Iola at June 30, 2011.

17-6 At the beginning of 2011, the City of Wichita reported an Unreserved Fund Balance of $890,000 and a supplies inventory balance of $280,000. During the year, Wichita purchased $360,000 in supplies and used $350,000 worth. The city will report a reserve for supplies inventory.

Required:
a. Prepare the journal entries needed to account for the supplies under the consumption method.
b. Prepare the necessary journal entries under the purchases method.
c. What would the December 31, 2011, balance in the Unreserved Fund Balance be under the consumption method, assuming that the only transactions of the fund are those involving the supplies?

17-7 The following account balances, among others, were included in the preclosing trial balance of the General Fund of the City of Baxter on December 31, 2011.

Appropriations $2,350,000
Cash 180,000
Due from Other Funds 170,000
Due to Other Funds 70,000
Encumbrances 250,000
Estimated Revenue 2,480,000
Expenditures 2,010,000
Expenditures – 2010 200,000
Reserve for Encumbrances 250,000
Reserve for Encumbrances – 2010 210,000
Revenue 2,400,000
Taxes Receivable 400,000
Transfers from Other Funds 250,000
Transfers to Other Funds 350,000
Unreserved Fund Balance 280,000
Vouchers Payable 270,000

Required:
a. Prepare the necessary closing entries on December 31, 2011.
b. Calculate the amount of both the unreserved fund balance and the total fund balance in the balance sheet (1) on December 31, 2010, and (2) on December 31, 2011.

Short Answer
1. Fund entities may be classified as expendable fund entities, fiduciary fund entities, and proprietary fund entities. Distinguish among expendable, fiduciary, and proprietary fund entities.

2. Expendable fund entities prepare closing entries at the end of each period just as business enterprises do. Describe the necessary closing entries for expendable funds.

Short Answer Questions from the Textbook

1. What characteristics distinguish nonbusiness organizations from profit-oriented enterprises?

2. Define a fund as the term is applied in accounting for the activities of governmental units and other nonbusiness organizations.

3. What is the significance of the “unreserved fundbalance” of an expendable fund entity?

4. What are the major classifications of increases and decreases in expendable fund resources?

5. What are the revenue-recognition criteria for expendable fund entities? How do these criteria differ from revenue-recognition criteria for profit-oriented enterprises?

6. Expenditures may be classified by function, activity, object, or organizational unit. Give an ex-ample of each classification for a municipality. Which classification is the most appropriate for
external financial reporting?

7. Distinguish between an appropriation, an en-cumbrance, an expenditure, and a disbursement.

8. Distinguish between an expense and an expenditure.

9. Explain and justify the difference between the treatment of estimated uncollectible taxes in fund accounting and the treatment of estimated bad debts in commercial accounting.

10. Explain the purposes of encumbrance accounting. Might encumbrance accounting be used by commercial enterprises?

11. Is the year-end balance in the Reserve for En-cumbrances account a liability? Explain.

12. What columns would you suggest for a subsidiary ledger account in order that it might be a subsidiary not only to the “appropriations” control account but also the “encumbrances” and the “expenditures” control accounts?

13. Why is depreciation on fixed assets not recorded in the records of expendable fund entities?

14. How does the adoption of a budget for a general fund entity differ from the adoption of a budget by a commercial unit?

15. Describe the principal financial statements used to report on the activities and status of expendable fund entities.

16. Why may it be difficult or impossible for a governmental unit to determine the total cost of performing a particular activity or function?

Business Ethics Question from the Textbook

At State College, where football has long reigned asking and fans are near fanatical in their attendance, the frenzy for football tickets has recently reached an all-time high. With requests for home game tickets at an unprecedented level, prices on everything from parking passes to hotel rooms to home rentals have soared beyond belief. Parking passes were going for $500 on eBay, and hotel rates have doubled—and in some cases nearly tripled—reaching as high as $650 per night at some hotels.
1. What are the moral or ethical issues in charging what people will pay for rooms and tickets to at-tend a State College football game?
2. Why not let the economic forces of supply and demand determine prices in our capitalistic system?

ANSWER KEY (Chapter 17)

Chapter 18

Introduction to Accounting for State and Local Governmental Units

Multiple Choice

1. The highest level of priority of pronouncements that a government entity should look to for accounting and reporting guidance is
a. GASB Technical Bulletins.
b. GASB Concepts Statements.
c. AICPA Industry Accounting Guides.
d. GASB Statements.

2. Which of the following funds would account for operations that are financed and operated in a manner similar to private business enterprises?
a. Debt Service Fund
b. Enterprise Fund
c. Internal Service Fund
d. Special Revenue Fund

3. All of the following are Governmental (Expendable) Fund Entities except the
a. Capital Projects Fund.
b. Debt Service Fund.
c. Internal Service Fund.
d. Special Revenue Fund.

4. The activities of a municipal airport should be accounted for in the
a. General Fund.
b. Internal Service Fund.
c. Special Revenue Fund.
d. Enterprise Fund.

5. Fixed assets and noncurrent liabilities are accounted for in the records of
a. governmental funds
b. expendable funds
c. proprietary funds
d. both governmental and expendable funds.

6. The liability for general obligation long-term debt is reported in the
a. Debt Service Fund.
b. Capital Projects Fund.
c. Enterprise Fund.
d. none of these.

7. The activities of a central computer facility should be accounted for in the
a. General Fund.
b. Internal Service Fund.
c. Enterprise Fund.
d. Capital Projects Fund.

8. Internal Service Fund billings to government departments for services rendered is an example of interfund
a. reimbursements.
b. transfers.
c. services provided and used.
d. loans.

9. A nonrecurring contribution from the General Fund to the Enterprise Fund is an example of an interfund
a. reimbursement.
b. transfer.
c. services provided and used.
d. loan.

10. For state and local government units, the full accrual basis of accounting should be used for what type of fund?
a. Special revenue
b. General
c. Debt service
d. Internal service

11. Encumbrances would not appear in which fund?
a. General
b. Enterprise
c. Capital projects
d. Special revenue

12. Which type of fund can be either expendable or nonexpendable?
a. Debt service
b. Enterprise
c. Trust
d. Special revenues

13. Which of the following funds frequently does not have a fund balance?
a. General fund
b. Agency fund
c. Special revenue fund
d. Capital projects fund

14. A city should record depreciation as an expense in its
a. general fund and enterprise fund.
b. internal service fund and general fund.
c. enterprise fund and internal service fund.
d. enterprise fund and capital projects fund.

15. Part of the general obligation bond proceeds from a new issuance was used to pay for the cost of a new city hall as soon as construction was completed. The remainder of the proceeds was transferred to repay the debt. Entries are needed to record these transactions in the
a. general fund and capital projects fund.
b. general fund and debt-service fund.
c. trust fund and debt-service fund.
d. debt-service fund and capital projects fund.

16. One of the differences between accounting for a governmental unit and a commercial unit is that a governmental unit should
a. not record depreciation expense in any of its funds.
b. always establish and maintain complete self-balancing accounts for each fund.
c. use only the cash basis of accounting.
d. use only the modified accrual basis of accounting.

17. When a truck is received by a governmental unit, it should be recorded in the General Fund as a(n)
a. appropriation.
b. encumbrance.
c. expenditure.
d. fixed asset.

18. Which of the following should be accrued as revenues by the general fund of a local government?
a. Sales tax held by the state which will be remitted to the local government
b. Parking meter revenues
c. Sales tax collected by merchants
d. Income taxes currently due

19. Which of the following funds of a governmental unit recognizes revenues and expenditures under the same basis of accounting as the general fund?
a. Debt service
b. Enterprise
c. Internal service
d. Nonexpendable trust

20. Repayments from the funds responsible for a particular expenditure to the funds that initially paid for them are interfund
a. loans.
b. services provided and used.
c. transfers.
d. reimbursements.

21. It is proper to recognize revenues or expenditures resulting from which of the following classifications of interfund activity?
a. Interfund loans and interfund transfers
b. Interfund services provided/used and interfund reimbursements
c. Interfund reimbursements and interfund loans
d. Interfund services provided/used and interfund transfers

22. Revenues of a special revenue fund of a governmental unit should be recognized in the period in which the
a. revenues become available and measurable.
b. revenues become available and appropriated.
c. revenues are billable.
d. cash is received.

23. What is the underlying reason a governmental unit uses separate funds to account for its transactions?
a. Governmental units are so large that it would be unduly cumbersome to account for all transactions as a single unit.
b. Because of the diverse nature of the services offered and legal provisions regarding activities of a governmental unit, it is necessary to segregate activities by functional nature.
c. Generally accepted accounting principles require that nonbusiness entities report on a funds basis.
d. Many activities carried on by governmental units are shortlived and their inclusion in a general set of accounts could cause undue probability of error and omission.

24. Which of the following is not a budgetary account?
e. Appropriations
f. Estimated Revenues
g. Encumbrances
h. Reserve for Encumbrances

25. An interfund transfer should be reported in a governmental fund operating statement as a(n):
a. due from (to) other funds
b. other financing source (use)
c. revenue or expenditure
d. none of the above

Problems

18-1 During 2010, the City of Lebo started a street paving project. The project is being financed by the proceeds from the issue of five-year, 6% special assessment bonds payable at a face value of $3,000,000. The bonds were issued July 1, 2010 at their par value. One-fifth of the principal plus interest is payable on June 30 of each year beginning June 30, 2011. Property owners are assessed to provide the funds to pay the principal and interest on the debt.

The following transactions occurred during 2010 and 2011:

1. The bonds for the paving of the streets were issued.

2. The street paving was completed at a cost of $3,000,000.

3. Property owners were assessed and billed for the first installment of principal and interest on the special assessment debt.

4. Assessments for the first installment of principal and interest on the special assessment debt were collected. The June 30, 2011, payment of principal and interest was made.

Required:
Prepare all journal entries for the preceding transactions that are necessary for the City of Lebo assuming:
A. The City of Lebo has not obligated itself in any manner to the holders of the special assessment bonds.
B. The City of Lebo has made a commitment to the holders of the special assessment bonds to assure the full payment of principal and interest on the due dates.

18-2 The following activities and transactions are typical of those which may affect the various funds used by a municipal government.

Required:
Prepare journal entries to record each transaction and identify the fund in which each entry is recorded.
1. The Zola City Council passed a resolution approving a general operating budget of $6,800,000 for the fiscal year. Total revenues are estimated at $5,800,000.

2. The Zola City Council passed an ordinance providing a property tax levy of $3.50 per $100 of assessed valuation for the fiscal year. Total property valuation in Zola City is $320,000,000. Property is assessed at 30% of current property valuation. Property tax bills are mailed to property owners. An estimated 5% will be uncollectible.

3. Kansas City sold a general obligation term bond issue for $1,000,000 at 104 to a major brokerage firm. The stated interest rate is 10%. Construction of a new Municipal Courts Building will be financed by the bond issue proceeds.

4. The premium on bond sale in (3) above is transferred to the Debt Service Fund.

5. At the end of fiscal year, the Zola City Council approves the write-off of $55,000 of uncollected taxes because of inability to locate the property owners.

6. The Kansas City Municipal Courts Building (3 above) is completed. Contracts and expenses total $1,190,000, and all have been paid and recorded in the Capital Projects Fund. Prepare entries to close this project and record the completion of the project in all other funds and/or account groups affected. Any balance in the Capital Projects Fund is to be applied to payment of interest and principal of the bond issue.

7. On March 1, Webb City issued 10% serial bonds at par to finance streetlights in an area recently incorporated in the city limits. The face amount of the bonds is $900,000; interest is payable annually, and bonds are to be retired in equal amounts over 6 years from collections from assessments against property affected. In case of default by the property owners, the bond principal will be paid by the city.
a. Record the issuance of the bonds on March 1 of the current year.
b. Record the payment to bondholders on March 1 of the next year.

8. The street lighting project in (7) above was completed on September 30 at a total cost of $840,000. Record summary entries for expenditure transactions from March 1 – September 30, and on completion of the project.

18-3 Prepare entries, in general journal form, to record the following transactions in the proper fund(s) and/or account group(s). Designate the fund or account group in which each entry is recorded.

1. Bond proceeds of $2,000,000 were received to be used in constructing a new City Jail. An equal amount is contributed from general revenues.

2. Serial bonds in the amount of $300,000 matured. Interest of $75,000 was paid on these and other serial bonds outstanding.

3. Insurance proceeds amounting to $19,000 were received as a result of the accidental destruction of a garbage truck costing $33,000. Accumulated depreciation on the truck was $21,000.

4. The City Parks Endowment Fund transferred $160,000 in expendable funds to the City Parks Special Revenue Fund.

5. Proceeds of $21,000 were received from the sale of equipment which had been purchased from general revenues at a cost of $100,000. Accumulated depreciation on the equipment was $75,000.

6. The City Power Company (an enterprise fund) issued a bill for $400,000 for electricity provided to municipal government buildings.

7. The City Power Company transferred excess funds of $90,000 to the General Fund.

8. A central data processing center was established by a contribution of $400,000 from the General Fund, a long-term loan of $130,000 from the City Parks Special Revenue Fund, and general obligation bond proceeds of $180,000.

9. The Data Processing Fund billed the General Fund $20,000 and the City Parks Special Revenue Fund $8,500 for data processing services.

10. The City Power Company received $7,000 as customer deposits during the year. The monies are to be held in trust until customers request that their services be discontinued and final bills are collected.

11. In order to retire general obligation term bonds when they become due, it is determined that the Debt Service Fund will require annual contributions of $40,000 and earnings in the current year of $3,000.

18-4 The general fund trial balance for Shawnee City held the following balances at June 30, 2011, just before closing entries were made:

Unreserved Fund Balance $ 2,000
Estimated Revenues 33,000
Revenues 27,250
Appropriations 28,000
Expenditures 26,200
Expenditures-Prior Year 1,200
Encumbrances 3,000
Operating Transfers In 6,000
Reserve for Encumbrances 3,000
Reserve for Encumbrances – Prior Year 1,500

Required:
Prepare the necessary closing entries.

18-5 The following schedule of capital assets was prepared for Pratt County.

Government Activities Beg. Balance Additions Retirements Ending Balance
Total Capital Assets $850,000 250,000 (185,000) $915,000
Less: Accumulated ( 500,000) ( 50,000) 150,000 ( 400,000)
Depreciation
Net Capital Assets $350,000 $200,000 ( 35,000) $515,000

All capital asset acquisitions were made in the capital projects fund and paid in cash. An asset was sold by the general fund for $40,000 cash.

Required:
Determine how the above information will be reflected on each of the following statements for the year 2011.
A. The governmental funds’ statement of revenues, expenditures, and changes in fund balances. List the governmental fund and then list the dollar amount within the appropriate heading on the statement (such as Revenues, Expenditures, or Other Financing Sources (Uses)).
B. The government-wide statement of net assets.
C. The government-wide statement of activities.

18-6 The following events take place:
1. Interest payments in the amount of $20,000 that are the responsibility of the Debt Service Fund are paid by the General Fund.
2. The Internal Service Fund bills the Special Revenue Fund $25,000 for services performed.
3. The Special Revenue Fund transfers $10,000 to the Internal Service Fund as a temporary loan.
4. The General Fund transfers $150,000 to start an Internal Service Fund.

Required:
Identify the interfund activity as a loan, services provided and used, interfund transfer, or interfund reimbursement and prepare entries in general journal form to record the transactions on the records of the fund involved.

18-7 The following transactions take place:
1. On January 1, the city issued 9% general obligation bonds with a face value of $4,000,000 payable in 10 years to finance the construction of city offices. Total proceeds were $4,500,000.
2. On December 20, construction was completed and occupancy taken of the city offices. The full cost of $3,900,000 was paid to the contractor, and appropriate closing entries were made with regard to the project.
3. The General Fund repaid the Special Revenue Fund a loan of $15,000 plus $900 in interest on the loan.

Required:
Prepare entries in general journal form to record these transactions in the proper fund(s). Designate the fund in which each entry is recorded.

Short Answer
1. There are eleven categories of government fund entities that fall under three subheadings. Describe the subheadings of government fund entities.

2. GASB Statement No. 34 specifies how governments report capital assets and long-term obligations. Describe where capital assets and long-term obligations are reported in government financial statements.

Short Answer Questions from the Textbook

1. Eleven funds are recommended to account for the various activities and resources of a govern-mental unit. Identify these funds by title and type and briefly state (in two sentences or less) the basic purpose of each fund.

2. Why are governments required to prepare financial statements on a government-wide basis using full accrual accounting?

3. What is the difference between a governmental fund and a proprietary fund?

4. Are fiduciary funds governmental funds or proprietary funds? Explain.

5. A disbursement by the general fund to another fund may be recorded as a receivable, an expenditure, or a fund transfer. Explain the circum-stances that would result in each of these different treatments.

6. In what funds would you expect bonds payable to be included?

7. In what funds might property and other non financial resources be recorded?

8. Why are budgeted revenues and expenditures formally recorded in the records of the general fund but not in the records of a capital projects fund?

9. Are all major capital facilities acquisitions ac-counted for in a capital projects fund? Explain.

10. What exception to the normal expenditure recognition criteria is associated with debt ser-vice funds and what is the justification for this exception?

11. Identify and describe four types of interfund activities.

12. The following funds and account groups are recommended for use in accounting for state and municipal governmental financial operations:
A. General Fund.
B. Special Revenue Fund.
C. Debt Service Fund.
D. Capital Projects Fund.
E. Agency Fund.
F. Enterprise Fund.
G. Internal Service Fund.
H. Trust Fund.
I. Government-wide Statement of Activities.
J. Government-wide Statement of Net Assets.

Identify, by the letters given above, the funds and account groups in which each of the ac-count titles below might properly appear.
(1) Bonds Payable.
(2) Reserve for Encumbrances.
(3) Equipment.
(4) Appropriations.
(5) Estimated Revenue.
(6) Property Taxes Receivable.
(7) Construction Work in Progress.
(8) Accumulated Depreciation.
(9) Depreciation Expense.
(10)Required Earnings.

13. Describe some of the major reconciling items between a government fund and the government-wide financial statements.

Business Ethics Question from the Textbook

GASB 45requires that the expected future costs of retiree health costs be recognized in the current period. Prior to this, governments used a pay-as-you-go plan in which only the current year’s actual payments affected the financial statements. Suppose you are working for a government prior to the issuance of GASB 45. As part of the collective bar-gaining agreement, the government offers employees increased health benefits.
1. Prior to the issuance of GASB 45, what would be the impact on the government’s financial statements?
2. Under GASB 45, what are the financial statement implications?
3. Why might the current governmental leaders agree to offer such a benefit?4.What are the ethical issues involved in this decision?

ANSWER KEY (Chapter 18)

Chapter 19

Accounting for Nongovernment Nonbusiness Organizations: Colleges and Universities, Hospitals, and Other Healthcare Organizations

Multiple Choice

1. Special entities are not-for-profit organizations that are
a. government owned.
b. privately owned.
c. publicly owned.
d. either government owned or privately owned.

2. A municipality’s capital projects fund is similar to a university’s
a. renewals and replacements fund.
b. retirement of indebtedness fund.
c. investment in plant fund.
d. none of these.

3. Board designated funds should be accounted for as
a. restricted funds.
b. specific purpose funds.
c. unrestricted funds.
d. none of these.

4. For a university, the receipt of assets for operating activities that have external restrictions as to the purposes for which they can be used is recorded by crediting
a. Fund Balance-Restricted.
b. Contribution Revenue.
c. Deferred Revenue.
d. Net Assets Released.

5. Which of the following statements related to pledges is incorrect?
a. Pledges are signed commitments to contribute specific amounts of money on a future date or in installments.
b. Pledges are recorded as revenues when a promise to give is nonrevocable and unconditional.
c. Pledges are generally enforceable contracts.
d. All of these are correct.

6. When the donor has specified a particular date or event after which the principal of the Endowment Fund may be expended, the Endowment Fund is referred to as a(n)
a. pure endowment fund.
b. term endowment fund.
c. quasi endowment fund.
d. expendable endowment fund.

7. The basic financial statements for all NNOs include a
1. Balance sheet
2. Statement of activities
3. Statement of cash flows
a. 1 and 3
b. 2 and 3
c. 1 and 2
d. 1, 2, and 3

8. Revenues and expenses of hospitals are recorded in the accounts of the
a. Endowment Fund.
b. General Fund.
c. Plant Replacement Fund.
d. Specific Purpose Fund.

9. Investments are reported by NNOs at
a. cost.
b. fair value.
c. the lower of cost or fair value.
d. the higher of cost or fair value.

10. Resources of an unrestricted fund that are designated by the governing board for endowment purposes are accounted for in the unrestricted fund by all NNOs except
a. voluntary health and welfare organizations.
b. hospitals.
c. colleges and universities.
d. other NNOs.

11. In accounting for loan funds, revenue is recorded when the
a. contribution is received.
b. loan is made to students.
c. loan is repaid by students.
d. students graduate.

12. All of the following are a plant fund in colleges and universities except
a. unexpended plant fund.
b. funds for renewals and replacements.
c. investment in plant.
d. plant replacement and expansion fund.

13. Most property, plant and equipment transactions of hospitals are accounted for in the
a. fund for renewals and replacements.
b. general fund.
c. plant replacement and expansion fund.
d. unexpended plant fund.

14. All NNOs have current restricted funds and unrestricted funds except
a. colleges and universities
b. hospitals
c. VHWOs
d. ONNOs

15. Tuition waivers for which there is no intention of collection from the student should be classified by a college as:

Revenue Expenditures
a. No No
b. No Yes
c. Yes Yes
d. Yes No

16. Which of the following is used for current expenditures by a college?

Unrestricted Restricted
Current Funds Current Funds
a. No No
b. No Yes
c. Yes Yes
d. Yes No

17. Under Newman Hospital’s established rate structure, the hospital would have earned patient service revenue of $7,000,000 for the year ended December 31, 2011. However, Newman did not expect to collect this amount because of charity allowances of $1,000,000 and discounts of $500,000 to third party payers. In May 2011, Newman purchased bandages from Ace Supply Co. at a cost of $5,000. However, Ace notified Newman that the invoice was being cancelled and that the bandages were being donated to Newman.
For the year ended December 31, 2011, how much should Newman record as patient service revenue?
a. $7,000,000
b. $6,500,000
c. $6,000,000
d. $5,500,000

18. Under Newman Hospital’s established rate structure, the hospital would have earned patient service revenue of $7,000,000 for the year ended December 31, 2011. However, Newman did not expect to collect this amount because of charity allowances of $1,000,000 and discounts of $500,000 to third party payers. In May 2011, Newman purchased bandages from Ace Supply Co. at a cost of $5,000. However, Ace notified Newman that the invoice was being cancelled and that the bandages were being donated to Newman.
For the year ended December 31, 2011, Newman should record the donation of bandages as:
a. a $5,000 reduction in operating expenses.
b. nonoperating revenue of $5,000.
c. other operating revenue of $5,000.
d. a memorandum entry only.

19. The following funds were among those on Cole University’s books at April 30, 2011:
Funds to be used for acquisition of additional properties
for university purposes (unexpended at 4/30/11) $2,500,000
Funds set aside for debt service charges and for the
retirement of indebtedness on university properties 5,000,000
How much of the above-mentioned funds should be included in plant funds?
a. $0
b. $2,500,000
c. $5,000,000
d. $7,500,000

20. Which basis of accounting should a voluntary health and welfare organization use?
a. Cash basis for all funds
b. Modified accrual basis for all funds
c. Accrual basis for all funds
d. Accrual basis for some funds and modified accrual basis for other funds

21. Which one of the following statements is not required for NNOs?
a. statement of financial position
b. statement of cash flows
c. statement of changes in net assets
d. statement of activities

22. Admissions, counseling and registration are considered to be:
a. educational and general services.
b. auxiliary enterprises.
c. student services.
d. institutional support.

23. A good reason for NNOs to adopt fund accounting even though FASB standards do not require it is because:
a. the capital assets are significant.
b. the donated services are significant.
c. the program services are involved with more than one type of revenue.
d. restrictions are placed by donors in many cases.

24. Which of the following groups of not-for-profit entities must use fund accounting to be in conformity with GAAP?

Governmental Nongovernmental
a. Yes Yes
b. Yes No
c. No Yes
d. No No

25. GASB No. 35 allows public colleges and universities to:
a. apply guidance designed for special-purpose governments.
b. use FASB standards to permit consistent reporting.
c. optionally follow FASB standards.
d. none of the above is correct.

26. For the fall semester of 2011, Newton College assessed its students $5,000,000 for tuition and fees. The net amount realized was only $4,700,000 because of the following revenue reductions:
Refunds occasioned by class cancellations and student withdrawals $ 80,000
Tuition remissions granted to faculty members’ families 20,000
Scholarships and fellowships 200,000

How much should Newton College report for the period for unrestricted current funds revenues from tuition and fees?
a. $5,000,000
b. $4,900,000
c. $4,780,000
d. $4,700,000

27. During the years ending June 30, 2010, and June 30, 2011, Madison University conducted a cancer research project financed by a $3,000,000 gift from an alumnus. This entire amount was pledged by the donor on July 10, 2009, although he paid only $800,000 at that date. The gift was restricted to the financing of this particular research project. During the two-year research period, Madison related gift receipts and research expenditures were as follows:

Year Ended June 30
2010 2011
Gift receipts 1,100,000 1,200,000
Cancer research restricted expenditures 1,400,000 1,600,000

How much gift revenue should Madison University report in the temporarily restricted column of its statement of activities for the year ended June 30, 2011?
a. $3,000,000
b. $1,600,000
c. $1,200,000
d. $0

28. Bell Foundation, a voluntary health and welfare organization, supported by contributions from the general public, included the following costs in its statement of functional expenses for the year ended December 31, 2011.

Fund raising $1,000,000
Administrative 600,000
Research 200,000

Bell’s functional expenses for 2011 program services included
a. $200,000.
b. $600,000.
c. $1,000,000.
d. $1,800,000.

29. National Service Center is a voluntary welfare organization funded by contributions from the general public. During 2010 unrestricted pledges of $800,000 were received, half of which were payable in 2010 with the other half payable in 2011 for use in 2011. It was estimated that 10% of these pledges would be uncollectible. How much should National report as net contribution revenue for 2010 with respect to the pledges?
a. $800,000
b. $720,000
c. $360,000
d. $0

30. Cindy Duncan is a social worker on the staff of National Service Center, a voluntary welfare organization. She earns $42,000 annually for a normal workload of 2,000 hours. During 2011 she contributed an additional 800 hours of her time to National at no extra charge. How much should National record in 2011 as contributed service expense?
a. $0
b. $1,680
c. $8,400
d. $16,800

Problems

19-1 The following events affected the Burlington University Loan Fund:

1. $300,000 is received from a donor to establish a student loan fund. Loans will carry a 6% annual interest rate.

2. The Loan Fund loaned the $300,000 to students. Five percent of the loans are estimated to be uncollectible.

3. Loans of $50,000 were repaid with $3,000 of interest.

4. A $1,000 student loan was written off as uncollectible.

Required:
Prepare the journal entries necessary to record these transactions.

19-2 On October 10, 2010, a national voluntary health help foundation was the recipient of a telethon sponsored by a renowned celebrity. Phone donations totaling $8,500,000 were promised. Based on historical information, 15% of these pledges are expected to be uncollectible. Of these pledges, $7,100,000 were collected in 2011; the remainder were considered uncollectible.

Required:
Identify the proper fund and prepare the journal entries necessary in 2010 and 2011.

19-3 Prepare journal entries for the following transactions or events:

1. The board of trustees of Young College voted to designate $300,000 for expansion of the student union and $90,000 for future research projects.

2. In accordance with the requirements of a bond indenture, Young College transferred $85,000 of unrestricted funds for the accumulation of cash to retire the debt related to the construction of the Central Computer Building.

3. A governing board of a hospital designates $280,000 for the future expansion of the emergency care facilities.

4. A heart association receives pledges of $900,000 from the general public in connection with a telethon. It is estimated that 30% of the amounts pledged will not be collectible.

5. An ONNO receives the donated services of a CPA with a market value of $10,000.

6. On November 3, 2011, $75,000 was donated to a university for library acquisitions of which $50,000 was expended for this purpose during the remainder of the fiscal year.

7. On November 4, 2011, $15,000 was contributed to a voluntary health organization to be used to conduct CPR classes for the public. During the remainder of the current fiscal year $14,000 was expended for this purpose.

8. On November 5, 2011, $100,000 was contributed to a hospital for cancer research of which $90,000 was expended for this purpose during the remainder of the fiscal year.

19-4 An NNO obtained cash for the acquisition of property and equipment as follows:
Loan proceeds $200,000
Contributions $400,000

These funds are used to acquire land. In addition, $20,000 in principal and $2,000 in interest is paid on indebtedness relating to property and equipment. Depreciation on property and equipment for the year is $80,000.

Required:
Prepare all necessary entries in the affected funds of the NNO, assuming that the NNO is a:
a. Voluntary health and welfare organization.
b. University.
c. Hospital.

19-5

The following information was taken from the accounts and records of the NSP Foundation, a private, not-for-profit organization. All balances are as of June 30, 2011, unless otherwise noted.

Unrestricted Support – Contributions $250,000
Unrestricted Revenues – Investment Income 28,000
Temporarily Restricted Gain on Sale of Investments 13,000
Expenses – Scholarships 300,000
Expenses – Fund Raising 60,000
Expenses – Management and General 120,000
Restricted Support – Contributions 420,000
Restricted Revenues – Investment Income 30,000
Permanently Restricted Support – Contributions 50,000
Unrestricted Net Assets, July 1, 2010 250,000
Temporarily Restricted Net Assets, July 1, 2010 40,000
Permanently Restricted Net Assets, July 1, 2010 10,000

The unrestricted support from contributions was received in cash during the year. The expenses included $500,000 payable from donor-restricted resources.

Required:
Prepare NSP’s statement of activities for the fiscal year ended June 30, 2011.

19-6

Christy Hospital received money from a donor to set up an endowment fund. The following information pertains to this contribution:

2010
1. $3,000,000 was received to establish the fund. The requirements were
a. $150,000 of the endowment fund’s income must be used for research grants each year.
b. The remainder of income is under the discretion of the governing board.
c. The principal is expendable after the donor’s death. It shall be used to purchase equipment.
2. The cash received was invested in a number of securities.

2011
3. Dividends of $150,000 and interest of $400,000 were received.
4. The income was transferred to the appropriate funds.
5. Of the restricted income, only $100,000 was expended for its specified purpose during 2011.
6. The governing board specified that $300,000 of the income would be used for loans for deserving medical students.

2012
7. $250,000 was lent to medical students.
8. The donor died of cancer.

Required:
Set up headings for the following funds: Endowment, General, Specific Purpose, and Plant Replacement and Expansion. Prepare the entries necessary in each fund to record the events listed above.

19-7

The following events were recorded on the books of Denton Hospital for the year ended December 31, 2011.
1. Revenue from patient services totaled $12,000,000. The allowance for uncollectibles was established at $2,500,000. Of the $12,000,000 revenue, $4,500 was recognized under cost reimbursement agreements. This revenue is subject to audit and retroactive adjustment by third-party payors.
2. Patient service revenue is accounted for at established rates on the accrual basis.
3. Other operating revenue totaled $260,000, of which $120,000 was from specific purpose funds.
4. Denton received $310,000 in unrestricted gifts and bequests. They are recorded at fair market value when received.
5. Endowment funds earned $120,000 in unrestricted income.
6. Board designated funds earned $62,000 in income.
7. Denton’s operating expenses for the year amounted to $10,030,000. This included $380,000 in straight-line depreciation.

Required:
Prepare a statement of activities for Denton Hospital for the year ended December 31, 2011.

Short Answer
1. The fund structure and terminology differ among NNOS, but there are six funds commonly used. Identify the funds used by nongovernment nonbusiness organizations.

2. Contributions to NNOS include gifts of cash, pledges, donated services, and gifts of noncash assets. Explain how contributions are recorded by NNOS.

Short Answer Questions from the Textbook

1. What authoritative body(s) is (are) responsible for establishing financial accounting standards for NNOs?

2. Why do most NNOs use fund accounting?

3. NNOs distinguish between restricted and un restricted funds. Why is this distinction important?

4. What is the major difference in accounting for the general fund of a hospital and the unrestricted fund of other NNOs?

5. What is the major difference in accounting between conditional and unconditional pledges? Give an example of each.

6. What is the relationship (if any) between board-designated funds and nonmandatory transfers?

7. May board designated funds ever be accounted for in the unrestricted current fund? Explain.

8. When should an NNO record donated services in its accounting records?

9. The donated services of volunteer workers on fundraising campaigns are usually not given ac-counting recognition. Why?

10. Universities and hospitals often reduce their standard service charge to students or patients. How are these reductions reflected in the statements of revenue and expenses of these organizations? Explain.

11. What fund is used to account for the library books owned by a university? How should depreciation of the library books be reflected in the financial statements of the university?

12. In which fund of a hospital are medical equipment and related longterm obligations recorded? Would your answer be the same for a voluntary health and welfare organization? Explain.

13. What capital assets (if any) of ONNOs need not be depreciated?

14. Identify three different types of endowment funds and explain how they differ.

15. Distinguish an annuity fund from a life income fund.

ANSWER KEY (Chapter 19)

ACC 410 Government and Non-for-profit Accounting – Strayer – A+ Graded

Click on the Link Below to Purchase Complete Test Bank (Chapter 1 – 15)

http://www.hwgala.com/ACC-410-Government-and-Non-Profit-Accounting-Strayer-247.htm

Chapter 1

The Government and Not-For-Profit Environment

TRUE/FALSE (CHAPTER 1)

1. The main objective of a typical governmental entity is to earn a profit.

2. A government’s budget may be backed by the force of law.

3. Governmental entities have no need for an accounting system.

4. Governments and not-for-profits employ a system of accounting known as fund accounting.

5. Governments and not-for-profits may never engage in business-type activities.

6. Lenders use the financial statements of governments and not-for profits just as they would those of businesses, that is, to help assess the borrower’s credit-worthiness.

7. Financial statements, no matter how prepared, do not directly impact the economic worth of an entity.

8. Cash flow statements are governments’ paramount financial documents.

9. Most governments budget on an accrual basis.

10. The Governmental Accounting Standards Board established generally accepted accounting principles for all state and local government entities, as well as all nongovernment entities.

MULTIPLE CHOICE (CHAPTER 1)

1. A primary characteristic that distinguishes governmental entities from business entities is
a) the need to generate revenues equal to or in excess of expenditures/expenses.
b) the importance of the budget in the governing process.
c) the need to provide goods or services.
d) the correlation between revenues generated and demand for goods or services.

2. Which of the following characteristics is NOT a characteristic that may distinguish a governmental or not-for-profit entity from a business entity?
a) There is often no direct link between revenues generated and expenditures/expenses incurred.
b) Capital assets may neither produce revenues nor save costs.
c) Revenues may not be indicative of demand for goods and services.
d) The mission of the entity will determine the goods or services provided.

3. The most significant financial document provided by a governmental entity may be
a) the balance sheet.
b) the operating statement.
c) the operating budget.
d) the cash flow statement.

4. Which of the following statements is NOT true?
a) All governmental entities engage in similar activities.
b) There are many different types of governments.
c) Governments may engage in activities similar to activities engaged in by for-profit entities.
d) Managers may have a short-term focus and thereby sacrifice the long-term viability of the entity.

5. Which of the following activities is NOT an activity in which a governmental entity might engage?
a) Selling electric power.
b) Operating a golf course.
c) Operating a book store.
d) All of the above are activities that might be carried out by a government.

6. In which of the following activities is a not-for-profit entity least likely to engage?
a) Providing educational services.
b) Providing health-care services.
c) Providing for the national defense.
d) Retail sales of cookies.

7. To obtain a comprehensive understanding of a government’s fiscal health, a financial analyst should obtain an understanding of which of the following?
a) All of the resources owned by the governmental entity.
b) All of the resources which may be summoned by a governmental entity.
c) Demographic data about the residents served by the governmental entity.
d) All of the above.

8. Which of the following is common to both governments and not-for-profit entities but distinguishes these entities from for-profit entities?
a) The budget is generally the most significant financial document.
b) Revenues are not necessarily indicative of demand for goods or services.
c) There is frequently no direct link between revenues and expenses.
d) All of the above are common to both governments and not-for-profit entities but distinguish them from for-profit entities.

9. Which of the following is NOT a purpose of external financial reporting by governments? External financial reports should allow users to
a) Assess financial condition.
b) Compare actual results with the budget.
c) Assess the ability of elected officials to effectively manage people.
d) Evaluate efficiency and effectiveness.

10. Which of the following is NOT a reason that users of government and not-for-profit external financial statements need to have information to enable them to assess the financial condition of a government?
a) To determine the ability of the entity to meet its obligations.
b) To determine the ability of the entity to continue to provide services.
c) To predict future fiscal developments.
d) To evaluate the overall profitability of the entity.

11. Users of financial statements should be interested in information about compliance with laws and regulations for which of the following reasons?
a) To determine if the entity has complied with bond covenants.
b) To determine if the entity has complied with taxing limitations.
c) To determine if the entity has complied with donor restrictions on the use of funds.
d) To determine all of the above.

12. Which of the following is NOT generally considered a main user of government and not-for-profit entity external financial statements?
a) Investors and creditors.
b) Taxpayers.
c) Donors.
d) Management.

13. Which of the following is NOT a probable use a donor would make of the external financial statements of a not-for-profit entity?
a) To determine the creditworthiness of the entity for investment purposes.
b) To determine the proportion of entity resources directed to programs as opposed to fund-raising.
c) To determine the salaries paid to the top officials of the entity.
d) To determine the allocation of resources within the entity.

14. A regulatory agency would use the external financial statements of a local government for which of the following purposes?
a) To assure that the entity is spending and receiving resources in accordance with laws, regulations or policies.
b) To help assess management’s performance.
c) To exercise general oversight responsibility.
d) To do all of the above.

15. Which of the following objectives is considered to be the cornerstone of financial reporting by a governmental entity?
a) Accountability.
b) Budgetary compliance.
c) Interperiod equity.
d) Service efforts and accomplishments.

16. Which of the following is NOT an objective of financial reporting by governmental entities as established by GASB?
a) Financial reporting should assist users in determining if current period revenues were sufficient to pay for current-period services.
b) Financial reporting should assist users in assessing the management skills of top management.
c) Financial reporting should assist users in evaluating the operating results of the governmental entity for the year.
d) Financial reporting should assist users in assessing the level of services that can be provided by the governmental entity and its ability to meet its obligations as they come due.

17. Which of the following is NOT an objective of financial reporting for not-for-profit entities as established by FASB? Financial reporting should provide information that is useful to present and potential resource providers and other users in:
a) Making rational decisions about the allocation of resources to those organizations.
b) Assessing the services provided and the entity’s ability to continue to provide those services.
c) Assessing the types of services provided and the need for those services.
d) Assessing how managers have discharged their stewardship responsibilities.

18. As used by GASB, interperiod equity refers to which of the following? Financial reporting should:
a) Demonstrate compliance with finance-related contractual requirements.
b) Provide information to determine whether current-year revenues were sufficient to pay for current-year services.
c) Demonstrate whether resources were obtained and used in accordance with the entity’s legally adopted budget.
d) Provide information to assist users in assessing the government’s economy, efficiency, and effectiveness.

19. Given a specific set of data, the basis of accounting selected by or imposed on a governmental entity will least affect which of the following?
a) Determining whether or not the governmental entity has a balanced budget.
b) Determining whether or not the governmental entity has the ability to issue debt.
c) Determining whether or not certain events occurred.
d) Determining the annual payments to a government-sponsored pension plan.

20. The Governmental Accounting Standards Board is the primary standard-setting body for:
a) All governments.
b) All state and local governmental entities.
c) All governments and all not-for-profit entities.
d) All state and local governments and all not-for-profit entities.

21. Under certain circumstances a governmental entity might use standards established by which of the following standard-setting bodies?
a) GASB.
b) FASB.
c) AICPA.
d) All of the above.

22. The primary standard-setting body for accounting and financial reporting by a state-supported college or university is:
a) GASB.
b) FASB.
c) AICPA.
d) All of the above.

23. In descending order, the hierarchy of GAAP applicable to a church-owned college may be:
a) FASB Statements, AICPA Industry Audit Guides, FASB Implementation Guides, GASB Standards.
b) FASB Statements, FASB Technical Bulletins, FASB Implementation Guides, AICPA Practice Bulletins (if cleared by FASB).
c) GASB Statements, AICPA Industry Audit Guides, GASB Implementation Guides, FASB Standards.
d) GASB Statements, GASB Technical Bulletins, GASB Implementation Guides, AICPA Practice Bulletins (if cleared by GASB).

24. Governments and not-for-profits employ a system of accounting known as
a) budget accounting.
b) financial accounting.
c) fund accounting
d) tax accounting.

25. Which of the following rule-making authorities would establish accounting standards for all nongovernment not-for-profits?
a) AICPA.
b) FASB.
c) GASB.
d) APB.

PROBLEMS (CHAPTER 1)

1. Thorn County adopted a cash budget for FY2000 as follows. The City budget laws prohibit budgeting or operating at a deficit. During the year the County collected or spent the following amounts. Was the County in compliance with the budget? Did the County accomplish the goal of interperiod equity? Explain your answers in detail.

Budgeted Collected/Spent
Receipts from Property tax collections
From the 1999 levy $ 100,000 $ -0-
From the 2000 levy $1,000,000 $ 900,000
In advance for 2001 $ 50,000 $ -0-
Receipts from Bonds Issued $ 500,000 $ 500,000
Borrowed from Bank (due in 5 years) $ -0- $ 75,000
Disbursements
Salaries and Wages $ 500,000 $ 500,000
Operating Expenses $ 200,000 $ 275,000
City Hall Annex purchased $ 500,000 $ 500,000
Payments on Debt-Principal $ 150,000 $ 150,000
Payments on Interest $ 50,000 $ 50,000
Pension Contribution $ 80,000 $ -0-

Explanations provided by the City for the differences between budget and actual are as follows. Property tax collections are down because the major industry in the community closed and many citizens are currently unemployed. Operating expenses are up because the only bridge over a river bisecting the City sustained damages by an uninsured motorist and had to be repaired immediately. The repair was not budgeted.

2. Save-the-Birds (STB), a not-for-profit entity dedicated to acquiring and preserving habitat for upland birds, prepares financial statements in accordance with generally accepted accounting principles. Currently, standards require that a not-for-profit entity report as revenue in the year received virtually all contributions. During the current year STB received a donation of several hundred acres of prime habitat for upland birds. STB will require several hundred thousand dollars in additional donations in order to make the land completely suitable for the birds. Before embarking on its fund-raising campaign STB prepares financial statements which are summarized as follows.

Statement of Financial Position (Balance Sheet)
Cash $ 8,000
Supplies $ 2,000
Equipment (net of depreciation) $ 5,000
Land $1,000,000
Total Assets $1,015,000

Liabilities $ 1,000
Net Assets—Unrestricted $ 14,000
Net Assets—Restricted $1,000,000
Total Liabilities and Net Assets $1,015,000

Statement of Activities (Income Statement)
Revenues $1,030,000
Expenses:
Salaries $ 30,000
Change in Net Assets $1,000,000

What difficulties, if any, will Save-the-Birds encounter in their new fund-raising drive? Knowing that the donation of the land accounted for $1,000,000 of the revenue reported by Save-the-Birds, do you think the financial statements present fairly the financial position and results of operations of this not-for-profit entity?

3. Johnson City prepares its budget on the cash basis and prepares its external financial statements on the accrual basis. From the following data prepare statements of activity (income statements) on both the cash basis and the accrual basis. Which statement best represents the results of operation of the City? Which statement best demonstrates compliance with laws and regulations? Which statement would you rather see? Which conveys the best information to the citizens of Johnson City?

The City levies taxes in the current year of $1 million. Of this amount $.9 million is collected during the current year, $.05 will be collected next year, and $.04 will be collected in the future. $.01 will never be collected. During the current year the City pays bills from prior periods $.06 million, bills of the current period $.8 million, and defers payment until future periods bills that were received for services consumed during the current period $.1 million.

ESSAY (CHAPTER 1)

1. In the United States, educational services can be provided by federal governmental entities, by non-federal governmental entities, by not-for-profit entities, and by for-profit entities. Are the accounting and financial reporting standards the same for each of these entities? Should they be the same?

2. The Governmental Accounting Standards Board (GASB) stated that an objective of financial reporting should be to measure interperiod equity. “Financial reporting should provide information to determine whether current-year revenues were sufficient to pay for current-year services.” What is your understanding of ‘interperiod equity.’? What costs incurred in the current year should be paid for by the taxpayers of the current period? What costs incurred in the current year should be paid for by future taxpayers?

3. A not-for-profit entity raises funds to support specific programs, services, and activities. The recipients of the programs, services, and activities are frequently not the providers of the resources to deliver the programs, services, and activities. What information would donors to these not-for-profit entities be interested in seeing? What information would program beneficiaries be interested in seeing? Identify other users of the financial statements of a not-for-profit and the types of information in which they would be interested.

Chapter 2

Fund Accounting

TRUE/FALSE (CHAPTER 2)

1. A fund is a separate fiscal and accounting entity with a self-balancing set of accounts.

2. Fund accounting promotes control and accountability over restricted resources.

3. The basis of accounting determines what transactions and events are recognized.

4. An entity’s measurement focus determines when transactions and events are recognized.

5. If an entity adopts a full accrual basis of accounting, its measurement focus will automatically be on all economic resources.

6. If an entity adopts a modified accrual basis of accounting, its measurement focus will automatically be on current financial resources.

7. A government may report some of its funds on a full accrual basis.

8. A government may have as many general funds as it deems necessary.

9. Funds divide a government into functional departments.

10. General funds are established to account for resources legally restricted for specified purposes.

11. Fiduciary activities only benefit parties other than the government itself.

12. The Financial Accounting Standards Board requires all nongovernmental not-for-profit entities to use fund accounting.

MULTIPLE CHOICE (CHAPTER 2)

1. What is the primary reason that governmental entities use fund accounting?
a) Fund accounting is required by law.
b) Fund accounting is required by GAAP.
c) Fund accounting promotes control and accountability over restricted resources.
d) Fund accounting promotes better control over operating activities.

2. Basis of accounting determines which of the following?
a) When transactions and events are recognized.
b) What transactions and events will be reported.
c) Where transactions and events will be reported.
d) Why transactions and events will be reported.

3. A fund is
a) A separate legal entity.
b) A separate fiscal and accounting entity.
c) A separate self-balancing set of accounts for inventory purposes.
d) None of the above.

4. Which of the following funds is a fiduciary fund?
a) Permanent fund.
b) Agency fund.
c) Capital project fund.
d) Debt service fund.

5. When a governmental entity adopts a basis of accounting other than full accrual and a measurement focus that excludes long-lived assets and liabilities in its governmental fund types:
a) It is in violation of the law.
b) It is in violation of GAAP.
c) It has recorded transactions in accordance with standards for presentation in the fund financial statement required by the new GASB reporting model.
d) It has the ability to better measure the results of operations.

6. A city receives a donation from a citizen who specifies that the principal must be invested and the earnings must be used to support operations of a city-owned recreational facility. The principal of this gift should be accounted for in which of the following funds?
a) Trust fund.
b) Special revenue fund.
c) Permanent fund.
d) Internal service fund.

7. Which of the following is NOT a governmental fund?
a) City Hall Debt Service Fund.
b) City Utilities Enterprise Fund.
c) Gasoline Tax Special Revenue Fund.
d) City Hall Capital Project Fund.

8. Which of the following accounts would you least expect to see in a debt service fund?
a) Principal payments.
b) Interest charges.
c) Interest earned.
d) Outstanding balance of the debt being serviced.

9. Which of the following funds is a proprietary fund?
a) Internal service fund.
b) Special revenue fund.
c) Capital project fund.
d) Permanent fund.

10. Which of the following funds is a governmental fund?
a) Enterprise fund.
b) Debt service fund.
c) Internal service fund.
d) Agency fund.

11. Which of the following activities should the City of Highland account for in a trust fund?
a) General fund contributions received by the City pension plan.
b) Greens fees received from golfers at the City-owned golf course.
c) Grants received from the Federal government to purchase buses to be used for public transit.
d) Proceeds of bonds issued to construct a new city hall building.

12. The state collects a gasoline tax that must be used to support highway construction and maintenance. The gasoline tax should be accounted for in which of the following funds?
a) General fund.
b) Special revenue fund.
c) Debt service fund.
d) Internal service fund.

13. The City of San Jose built a new city hall and financed construction by issuing bonds due in installments over the next 30 years. The bond principal and interest will be paid by a special tax levied on property in the City. The money received from this special tax should be accounted for in which of the following funds?
a) General fund.
b) Special revenue fund.
c) Capital project fund.
d) Debt service fund.

14. Riverside Golf Course is a City-owned golf course that collects greens fees in amounts sufficient to cover its expenses. Riverside Golf Course should be accounted for in which of the following funds?
a) Internal service fund.
b) Enterprise fund.
c) General fund.
d) Special revenue fund.

15. To fulfill the printing needs of its various departments and agencies, the City has established a Central Print Shop which bills the various departments and agencies of the city for printing services rendered. The Central Print Shop should be accounted for in which of the following funds.
a) Internal service fund.
b) Enterprise fund.
c) General fund.
d) Special revenue fund.

16. Which of the following funds is accounted for on the modified accrual basis of accounting?
a) General fund.
b) Internal service fund.
c) Proprietary fund.
d) Pension trust fund.

17. Which of the following assets would NOT be found in the fund balance sheet of the General Fund of the City of Harrison?
a) Cash.
b) Capital assets.
c) Receivable from Special Revenue Fund.
d) Receivable from State.

18. Which of the following liabilities would NOT be found in the fund balance sheet of the General Fund of the City of Marmaduke?
a) Accounts payable.
b) Payable to the special revenue fund.
c) Deferred revenue.
d) Bonds payable, due in 5 years.

19. For which of the following entities is fund accounting mandated?
a) American Hospital Association.
b) City of New York.
c) Grace Lutheran Church.
d) United Way.

20. Governments most commonly separate resources into funds to assure that they adhere to restrictions placed on them by
a) legislators.
b) grantors.
c) donors.
d) all of the above.

PROBLEMS (CHAPTER 2)

1. Assume that the City of Ft. Smith maintains its books and records in a manner that facilitates the preparation of the fund financial statements. For each of the following events indicate in which fund(s) of the City of Ft. Smith the event would be recorded and justify your fund selection.

a. The City collected property taxes levied for the general operations of the City.
b. The City collected property taxes levied to pay principal and interest on bonds issued several years in the past to construct a new fire station.
c. The City collected property taxes levied on a specific area of the City for the purposes of providing more frequent snow removal than is enjoyed by the rest of the City.
d. The City sold bonds to finance the construction of a new City Hall.
e. The City sold bonds to finance major renovations at the city-owned electric utility.

2. Assume that the City of Amber maintains its books and records in a manner that facilitates the preparation of the fund financial statements. Amber City maintains a general fund, a capital project fund, and a special revenue fund. During 2002, the City engaged in the following transactions. Record all transactions. Be sure to clearly indicate the fund in which the entry is made.

a. The City sold bonds, face value $26 million, at par to finance the construction of a new City Hall.
b. The City purchased two new police cars at a total cost of $50,000.
c. The City collected $8,000 in taxes dedicated for the eradication of noxious weeds.
d. The City spent $6,000 on pesticides for noxious weeds.
e. The City acquired a new tractor for $75,000. The City paid $20,000 in cash, and signed a $55,000 note which is due in three years.

3. Assume that the Blackfoot County maintains its books and records in a manner that facilitates the preparation of the fund financial statements. Blackfoot County engaged in the following transactions during the current month. Prepare journal entries in the general fund to record these events.

a. Paid salaries to County employees, $100,000.
b. Borrowed $35,000 at a local bank to use to buy a County car.
c. Purchased an automobile for the use by County administrative officials, $35,000.
d. Made a $7,000 payment on the outstanding accounts payable.
e. Collected $3,500,000 of the current property tax lavy.
f. Received a $50,000 grant from the State to support general government activities.

4. For each of the following funds list the basis of accounting it should use, either modified accrual or full accrual.

a. General fund
b. Debt service fund
c. Internal service fund
d. Investment trusts
e. Private purpose trusts
5. For each of the following funds list the measurement focus it should use, either current financial resources or economic resources.

a. General fund
b. Special revenue funds
c. Capital projects funds
d. Enterprise funds
e. Pension trusts

ESSAYS (CHAPTER 2)

1. Why do governments and not-for-profit entities use fund accounting?

2. Governments use the modified accrual basis of accounting and a current financial resources measurement focus when presenting the fund financial statements of the governmental funds, but they use the accrual basis of accounting and the flow of economic resources for the government-wide financial statements. What is a basis of accounting? What is measurement focus? How does the selection of one affect the selection of the other?

3. For what purposes do governmental and not-for-profit entities use agency funds? What are the distinguishing characteristics of agency funds?

4. Briefly describe the three broad categories of activities that most general-purpose governments engage in.

Chapter 3

Government Financial Reporting

TRUE/FALSE (CHAPTER 3)

1. In addition to preparing fund financial statements, governments should also prepare consolidated financial statements to provide information on the financial position and operating results of the government as a single economic entity.

2. Fiduciary activities should be reported in fund statements, but should be excluded from the government-wide statements.

3. To prepare their government-wide statements, governments must adjust the governmental fund statements from the full accrual basis to the modified accrual basis.

4. The format that may now be used for the government-wide statement of net assets is “assets plus liabilities equals net assets.”

5. The government-wide statement of activities bears little resemblance to the income statement of a business.

6. A reservation of fund balance is, in essence, an additional restriction on fund resources.

7. Internal service fund balances generally are included in the governmental activities column of the government-wide statement of net assets, rather than in the business-type activities column.

8. A governmental funds balance sheet does not include capital or other noncurrent assets.

9. Fund balance is equal to fund assets plus fund liabilities.

10. Footnotes are not required to be included as part of the basic financial statements of governments.

MULTIPLE CHOICE (CHAPTER 3)

1. __________ is governments’ responsibility to report the extent to which they have met their operating objectives efficiently and effectively, using all resources available for that purpose, and whether they can continue to meet their objectives for the foreseeable future.
a) Fund accountability.
b) Fiscal accountability.
c) Operational accountability.
d) Government accountability.

2. __________ is the responsibility of governments to justify that their actions in the current period have complied with public decisions concerning the raising and spending of public moneys in the short term.
a) Fund accountability.
b) Fiscal accountability.
c) Operational accountability.
d) Government accountability.

3. Which of the following is NOT considered Required Supplementary Information (RSI)?
a) Notes to the financial statements.
b) Management’s Discussion and Analysis.
c) Budgetary comparisons.
d) Pension schedules.

4. Government-wide financial statements should include
a) the statement of net assets, and the statement of activities.
b) the statement of net assets only.
c) the statement of activities only.
d) the statement of net assets, the statement of activities, and the statement of cash flows.

5. In addition to government-wide statements, GASB Statement No. 34 requires fund financial statements be included in the government’s basic set of financial statements. The basic fund financial statements that should be included for governmental funds are
a) the Balance Sheet and
the Statement of Revenues, Expenditures, and Changes in Fund Balance.
b) the Statement of Nets Assets,
the Statement of Revenues, Expenses, and Changes in Fund Net Assets, and
the Statement of Cash Flows.
c) the Statement of Fiduciary Net Assets, and
the Statement of Changes in Fiduciary Net Assets.
d) the Balance Sheet,
the Income Statement,
the Statement of Cash Flows, and
the Statement of Retained Earnings.

6. In addition to government-wide statements, GASB Statement No. 34 requires fund financial statements be included in the government’s basic set of financial statements. The basic fund financial statements that should be included for proprietary funds are
a) the Balance Sheet and
the Statement of Revenues, Expenditures, and Changes in Fund Balance.
b) the Statement of Nets Assets,
the Statement of Revenues, Expenses, and Changes in Fund Net Assets, and
the Statement of Cash Flows.
c) the Statement of Fiduciary Net Assets, and
the Statement of Changes in Fiduciary Net Assets.
d) the Balance Sheet,
the Income Statement,
the Statement of Cash Flows, and
the Statement of Retained Earnings.

7. In addition to government-wide statements, GASB Statement No. 34 requires fund financial statements be included in the government’s basic set of financial statements. The basic fund financial statements that should be included for fiduciary funds are
a) the Balance Sheet and
the Statement of Revenues, Expenditures, and Changes in Fund Balance.
b) the Statement of Nets Assets,
the Statement of Revenues, Expenses, and Changes in Fund Net Assets, and
the Statement of Cash Flows.
c) the Statement of Fiduciary Net Assets, and
the Statement of Changes in Fiduciary Net Assets.
d) the Balance Sheet,
the Income Statement,
the Statement of Cash Flows, and
the Statement of Retained Earnings.

8. The aim of the government-wide statement of activities is to show
a) the net cost of each of the government’s main functions and programs.
b) the net income for the government as a whole.
c) the net income for the government’s governmental activities and fiduciary activities.
d) the net income for the government’s governmental activities and proprietary activities.

9. The government-wide statements should be prepared using
a) the cash basis.
b) the full accrual basis.
c) the modified accrual basis.
d) the modified accrual basis for the governmental activities, and the full accrual basis for the business-type activities.

10. In the fund financial statements, the statements for the governmental funds should be prepared using
a) the cash basis.
b) the full accrual basis.
c) the modified accrual basis.
d) the modified cash basis.

11. In the fund financial statements, the statements for the proprietary funds should be prepared using
a) the cash basis.
b) the full accrual basis.
c) the modified accrual basis.
d) the modified cash basis.

12. In the fund financial statements, the statements for the fiduciary funds should be prepared using
a) the cash basis.
b) the full accrual basis.
c) the modified accrual basis.
d) the modified cash basis.

13. Per Statement No. 34, the GASB requires that governments present their budget versus actual comparisons on a __________ and include a schedule that reconciles the actual amounts per the budgetary comparison with the GAAP amounts per the financial statements.
a) full accrual basis
b) modified accrual basis
c) cash basis
d) budgetary basis

14. How many government-wide statements is a municipality required to prepare?
a) One.
b) Two.
c) Eight.
d) Ten.

15. The Basic Financial Statements of a city do not include which of the following?
a) Government-wide Statement of Net Assets.
b) Government-wide Statement of Activities.
c) Government-wide Statement of Cash Flows.
d) Balance Sheet for each governmental and proprietary fund.

16. Which of the following would NOT be found in the business-type activity column of the government-wide Statement of Net Assets of the City of Smithville?
a) Cash.
b) Inventory.
c) Capital assets.
d) Receivable from general fund.

17. Which of the following would NOT be found in the Statement of Net Assets of Teton City?
a) Cash.
b) Capital assets.
c) Receivable from special revenue fund.
d) Inventories.

18. The focus of the Statement of Activities of the city of West Hills is on which of the following?
a) Determining the total expenses by natural classification.
b) Determining the total expenses by function.
c) Determining the total revenues by function.
d) Determining the net cost of functions.

19. Under the new GASB reporting model for governmental entities, which of the following is required?
a) Only one set of financial statements, prepared on the full accrual basis of accounting.
b) Only one set of financial statements, prepared on the modified accrual basis of accounting.
c) Two sets of financial statements, one similar to the pre-GASB #34 reporting requirements using the current financial resources measurement focus and modified accrual basis of accounting and one that combines all governmental activities in one column and all business-type activities in another column using the full accrual basis of accounting for both columns.
d) Two sets of financial statements, one exactly like the pre-GASB #34 reporting requirements using the current financial resources measurement focus and modified accrual basis of accounting and one that combines all governmental activities in one column and all business-type activities in another column using the full accrual basis of accounting for both columns.

20. Under the new GASB reporting model for governmental entities, the entity-wide balance sheet will display which of the following?
a) Assets, Liabilities, and Net Assets.
b) Assets, Liabilities, and Fund Balances.
c) Assets, Liabilities, and Fund Equity.
d) Assets, Liabilities, and Owner’s Equity.

21. Under the new GASB reporting model for governmental entities, the focus of the entity-wide activity/operating statement is on which of the following?
a) Program revenues and expenditures.
b) Program revenues and expenses.
c) Net income.
d) Net program revenues/expenses.

PROBLEMS (CHAPTER 3)

1. Listed below are the names of the two government-wide financials statements and the seven fund statements that should be included in the government’s basic financial statements. Identify each as either a government-wide statement, a governmental funds statement, a proprietary funds statements, or a fiduciary funds statement.

________________ (a) Statement of Activities

________________ (b) Statement of Fiduciary Net Assets

________________ (c) Statement of Cash Flows

________________ (d) Statement of Revenues, Expenses, and Changes in Fund Net Assets

________________ (e) Statement of Revenues, Expenditures, and Changes in Fund Balance

________________ (f) Balance Sheet

________________ (g) Statement of Net Assets (or a Balance Sheet)

________________ (h) Statement of Net Assets

________________ (i) Statement of Changes in Fiduciary Net Assets

2. Listed below are the names of the two government-wide financials statements and the seven fund statements that should be included in the government’s basic financial statements. Identify the appropriate basis of accounting, either modified accrual or full accrual, that should be used to prepare that statement.

________________ (a) Statement of Activities

________________ (b) Statement of Fiduciary Net Assets

________________ (c) Statement of Cash Flows

________________ (d) Statement of Revenues, Expenses, and Changes in Fund Net Assets

________________ (e) Statement of Revenues, Expenditures, and Changes in Fund Balance

________________ (f) Balance Sheet

________________ (g) Statement of Net Assets (or a Balance Sheet)

________________ (h) Statement of Net Assets

________________ (i) Statement of Changes in Fiduciary Net Assets

3. Listed below are the names of the two government-wide financials statements and the seven fund statements that should be included in the government’s basic financial statements. Identify the appropriate measurement focus, either economic resources or current financial resources, that should be followed to prepare that statement.

________________ (a) Statement of Activities

________________ (b) Statement of Fiduciary Net Assets

________________ (c) Statement of Cash Flows

________________ (d) Statement of Revenues, Expenses, and Changes in Fund Net Assets

________________ (e) Statement of Revenues, Expenditures, and Changes in Fund Balance

________________ (f) Balance Sheet

________________ (g) Statement of Net Assets (or a Balance Sheet)

________________ (h) Statement of Net Assets

________________ (i) Statement of Changes in Fiduciary Net Assets

ESSAYS (CHAPTER 3)

1. Concerning the government-wide statement of net assets, describe what information is included in the governmental activities column, the business-type activities column, and the column for the total primary government.

2. The activities of an internal service fund are presented on the Statement of Revenues, Expenses, and Changes in Fund Net Assets in the fund financial statements. Why? Where are the activities of an internal service fund presented on the Government-wide Statement of Activities? Why?

3. Contrast the reporting of major funds in the governmental funds financial statements versus that of nonmajor funds.

Chapter 4

Governmental Activities – Recognizing Revenues

TRUE/FALSE (CHAPTER 4)

1. If an entity elects to focus on all economic resources (both current and long-term assets and liabilities), then it should adopt a modified accrual basis of accounting.

2. The budgetary measurement focus of governments is determined by applicable state or local laws.

3. The revenue-recognition issues facing governments are simpler to resolve than those of businesses.

4. Governmental activities tend to derive the majority of their revenues from exchange transactions.

5. In accounting for property taxes, under the modified accrual basis, existing standards provide that, except in unusual circumstances, revenues should be recognized only if cash is expected to be collected within sixty days of year-end.

6. Ad valorem taxes are taxes that are based on value.

7. Income taxes are classified as ad valorem taxes.

8. Sales taxes are taxpayer assessed, that is, parties other than the beneficiary government determine the tax base.

9. All intergovernmental grants are accounted for in exactly the same way.

10. Revenues that cannot be classified as general revenues are by default considered program revenues.

11. Taxes that are imposed on the reporting government’s citizens are considered general revenues, even if they are restricted to specific programs.

MULTIPLE CHOICE (CHAPTER 4)

1. As used in governmental accounting, interperiod equity refers to a concept of
a) providing the same level of services to citizens each year.
b) measuring whether current year revenues are sufficient to pay for current year services.
c) levying property taxes at the same rate each year.
d) requiring that general fund budgets be balanced each year.

2. For fund financial statements, the measurement focus and basis of accounting used by governmental fund types are
a) current financial resources and modified accrual accounting.
b) economic resources and modified accrual accounting.
c) financial resources and full accrual accounting.
d) economic resources and full accrual accounting.

3. The modified accrual basis of accounting is used in presenting the fund financial statements of the governmental funds because
a) it is the superior method of accounting for the economic resources of any entity.
b) it provides information as to the extent the entity achieved interperiod equity.
c) it is budget oriented while facilitating comparisons among entities.
d) it results in accounting measurements based on the substance of transactions.

4. As used in defining the term ‘modified accrual basis of accounting’, available means
a) received in cash.
b) will be received in cash within 60 days of year-end.
c) collection in cash is reasonably assured.
d) collected within the current period or expected to be collected soon enough thereafter to be used to pay liabilities of the current period.

5. Under the accrual basis of accounting, property tax revenues are recognized
a) when they are received in cash.
b) in the year for which they were levied.
c) in the year for which they were levied and when collection in cash is reasonably assured.
d) when they are available to finance expenditures of the fiscal period.

6. Under the modified accrual basis of accounting, the amount of property tax revenues that should be recognized by a governmental entity in the current year related to the current year levy will be
a) the total amount of the levy.
b) the expected collectible portion of the levy.
c) the portion of the levy collected.
d) the portion of the levy collected in the current year or within sixty days of the fiscal period.

7. Under the modified accrual basis of accounting used by a governmental entity, investment revenues for the current period should include
a) only interest and dividends received.
b) all interest and dividends received during the period plus all accruals of interest and dividends earned.
c) all interest and dividends received plus gains and losses on securities that were sold during the period.
d) all interest and dividends received, all gains and losses on securities sold and all changes in market values on securities held in the portfolio at year-end.

8. Under the accrual basis of accounting used by a governmental entity, investment revenues for the current period should include
a) only interest and dividends received.
b) all interest and dividends received during the period plus all accruals of interest and dividends earned.
c) all interest and dividends received plus gains and losses on securities that were sold during the period.
d) all interest and dividends received, all gains and losses on securities sold and all changes in market values on securities held in the portfolio at year-end.

9. Under the modified accrual basis of accounting, derived nonexchange revenues are recognized by a governmental entity as revenue
a) when the underlying exchange transaction occurs.
b) when available.
c) when the underlying event occurs and the revenue is available.
d) when earned.

10. Under the accrual basis of accounting, derived nonexchange revenues are recognized by a governmental entity as revenue
a) when the underlying exchange transaction occurs.
b) when available.
c) when the underlying event occurs and the revenue is available.
d) when earned.

11. Under the modified accrual basis of accounting, gains and losses on disposal of fixed assets
a) are not recognized.
b) are recognized when the proceeds (cash) of the sale are received (on the installment basis).
c) are recognized only if there is a gain.
d) are recognized when the sale occurs, regardless of when the cash is collected.

12. Under the accrual basis of accounting, gains and losses on disposal of fixed assets
a) are not recognized.
b) are recognized when the proceeds (cash) of the sale are received (on the installment basis).
c) are recognized only if there is a gain.
d) are recognized when the sale occurs, regardless of when the cash is collected.

13. Under the modified accrual basis of accounting, fines, license fees, permits, and other miscellaneous revenue are generally recognized
a) when cash is received.
b) when assessed.
c) when an enforceable legal claim exists.
d) when an enforceable legal claim exists and the revenue is available.

14. Under the accrual basis of accounting, fines, license fees, permits, and other miscellaneous revenue are generally recognized
a) when cash is received.
b) when assessed.
c) when an enforceable legal claim exists.
d) when an enforceable legal claim exists and the revenue is available.

15. A city which has a 12/31 fiscal year end has adopted a policy of recognizing the maximum amount of property tax revenue allowable under GAAP. Property taxes of $600,000 (of which 10% are estimated to be uncollectible) are levied in October 1999 to finance the activities of the fiscal year 2000. During 2000, cash collections related to property taxes levied in October 1999 were $500,000. In 2001 the following amounts related to the property taxes levied in October 1999 were collected: January $25,000; March, $5,000. For the fiscal year ended 12/31/00, what amount should be recognized as property tax revenues related to the 1999 levy on the fund financial statements?
a) $600,000.
b) $540,000.
c) $525,000.
d) $500,000.

16. A city that has adopted a 12/31 fiscal year end has adopted a policy of recognizing property tax revenue consistent with the 60-day rule allowable period under GAAP. Property taxes of $600,000 (of which none are estimated to be uncollectible) are levied in October 2000 to finance the activities of fiscal year 2001. Property taxes are due in two installments June 20 and December 20. Cash collections related to property taxes are as follows:
1/15/01 for property taxes levied in 1999, due in 2000 $ 25,000
2/15/01 for property taxes levied in 1999, due in 2000 $ 15,000
3/15/01 for property taxes levied in 1999, due in 2000 $ 10,000
6/20/01 First installment of taxes levied in 2000, due 6/20/01 $350,000
12/20/01 Second installment of taxes levied in 2000, due 12/20/01 $150,000
1/15/02 for property taxes levied in 2000, due in 2001 $ 15,000
2/15/02 for property taxes levied in 2000, due in 2001 $ 10,000
3/15/02 for property taxes levied in 2000, due in 2001 $ 5,000
The total amount of property tax revenue that will be recognized in the government-wide financial statements in 2001 is:
a) $600,000.
b) $575,000.
c) $535,000.
d) $525,000.

17. Under GAAP, property taxes levied in one fiscal period to finance the activities of the following fiscal period are recognized as revenue in the fund financial statements
a) in the year levied.
b) in the year for which they are intended to finance the activities.
c) when collected, regardless of when levied.
d) in the year for which they are intended to finance the activities, if collected within that period or within a period no greater than 60 days after the close of the fiscal year.

18. Under GAAP, property taxes levied in one fiscal period to finance the activities of the following fiscal period are recognized as revenue in the government-wide financial statements
a) in the year levied.
b) in the year for which they are intended to finance the activities.
c) when collected, regardless of when levied.
d) in the year for which they are intended to finance the activities, if collected within that period or within a period no greater than 60 days after the close of the fiscal year.

19. A City levies a 2% sales tax. Sales tax must be remitted by the merchants to the City by the 20th day of the month following the month in which the sale occurred. Cash received by the City related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1999 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received during 2000 related to February-November 2000 sales $200
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize in the fund financial statement as sales tax revenue for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

20. A City levies a 2% sales tax. Sales tax must be remitted by the merchants to the City by the 20th day of the month following the month in which the sale occurred. Cash received by the City related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1998 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received during 2000 related to February-November 2000 sales $200
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize in the government-wide financial statement as sales tax revenue for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

21. A City levies a 2% sales tax that is collected for them by the State. Sales tax must be remitted by the merchants to the State by the 20th day of the month following the month in which the sale occurred. The State has a policy of remitting sales taxes to the City within 30 days of collection by the State. Cash received by the State related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1999 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received 3/20/00, applicable to February 2000 sales $ 10
Amount received during 2000 related to March-November 2000 sales $190
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Amount received 3/20/01 for February 2001 $ 5
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize as sales tax revenue in its fund financial statements for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

22. A City levies a 2% sales tax that is collected for them by the State. Sales tax must be remitted by the merchants to the State by the 20th day of the month following the month in which the sale occurred. The State has a policy of remitting sales taxes to the City within 30 days of collection by the State. Cash received by the State related to sales tax is as follows:
Amount received 1/20/00, applicable to December 1999 sales $ 50
Amount received 2/20/00, applicable to January 2000 sales $ 15
Amount received 3/20/00, applicable to February 2000 sales $ 10
Amount received during 2000 related to March-November 2000 sales $190
Amount received 1/20/01 for December 2000 sales $ 55
Amount received 2/20/01 for January 2001 $ 20
Amount received 3/20/01 for February 2001 $ 5
Assuming the City uses the same period to define “available” as the maximum period allowable for property taxes, what amount should it recognize as sales tax revenue in its government-wide financial statements for the fiscal year ended 12/31/00.
a) $215.
b) $265.
c) $270.
d) $275.

23. Under GAAP, income tax revenues should be recognized in the fund financial statements in the accounting period
a) when collected in cash by the taxing authority.
b) in which the underlying income was earned, regardless of when collected.
c) in which the underlying income was earned, if collected in time to satisfy the budgetary obligations of the preceding year.
d) when earned.

24. Under GAAP, income tax revenues should be recognized in the government-wide financial statements in the accounting period
a) when collected in cash by the taxing authority.
b) in which the underlying income was earned, regardless of when collected.
c) in which the underlying income was earned, if collected in time to satisfy the budgetary obligations of the preceding year.
d) when earned.

25. During 2000, the city issued $300 in fines for failure to keep real property in ‘acceptable’ condition. During that period the city spent $200 to mow and clean up the unoccupied properties for which the fines were assessed. The city estimates that $30 of the fines issued in 2000 will be uncollectible. During 1999 the city collected $230 related to 2000 fines and $20 related to 1999 fines. The amount of revenue that the city should recognize in its 2000 fund financial statements related to fines is
a) $230.
b) $250.
c) $270.
d) $300.

26. Under GAAP, license and permit fees should be recognized in the fund financial statements in the accounting period
a) when collected.
b) when collected, plus proceeds collected within 60 days of fiscal year-end.
c) when earned.
d) when earned, if collected within 60 days of fiscal year end.

27. A city receives a $200,000 grant from the state to purchase vans to transport physically challenged individuals. During the current year the city receives the entire $200,000 and purchases one bus for $85,000 and issues a purchase order for another van for $80,000. The grant revenue that the city should recognize on the government-wide financial statements in the current year is
a) $-0-.
b) $ 85,000.
c) $165,000.
d) $200,000.

28. A city receives notice of a $200,000 grant from the state to purchase vans to transport physically challenged individuals. Although the city did not receive any of the grant funds during the current year, the city purchased one bus for $85,000 and issues a purchase order for another van for $80,000. The grant revenue that the city should recognize in the government-wide financial statements in the current year is
a) $-0-.
b) $ 85,000.
c) $165,000.
d) $200,000.

29. Payments made to a state pension plan by the state government on behalf of a local government should
a) not be displayed or disclosed in the local government financial statements.
b) be displayed as a revenue in the local government financial statements.
c) be displayed as both a revenue and an expenditure in the local government financial statements.
d) should be disclosed, but not displayed, in the local government financial statements.

30. Unrestricted grant revenues with a time requirement should be recognized in the accounting period in which
a) the award is announced.
b) the cash is received.
c) the grant may be used.
d) expenditures are recorded on grant-related activities.

31. Reimbursement-type grant revenues are recognized in the accounting period in which
a) the award is made.
b) the cash is received.
c) cash is disbursed on grant-related activities.
d) expenditures are recorded on grant-related activities.

32. A local governmental entity began the year with a security with an historical cost of $85 and a fair value at the beginning of the year of $95. During the year, dividends of $2 were received. At the end of the year the security had a fair value of $100. The amount that should be recognized on the fund financial statements for the year as investment income is
a) $-0-.
b) Gain $7.
c) Gain $15.
d) Gain $17.

33. A local governmental entity began the year with a portfolio of securities with an historical cost of $600 and a fair value of $620. During the year the government acquired an additional security at a cost of $130 and sold for $100 a security that had an historical cost of $86 and a fair value at the beginning of the year of $95. At the end of the year the securities portfolio had a fair value of $665. The amount that should be recognized on the financial statements for the year as investment income is
a) Gain $5.
b) Gain $10.
c) Gain $14.
d) Gain $15.

34. Under GAAP, investment income for governmental entities must include
a) only dividends and interest received during the period.
b) only dividends and interest earned during the period.
c) only realized gains and losses.
d) dividends and interest received during the period and both realized and unrealized gains and losses.

PROBLEMS (CHAPTER 4)

1. Property Taxes
Assuming that the City maintains the books and record in a manner that facilitates the preparation of the fund financial statements, prepare all necessary 2000 journal entries to record the following 2000 events related to the revenues of a city. The City has a 12/31 fiscal year-end. The city has adopted the 60-day rule for all revenue recognition for which it is appropriate.

a) On January 3, the City Council levied property taxes of $1 million to support general government operations, due in two equal installments with due dates of June 20 and December 20. The property taxes were levied to finance the 2000 budget which had been adopted on November 3, 1999. Historically 2% of property taxes are uncollectible.

b) The City collected the following amounts related to property taxes
Delinquent 1999 taxes collected in January, 2000 $ 11,000
Delinquent 1999 taxes collected in March, 2000 $ 12,500
2000 taxes collected in June, 2000 $ 540,000
2000 taxes collected in December, 2000 $ 400,000
Delinquent 2000 taxes collected in January, 2001 $ 10,000
Delinquent 2000 taxes collected in March, 2001 $ 15,000

c) Delinquent 2000 property taxes were reclassified as delinquent.

d) $2,000 of 1998 taxes was written off.

2. Sales Tax Revenues
Assuming that the City maintains the books and records in a manner that facilitates the preparation of the fund financial statements, prepare all necessary 2000 journal entries to record the following 2000 events related to the revenues of a city. The City has a 12/31 fiscal year-end. The city has adopted the 60-day rule for all revenue recognition for which it is appropriate. The City levies a local sales tax which is collected by the merchants and remitted to the City by the 20th day of the month following the month of sale.

a) On January 20, the City receives sales tax returns and related payments of $7,000 from the merchants of the City for the month of December 1999.

b) On February 20, the City receives sales tax returns and related payments of $3,000 from the merchants of the City for the month of January 2000.

c) During 2000 the City receives sales tax returns and related payments of $40,000 from the merchants for the months of February-November 2000

d) On January 20, 2001 the City receives sales tax returns and related payments of $7,500 from the merchants of the City for the month of December 2000.

3. Assuming that the City maintains the books and records in a manner that facilitates the preparation of the fund financial statements, prepare all necessary 2000 journal entries to record the following 2000 events related to the revenues of a city. The City has a 12/31 fiscal year-end. The city has adopted the 60-day rule for all revenue recognition for which it is appropriate.

a) On January 15, the City received notification that it was the recipient of a $200,000 federal grant to assist in the operation of a “Meals on Wheels’ program. The federal government expects to send the cash in about 3 months.

b) In February the City spent $21,000 on ‘Meals on Wheels.’

c) In March, fines of $1,200 were issued for parking tickets. Payment may be made by the citizens by mail within a specified period of time or they may be protested and a court date will be set. Approximately 10% will be abated by the Courts.

d) In April the City received the $200,000 from the federal government.

e) Payments of $800 were received in April in payment of March parking tickets.

f) Restaurant licenses are issued for a one-year period. The licenses are valid for one year from July 1 to June 30. The license fees are used to pay restaurant inspectors. In June, $7,500 in restaurant license fees was received.

ESSAY (CHAPTER 4)

1. Governmental entities use modified accrual accounting to determine when transactions and events will be recognized in the financial statements of the governmental fund types.
Required:
a) What is modified accrual accounting and how does it affect revenue recognition for the following types of revenue: property taxes; sales and income taxes; licenses, permits and fines; grants of all types; investment income; and donations.
b) In your opinion is modified accrual accounting the best basis of accounting for governmental entities? Why or why not? Defend your answer.

2. Answer the following questions with regard to preparation of the fund financial statements. At fiscal year-end, a city holds an investment portfolio in it general fund that has a fair market value of $15 million and a historical cost of $28 million. The portfolio had a fair value of $18 million at the beginning of the current fiscal year. The portfolio is composed of a variety of bonds with a face value of $29 million and a due date five years in the future. The bonds were acquired to meet a $29 million debt due five years in the future. Although the bonds have the usual market risk, the credit risk is minimal.
Required:
a) At what amount should the portfolio be valued on the balance sheet?
b) What amount, if any, should appear on the operating statement?
c) Defend the valuation method required by GAAP.
d) Argue against the valuation method required by GAAP.
e) At what amount would the City want to record the investments on their financial statements? Why?

3. Answer the following questions with regard to preparation of the fund financial statements. A local government receives three grants from the State. One grant is received in cash but must be used only for the acquisition of two vans specifically equipped to transport physically challenged citizens who use wheelchairs as a means of mobility. The second grant provides for reimbursement of costs incurred in operating a public transit system. The third grant is a distribution of State general fund revenues allocated to each City in the State based on the population of the City. This last grant is to be used in general government operations. The City also receives a federal grant which must be passed through by the City to smaller units of government who meet the eligibility requirements. The City must monitor these smaller units of government for compliance with grant requirements.
Required:
a) Discuss the various methods of revenue recognition for grants and other similar revenues.
b) Discuss the appropriate basis for revenue recognition for each of these grants.
c) Discuss the rationale for each of these methods of revenue recognition.

B.
C. Chapter 5

Governmental Activities – Recognizing Expenditures and Expenses

TRUE/FALSE (CHAPTER 5)

1. Expenditures are generally recognized when resources are acquired; expenses when resources are consumed.

2. Governmental fund liabilities are considered current only when they must be liquidated with expendable available financial resources—not, as in businesses and in the government-wide statements, when they must be paid within a year.

3. In a governmental fund, expenditures for wages and salaries should be recognized in the period in which the employees earn them.

4. When accounting for inventory items in a governmental fund, GASB standards permit the use of the consumption method only.

5. When accounting for inventory items in a governmental fund, a reservation of fund balance is always required when the consumption method is used.

6. In budgeting for a governmental fund, the government should appropriate the resources for general capital assets in the periods when they are to be purchased, not those in which they will be used.

7. Per GASB standards, governments do not report general capital assets or depreciation in governmental funds.

8. When recording a general long-term liability in a governmental fund upon issuing a bond, the credit should be to a bonds payable account.

9. Most governments budget (appropriate) resources for principal and interest only for the period in which a payment is due—not for future payments.

10. Government-wide statements present revenues and expenses from the perspective of the government, not of individual funds.

MULTIPLE CHOICE (CHAPTER 5)

1. Which of the following funds would use the modified accrual basis of accounting in preparing its fund financial statements?
a) City Electric Utility Enterprise Fund.
b) City Hall Capital Project Fund.
c) City Motor Pool Internal Service Fund.
d) City Employee Pension Trust Fund.

2. Which of the following funds would use the accrual basis of accounting in preparing its fund financial statements?
a) City General Fund.
b) City Hall Capital Project Fund.
c) City Motor Pool Internal Service Fund.
d) None of the above.

3. As used in governmental accounting, expenditures are decreases in
a) Net Assets.
b) Net Financial Resources.
c) Net Cash.
d) Net Economic Resources.

4. Assume that the City of Juneau maintains its books and records to facilitate the preparation of its fund financial statement. The City pays its employees bi-weekly on Friday. The fiscal year ended on Wednesday, June 30. Employees had been paid on Friday, June 25. The employees paid from the General Fund had earned $120,000 on Monday, Tuesday, and Wednesday (June 28, 29, and 30). What entry, if any, should be made on June 30?
a) Debit Expenditures; Credit Wages and Salaries Payable.
b) Debit Expenses; Credit Wages and Salaries Payable.
c) Debit Expenditures; Credit Encumbrances.
d) No entry is required.

5. Assume that the City of Juneau maintains its books and records to facilitate the preparation of its fund financial statements. The City pays its employees bi-weekly on Friday. The fiscal year ended on Wednesday, June 30. Employees had been paid on Friday, June 25. The employees paid from the General Fund had earned $120,000 on Monday, Tuesday, and Wednesday (June 28, 29, and 30). They will earn $80,000 on Thursday and Friday (July 1 and 2). What entry, if any, should be made on June 30?
a) Debit Expenditures $120,000; Credit Wages and Salaries Payable $120,000.
b) Debit Expenditure $200,000; Credit Wages and Salaries Payable $200,000.
c) Debit Expenses $120,000; Credit Wages and Salaries Payable $120,000.
d) No entry is required.

6. Assume that the City of Juneau maintains its books and records to facilitate the preparation of its government-wide financial statements. The City pays its employees bi-weekly on Friday. The fiscal year ended on Wednesday, June 30. Employees had been paid on Friday, June 25. The employees paid from the General Fund had earned $120,000 on Monday, Tuesday, and Wednesday (June 28, 29, and 30). They will earn $80,000 on Thursday and Friday (July 1 and 2). What entry, if any, should be made on June 30?
a) Debit Expenditures $120,000; Credit Wages and Salaries Payable $120,000.
b) Debit Expenditure $200,000; Credit Wages and Salaries Payable $200,000.
c) Debit Expenses $120,000; Credit Wages and Salaries Payable $120,000.
d) No entry is required.

7. Employees of the City of Orleans earn ten days paid leave for each 12 months of employment. The City has a policy that employees must take their vacation days during the year following the year in which it is earned. If they do not take vacation in the allotted period, they forfeit the vacation pay benefit. Traditionally, employees have taken 80% of the vacation days earned. During the current year, employees of the City of Orleans earned $400,000 in vacation pay. Assuming the city maintains its books and records in a manner to facilitate the preparation of the fund financial statements, which of the following entries is the correct entry in the General Fund to record the vacation pay earned during the current period?
a) Debit Expenditures $400,000; Credit Vacation Payable $400,000.
b) Debit Expenses $400,000; Credit Vacation Payable $400,000.
c) Debit Expenditures $320,000; Credit Vacation Pay Payable $320,000.
d) No entry required.

8. Employees of the City of Orleans earn ten days paid leave for each 12 months of employment. The City has a policy that employed must take their vacation days during the year following the year in which it is earned. If they do not take vacation in the allotted period, they forfeit the vacation pay benefit. Traditionally, employees have taken 80% of the vacation days earned. During the current year, employees of the City of Orleans earned $400,000 in vacation pay. Assuming the city maintains its books and records in a manner to facilitate the preparation of the government-wide financial statements, which of the following entries is the correct entry in the General Fund to record the vacation pay earned during the current period?
a) Debit Expenditures $400,000; Credit Vacation Payable $400,000.
b) Debit Expenses $400,000; Credit Vacation Payable $400,000.
c) Debit Expenses $320,000; Credit Vacation Pay Payable $320,000.
d) No entry required.

9. Employees of the General Fund of Scott City earn ten days paid leave for each 12 months of employment. The City permits employees to carry the vacation days forward as long as they wish. During the current year employees earned $800,000 of vacation benefits of which the City estimates that $500,000 will be taken in the next year and the balance will be carried forward. Assuming that the City maintains its books and records in a manner that facilitates the preparation of their fund financial statements, which of the following entries is the correct entry in the General Fund to record the vacation pay earned during the current period?
a) Debit Expenditures $800,000; Credit Vacation Pay Payable $800,000.
b) Debit Expenditures $500,000; Credit Vacation Pay Payable $500,000.
c) Debit Vacation Expense $800,000; Credit Vacation Pay Payable $800,000.
d) No entry required.

10. Employees of the General Fund of Scott City earn ten days paid leave for each 12 months of employment. The City permits employees to carry the vacation days forward as long as they wish. During the current year employees earned $800,000 of vacation benefits of which the City estimates that $500,000 will be taken in the next year and the balance will be carried forward. Assuming that the City maintains its books and records in a manner that facilitates the preparation of their government-wide financial statements, which of the following entries is the correct entry in the General Fund to record the vacation pay earned during the current period?
a) Debit Expenditures $800,000; Credit Vacation Pay Payable $800,000.
b) Debit Expenditures $500,000; Credit Vacation Pay Payable $500,000.
c) Debit Vacation Expense $800,000; Credit Vacation Pay Payable $800,000.
d) No entry required.

11. Culver City recognized as revenues/expenditures those amounts collected/paid during the year or within 60 days of fiscal year-end. The City offers a pension benefit to its employees who meet certain age and years of employment criteria. The City participates in the State Pension Plan. The City’s actuarially determined contribution to the State Pension Plan for the fiscal year ended 6/30/00 is $4 million. Due to cash inflow shortages the City, which budgeted $4 million for pension payments paid only $3 million in the fiscal year ended 6/30/00. The City made the final payment September 30, 2000. Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, what is the appropriate entry to record the pension payments and recognize any associated liability?
a) Debit Expenditures $4 million; Credit Cash $3 million and Pension Payable $1 million
b) Debit Expenses $4 million; Credit Cash $3 million and Pension Payable $1 million
c) Debit Expenditures $3 million; Credit Cash $3 million
d) Debit Expenses $3 million; Credit Cash $3 million

12. Culver City recognized as revenues/expenditures those amounts collected/paid during the year or within 60 days of fiscal year-end. The City offers a pension benefit to its employees who meet certain age and years of employment criteria. The City participates in the State Pension Plan. The City’s actuarially determined contribution to the State Pension Plan for the fiscal year ended 6/30/00 is $4 million. Due to cash inflow shortages the City, which budgeted $4 million for pension payments paid only $3 million in the fiscal year ended 6/30/00. The City made the final payment September 30, 2000. Assuming the City maintains its books and records in a manner that facilitates the preparation of the government-wide financial statements, what is the appropriate entry to record the pension payments and recognize any associated liability?
a) Debit Expenditures $4 million; Credit Cash $3 million and Pension Payable $1 million
b) Debit Expenses $4 million; Credit Cash $3 million and Pension Payable $1 million
c) Debit Expenditures $3 million; Credit Cash $3 million
d) Debit Expenses $3 million; Credit Cash $3 million

13. The amount of pension expenditures that should be recognized in the General Fund financial statements during the current year is
a) The amount paid.
b) The amount paid plus the amount that will be paid with available expendable financial resources.
c) The amount paid so long as it does not exceed the actuarially determined amount.
d) The actuarially determined amount.

14. The amount of pension expenditures that should be recognized in the government-wide financial statements during the current year is
a) The amount paid.
b) The amount paid plus the amount that will be paid with available expendable financial resources.
c) The amount paid so long as it does not exceed the actuarially determined amount.
d) The actuarially determined amount.

15. This year Port City was sued for injuries sustained when a citizen slipped and broke her hip on the icy City Hall steps. The City attorney estimates the City will be held liable by the courts and a judgment of $200,000 will result. Because of the nature of the case it will likely be four years before the City makes any payment related to the accident. The present value of the likely future payment is $167,000. In the General Fund, at the end of the current fiscal year, Port City should recognize a liability of
a) $200,000.
b) $167,000.
c) $0 with required note disclosure.
d) $0 with no required not disclosure.

16. Several years ago, Grant County was sued by a former County employee for wrongful discharge. Although it was to be contested by the County, at the time of the lawsuit the attorneys felt that that the County was likely to lose and the estimated amount of the ultimate judgment would be $100,000. This year, the case was finally settled with a judgment against the County of $150,000, which was paid. Assuming that the county maintains its books and records in a manner to facilitate the preparation of its fund financial statements, the entry in the current year should be
a) Debit Expenditures $150,000; Credit Cash $150,000
b) Debit Expenses $150,000; Credit Cash $150,000
c) Debit Expenditures $50,000 and Claims Payable $100,000; Credit Cash $150,000
d) Debit Expenses $50,000 and Claims Payable $100,000; Credit Cash $150,000

17. Several years ago, Grant County was sued by a former County employee for wrongful discharge. Although it was to be contested by the County, at the time of the lawsuit the attorneys felt that that the County was likely to lose and the estimated amount of the ultimate judgment would be $100,000. This year, the case was finally settled with a judgment against the County of $150,000, which was paid. Assuming that the county maintains its books and records in a manner to facilitate the preparation of its government-wide financial statements, the entry in the current year should be
a) Debit Expenditures $150,000; Credit Cash $150,000
b) Debit Expenses $150,000; Credit Cash $150,000
c) Debit Expenditures $50,000 and Claims Payable $100,000; Credit Cash $150,000
d) Debit Expenses $50,000 and Claims Payable $100,000; Credit Cash $150,000

18. The City of Upper Falls accounts for its inventory using the purchases method. During the year the City bought $400,000 of supplies, for which it owed $100,000 at year-end. The City will pay for the supplies from available expendable financial resources. The appropriate entry is
a) Debit Expenditures $400,000; Credit Cash $300,000 and Accounts Payable $100,000.
b) Debit Expenditures $300,000; Credit Cash $300,000.
c) Debit Supplies Inventory $400,000; Credit Cash $300,000 and Accounts Payable $100,000.
d) Debit Supplies Inventory $300,000; Credit Cash $300,000.

19. Bay City uses the purchases method to account for supplies. At the beginning of the year the City had no supplies on hand. During the year the City purchased $600,000 of supplies for use by activities accounted for in the General Fund. The City used $400,000 of those supplies during the year. Assuming that the city maintains its books and records in a manner that facilitates the preparation of the fund financial statements, at fiscal year-end the appropriate account balances related to supplies expenditures and supplies inventory would be
a) Expenditures $600,000; Supplies Inventory $200,000.
b) Expenditures $600,000; Supplies Inventory $0.
c) Expenditures $400,000; Supplies Inventory $200,000.
d) Expenditures $400,000; Supplies Inventory $0.

20. Shoshone County uses the consumption method to account for supplies. At the beginning of the year the City had no supplies on hand. During the year the City purchases $600,000 of supplies for use by activities accounted for in the General Fund. The City used $400,000 of those supplies during the year. At fiscal year-end the appropriate account balances on the General Fund financial statements would be
a) Expenditures $600,000; Supplies Inventory $200,000.
b) Expenditures $600,000; Supplies Inventory $0.
c) Expenditures $400,000; Supplies Inventory $200,000.
d) Expenditures $400,000; Supplies Inventory $0.

21. Sugar City uses the purchases method to record all prepayments. The City has a 6/30 fiscal year-end. On December 31, 2000, the city purchased a three-year insurance policy covering all city owned vehicles acquired by the General Fund to be used in general government activity. Cost of the policy was $360,000. After the 6/30/01 closing entries, the appropriate balance sheet accounts and balances associated with this transaction are:
a) Prepaid Insurance $300,000; Expenditure $60,000.
b) Prepaid Insurance $300,000; Expenditures $360,000
c) Prepaid Insurance $0; Expenditure $360,000.
d) Prepaid Insurance $0; Expenditures $60,000.

22. Campbell County uses the consumption method to record all inventories and prepayments. The City has a 9/30 fiscal year-end. On April 1, 2000, the County purchased a two-year insurance policy at a total cost of $400,000, paying for the policy out of the General Fund. On the General Fund financial statements, the amount of insurance expenditures for the fiscal year ended 9/30/00 would be
a) $400,000.
b) $300,000.
c) $200,000.
d) $100,000.

23. On July 1 Gilbert County bought computer equipment for use in the administrative offices of the County. The equipment has an estimated useful life of three years and salvage of $10,000. Gilbert County has a 6/30 fiscal year-end. Assuming that the County maintains its books and records in a manner that facilitates the preparation of fund financial statements, the $70,000 cost of this equipment would require which of the following entries?
a) Debit Expenditures $70,000; Credit Cash $70,000
b) Debit Equipment $70,000; Credit Cash $70,000
c) Debit Expenses $70,000; Credit Cash $70,000
d) No entry in the General Fund

24. On July 1 Gilbert County bought computer equipment for use in the administrative offices of the County. The equipment has an estimated useful life of three years and salvage of $10,000. Gilbert County has a 6/30 fiscal year-end. Assuming that the County maintains its books and records in a manner that facilitates the preparation of government-wide financial statements, the $70,000 cost of this equipment would require which of the following entries?
a) Debit Expenditures $70,000; Credit Cash $70,000
b) Debit Equipment $70,000; Credit Cash $70,000
c) Debit Expenses $70,000; Credit Cash $70,000
d) No entry in the General Fund
25. Pocahontas School District, an independent public school district, financed the acquisition of a new school bus by signing a note for $90,000 plus interest on the unpaid balance at 6%. Annual principal payment of $30,000, plus interest, are due each July 1. Assuming that the District maintains its books and records in a manner that facilitates the preparation of the fund financial statements, the appropriate entry in the General Fund at the date of acquisition is
a) Debit Expenditures $90,000; Credit Notes Payable $90,000.
b) Debit Fixed Assets $90,000; Credit Notes Payable $90,000.
c) Debit Expenditures $90,000; Credit Other Financing Sources $90,000.
d) Debit Fixed Assets $90,000; Credit Other Financing Sources $90,000.

26. Pocahontas School District, an independent public school district, financed the acquisition of a new school bus by signing a note for $90,000 plus interest on the unpaid balance at 6%. Annual principal payment of $30,000, plus interest, are due each July 1. Assuming that the District maintains its books and records in a manner that facilitates the preparation of the government-wide financial statements, the appropriate entry at the date of acquisition is
a) Debit Expenditures $90,000; Credit Notes Payable $90,000.
b) Debit Fixed Assets $90,000; Credit Notes Payable $90,000.
c) Debit Expenditures $90,000; Credit Other Financing Sources $90,000
d) Debit Fixed Assets $90,000; Credit Other Financing Sources $90,000

27. Several years ago, Durham City issued $1 million in zero coupon bonds due and payable in 2010. The bonds were sold at an amount to yield investors 6% over the life of the bonds. During the current year, how much interest expenditures would Durham City recognize related to these bonds?
a) Difference between the present value of the bonds at the beginning of the period and the present value of the bonds at the end of the period.
b) Face amounts of bonds times 6%.
c) Book value of bonds times 6%.
d) None.

28. The City of Holbrook transferred $100,000 from the General Fund to the Debt Service Fund for payment of interest. The appropriate entry in the General Fund to record this transfer would be
a) Debit Expenditures $100,000; Credit Cash $100,000.
b) Debit Other Financing Uses—Nonreciprocal Transfer Out $100,000; Credit Cash $100,000.
c) Debit Fund Balance—Transfer Out $100,000; Credit Cash $100,000.
d) Debit Other Financing Sources—Nonreciprocal Transfer In $100,000; Credit Cash $100,000.

29. Harris County transferred $200,000 from the General Fund to the Motor Pool Internal Service Fund to pay for the use of automobiles during the first six months of FY 2001. The appropriate entry in the General Fund to record this transfer of cash would be
a) Debit Expenditures $200,000; Credit Cash $200,000.
b) Debit Other Financing Uses—Transfer Out $200,000; Credit Cash $200,000.
c) Debit Fund Balance—Transfer Out $200,000; Credit Cash $200,000.
d) Debit Other Financing Sources—Transfer In $200,000; Credit Cash $200,000.

30. Other financing sources/uses would appear on which of the following statements?
a) Balance Sheet.
b) Statement of Revenues, Expenditures, and Changes in Fund Balance.
c) Cash Flow Statement.
d) None of the above.

PROBLEMS (CHAPTER 5)

1. Employees of the City of Hastings are paid from the general fund semi-monthly on the 15th day and the last day of the month. The City provides numerous employee benefits. Employees earn ten vacation days for each 12 months of employment. The employee can take the vacation during any summer months (May-September) prior to retirement. The employees also earn one sick day for each month of employment. Sick pay vests at the completion of five years of continuous service. Vested unused sick pay will be paid upon retirement or termination. The City contributes to a retirement plan that is administered by the State. Each year the City gets a statement from the State explaining the actuarially determined contribution required.

The City recognizes revenues/expenditures when collected/paid or if collected/paid within 60 days of year-end. The City’s fiscal year end is December 31. At the beginning of the current year employees had $.4 million of earned vacation time and $7 million of vested earned sick leave. The City uses the FIFO method of accounting for vacation and sick days.

REQUIRED: Assuming that the City maintains its books and records in a manner to facilitate the preparation of its fund financial statements, record the following transactions related to employee salaries and benefits. Be sure to make ALL necessary entries

a. During the year employees of the City earned $50 million. At year-end all but $2 million had been paid to the employees.

b. During the year the employees of the City earn $2 million in vacation pay. By year-end the employees had taken $1.5 million of vacation. Of the balance of vacation pay due to the employees, the City estimates that $.3 million will be taken during the next year and $.2 million will be deferred until later.

c. During the year the employees of the City earned $3 million in sick pay, of which $2.5 million is expected to vest. Of the $2.5 million, employees are expected to take $2.0 million and $.5 million is expected to be paid to employees upon their termination or retirement. During the year employees took $1 million in sick days.

d. The City received a statement from the State requiring a contribution to the Retirement Plan of $7 million for the current year. Because of a cash shortage the City paid $5 million of the required contribution during the year, $1.5 million on February 15 of the following year and $.5 million in June of the following year.

2. During the year the City of Hamburg engaged in the following transactions. The City uses the consumption method of recording inventories and prepayments. The City has a 6/30 fiscal year end. REQUIRED: Record the following transactions related to supplies, prepaid items and fixed asset acquisitions. Be sure to make ALL necessary entries.

a. During the year the City purchases $600,000 of expendable supplies.

b. On September 1 the City paid $360,000 for a three-year insurance policy to cover some assets used in general government activities.

c. On December 1 the City purchased four pickup trucks for general government activities. The trucks cost $100,000 in total.

d. On April 1 the City leased a copying machine. The lease qualified as an operating lease. The terms of the lease require yearly payments of $2,000 each April 1 for 5 years. The City prepaid the entire five years of the lease.

3. During the year, the City of Pittsboro engaged in the following transactions. The City has a 12/31 fiscal year end. REQUIRED: assuming that the City maintains its books and records in a manner to facilitate the preparation of its fund financial statement, record the following transactions related to fixed asset acquisition and payments on long-term debt.

a. On April 1 1998, the City acquired a piece of equipment for $140,000. The equipment will be used by the Street Department. The City financed the purchases by borrowing $140,000 from the local bank at 5% interest. Principal payments of $20,000 plus interest are due yearly each April 1.

b. The City transferred $1,500,000 from the General Fund to the Debt Service Fund to make principal and interest payments during the current year.

c. The City made payments of $1 million principal and $500,000 interest on bonds that had been outstanding for several years.

d. On June 1, the City paid $4,000 on account. The City owed for supplies purchased in May.

ESSAYS (CHAPTER 5)

1. When a governmental entity finances the purchases of a fixed asset, the acquisition is treated as an expenditure and reduces net financial resources during the year of acquisition. During the years that principal and interest payments are being made on the debt incurred to finance the fixed asset acquisition, the amount of the principal and interest is also treated as expenditures. This appears to reduce the net financial resources by twice the cost of the fixed asset. Discuss these transactions and their overall effect on the net financial resources of the governmental entity.

2. In the governmental fund types, expenditures are generally recognized when resources are acquired. Liabilities are generally recognized if they will be liquidated with available expendable financial resources. Define ‘available.’ Relate the definition of available to the recognition of liabilities and expenditures in governmental fund-type financial statements. Discuss the reporting deficiencies that are directly associated with the use of the ‘available’ criterion in the governmental fund-types.

3. Paid vacations, paid sick leave, and pensions are employee benefits frequently offered by governmental entities. Discuss the reporting requirements related to each of these benefits and explain, if necessary, any differences between reporting for vacation pay earned but unused, sick leave earned but unused, and pensions earned during the current period.

Chapter 6

Governmental Activities – Accounting for Capital Projects and Debt Service

TRUE/FALSE (CHAPTER 6)

1. The resources to service all long-term debts of the governmental entity are typically accounted for in debt service funds.

2. When governments establish capital projects funds, they may choose to maintain a separate fund for each major project, or they may choose to combine two or more projects in a single fund.

3. GASB Statement No. 34 does not require a budgetary comparison statement for capital projects funds as it does for the general fund and for each major special revenue fund that has a legally adopted annual budget.

4. Capital projects funds do not report long-term obligations in the fund.

5. When bonds are issued at a premium, the capital projects fund can transfer those excess resources to the debt service fund.

6. When bonds are issued at a discount, the debt service fund usually transfers an amount to the capital projects fund to make up for the deficiency.

7. In accounting for costs incurred on a major construction project in a capital projects fund, the construction outlays would be accumulated in a long-term asset account.

8. Debt service funds are maintained to account for resources accumulated to pay interest and principal on general long-term debt—that is, long-term debt associated primarily with governmental activities.

9. In contrast to the accounting for debt service fund expenditures, the interest revenue on bonds held as investments should be accrued in the period the revenue is earned.

10. Special assessments are imposed nonexchange transactions, similar to property tax levies.

11. The interest paid on debt issued for public purposes by state and local governments is generally subject to federal taxation.

12. Nongovernmental not-for-profits must account for defeasances differently than governments.

MULTIPLE CHOICE (CHAPTER 6)

1. The capital project fund of a governmental entity is accounted for using which of the following bases of accounting?
a) Budgetary basis.
b) Cash basis.
c) Modified accrual basis.
d) Accrual basis.

2. In which fund type would a governmental entity’s capital project fund be found?
a) Governmental fund type.
b) Proprietary fund type.
c) Fiduciary fund type.
d) Capital project fund type.

3. The debt service fund of a governmental entity is accounted for using which of the following bases of accounting?
a) Budgetary basis.
b) Cash basis.
c) Modified accrual basis.
d) Accrual basis.

4. In which fund type would a governmental entity’s debt service fund be found?
a) Governmental fund type.
b) Proprietary fund type.
c) Fiduciary fund type.
d) Capital project fund type.

5. With regard to the resources dedicated to the acquisition of fixed assets which will be used in general government activities, which of the following is true?
a) Governments must maintain capital project funds for resources that are legally restricted to the acquisition of fixed assets.
b) Governments may maintain capital project funds for resources that are legally restricted to the acquisition of fixed assets.
c) Governments may account for any resources dedicated (whether legally or not) to the acquisition of fixed assets in any of the governmental funds.
d) Government must account for all resources set aside for fixed asset acquisition in a capital project fund.

6. Salt City issued $5 billion of bonds at face value to fund the reconstruction of the major interstate highways in and around their city. The bond underwriters withheld $2 million for underwriting fees and remitted the balance to the City. Assuming the City maintains its books and records in a manner that facilitates the preparation of fund financial statement, how would the underwriting fee be accounted for in the capital project fund?
a) Reduce Other financing sources $2 million.
b) Reduce Bonds payable $2 million.
c) Increase Expenditures $2 million.
d) It would not be accounted for in the capital project fund.

7. Sugar City issued $2 million of bonds to fund the construction of a new city office building. The bonds have a stated rate of interest of 5% and were sold at 101. Which of the following entries should be made in the Capital Project Fund to record this event?
a) Debit Cash $2.02 million; Credit Bonds Payable $2 million and Premium on Bonds Payable $.02 million.
b) Debit Cash $2.02 million; Credit Bonds Payable $2 million and Other Financing Sources $.02 million.
c) Debit Cash $2.02 million; Credit Other Financing Sources $2.02 million.
d) Debit Cash $2.02 million; Credit Other Financing Sources $2 million and Revenue $.02 million.

Use the following information to answer questions # 8 and #9
Voters in Lincoln School District approved the construction of a new high school and approved a $10 million bond issue with a stated rate of interest of 6% to fund the construction. Bids were received and the low bid was $10 million. When the bonds were issued, they sold for face value less bond underwriting fees of $.5 million. The School Board voted to fund the balance of the construction by a transfer from the general fund.

8. The entry in the capital project fund to record the receipt of the bond proceeds would be
a) Debit Cash $9.5 million; Credit Bonds Payable $9.5.
b) Debit Cash $9.5 million; Credit Other Financing Sources $9.5.
c) Debit Cash $9.5 million and Expenditures $.5 million; Credit Bonds Payable $10 million.
d) Debit Cash $9.5 million and Expenditures $.5 million; Credit Other Financing Sources $10.

9. The entry in the capital project fund to record the additional funding for the construction would be
a) Debit Due from General Fund $.5 million; Credit Other financing Sources $.5 million.
b) Debit Due from General Fund $.5 million; Credit Revenue $.5 million.
c) Debit Cash $.5 million; Credit Due to General Fund $.5 million.
d) Debit Other Financing Sources $.5 million; Credit Due to General Fund $.5 million.

Use the following information to answer questions #10 and #11
Voters in Phillips City approved the construction of a new $10 million city hall building and approved a $10 million bond issue with a stated rate of interest of 6% to fund the construction. When the bonds were issued, they sold for 101. What are appropriate entries related to the premium?

10. In the capital project fund
a) Debit Cash $100.000; Credit Revenues $100,000 ; no other entries required.
b) Debit Cash $100,000; Credit Other Financing Sources $100,000; No other entries required.
c) Debit Cash $100,000; Credit Revenues; ALSO
Debit Other Financing Uses—Nonreciprocal Transfer $100,000; Credit Cash $100,000
d) Debit Cash $100,000; Credit Other Financing Sources—$100,000; ALSO
Debit Other Financing Uses—Nonreciprocal Transfer $100,000; Credit Cash $100,000

11. In the debt service fund
a) Debit Cash $100.000; Credit Revenues $100,000 ; no other entries required.
b) Debit Cash $100,000; Credit Other Financing Sources—Nonreciprocal Transfer $100,000; No other entries required.
c) Other Financing Sources—Nonreciprocal Transfer $100,000; credit Cash $100,000.
d) No entry in the Debt Service Fund

12. Sister City was notified by the State that they had been awarded a $6 million grant to aid in the construction of a senior citizens center. At the time of the notification what is the appropriate entry in the capital project fund (assuming that the City maintains its books and records in a manner to facilitate the preparation of the fund financial statements)?
a) No entry at the time of the notification
b) Debit Grants Receivable $6 million; Credit Revenue $6 million
c) Debit Grants Receivable $6 million; Credit Deferred Revenue $6 million.
d) Debit Grants Receivable $6 million; credit Other Financing Sources—Nonreciprocal Transfer $6 million.

13. Previously Rose City issued bonds with a face value of $10 million to construct a new city maintenance facility. Assuming that the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, what is the appropriate entry when the City receives a progress billing from the contractor?
a) Debit Building; Credit Cash
b) Debit Building; Credit Accounts Payable.
c) Debit Expenditure; Credit Accounts Payable
d) No entry is required.

14. Previously Atomic City had issued bonds with a face value of $10 million to construct a new city hall. Because the money will not be needed for several months, the city invested the bond proceeds in U.S. Government securities. Assuming that the city maintains its books and records in a manner that facilitates the preparation of the fund financial statements, what is the appropriate entry when the City receives interest on the investments?
a) Debit Cash; Credit Revenue.
b) Debit Cash; Credit Other Financing Source
c) Debit Cash; Credit Deferred Revenue
d) No entry required.

15. A City issued bonds for the purpose of financing a major capital improvement. Which fund is the most appropriate fund in which to record the receipt of the bond proceeds?
a) General Fund.
b) Special Revenue Fund.
c) Capital Project Fund.
d) Debt Service Fund.

16. Use of a Debt Service Fund is required
a) When financial resources are being accumulated for the purpose of paying for capital asset acquisition.
b) When financial resources are being accumulated for the purpose of paying principal and interest when it matures.
c) For all bonded debt service payments.
d) For all debt service payments.

17. Six years ago Hill City issued $10 million of 6% term bonds, due 30 years from the date of issue. Interest on the bonds is payable semi-annually on January 1 and July 1. Hill City has a September 30 fiscal year end. The amount of interest payable that would be included on the balance sheet for the debt service fund of Hill City at September 30 would be
a) $ -0-
b) $150,000
c) $300,000
d) $600,000

18. Sue City has outstanding $5 million in general term bonds used to finance the construction of the new City Library. Sue City has a June 30 fiscal year-end. Interest at 6% is payable each January 1 and July 1. The principal of the bonds is due 10 years in the future. The City budgeted the July 1, 1999 interest payment in the budget for the fiscal year ended June 30, 1999. On June 30, cash was transferred from the General Fund to the Debt Service Fund to make the required payment. The maximum amount of interest payable that may be included on the balance sheet of the debt service fund of Sue City at June 30 would be
a) $ -0-
b) $150,000.
c) $300,000.
d) $3,000,00.

Use the following information to answer questions #19 and #20
Calhoun County makes annual transfers from the general fund to the debt service fund to pay principal and interest on long-term debt.

19. When the County makes the transfer the entry in the debt service fund should be
a) Debit Cash; Credit Revenue.
b) Debit Cash; Credit Other Financing Sources.
c) Debit Cash; Credit Interest Payable.
d) Debit Cash with Fiscal Agent; Credit Other Financing Sources.

20. In the debt service fund, what is the appropriate entry when the principal payment is made?
a) Debit Bonds Payable; Credit Cash.
b) Debit Expenditures; Credit Cash.
c) Debit Other Financing Uses—Nonreciprocal Transfer; Credit Cash.
d) No entry is required.

Use the following information to answer questions #21 and #22.
The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks. The citizens agreed to tax themselves for 20 years in an amount sufficient to pay principal and interest on the bonds. The City will oversee the construction of the sidewalks and act as agent for servicing the debt. The City does not guarantee the debt nor does it assume any legal or moral obligation for the bonds.

21. The proceeds of the bond issue should be recorded in which fund of the City of Arlington?
a) Agency Fund.
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

22. When the City collects the special tax, the proceeds of that tax should be accounted for in which fund of the City of Arlington?
a) Agency Fund.
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

Use the following information to answer questions #23 – #25.

The citizens of a specific area of the City of Arlington approved the construction of sidewalks in their residential neighborhood and approved a $1 million bond issue to finance construction of those sidewalks. The citizens agreed to a special tax on their property for 20 years in an amount sufficient to pay principal and interest on the bonds. The City will oversee the construction of the sidewalks and act as agent for servicing the debt. If the special tax is not sufficient to make the principal and interest payments, the City will assume the obligations.

23. The proceeds of the bond issue should be recorded in which fund of the City of Arlington?
a) Agency Fund.
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

24. When the City collects the special tax, the proceeds of that tax should be accounted for in which fund of the City of Arlington?
a) Agency Fund
b) Special Assessment Fund.
c) Capital Project Fund.
d) Debt Service Fund.

25. When the City of Arlington levies the special assessment tax, the best entry would be
a) Debit Taxes Receivable; Credit Revenues.
b) Debit Taxes Receivable; Credit Deferred Revenues.
c) Debit Taxes Receivable; Credit Liability.
d) Debit Taxes Receivable; Credit Fund Balance.

26. Adams County has outstanding $10 million in bonds issued by the County to construct a sewer system in a specific area of the county. The taxpayers in that area voted for the construction and the bonds and agreed to tax themselves to pay the principal and interest on the bonds. The County contracted for the construction and issued the bonds but the City assumed no legal or moral obligation for the bonds. If the special tax payments are not sufficient to make the required principal and interest payments, the County will not make up the difference. The $10 million of bonds should appear in which fund financial statements or schedule?
a) Capital Project Fund.
b) Special Assessment Fund.
c) Schedule of Long-term Obligations.
d) The bonds need not appear on the face of the financial statements of Adams County.

27. Harbor City issued 6% tax-exempt bonds and used the proceeds to acquire federal government securities yielding 7%. After paying the interest on the tax-exempt bonds, the City cleared 1%. This is an example of
a) An illegal act.
b) Poor fiscal management.
c) Arbitrage.
d) Debt refunding.

28. The City of St. Joe had outstanding $5 million of 6% bonds with a call provision. Due to changes in the prevailing interest rates, the City issued new bonds at 4.5% and used the proceeds to call the 6% bonds. This is an example of
a) Debt retirement.
b) Debt refunding.
c) In-substance defeasance.
d) Economic defeasance.

29. A governmental entity has elected to issue new debt and use the proceeds to redeem existing debt because there is an economic gain in doing so. There is, however, an ‘accounting loss’ associated with these events. An accounting loss is defined as
a) The present value of the principal and interest payments on the new debt less the present value of the principal and interest payments on the old debt.
b) The present value of the principal and interest payments on the old debt less the present value of the principal and interest payments on the new debt.
c) The cash paid to redeem the old debt less the book value of the old debt.
d) The face value of the new debt less the cash paid to redeem the old debt.

30. The City of Williamsburg decided to defease old 6% bonds carried in its Electric Enterprise Fund with new 4.5% bonds. As a result of the defeasance, the City incurred an accounting loss. This loss should be recognized
a) As an adjustment to retained earnings since it is applicable to prior periods.
b) In the year of the defeasance.
c) Over the remaining life of the old bonds or the new bonds, whichever is shorter.
d) It should not be recognized.

PROBLEMS (CHAPTER 6)

1. The voters of Salt Lake City authorized the construction of a new north-south expressway for a total cost of no more that $75 million. The voters also approved the issuance of $50 million of 5% general obligation bonds. The balance of the necessary funds will come from the following sources: $15 million from a federal grant and $10 million from a state grant. The City controls expenditures in capital project funds through project management The City does not formally incorporate budgetary entries in the capital project fund but it does use encumbrance accounting for control purposes. REQUIRED: Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, prepare journal entries, in the Capital Project Fund, for the following transactions.

(a) The City issued $50 million of 5% general obligation bonds at 101.

(b) The City transferred the premium to the appropriate fund.

(c) The City incurred bid-related expenditures of $1,000.

(d) The City signed a contract with the lowest competent bidder for $48 million.

(e) The city received notice from the State that the grant had been approved and the proceeds will be forwarded to the City in the State’s current fiscal year.

(f) The City received the federal grant in full.

(g) The City received a progress billing from the contractor for $10 million. The City pays the billing.

2. The City of Eugene has the following balances in the accounts of its capital project fund at year-end. All accounts have normal balances. All amounts are in millions of dollars.
REQUIRED: (a) Prepare an operating statement for the capital project fund.
(b) Prepare a Balance Sheet for the capital project fund.

Cash $ 68
Deferred Revenue $ 5
Expenditures $ 10
Fund Balance—Unreserved $ 14
Grants Receivable $ 10
Other Financing Sources $ 50
Other Financing Uses $ 1
Revenues $ 20

3. In 1999, the voters of Southside City authorized the construction of a new swimming pool for a total cost of no more that $5 million. The voters also approved the issuance of $5 million of 5% general obligation serial bonds to be repaid by a special property tax . Interest on these bonds is payable annually on June 30. On June 30, 1999, the City sold the bonds at 101 and signed contracts for the construction of the swimming pool. Each June 30, beginning in 2000, $250,000 of the bonds mature. If the property tax is not sufficient to make the necessary principal and interest payments the City is obligated to transfer the necessary monies from the general fund to the debt service fund. The City does not formally incorporate budgetary entries in the debt service fund but it does use encumbrance accounting for control purposes. The City has a June 30 fiscal year end.
REQUIRED: Assuming the City maintains it books and records in a manner that facilitates the preparation of the fund financial statements, prepare journal entries, in the Debt Service Fund, for the following transactions.

(a) The City immediately transferred the premium to the Debt Service Fund. The Debt Service Fund may not use the premium to pay principal or interest until the year 2019.

(b) On June 30, Southside City invests the premium in a 10-year 5% Certificate of Deposit at a local financial institution. The Certificate pays interest annually on June 30. The interest is automatically reinvested in the Certificate.

(c) Property taxes in the amount of $300,000 were collected by June 30, 2000. Another $50,000 is expected to be collected by August 31.

(d) The city transferred, to the debt service fund, the cash necessary to make the June 30, 2000 payments. The checks will be mailed on July 1.

(e) The city recognized the interest earned on the Certificate of Deposit.

(f) The city recognizes the appropriate liabilities in the debt service fund.

ESSAYS (CHAPTER 6)

1. The citizens of a defined geographical area of the City of Sale authorized a special assessment to be levied on their property to finance the reconstruction of the sewer system infrastructure that serves the area. The City will solicit bids, oversee reconstruction, issue the debt in the name of the City, and service the debt. The City does not guarantee the debt but the City will collect the special assessments and make principal and interest payments to the bondholders. Discuss the appropriate accounting for the construction phase and the debt service phase of this project. Justify the required accounting and financial reporting for these two phases of this project.

2. What is arbitrage? What are its potential uses and/or abuses? How are potential abuses regulated?

Chapter 7

Governmental Activities – Capital Assets and Investments in Marketable Securities

TRUE/FALSE (CHAPTER 7)

1. General capital assets are distinguished from the capital assets of proprietary funds and fiduciary funds.

2. General capital assets are excluded from governmental funds, themselves, because of the funds measurement focus (current financial resources).

3. In governmental funds, the capital asset costs are reported as expenses when the assets are acquired.

4. At the government-wide level, governments must depreciate inexhaustible assets, such as land, works of art, or historical treasures.

5. Governments do not have to depreciate infrastructure assets if they can demonstrate they are preserving them in a specified condition.

6. Unlike businesses, governments should not capitalize interest on general capital assets that they construct themselves.

7. Most infrastructure assets are the responsibility of the federal government, not state and local governments.

8. Prior to the issuance of GASB Statement No. 34, state and local governments provided virtually no information as to most of their infrastructure.

9. Governments invest in marketable securities for much the same reason that businesses do—to earn a return on cash that would otherwise be unproductive.

10. Governments are prohibited from entering into reverse repurchase agreements.

MULTIPLE CHOICE (CHAPTER 7)

1. The objectives of financial reporting for fixed assets should be to provide information
a) About a governmental entity’s physical resources.
b) That can be used to assess the service potential of a governmental entity’s physical resources.
c) To help users assess a government’s long- and short-term capital needs.
d) All of the above.

2. A governmental entity may record long-term assets in which of the following funds or account groups?
a) General Fund
b) Internal Service Fund.
c) Capital Project Fund
d) Debt Service Fund.

3. General fixed assets are excluded from governmental funds because
a) The measurement focus of governmental funds is on current financial resources.
b) They are not used to generate revenues.
c) The basis of accounting is accrual.
d) None of the above.

4. The City of Shiloh sold a used police car. The police car, which had a historical cost of $17,000 and a fair value of $12,000, was sold for $5,000. Assuming that the City maintains its books and records in a manner to facilitate the preparation of the fund financial statements, what is the appropriate entry in the General Fund to record this sale?
a) Debit Cash $5,000; Credit Revenue $5,000.
b) Debit Cash $5,000 and Loss on Sale $7,000; Credit Automotive Equipment $12,000.
c) Debit Cash $5,000; Credit Other Financing Sources—Sale of Asset $5,000.
d) Debit Cash $5,000; Credit Automotive Equipment $5,000.

5. Which of the following costs will be included in the cost of land on the government-wide financial statements?
a) Purchase price (invoice amount).
b) Cost of demolishing existing structures that cannot be used.
c) Closing costs.
d) All of the above.

6. Donated assets are reported at
a) Historical cost to the donor.
b) Book value in the hands of the donor.
c) Fair value on date of donation.
d) Zero value because they were not purchased.

7. To elect not to capitalize works of art and similar assets, a government must see that the assets meet all of the following criteria except:
a) The assets must be held for public exhibition, education, or research in furtherance of public service, rather than for financial gain.
b) The assets must be protected, kept unencumbered, cared for and preserved.
c) The assets must be subject to an organizational policy that requires the proceeds form sales of the collection items be used to acquire very similar items for the collection.
d) The assets must be subject to an organizational policy that requires the proceeds from sales of the collection items be used to acquire other items for the collection.

8. If a government capitalizes works of art and similar assets, which of the following statements is true relative to depreciation on the works of art and similar assets?
a) Donated assets cannot be depreciated.
b) All works of art must be depreciation, not just exhaustible.
c) All exhaustible assets must be depreciated.
d) The government may elect to omit all depreciation.

9. Which of the following is NOT an infrastructure asset?
a) Roads.
b) Sidewalks.
c) Buildings.
d) Bridges.

10. If a government receives a donation of a work of art, the government must recognize revenue
a) Only if it elects to capitalize its collection.
b) Only if it elects NOT to capitalize its collection.
c) On all donations of works of art.
d) It cannot recognize revenue from donations.

11. For a government that elects NOT to capitalize its works of art and similar assets, the appropriate entry when receiving a contribution of a work of art at the government-wide level is
a) No entry is required for contributed assets.
b) Debit Asset; Credit Revenues.
c) Debit Asset; Credit Equity.
d) Debit Expense, Credit Revenue.

12. For a government that elects to capitalize its works of art and similar assets, the appropriate entry when receiving a contribution of a work of art at the government-wide level is
a) No entry is required for contributed assets.
b) Debit Asset; Credit Revenues.
c) Debit Asset; Credit Equity.
d) Debit Expense/Expenditure, Credit Revenues.

13. GASB standards require that depreciation be reported on all capital assets except
a) Infrastructure accounted for on the standard approach.
b) Infrastructure assets accounted for on the modified approach.
c) Donated assets.
d) Capitalized works of art.

14. With regard to capitalization of infrastructure, which of the following is true?
a) All infrastructure must be capitalized on the financial statement before GASB Statement No. 34 can be implemented.
b) Only large governments must capitalize all infrastructure on the date they implement GASB Statement No. 34.
c) Small and medium size governments may elect to delay capitalization of infrastructure.
d) Small governments may omit capitalizing all infrastructure acquired before the date on which they implement GASB Statement No. 34.

15. If a government elects the modified approach with regard to capitalization of infrastructure
a) Costs to preserve infrastructure assets are expensed as incurred with no additional disclosure required.
b) Costs to preserve infrastructure assets are expensed as incurred and disclosure of assessed condition is required.
c) Costs to preserve infrastructure assets are capitalized as incurred and depreciated over the estimated useful life with no additional disclosure required.
d) Costs to preserve infrastructure assets are capitalized as incurred and NOT depreciated over the estimated useful life with additional disclosure required.

16. A broker-dealer or other financial institution transfers cash to a government in exchange for securities and the government agrees to repay the cash plus interest and return the securities. From the government’s point of view, this transaction is a
a) Repurchase agreement.
b) Reverse repurchase agreement.
c) Derivative.
d) Option.

17. The risk that the other party to an investment will not fulfill its obligation is
a) Market risk.
b) Credit risk.
c) Collaterized risk.
d) Legal risk.

18. Which of the following is NOT an example of a derivative?
a) Stock options.
b) Interest-only strips.
c) Debt instruments backed by pools of mortgages.
d) Repurchase agreements.

19. Governments must classify bank balance in one of three categories. Which of the following is NOT one of those categories?
a) Insured or collateralized with the security held by the entity or its agents in the entity’s name.
b) Collateralized with security held by the pledging financial institution’s trust department.
c) Insured, registered in the name of the government or held by the government or its agent in the government’s name.
d) Uncollateralized.

20. Investments, other than bank balances, must be classified into one of three categories. Which of the following is NOT one of those categories?
a) Insured, registered in the name of the government or held by the government or its agent in the government’s name.
b) Uninsured and unregistered, with securities held by the other party’s trust department or agent in the government’s name.
c) Uninsured and unregistered in the government’s name and held by the other party or the other party’s agent.
d) Uncollateralized.

PROBLEMS (CHAPTER 7)

1. The City of Brownsville engaged in the following transactions. Assuming that the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, prepare the appropriate journal entries in the General Fund.

a) The City purchased for cash three dump trucks at a unit cost of $70,000 each.

b) The City sold for $3,000, a police car that had been purchased four years ago at a cost of $30,000. At the time of acquisition, the City estimated that the police car had a useful life of five years and a salvage value of $5,000.

c) During the year, the City spent $12 million to build a third lane on both sides of the major north-south highway through town.

d) During the year the City began construction of a new City Hall. By year-end, the City had made progress payments to the contractor of $2 million.

2. The City of Brownsville engaged in the following transactions. Assuming that the City maintains its books and records in a manner that facilitates the preparation of the government-wide financial statements, prepare the appropriate journal entries.

a) The City purchased for cash three dump trucks at a unit cost of $70,000 each.

b) The City sold for $3,000, a police car that had been purchased four years ago at a cost of $30,000. At the time of acquisition, the City estimated that the police car had a useful life of five years and a salvage value of $5,000.

c) During the year, the City spent $12 million to build a third lane on both sides of the major north-south highway through town.

d) During the year the City began construction of a new City Hall. By year-end, the City had made progress payments to the contractor of $2 million.

3. GASB Statement No. 34 allows for two different treatments of infrastructure. If the government chooses to use the modified approach instead of the standard (depreciation) approach, what is the proper accounting treatment of preservation cost at the government-wide level?

ESSAYS (CHAPTER 7)

1. Governmental accounting does not permit depreciation to be charged on the operating statements of the governmental funds. Present arguments FOR reporting depreciation and present arguments AGAINST reporting depreciation.

2. What is “deferred maintenance”? What is its possible role in governmental financial reporting?

3. Recently, governmental investment policies have been sharply criticized because of some significant losses incurred by certain governments. What is the nature of the problem that is being criticized? What should be the role of accounting in determining and reporting investment strategies?

Chapter 8

Governmental Activities – Long-Term Obligations

D. TRUE/FALSE (CHAPTER 8)

1. Unlike individuals and businesses, governments cannot seek protection under the Federal Bankruptcy Code.

2. General obligation debt is the obligation of the government at large and is thereby backed by the government’s general credit and revenue-raising powers.

3. Revenue debt is secured only by designated revenue streams.

4. When the proceeds of general long-term debt are received by a governmental fund, rather than reporting a liability on the balance sheet, the inflow of resources is treated as another financing source on the operating statement.

5. Per GASB Statement No. 34, governments generally should report their bonds, notes, and comparable long-term obligations at present value.

6. A government is prohibited from ever recognizing bond anticipation notes (BANs) as long-term obligations.

7. Tax anticipation notes (TANs) must be reported as current liabilities of the governmental funds in which the related revenues will be reported, as well as in the government-wide statements.

8. Governments may enter into operating leases, but may not enter into capital leases.

9. In accounting for operating leases, the rental payments should be recognized in a governmental fund and as expenses in the government-wide statement of activities in the periods in which they apply.

10. Because they are not obligations of the government at large, revenue bonds are usually not subject to voter approvals or other forms of voter oversight.

11. Although governments may elect to report conduit obligations in their government-wide and proprietary fund statements, the GASB has ruled that note disclosure is sufficient.

MULTIPLE CHOICE (CHAPTER 8)

1. A governmental entity that is unable to satisfy claims against it
a) Is prohibited from filing bankruptcy.
b) May not seek protection under the Federal Bankruptcy Code.
c) May seek protection under the Federal Bankruptcy Code, using a special section directed to governments.
d) Is automatically placed under the jurisdiction of a higher level of government.

2. To seek protection under the Federal Bankruptcy Code, a governmental entity must
a) Be unable to provide the level of services it has provided in the recent past.
b) Be unable to pay its debt in its current year.
c) Have budgeted expenditures in excess of revenues.
d) Both (b) and (c).

3. General long-term debt of a governmental entity includes
a) All future financial obligations.
b) All future financial obligations that result from past transactions.
c) All future financial obligations that result from past transactions for which the government has already received a benefit.
d) All future financial obligations that are backed by the government’s general credit and revenue raising power and that result from past transactions for which the government has already received a benefit.

4. In governmental fund-type financial statements, the assets acquired under a capital lease would be reported at
a) They are not reported in the fund financial statements.
b) The present value of the required lease payments.
c) The undiscounted total of required lease payments.
d) The total of all payments required under the lease.

5. In the government-wide financial statements, the assets acquired under a capital lease would be reported at
a) They are not reported in the fund financial statements.
b) The present value of the required lease payments.
c) The undiscounted total of required lease payments.
d) The total of all payments required under the lease.

6. In the government-wide financial statements, long-term liabilities of governmental entities are generally reported at
a) Face value.
b) Face value plus (minus) unamortized premium (discount).
c) Present value.
d) Market value of the obligation.

7. Pulling County has a December 31 fiscal year-end. In November, the County borrowed $8 million from a local bank, due in six months at 6% interest, to finance general government operations. The county pledges property tax revenues to secure the loan. At year-end, how should the bank note be displayed in the fund financial statements?
a) Nothing in the General Fund; Nothing in a Schedule of Changes in Long-Term Obligations.
b) General Fund–$8 million in Other Financing Sources; Nothing in a Schedule of Changes in Long-Term Obligations.
c) General Fund–$8 million in Other Financing Sources; $8 million in a Schedule of Changes in Long-Term Obligations.
d) General Fund–$8 million in Notes Payable; Nothing in a Schedule of Changes in Long-Term Obligations.

8. Governmental entities enter into capital leases, rather than conventional buy and borrow arrangements for which of the following reasons? Capital leases
a) May be an effective means of circumventing debt limitations.
b) Are less expensive overall than buy and borrow arrangements.
c) Reduce the cash outflows related to the asset acquisition.
d) Have less impact on fund balance than buy and borrow arrangements.

9. New City entered into a lease agreement for several new dump trucks to be used in general government activities. Assuming the City maintains its books and records in a manner that facilitates the preparation of the fund financial statements, acquisition of these dump trucks would require entries in which of the following funds and/or schedules?
a) General Fund only.
b) General Fund AND Schedule of Changes in Long-Term Debt Obligations.
c) General Fund AND Schedule of General Fixed Assets.
d) General Fund, Schedule of General Fixed Assets AND Schedule of General Long-Term Debt Obligations.

10. Southwest City enters into a lease agreement that contains a nonappropriation clause. The clause
a) Has been held by courts in 26 states to effectively cancel the lease.
b) Stipulates that the yearly lease payment must be appropriated by the City Council each year.
c) Prohibits the city from replacing leased property with similar property.
d) Permits the city to lease at lower rates than would be possible without the presence of the clause.

11. Why would a government issue revenue bonds (which generally are issued at a higher rate of interest than general obligation bonds) even though the government knows that if revenues from the project are not sufficient to cover principal and interest payments, the government will use resources from general government activities to fund the principal and interest payments?
a) Revenue bonds may not require approval of the voters.
b) Revenue bonds may not be considered in legal debt limitations.
c) Revenue bonds may permit the interest costs to be passed on to the users.
d) All of the above.

12. Which of the following funds is most likely to receive the proceeds of revenue bonds?
a) General Fund.
b) Capital Project Fund.
c) City Utility Enterprise Fund.
d) Highway Department Special Revenue Fund.

13. Sun City is located in Hailey County. Sun Valley School District encompasses all of Sun City and some of Hailey County. Property in Sun City is assessed at $400 million; property in Hailey County is assessed at $800 million; property in Sun Valley School District is assessed at $600 million. The total debt outstanding for Sun City is $30 million; Hailey County is $50 million; Sun Valley School District is $45 million. Compute the amount of direct and overlapping debt for Sun City.
a) $ 30 million.
b) $ 75 million.
c) $ 85 million.
d) $125 million.

14. Obligations of property owners within a particular government for their proportionate share of debts of other governments with whom they share boundaries is
a) Overlapping debt.
b) Conduit debt.
c) Committed debt.
d) Moral obligation debt.

15. Overlapping debt should be reported in which of the following ways?
a) It should be reported in the Schedule of Changes in Long-Term Obligations.
b) It should be disclosed as a note to the financial statements.
c) It should be reported in a schedule in the statistical section of the annual report.
d) It should not be reported in the financial statements of the reporting entity.

16. An obligation issued in the name of a government on behalf of a nongovernmental entity is called
a) Overlapping debt.
b) Conduit debt.
c) Committed debt.
d) Moral obligation debt.

17. The City of Pocahontas issued $20 million in general obligation bonds at par. The City loaned the proceeds to Domsee Fish Processors to expand the size of their facility, which would allow Domsee to hire additional workers. The loan payments from Domsee to the City are established to match the principal and interest payments on the bond issue. The bonds are payable exclusively from the loan repayments by Domsee. The bonds are secured by the additional plant facilities built by Domsee. Where should the City report the bonds on the annual financial report?
a) In the government-wide financial statements.
b) In the notes to the financial statements.
c) In the proprietary fund financial statements.
d) In any of the above ways.

18. Industrial development bonds are issued in the name of a government with the proceeds used to attract private businesses to a community. Which of the following is a true statement about industrial development bonds?
a) The proceeds are used by the private corporations and principal and interest payments are made by the private corporation. The government backs the bonds in the event of default by the private corporation.
b) The proceeds are used by the private corporations and principal and interest payments are made by the private corporation. The government does not back the bonds in the event of default by the private corporation.
c) The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the government out of the additional tax revenues received from the private corporation.
d) The proceeds are used by the government to build infrastructure to service private corporations with principal and interest payments made by the private corporation in lieu of property taxes.

19. The Southside City has $95 million of debt recorded in its Schedule of Changes in Long-Term Obligations, made up of $60 million of general obligation debt, $2 million of compensated absences payable, $8 million claims and judgments, and $25 million of obligations under capital leases. The State limits the amount of general obligation debt that can be issued by a City to 20% of the assessed value of taxable property. The assessed value of property in Southside City is $500 million. The amount of legal debt margin for Southside City is
a) $ 5 million.
b) $ 40 million.
c) $ 60 million.
d) $100 million.

20. A state created a Housing Authority to provide financing for low-income housing. The Authority issues bonds and uses the proceeds for that purpose. Currently the Authority has outstanding $200 million in bonds backed by the State’s promise to cover debt service shortages should they arise. The State Constitution specifically limits the State to no more than $2 million in general obligation debt. How can the state officials defend the $200 million in debt outstanding?
a) The debt is not general obligation debt.
b) The State is only morally obligated on the debt.
c) The debt is the debt of the Authority not the State.
d) All of the above.

21. Debt that is issued by one entity but backed by the promise of another entity to make up any debt service deficiency is
a) Committed debt.
b) Overlapping debt.
c) Conduit debt.
d) Moral obligation debt.

22. A City entered into a long-term capital lease for some office equipment. Assuming the city maintains its books and records in a manner to facilitate preparation of fund financial statements, what entry would be made in the General Fund to record this event?
a) Debit Expenditures; Credit Other Financing Sources—Leases.
b) Debit Equipment; Credit Other Financing Sources—Leases.
c) Debit Equipment; Credit Leases Payable.
d) No entry since it this event had no impact on financial resources.

23. Which of the following is likely to be used by a bond-rating agency to rate the general obligation bonds of a governmental entity?
a) A review of the Basic Financial Statements.
b) Consideration of economic statistics such as unemployment rates.
c) Consideration of legal debt margin.
d) All of the above.

PROBLEMS (CHAPTER 8)

1. During the fiscal year ended 6/30/02 the City of Hartsville engaged in the following transactions. Assuming the city maintains its books and records in a manner that facilitates the preparation of its fund financial statement, prepare all necessary journal entries that the City should make for each transaction. Clearly indicate in which fund the entry is being made. If no entry is required, write ‘No Entry Required’.

a) In July 2001, the City issued $20 million in 6% general obligation term bonds to finance construction of a new building to house City offices. The bonds were issued at a premium of $200,000.

b) In September, 2001 the City transferred $1 million from the General Fund to cover the $.6 million principal and $.4 million interest payments due that month on debt issued in previous years.

c) In September, 2001 the City paid the principal and interest due from (b).

d) In June 2002, the City transferred $2 million from the General Fund to cover the $1.2 million interest payment and the $.8 million principal payment due in July on the bonds issued in July 2001.

2. A city enters into the following transactions during the current year. Assuming that the City maintains its books and records in a manner that facilitates the preparation of its fund financial statements, prepare entries to record the following transactions. Indicate the fund in which the entry is being made.

a) The City issues $5 million of tax anticipation notes, backed by property taxes that will be recorded in the General Fund.

b) The City issues $2 million of 90-day bond anticipation notes that it expects to roll over into long-term bonds.

c) The City repays the $5 million in (a)

d) The City successfully issues $20 million in long-term bonds and uses some of the proceeds to repay the notes in (c).

3. Young County engaged in the following debt-related transactions during the year. Assuming that Young County maintains its books and records in a manner that facilitates the preparation of its government-wide financial statement, prepare the necessary journal entries to record these transactions. Clearly indicate if debt is long-term or short-term (current). If no entry is required, write ‘No Entry Required’.

a) The County issued $5 million in 6%, 20-year bonds for $5,117,466 to yield 5.8 % to the investor.

b) The County made the first semi-annual interest payment on the bonds in (a). Assume an amount of $1,594 for amortization of the premium.

c) The County issues $3 million in 6% demand bonds for which it does not enter into a take-out agreement.

d) In anticipation of property tax revenues being received several months after fiscal year-end, the County borrows $2 million from a local bank payable in nine months.

e) The County leased a new machine for its County Highway Department in an arrangement that qualified as a capital lease. The present value of the minimum lease payments is $150,000, which approximates the fair value of the machine.

ESSAYS (CHAPTER 8)

1. Identify and define ‘conduit debt.’ What is/are the current reporting standards for conduit debt issued by governmental entities. Do you approve or disapprove of the use of conduit debt by governmental entities? Justify your answer. Do you approve or disapprove of the current reporting standards related to conduit debt? Why?

2. Generally accepted accounting principles require many assets to be reported at market values. However, few liabilities are reported at market value. What are the arguments for and against reporting liabilities at market value?

3. Why is information about long-term debt important to financial statement users?

E. Chapter 9

Business-Type Activities and Internal Services

F. TRUE/FALSE (CHAPTER 9)

1. In both the fund statements and the government-wide statements, business-type activities and internal services are on a full accrual basis, and their measurement focus is on all economic resources.

2. The operating statement required as one of the three basic financial statements for proprietary funds is called the statement of revenues, expenditures, and changes in fund net assets.

3. The amounts reported in proprietary fund statements are generally the same as those reported in the government-wide statements because both sets of statements are on a full accrual basis of accounting.

4. Governments are required to prepare a statement of cash flows for proprietary funds, but not for governmental funds.

5. GASB Statement No. 34 mandates that governments report their cash flows from operations using the indirect method.

6. The FASB mandates entities report their cash flows from operations using the direct method.

7. Governments generally do not have to get formal legislative approval for enterprise fund budgets or incorporate them into their accounting systems.

8. In accounting for closure and postclosure landfill costs in an enterprise fund, a government does not necessarily have to “fund” the costs during the landfill’s useful life; it merely has to report both an expense and a liability for them.

9. The revenues of an internal service fund are the expenditures and expenses of other funds of that government.

10. The proprietary fund statements do not include a total column for all proprietary funds.

MULTIPLE CHOICE (CHAPTER 9)

1. The appropriate measurement focus for the business-type activities of the City of Rockford is
a) Current financial resources.
b) Economic resources.
c) Both (a) and (b).
d) None of the above.

2. Which of the following is not a proprietary fund?
a) City Water Enterprise Fund.
b) City Motor Pool Internal Service Fund.
c) City Hall Capital Project Fund.
d) None of the above. They are all proprietary funds.

3. The appropriate basis of accounting for the proprietary funds of a governmental entity is
a) Cash basis.
b) Modified accrual.
c) Full accrual.
d) None of the above.

4. Which of the following is NOT a valid reason for governmental entities to engage in business-type activities?
a) The activities provide resources that would otherwise have to be raised in other ways.
b) The entity can provide the services more cheaply or efficiently than can a private firm.
c) The entity wants to subsidize the activity.
d) All of the above are valid reasons for governments to engage in business-type activities.

5. Which of the following is NOT a budget typically prepared for an activity accounted for in a proprietary fund?
a) Appropriation budget.
b) Cash budget.
c) Capital budget.
d) Flexible budget.

6. A proprietary fund of a governmental entity has donor-restricted assets on its balance sheet. Which of the following best describes where and how those assets will generally be displayed?
a) In a separate restricted asset category on the balance sheet.
b) Intermingled with other assets on the balance sheet.
c) Intermingled with other assets on the balance sheet but footnoted.
d) In a separate restricted fund.

Use the following information to answer #7 and #8.

The City of Brockton voted to establish an internal service fund to account for its printing services. The City transferred $500,000 cash from the General Fund to the newly created internal service fund.

7. The appropriate entry in the General Fund to account for this transfer would be a credit to cash for $500,000 and a debit for $500,000 to
a) Operating Transfer Out.
b) Nonreciprocal Transfer Out.
c) Expenditures.
d) Investment in Internal Service Fund.

8. The appropriate entry in the proprietary fund is a debit to cash for $500,000 and a credit for $500,000 to
a) Operating transfer in.
b) Nonreciprocal Transfer In.
c) Capital Contribution (Revenues).
d) Investment provided by the General Fund.

9. The City issued $2 million in general obligation bonds to acquire a fleet of vehicles for the Central Motor Pool Internal Service Fund At the date of issue, the appropriate entry in the proprietary fund is a $ 2 million debit to cash and a $2 million credit to
a) Bonds Payable.
b) Contribution Capital (Revenues).
c) Contributed Capital (Revenues) AND show $2 million as an addition to the Schedule of Changes in Long-Term Obligations.
d) No entry in the proprietary fund. Show $2 million as an addition to the Schedule of Changes in Long-Term Obligations.

10. Which of the following is NOT a rationale/justification for reporting the business-type activities of a government in a separate fund?
a) Legally restricted resources should be reported apart from those that are unrestricted.
b) Separate funds facilitate budgeting, planning, and controlling.
c) Separate funds facilitate the assessment of performance of the activity.
d) Separate funds facilitate the assessment of fiscal status of the activity.

11. Which of the following are required basic statements of a proprietary fund?
a) Balance Sheet, Income Statement, Statement of Cash Flows.
b) Balance Sheet, Statement of Revenues, Expenses, and Changes in Equity, and a Statement of Cash Flows.
c) Statement of Net Assets, Statement of Revenues, Expenses, and Changes in Fund Net Assets.
d) Statement of Net Assets, Statement of Revenues, Expenses, and Changes in Fund Net Assets, and Statement of Cash Flows.

12. Franklin County operates a solid waste landfill that is accounted for in an enterprise fund. The County calculated this year’s portion of the total closure and postclosure costs associated with the landfill to be $300,000. The entry(ies) to record this cost should be
a) Debit Landfill Expense $300,000; Credit Liability for Landfill Costs $300,000.
b) Debit Landfill Expense $300,000; Credit Liability for Landfill Costs $300,000 AND include an addition of $300,000 on the Schedule of Changes in Long-Term Obligations.
c) Show only an addition of $300,000 on the Schedule of Changes in Long-Term Obligations.
d) No entry in any fund; No entry in the Schedule of Changes in Long-Term Liabilities.

13. Marsh Lake County operates a solid waste landfill that is accounted for in a governmental fund. The County calculated this year’s portion of the total closure and postclosure costs associated with the landfill to be $600,000. The entry to record this cost should be
a) Debit Landfill Expenditure $600,000; Credit Liability for Landfill Costs $600,000.
b) Debit Landfill Expenditure $600,000; Credit Liability for Landfill Costs $600,000 AND include $600,000 as an addition on the Schedule of Changes in Long-Term Obligations.
c) No entry in the fund; include $600,000 on the Schedule of Changes in Long-Term Obligations.
d) No entry in any fund or Schedule.

14. Over the long run, governmental internal service funds are intended to
a) Generate revenues sufficient to cover the full costs of providing services.
b) Generate revenues sufficient to cover the full costs of providing services and to earn a profit.
c) Generate revenues sufficient to cover the current operating costs of providing services.
d) Generate revenues sufficient to cover the current operating costs of providing services and to earn an operating profit.

15. Which of the following is NOT true about internal service funds as reported in the fund financial statements?
a) Costs reported by internal service funds are reported twice within the same set of financial statements.
b) Billing rates must be set to cover the full cost of providing the goods or services.
c) Depreciation can be charged to governmental funds through the billing rates established by the internal service fund.
d) Deficits or surpluses in the general fund can be transferred to the internal service fund by adjusting the billing rates.

16. In the Statement of Net Assets, the net assets of a proprietary fund should be displayed in which of the following categories?
a) Unrestricted Fund Balance, Restricted Fund Balance, Invested in Capital Assets.
b) Unrestricted Net Assets, Restricted Net Assets, Invested in Capital Assets Net of Related Debt.
c) Unrestricted Net Assets, Restricted Net Assets, Net Assets Available for Use.
d) Net Assets Available for Use.

17. A Statement of Revenues, Expenses, and Changes in Fund Net Assets should include which of the following in addition to operating revenues and operating expenses and ending Net Assets?
a) Nonoperating revenues and expenses.
b) Nonoperating revenues and expenses, and Other changes in Net Assets.
c) Nonoperating revenues and expenses, Capital Contribution and Other changes in Net Assets, and Beginning Net Assets.
d) None of the above.

18. In which of the following circumstances must an enterprise fund be used to account for the activity?
a) A newly created electric utility fund will finance its operations by a charge to users based on kilowatt hours used.
b) To finance the acquisition of plant facilities a newly created electric utility issues general obligation debt.
c) To finance the acquisition of plant facilities a newly created electric utility issues revenue bonds which will be repaid from operations of the electric utility.
d) To acquire needed plant facilities a newly created electric utility enters into long-term lease agreements.

19. Washington County has designated the general fund as the single fund to account for its self-insurance activities. What is the maximum amount that can be charged to expenditure in the general fund related to the self-insurance activities?
a) The amount of ‘premium’ charged to the other funds.
b) The amount of actual claims expenditures.
c) The actuarially-determined amount necessary to cover claims, expenditures, and catastrophic losses.
d) The amount transferred from other funds and activities to the general fund for self-insurance purposes.

20. Lehi City has designated an internal service fund as the single fund to account for its self-insurance activities. Most of the insured activities such as the police department, fire department, and general government functions are accounted for in the General Fund. What is the maximum amount that can be charged to expenditure in the General Fund related to the self-insurance activities?
a) The amount of ‘premium’ charged to the General Fund by the internal service fund.
b) The amount of actual losses incurred by the insurance activity.
c) The actuarially-determined amount necessary to cover claims, expenditures, and catastrophic losses.
d) The amount transferred from the General Fund to the internal service fund for self-insurance purposes.

Use the following information to answer questions #21 and #22.
During the year the City’s Self-Insurance Internal Service Fund billed the General Fund $300,000 for ‘premiums,’ of which $30,000 was for catastrophic losses and the balance was the premium computed on an actuarially-determined basis. During the year the City incurred $250,000 in claims losses. The total amount transferred to the Self-Insurance Fund by the General Fund was $310,000.

21. The amount the City Self-Insurance Fund can recognize as revenue is
a) $310,000
b) $300,000.
c) $270,000.
d) $250,000.

22. The amount the City General Fund can recognize as expenditure is
a) $310,000.
b) $300,000.
c) $270,000.
d) $250,000.

23. When a governmental enterprise fund has restricted assets on its balance sheet which of the following is a true statement?
a) The total of the restricted assets in the asset section will be equal to the “Restricted Net Assets” amount in the equity section.
b) The total of the restricted assets will be offset by a liability of an equal amount.
c) The total of the restricted assets less related liabilities will be equal to the “Restricted Net Assets” amount in the equity section.
d) None of the above statements is true.

24. Any internal service fund balances that are not eliminated in the consolidation process should generally be presented on the government-wide financial statements
a) Should not be presented on the government-wide financial statements.
b) In the internal service fund column.
c) In the governmental activities column.
d) In the business-type activities column.

25. On the fund financial statements, internal service activities should be presented
a) In the Propriety Fund statements, net of interfund eliminations.
b) In the Governmental Fund statements, net of interfund eliminations.
c) In the Proprietary fund statements, without any interfund eliminations.
d) In the Governmental Fund statements, without any interfund eliminations.

26. Cash flows from Operating Activities does NOT include which of the following as cash inflows?
a) Cash collection of receivable for sale of services.
b) Grants for operating activities.
c) Interest and dividends earned.
d) Receipts for services performed for other funds.

27. Cash flows from Operating Activities does NOT include which of the following as cash outflows?
a) Grants to other governments for operating activities.
b) Grants to other governments for capital asset acquisitions.
c) Payments for services performed by other funds.
d) Payments in lieu of taxes.

PROBLEMS (CHAPTER 9)

1. Benton County voted to establish an internal service fund to account for printing and copying for all its department and agencies. The County engaged in the following activities related to the new fund. Prepare transactions to record these events in the internal service fund. If no entry is required, write “No Entry Required.”

a) The County Commission voted to transfer $200,000 from the General Fund to the internal service fund to establish the new fund.

b) Leased equipment to be used in printing activities. The total lease obligation is $600,000.

c) Issued $1 million in general obligation bonds at 101. The bonds were issued to acquire additional equipment. The bonds are to be serviced from the internal service fund.

d) Purchased equipment at a cost of $980,000. The equipment has an estimated useful life of nine years and an estimated salvage value of $80,000.

e) Billed the General Fund for 1998 copying and printing charges, $70,000.

f) Paid salaries to printing employees, $50,000.

2. The City of Petersburg has operated a City Utility Enterprise Fund for a number of years. The fund accounts for the activities of the City-owned electric, water and sewer systems. During the current year, the City engaged in the following transactions related to the City Utility Fund. Prepare the appropriate journal entries. If none is required, write “No Entry Required.”

a) The City billed its customers $1 million for services provided during the year.

b) The City received $260,000 from a developer to connect new houses to the existing utility lines.

c) Depreciation on existing physical plant was $700,000.

d) Revenue bonds in the amount of $2 million were issued at par to finance new construction. The bond agreement requires that the City retain $200,000 of the bond proceeds for purposes of servicing the debt if revenues are not sufficient to do so.

3. The City of San Dominguez received a $500,000 federal grant to acquire several buses to be used in its public transit system. The City paid $400,000 to acquire several buses. At year-end, $100,000 of the grant had not yet been used. During the year total depreciation on the buses was $40,000. Revenues for the public system were $600,000, operating expenses (other than depreciation) were $470,000. Assuming the Public Transit Proprietary Fund began the year with Unrestricted NetAssets of $420,000, prepare the following for the Public Transit Enterprise Fund.
a) Statement of Revenues, Expenses, and Changes in Fund Net Assets.
b) Net Asset section of the Balance Sheet.

4. Greene County operates a solid waste landfill that is accounted for as an enterprise fund. At the end of 1999, the Landfill Enterprise Fund had a Liability for Landfill Costs of $50,000. The County estimated the costs associated with closing monitoring the landfill as follows. Calculate the total costs as of year-end 2000 and 2001 and the current period costs. Prepare the required journal entry(ies) at year-end 2000 and 2001. Be sure to show all of your work.
2000 2001
Costs
Equipment to be installed $2.5 million $3.0 million
Final cover $ .5 million $1.0 million
Monitoring and maintaining $4.0 million $4.0 million
Capacity used in total 30,000 58,000
Estimated total capacity 600,000 580,000

ESSAYS (CHAPTER 9)

1. Internal service funds are used by many governmental entities to account for activities that provide services to the entity itself. What are the ramifications of such an accounting arrangement? What are the effects on the entity’s financial statements?

2. Governmental entities may elect to account for their landfill activities in either of two different funds. Explain the differences that would result if one government elected to account for its landfill activities in its general fund and another government elected to account for its landfill activities in an enterprise fund.

3. Because of the rising cost of commercial insurance, many governments have elected to be ‘self-insured.’ Explain what is meant by being ‘self-insured.’ Explain the difference in the accounting for self-insurance activities between a governmental fund and a proprietary fund.

G.
H.
I.
J. Chapter 10

Permanent Funds and Fiduciary Funds

TRUE/FALSE (CHAPTER 10)

1. Per GASB Statement No. 34, permanent funds are classified as fiduciary funds.

2. In accounting for permanent funds only the income can be spent; the principal must be preserved intact.

3. Fiduciary funds focus on current financial resources and use a full accrual basis of accounting.

4. Fiduciary funds are excluded from the government-wide statements.

5. The concept of major versus nonmajor funds does not apply to fiduciary funds, as it does to governmental and proprietary funds.

6. Accounting for the employer’s contribution in a defined contribution plan is straight forward, because the employer is obligated only to make annual contributions in the amount specified in the plan terms.

7. Accounting for the employer’s contribution in a defined benefit plan is straight forward, because the employer is obligated only to make annual contributions in the amount specified in the plan terms.

8. Most public pension plans are defined benefit plans.

9. An employer may have a liability to a defined benefit plan other than for its annual required contributions, depending on the future financial health of the plan.

10. In an agency fund, assets always equals fund balance because there are no liabilities.

MULTIPLE CHOICE (CHAPTER 10)

1. A governmental entity receives a gift of cash and investments with a fair value of $200,000. The donor specified that the earnings from the gift must be used to beautify city-owned parks and the principal must be re-invested. The $200,000 gift should be accounted for in which of the following funds?
a) Investment trust fund.
b) Private-purpose trust fund.
c) Agency fund.
d) Permanent fund.

2. In previous years, Center City had received a $400,000 gift of cash and investments. The donor had specified that the earnings from the gift must be used to beautify city-owned parks and the principal must be re-invested. During the current year, the earnings from this gift were $24,000. The earnings from this gift should generally be considered revenue to which of the following funds?
a) Special revenue fund.
b) Private-purpose trust fund.
c) Agency fund.
d) Permanent fund.

3. Which of the following activities of a governmental entity should be accounted for in a fiduciary fund?
a) Funds received from the federal government to support public transportation activities.
b) Funds received from an individual who specified that the principal must be kept intact but the income can be used to support families of police officers killed in the line of duty.
c) Funds received from the state government that must be used to purchase capital assets.
d) Funds received from a contractor to assist with the development of utility infrastructure.

4. What basis of accounting is used to account for transactions of a governmental private-purpose trust fund?
a) Full accrual basis of accounting.
b) Modified accrual basis of accounting.
c) Cash basis of accounting.
d) Budgetary basis of accounting.

5. Which of the following would NOT be accounted for in a fiduciary fund of a governmental entity?
a) Nonexpendable resources held for the benefit of other governmental units.
b) Nonexpendable resources held for the benefit of the government holding the resources.
c) Expendable resources held for the benefit of other governmental units.
d) Funds held as an agent for other entities.

6. Permanent funds are classified as
a) Governmental funds.
b) Proprietary funds.
c) Fiduciary funds.
d) Trust funds.

7. Which of the following is NOT a fiduciary fund?
a) Pension trust funds.
b) Investment trust funds.
c) Permanent funds.
d) Private-purpose trust funds.

8. What basis of accounting is used to account for transactions of a government permanent fund?
a) Full accrual basis of accounting.
b) Modified accrual basis of accounting.
c) Cash basis of accounting.
d) Budgetary basis of accounting.

K. Use the following information to answer #9-#12
Previously a city received a $1 million gift, the income from which was restricted to support maintenance of city-owned parks. During the current year the endowment earned $70,000 of which $50,000 was transferred to the City Park Special Revenue Fund.

9. On the year-end fund financial statement, the endowment fund would report revenues of:
a) $0.
b) $50,000.
c) $70,000.
d) None of the above.

10. On the year-end fund financial statement, the endowment fund would report the $50,000 transferred to the Special Revenue Fund as:
a) A reduction of revenues.
b) A nonreciprocal transfer out.
c) A reduction of equity.
d) An expenditure.

11. On the year-end financial statements, the endowment fund would report, as a result of these transactions, a fund balance (net assets) of:
a) $1,000,000
b) $1,070,000
c) $1,050,000
d) $1,020,000

12. On the year-end financial statements, the special revenue fund will report
a) $50,000 Nonreciprocal Transfer In
b) $70,000 Nonreciprocal Transfer In
c) $50,000 Revenue
d) $70,000 Revenue

13. Cedar City has a permanent fund that reported current year investment earnings (realized and unrealized) of $80,000. The endowment principal is $800,000 and the city council has adopted a policy of considering only the inflation adjusted rate of return to be available for transfer to the recipient fund. During the current year the Council declared the inflation-adjusted rate of return to be 8%. How much revenue would be recognized in the permanent fund?
a) $ 0.
b) $ 64,000.
c) $ 80,000.
d) Unable to determine.

14. At the beginning of the year, the permanent fund of Rapid City had an investment portfolio with a historical cost of $200,000 and a fair value of $220,000. There were no purchases or sales of securities during the year. At year end the portfolio had a fair value of $240,000. At the end of the year Rapid City will account for this increase in fair value in which of the following ways?
a) Credit Investment Income, $20,000.
b) Credit Investment Income, $40,000.
c) Credit Fund Balance, $20,000.
d) No entry is made to recognize increase in fair value.

15. Several years ago, a donor gave $5 million to the City and specified that the principal was to be kept intact but the earnings were to be used to support operations of the city parks. During the current year, the City earned $300,000 on the gift. To what type of fund should the City transfer accountability for the $300,000 earnings.
a) It should not transfer accountability. The $300,000 should remain in the Permanent Fund.
b) A special revenue fund.
c) The General Fund.
d) An enterprise fund.

16. A defined contribution pension plan is one in which the employer agrees to which of the following?
a) The employer agrees to make specific payments to a specified pension plan with no guarantee of a specific pension amount to be paid to the employee.
b) The employer agrees to make specific payments to a specified pension plan AND guarantees that the employee will receive a specified pension (usually determined by length of service and salary).
c) The employer agrees to make necessary payments to a specified pension plan that guarantees that the employee will receive a specified pension (usually determined by length of service and salary).
d) The employer agrees to pay a specified amount (usually determined by length of service and salary) to the employee, but the employer makes no specific guarantee to make payments to the specified pension plan.

17. Hill City Light & Water (a proprietary fund) contributes to a defined benefit plan for its employees. During 1999 Hill City contributed $27 million to its pension plan. On February 15, 2000, Hill City made an additional $3 million contribution related to 1999. The actuarially determined contribution amount was $32 million. The amount of pension expense recognized by Hill City Light & Water for 1999 should be:
a) $ 0
b) $ 27 million
c) $ 30 million
d) $ 32 million

18. During the fiscal year ended December 31, 2001, the Highland City General Fund contributed $48 million to a defined benefit pension plan for its employees. On February 27, 2002, Highland made an additional $2 million contribution related to the 2001 pension contribution requirements. The actuarially determined contribution amount for 2001 is $52 million. The amount of pension expenditure recognized by Highland City General Fund for 2001 should be:
a) $ 0
b) $ 48 million
c) $ 50 million
d) $ 52 million

19. The Schedule of Changes in Long-Term Obligations contains an account Net Pension Obligation. Which of the following describes the event that gave rise to this account?
a) The actual contribution by a proprietary fund was less than the actuarially required contribution.
b) The actual contribution by a governmental fund was less than the actuarially required contribution.
c) The actuarially computed pension liability exceeded the pension plan assets.
d) The pension plan assets exceeded the actuarially computed pension liability.

20. Required disclosure by a government General Fund related to its pension plan does NOT include which of the following?
a) The employer’s funding policy.
b) The components of the pension cost.
c) The key assumptions used in determining the pension costs.
d) The present value of the future benefits to be paid.

21. A plan’s unfunded actuarially accrued liability is the excess of
a) The actuarially-determined plan cost over the actual contribution.
b) The actuarially-determined plan cost over the plan assets.
c) The actuarially-determined pension liability over the plan assets.
d) The actuarially-determined pension liability over the total contributions.

22. Citizens within a defined geographic area of Hill City created a special assessment district to facilitate the construction of sidewalks. Hill City was responsible for overseeing the entire construction project. Hill City issued bonds in its own name to pay the contractor for the construction. However, Hill City was not responsible in any manner for the bonds. The bonds were secured by the special assessments which would be levied against the property within the special assessment district. Collections of special assessments would be recorded in which of the following funds of Hill City?
a) Special Assessment Fund.
b) Agency Fund.
c) Special Revenue Fund.
d) Debt Service Fund

23. The City of Highland Hills receives a federal grant to assist in nutrition (feeding) programs for senior citizens. The City will select the contractors to provide the feeding and approve the participants in the program. The proceeds of this grant should be accounted for in which of the following funds of the City?
a) General Fund.
b) Special Revenue Fund.
c) Agency Fund.
d) Expendable Trust Fund.

24. The City of Highland Hills receives a federal grant to assist in nutrition (feeding) programs for senior citizens. Senior citizens whose income is below a specified amount (the amount was specified by the Federal government) are eligible to participate in the program. Monthly checks of $100 (this amount was specified by the Federal government) will be mailed to eligible senior citizens. The proceeds of this grant should be accounted for in which of the following funds of the City?
a) General Fund.
b) Special Revenue Fund.
c) Agency Fund.
d) Expendable Trust Fund.

25. Financial assets held by a governmental investment pool should be valued at
a) Cost.
b) Amortized cost.
c) Fair value on the date of the financial statements.
d) Fair value computed by a weighted-average approach.
L.
M.
N. PROBLEMS (CHAPTER 10)

1. Name the two financial statements and two schedules of required supplementary information required by GASB Statement No. 25 for each defined benefit pension plan.

2. The City of Shane received a cash gift of $125,000 from a citizen who specified that the gift must be used to support recreational activities for youth of the City. The City accounted for this gift in the appropriate fund. During the year the City engaged in the following activities. Prepare the appropriate journal entries.

a) The City accepted the donation.

b) The City engaged in a fund-raising effort to provide additional funds to support youth recreational activities. The City raised $6,000 in pledges. The City collected $2,000 in cash with the remaining pledges collectible shortly after the end of the year.

c) The City temporarily invested $50,000 of the gift in marketable securities.

d) The City spent $26,000 on goal posts, nets, etc., for the soccer field.

e) The City received $2,000 in dividends and interest earned on the temporary investment.

f) At year-end the temporary investments had a market value of $51,000.

g) The City closed the revenue and expense accounts.

3. Assume a state government qualifies as a “cash conduit” on a $1 million pass-through grant from the federal government to a local government. Record the following transactions in the state’s Pass-Through Agency Fund.

a) Receipt of the $1 million in cash.

b) Cash disbursement of $1 million to the local government.

ESSAYS (CHAPTER 10)

1. Explain the difference between public-purpose trusts and private-purpose trusts.

2. Agency funds are excluded from the face of the external financial statements for a governmental entity. What are agency funds? Should they be presented on the face of the government’s financial statements? Could, or should, they be presented elsewhere?

3. Why do agency funds have no fund equity or operating accounts?

Chapter 11

Issues of Reporting, Disclosure, and Financial Analysis

TRUE/FALSE (CHAPTER 10)

1. Governments must incorporate their blended component units into both the fund and government-wide statements.

2. Governments must incorporate their discretely presented component units into both the fund and the government-wide statements.

3. A related organization is a contractual arrangement, whereby two or more participants agree to carry out a common activity and share its risks and rewards.

4. A related organization must be incorporated into the primary government’s financial statements.

5. The comprehensive annual financial report (CAFR) is divided into three main sections: the table of contents section, the auditors’ report section, and the financial section.

6. The typical audit is designed to cover all information included in the CAFR.

7. There are only two government-wide statements: the statement of net assets and the statement of activities.

8. Required notes are an essential element of the basic financial statements.

9. Required supplementary information (RSI) is considered part of the basic financial statements.

10. Public colleges and universities must adhere to the same GASB pronouncements as other types of governments.
O.
P.
Q. MULTIPLE CHOICE (CHAPTER 11)

1. Which of the following is NOT a primary government?
a) A state government.
b) A general purpose local government with the ability to determine its own budget.
c) A general purpose local government whose tax levies must be approved by the state.
d) A special purpose local government whose tax levies must be approved by the state.

2. Which of the following is NOT required for a special purpose local government to be considered a primary government?
a) It must have a separately elected governing body.
b) It must have the power to issue tax exempt debt.
c) It must be legally separate from other primary governments.
d) It must be fiscally independent of other governments.

3. Which of the following is NOT a necessary condition for a governmental entity to be considered fiscally independent?
a) It must be able to determine its own budget.
b) It must be able to levy taxes and/or set rates for its services.
c) It must be able to issue bonds.
d) It must be able to issue bonds that are tax-exempt.

4. Which of the following is NOT a necessary characteristic of a component unit?
a) It is legally separate from the other government.
b) The other government appoints a voting majority of the component unit’s governing body or a voting majority of the unit’s governing body is composed of officials of the other government.
c) The other government can impose its will on the unit or the unit has the potential to provide a financial benefit to or impose a financial burden on the other government.
d) The other government provides services that are used by both governments.

5. The Marsh River School District, a legally separate school district that has a separately elected governing body, cannot enter into any debt agreements without the approval of the County Commission. Marsh River School District would be considered a:
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

6. The County Commission appoints a voting majority of the members of the Board of a particular organization. The County Commission cannot impose its will upon the organization. There is no potential for the organization to provide any financial benefit to the County nor is there is any potential for the organization to impose any financial burden on the county. The organization is an example of a:
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

7. The State has a legally separate State Building Authority which has a board appointed by the Governor. The Authority issues debt in its own name, holds title to buildings in its own name, and leases its building exclusively to the State. The authority would be considered a
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

8. The State has a legally separate State Building Authority which has a board appointed by the Governor. The Authority issues debt in its own name, holds title to buildings in its own name, and leases its building exclusively to the State. In what manner would the Authority be included in the State’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

9. The City created a legally separate Housing Authority to provide low-income housing to residents of the City. The City issues debt for the Housing Authority in the name of the City, but the Housing Authority is responsible for repayment of the debt. The Housing Authority is governed by a board composed of all 5 members of the City Council. Actions can be taken by the Authority upon receiving an affirmative vote by a simple majority of the board. The Housing Authority would be considered a:
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

10. The City created a legally separate Housing Authority to provide low-income housing to residents of the City. The City issues debt for the Housing Authority in the name of the City, but the Housing Authority is responsible for repayment of the debt. The Housing Authority is governed by a board composed of all 5 members of the City Council. Actions can be taken by Authority upon receiving an affirmative vote by a simple majority of the board. In what manner would the Authority be included in the City’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

11. The County created a legally separate County Hospital authority. Members of the board of the County Hospital are elected in county-wide elections. The hospital receives no financial support from the County, except that the County pays the hospital bills for county indigents. All revenues of the Hospital are user fees. The County Hospital would be considered a
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

12. The County created a legally separate County Hospital authority. Members of the board of the County Hospital are elected in county-wide elections. The hospital receives no financial support from the County, except that the County pays the hospital bills for county indigents. All revenues of the Hospital are user fees. In what manner would the Hospital be included in the County’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

13. The City created a legally separate Port Authority. Members of the board of the Port Authority are elected in general city elections. The Port Authority receives no tax dollars; it is supported entirely by user fees. The Port Authority determines its budget, sets user fees, and has the power to issue bonded debt. The Authority would be considered a
a) Primary government.
b) Component unit.
c) Related organization
d) Affiliated organization.

14. The City created a legally separate Port Authority. Members of the board of the Port Authority are elected in general city elections. The Port Authority receives no tax dollars; it is supported entirely by user fees. The Port Authority determines its budget, sets user fees, and has the power to issue bonded debt. In what manner would the Port Authority be included in the City’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Note disclosure only.
d) Not included in any manner.

15. The City created a legally separate entity to operate a County Hospital. The City Council appoints a voting majority of the board of the Hospital. The City cannot impose its will on the Hospital and there is no potential for a financial benefit or financial burden to the City. The County Hospital would be a
a) Primary government.
b) Component unit.
c) Related organization.
d) Affiliated organization.

16. The City created a legally separate entity to operate a County Hospital. The City Council appoints a voting majority of the board of the Hospital. The City cannot impose its will on the Hospital and there is no potential for a financial benefit or financial burden to the City. In what manner would the Hospital be included in the City’s Basic Financial Statements?
a) Blended.
b) Discretely presented.
c) Only by note disclosure of the relationship.
d) Not included in any manner.

17. A Comprehensive Annual Financial Report for the City of Highland Hills need not include which of the following sections?
a) Condensed summary data.
b) Introductory section.
c) Financial section.
d) Statistical section.

18. The introductory section of a CAFR does NOT include which of the following?
a) Table of Contents.
b) Letter of Transmittal.
c) Auditor’s Opinion on the Basic Financial Statements.
d) GFOA Certificate of Achievement.

19. The financial section of a CAFR does not include:
a) Letter of Transmittal.
b) MD&A and Other RSI.
c) Basic Financial Statements.
d) Notes to the financial statements.

20. Which of the following statements is not a required part of the General Basic Financial Statements of the City of Highland Hills?
a) Government-wide Statement of Net Assets.
b) Statement of Revenues, Expenditures, and Changes in Fund Balances for all Governmental Funds.
c) Statement of Revenues, Expenses, and Changes in Net Assets for all Proprietary and Fiduciary Funds.
d) Statement of Cash Flows for all Proprietary Funds.

21. The auditor’s report generally includes an opinion on which of the following sections of the CAFR?
a) The introductory section, the financial section, and the statistical section.
b) The introductory and the financial sections only.
c) The statistical and the financial sections only.
d) The financial section only.

22. Government-wide financial statements include which of the following?
a) Balance Sheet; Income Statement.
b) Balance Sheet; Income Statement; Statement of Cash Flows.
c) Statement of Net Assets; Statement of Activities.
d) Statement of Net Assets; Statement of Activities; Statement of Cash Flows; Statement of Changes in Long-Term Obligations.

23. Fund Financial Statements include which of the following for a proprietary fund?
a) Balance Sheet; Statement of Revenues, Expenses, and Changes in Net Assets.
b) Statement of Net Assets; Statement of Revenues, Expenses, and Changes in Net Assets; Statement of Cash Flows.
c) Statement of Net Assets; Statement of Changes in Net Assets.
d) Statement of Net Assets; Statement of Changes in Net Assets; Statement of Cash Flows.

24. Fund Financial Statements include which of the following for a governmental fund?
a) Statement of Net Assets; Statement of Changes in Net Assets.
b) Statement of Net Assets; Statement of Changes in Net Assets; Statement of Cash Flows.
c) Balance Sheet; Statement of Revenue, Expenditures, and Changes in Fund Balance; Statement of Cash Flows.
d) Balance Sheet; Statement of Revenue, Expenditures, and Changes in Fund Balance.

25. Fund financial statements for Fiduciary Funds include which of the following?
a) Balance Sheet; Income Statement.
b) Balance Sheet; Income Statement; Statement of Cash Flows.
c) Statement of Fiduciary Net Assets; Statement of Changes in Fiduciary Net Assets.
d) Statement of Fiduciary Net Assets; Statement of Changes in Fiduciary Net Assets; Statement of Cash Flows.

26. With regard to combining statements, which of the following statements is true?
a) Combining statements for nonmajor governmental funds are optional.
b) Combining statements for nonmajor governmental funds are required.
c) Combining statements for nonmajor internal service funds are optional.
d) Combining statements for all internal service funds is optional.

27. With regard to MD&A, which of the following is true?
a) Is necessary to understanding a government’s financial standing.
b) Is necessary to provide information not already provided by the basic financial statements.
c) Is necessary to provide information not already provided by the CAFR.
d) Should not be required.

R. PROBLEMS (CHAPTER 11)

S. 1. For each of the following independent cases state whether or not the entity described should be included in the financial statements of the primary government and if so, how? Be concise but adequately defend your answer using GASB criteria.

a) The Planning and Development Authority is a separate legal entity with a five-member board appointed as follows: one member appointed by the School District, one member appointed by the City, one member appointed by the County, and two members elected by the three appointed members. The Planning and Development Authority borrowed $50,000 from the City. The money was used to make loans to businesses agreeing to relocate to the immediate area. Repayments of the principal and interest by borrowers is available for lending to new entities.

b) The State created a Public Building Authority, a separate legal entity. The Governor appoints a voting majority of the board of the Authority. The Authority issues bonds, backed by the assets financed with the proceeds. The Authority leases the buildings to the State and use the proceeds of the leases to service the debt on the bonds.

c) Bane County Hospital is built on land donated to the hospital by the US Bureau of Land Management. The hospital board members elect replacements to the Board without outside nominations. The hospital is entirely supported by revenues generated by the hospital. The County Commission must approve the budget each year, but the County Commission has never questioned any item in the budget.

d) The State University board of trustees are elected in a statewide general election. The State provides approximately half of the operating revenues necessary to fund University programs. State laws apply to the conduct of business at the University.

2. Outline the required parts of a Comprehensive Annual Financial Report.

ESSAYS (CHAPTER 11)

1. The state established the State Housing Authority to finance construction of low-income housing. The Authority, a state-owned corporation, is governed by an independent board of directors, the members of which are appointed by the governor. They can be removed only for cause. The board of directors has complete control over the Authority’s operations. The Director is hired by the Board and reports to the Board; the Director cannot be removed by the Governor. Although the State Constitution limits the State to $2 million of bonds, the Authority issued $970 million in bonds to finance construction projects. Older debt issues are issued by the Authority but are backed by the taxing power of the State. The newer bonds are issued by the Authority but are revenue bonds only.

The Authority uses the proceeds of its debt to make loans to finance housing construction. Debt is serviced from monies received in repayment of loans made by the Authority.
Do you believe the State should include the Authority in its reporting entity? If so, how? Justify your answer using the GASB Financial Reporting Entity criteria.

2. A Comprehensive Annual Financial Report includes a Statistical Section. What kinds of information are found in the statistical section? To what use would a reader put the information found in the statistical section? In your opinion, is the statistical section worth the effort put into its preparation?

3. GASB reporting standards require that legally separate component units be included on the face of the financial statements of the primary government. Small City created a legally separate City Utility Service. The Small City Council appoints the Utility board members, authorizes the bonds of the Utility, and approves its budget. Small City’s general fund revenues are $58 million; the revenues of the Public Utility are $100 million (the Public Utility owns a generating plant and sells its excess power to other communities). Discuss the appropriate reporting for the Public Utility. Do you think that this presentation is meaningful? Why or why not?

Chapter 12

Not-for-Profit Organizations

TRUE/FALSE (CHAPTER 12)

1. The FASB has standard-setting jurisdiction over all private not-for-profits and all government-owned not-for-profits.

2. Private not-for-profit accounting is closer to business than to government accounting.

3. FASB Statement No. 117 directs that revenues and expenses be reported in a statement of financial position.

4. In the statement of activities, FASB Statement No. 117 requires revenues to be reported as increases in one of the three categories of net assets, depending on donor-imposed restrictions; however, all expenses should be reported as decreases in unrestricted net assets.

5. Restricted contributions may be reported as unrestricted if the restriction has been met in the same period as the contribution is made.

6. FASB Statement No. 95 requires not-for-profits use the direct method in the preparation of the statement of cash flows.

7. In accounting for investments, not-for-profits, like businesses, must report their investments at fair value and classify the investments as either trading, available-for-sale, or held-to-maturity.

8. Absent explicit donor or legal stipulations, a not-for-profit’s endowment principal (permanently restricted net assets) would not be affected by either gains or losses on investments.

9. Not-for-profits cannot own or be integrally affiliated with either businesses or other not-for-profits.

10. FASB Statement No. 93 makes the recognition of depreciation on long-lived assets optional at the discretion of the not-for-profit.

MULTIPLE CHOICE (CHAPTER 12)

1. Financial statements for Smith College, a church-supported college, should be prepared according to standards set by
a) AICPA.
b) FASB.
c) GASB.
d) Smith may choose any of the above.

2. The basis of accounting used by not-for-profit organizations in their external financial reports is
a) Industry-specific basis of accounting.
b) Cash basis of accounting.
c) Modified accrual basis of accounting.
d) Accrual basis of accounting.

3. FASB requires the focus of external financial reporting be on
a) The donor-imposed restrictions on resources.
b) All restrictions on resources.
c) Funds of the entity.
d) The entity taken as a whole.

4. Expenses incurred by not-for-profit organizations should be reported as
a) Decreases in one of the three categories of net assets.
b) Decreases in unrestricted net assets.
c) Decreases in temporarily restricted net assets.
d) Decreases in permanently restricted net assets.

5. Revenues of a not-for-profit organization should be reported as
a) Increases in one of the three categories of net assets.
b) Increases in unrestricted net assets.
c) Increases in temporarily restricted net assets.
d) Increases in permanently restricted net assets.

6. Restricted gifts to not-for-profit organizations
a) Must always be shown as an increase in restricted net assets.
b) Must always be shown as an increase in unrestricted net assets.
c) May be shown as an increase in unrestricted net assets if the restriction is met in the same period.
d) May be shown as an increase in unrestricted net assets at the discretion of management.

7. The account title “Resources Released from Restriction” is reported by a ‘restricted fund’ as a
a) Revenue account.
b) Contra-revenue account.
c) Expense account.
d) Contra-expense account.

8. The account title “Resources Released from Restriction” is reported by an ‘unrestricted fund’ as a
a) Revenue account.
b) Contra-revenue account.
c) Expense account.
d) Contra-expense account.

9. FASB requires that all not-for-profit organizations report expenses
a) By object.
b) By function.
c) By natural classification.
d) By budget code.

10. Voluntary health and welfare organizations must also report expenses by
a) Object.
b) Function.
c) Natural classification.
d) Budget code.

11. The National Association for the Preservation of Wildlife received $10,000 from a benefactor to support the overall objective of the organization. This amount will be recognized as revenue
a) In the period received.
b) In the period spent.
c) Never, because it is not earned.
d) In the period it becomes susceptible to accrual.

12. Not-for-profit organizations report their cash flows in which of the following categories?
a) Operating, noncapital financing, capital financing, investing.
b) Operating, noncapital financing, investing.
c) Operating capital financing, investing.
d) Operating, financing, investing.

13. Not-for-profit organization should report contributions restricted for long-term purposes in which of the following categories?
a) Operating.
b) Financing.
c) Capital financing.
d) Investing.

14. Not-for-profit organizations should report interest and dividends earned and restricted for long-term purposes in which of the following categories?
a) Operating.
b) Financing.
c) Capital financing.
d) Investing.

15. Revenue from an exchange transaction may be classified as an increase in which class of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Any of the above.

16. During the annual fundraising drive, the Cancer Society raised $900,000 in pledges of financial support for their general operations. By the fiscal year-end, the Society had collected $600,000 of the pledges. The Society estimates that 10% of the remaining pledges will be uncollectible. The NET amount of revenue the Society should recognize during the current year from this pledge drive is
a) $900,000.
b) $870,000.
c) $810,000.
d) $600,000.

Use the following information to answer #17 – #19.
United Charities’ annual fund raising drive in 2001 raised pledges of $600,000 of which $400,000 were collected in 2001 and $100,000 were collected in 2002. United Charities estimates $75,000 of the remaining pledges will never be collected.

17. The increase in unrestricted net assets in 2001 as a result of the fund raising drive is
a) $600,000.
b) $525,000.
c) $400,000.
d) $125,000.

18. The increase in temporarily restricted net assets in 2001 as a result of the fundraising drive is
a) $600,000.
b) $525,000.
c) $400,000.
d) $125,000.

19. In 2002, the change in unrestricted net assets is
a) $0
b) $100,000 increase.
c) $100,000 decrease.
d) $500,000 increase.

20. In a prior year, United Charities received a $100,000 gift to be used to acquire vans to provide transportation for physically challenged adults. During the current year, United acquired two vans at a cost of $60,000 each. The appropriate entry(ies) to record the acquisition should be
a) UNRESTRICTED FUND
Resources Released from Restriction $100,00
Cash $100,000
RESTRICTED FUND
Fixed Assets $120,000
Cash $ 20,000
Resources Released from Restriction $100,000
b) RESTRICTED FUND
Resources Released from Restriction $ 100,000
Cash $100,000
UNRESTRICTED FUND
Fixed Assets $120,000
Resources Released from Restriction $100,000
Cash $ 20,000
c) UNRESTRICTED FUND
Fixed Assets $120,000
Cash $120,000
d) RESTRICTED FUND
Fixed Assets $120,000
Cash $120,000

21. In the current year National Pet Charities, which uses fund-type accounting to maintain its books and records, received a $30,000 contribution to help educate people on responsible pet ownership. During the current year, the entry to record this donation is
a) UNRESTRICTED FUND. No entry.
RESTRICTED FUND. Debit Cash $30,000; Credit Revenues $30,000.
b) UNRESTRICTED FUND. No entry.
RESTRICTED FUND. Debit Cash $30,000; Credit Net Assets $30,000.
c) UNRESTICTED FUND. Debit Cash $30,000; Credit Revenues $30,000.
RESTRICTED FUND. No entry.
d) UNRESTRICTED FUND. Debit Cash $30,000; Credit Net Assets $30,000.
RESTRICTED FUND. No entry.

22. Grace Church, a nondenominational not-for-profit entity, operates a school in connection with the Church. This year members of the Church decided to construct a new wing on the school with six classrooms. The Church hired an architect and a construction supervisor. The bulk of the labor for construction was donated by Church members who were willing workers but not necessarily skilled carpenters. Materials for the construction cost $300,000 and the paid labor was $100,000. The fair value of the completed building is $1 million. When the building is completed what should be the balance in the asset account ‘Building’ and the account ‘Contributed Revenue.’
a) Building $400,000; Contributed Revenue $0.
b) Building $400,000; Contributed Revenue $600,000.
c) Building $1 million; Contributed Revenue $600,000.
d) Building $1 million; Contributed Revenue $0.

23. Mary’s Extended Care Center, a not-for-profit entity, enjoys the services of a group of high school age people who each agree to work three afternoons a week for three hours each afternoon performing a variety of patient-related services such as writing letters for those who are unable to do so, delivering mail to the patient rooms, and pushing wheel-chair patients across the grounds. The services rendered by these young people enhance the quality of life for the residents. They could not be provided if they were not donated because there are not enough resources to do so. The past year the young people donated 5000 hours in total. The services would have cost $6.00 per hour if they had been purchased but they were worth $10 an hour to St. Mary’s. What is the amount of contributed revenue that should be recognized by St. Mary’s related to these services?
a) $50,000.
b) $30,000.
c) $0.
d) Cannot determine.

24. Simplex Games, a not-for-profit entity organized to provide athletic competition opportunities for high school students, utilizes a number of volunteers in carrying out its mission. At the 2002 Games 50 volunteers provided a total of 1000 hours of service performing tasks such as picking up litter and delivering water to the athletes. A local CPA firm donates its services to prepare the annual tax return and other federal and state required paperwork which must be filed to maintain its status as a tax-exempt organization. During 2002 the CPA firm provided 50 hours of service. If purchased, the CPA services would have cost $50 per hour and the game workers would have cost $5 per hour. How much contributed service revenue should Simplex Games recognize in 2002?
a) $7,500.
b) $5,000.
c) $2,500.
d) $0.

25. A not-for-profit Art Museum that has elected not to capitalize its art collection receives a donation of a rare piece of Tlinket Indian art. The donor paid $8,000 for the piece several years ago. Today the piece has an estimated fair value of $50,000. What entry should the Art Museum make upon receipt of this donation?
a) Debit Collection Items $50,000; Credit Donated Revenue $50,000.
b) Debit Collection Items $8,000; Credit Donated Revenue $8,000.
c) Debit Collection Items $50,000; Credit Unrestricted Net Assets $50,000.
d) No entry required.

26. Native Art Museum, a not-for-profit entity that elects not to capitalize its collection items, purchased for $10,000 a wonderful totem pole for display near the door of the Museum. As a result of this transaction, which of the following entries should be made?
a) Debit Collection Items $10,000; Credit Cash $10,000.
b) Debit Collection Expense $10,000; Credit Cash $10,000.
c) Debit Unrestricted Net Assets $10,000; Credit Cash $10,000.
d) No entry is required.

27. The Nature Conservatory, a not-for-profit entity, engaged in a fundraising drive to raise money to buy land to provide a habitat for the endangered Sleepy Eagle. A donor pledged $1 million to the project provided that the Nature Conservatory was able to raise an additional $1.5 million from other sources. What entry should the Nature Conservatory make at the time of the $1 million pledge?
a) Debit Pledge Receivable $1 million; Credit Unrestricted Revenue $1 million.
b) Debit Pledges Receivable $1 million; Credit Temporarily Restricted Revenue $1 million.
c) Debit Pledges Receivable $1 million; Credit Temporarily Restricted Net Assets $1 million.
d) No entry is made at the time of the pledge.

28. When should a not-for-profit entity recognize pledge revenue that is contingent upon raising a matching amount?
a) When the pledge is made.
b) When the cash is received.
c) When the matching funds have been raised.
d) When the project is completed.

29. A donor pledges $100,000 to the Shakespeare Foundation to be used only to support the summer Shakespeare Theater—an event that has been held every summer for 38 years. This is an example of a(an)
a) Conditional contribution.
b) Unconditional contribution.
c) Restricted contribution.
d) Unrestricted contribution.

30. United Charities accepted a contribution from a donor and agreed to transfer the assets to Aid for Friends, a not-for-profit that provides temporary shelter to the homeless. United Charities should debit cash or other assets and credit
a) Unrestricted revenue.
b) Temporarily restricted revenue.
c) Liability to Aid for Friends.
d) United Charities should not make an entry.

31. Music Lovers Foundation, a not-for-profit governed by an independent board, was founded to support the Northern State University Choir until such time as the state legislature shall adequately fund the choir. When the Choir is adequately funded by appropriation the Foundation may direct resources to other music projects that it deems acceptable. When Music Lovers accepts a contribution from a donor it should debit cash and/or other assets and credit
a) Unrestricted revenue.
b) Temporarily restricted revenue.
c) Liability.
d) It should not make an entry.

32. The Save the Animals Foundation received a gift of $500,000 from a donor who wanted the gift used to acquire habitat for endangered snails. The money may be invested but all earnings are restricted to habitat acquisition. During the year all of the gift was invested in corporate securities. At year-end, the securities had a value of $501,0000. The appropriate way to recognize the change in fair value is
a) Debit Investment $1,000; Credit Unrestricted Revenue $1,000.
b) Debit Investment $1,000; Credit Temporarily Restricted Revenue $1,000.
c) Debit Investment $1,000; Credit Permanently Restricted Revenue $1,000.
d) No entry should be made until the securities are sold.

33. Sheridan Public School Foundation had available temporarily restricted gifts in excess of $200,000. The Foundation decided to invest this money temporarily until it needs the funds for the restricted purpose. The donors had made no specific stipulations regarding investment earnings but the Foundation board had voted to use the earnings on the projects for which the gift had originally been restricted. At year-end, the securities had a fair value of $200,500. The appropriate way to recognize the change in fair value is
a) Debit Investment $500; Credit Unrestricted Revenue $500.
b) Debit Investment $500; Credit Temporarily Restricted Revenue $500.
c) Debit Investment $500; Credit Permanently Restricted Revenue $500.
d) No entry should be made until the securities are sold.

34. The Friends of the Library (FOL), a not-for-profit entity, received a gift restricted to acquisition of a special piece of the equipment used to restore books. Late last year FOL acquired the machine at a total cost of $19,000. The machine is estimated to have a useful life of eight years and a salvage value of $3,000. In what fund should FOL make the entry to record the depreciation for the current year?
a) Unrestricted fund.
b) Temporarily restricted fund.
c) Permanently restricted fund.
d) FOL should not recognize depreciation.

35. A not-for-profit would include which of the following financial statements in is Basic Financial Statements?
a) Statement of Financial Position and Statement of Activities.
b) Statement of Financial Position, Statement of Activities, and Cash Flow Statement.
c) Statement of Financial Position, Statement of Activities, Cash Flow Statement, and a Statement of Functional Expenses.
d) Statement of Financial Position, Statement of Activities, and a Statement of Functional Expenses.

PROBLEMS (CHAPTER 12)

1. United Charities, a not-for-profit entity, supports activities for lower-income families. They have regularly engaged in activities such as providing transportation for physically-challenged individuals, providing shelters for the temporarily homeless, providing congregate meals for the homeless, and providing shelters for abused women and children. Record the following transactions. Your account titles should clearly indicate to which class of net assets the entry will be closed or the fund in which the entry is being made. If no entry is required, write “No entry required.”

a. United Charities engaged in a fund-raising campaign which resulted in pledges of $600,000 to support activities of the current year. During the year, United collected $500,000 on these pledges.

b. A local citizen pledged $50,000 to purchase and equip a van to provide transportation for physically challenged individuals. This citizen has donated regularly and there is no reason to believe that this pledge will not be collectible.

c. In prior years, an advocacy group for abused women donated $10,000 to be used to furnish a ‘safe-house’ for abused women and children. During the current year renovation of the safe house was completed and furniture was acquired at a total cost of $15,000.

d. A wealthy benefactor pledges $100,000 to United if United successfully raises a matching amount in a capital asset fund-raising drive being conducted over a 12-month period.

e. $60,000 cash is received from a donor who specifies that the money must be spent to provide educational activities for children who will be living in the ‘safe-house’. It will be next year before the ‘safe-house’ has its first residents.

f. A local attorney has agreed to provide legal services to United on a pro-bona basis. During the current period the attorney provided services for which she would have billed $1,500.

g. Several older housewives provide services at the United Charities congregate meal setting facility. These women work in the kitchen serving meals and cleaning up the kitchen. If these services were not donated they would have to purchased. The value of these services at the prevailing wage rate for similar employees would have amounted to $50,000 for the current year.

h. Fixed assets belonging to United Charities have an original cost of $270,000, an estimated salvage value of $70,000, and an estimated useful life of 20 years. Record depreciation if applicable.

2. The Heritage Art Museum, a not-for-profit entity specializing in art items created by natives of the Pacific Northwest, has a December 31 fiscal year-end. The Museum has a policy of not capitalizing collection items. Your entry should clearly indicate to which class of net assets the account would be closed, or in which fund the entry is being made. If no entry is required, write “No entry required.”

a. During the current year the Museum received admissions fees in cash $500,000.

b. Citizens of the local community are encouraged to participate in a program called ‘Friends of the Museum.’ For a yearly contribution of $25 per family, a family is entitled to free admission to the Museum during the calendar year. A ‘Friend of the Museum; also receives a monthly one-page newsletter announcing upcoming events. At year-end, there were 1000 members in the ‘Friends of the Museum.’

c. During the current year the Museum incurred salary expense of $1 million of which $60,000 remains unpaid at year end.

d. During the year the Museum incurred operating expenses of $400,000 of which $30,000 remains unpaid at year end. Of the $400,000, $50,000 was used to buy supplies of which $20,000 remains on hand at year-end.

e. Office equipment owned by the Museum has a historical cost of $100,000, salvage value of $20,000 and can be depreciated over 8 years on the straight-line basis.

f. During the year the Museum conducted a fund-raising drive to raise money to acquire new art items for the Museum. The Museum received pledges of $200,000 of which the Museum had collected $150,000 by year-end and expected to ultimately collect another $20,000.

g. The Museum had a small portfolio of investments in equity securities.. At the beginning of the year the portfolio had a fair value of $60,000. During the year the Museum collected $3,000 in dividends on the securities. At year-end the portfolio had a market value of $61,000.

h. During the year a citizen died and willed his wonderful collection of native art to the Museum. The appraised value of the collection was $600,000.

i. To balance its collection, the Museum sold two of its collection items for $250,000 which approximates fair value. These items had a historical cost to the Museum of $10,000.

j. The proceeds of the sale were used to acquire two new items at a cost of $310,000.

ESSAYS (CHAPTER 12)

1. For each of the cases below state whether or not the contributed services would be recognized, how much would be recognized, and how it would be recognized. Explain your answer in terms of the existing standard. Also explain why, in your opinion, the standard permits/prohibits recognition of this particular type of contribution.

a. A non-denominational church votes to construct a new educational wing on their existing facility. The church will hire an architect to design the new wing and a construction supervisor to oversee the construction. Church members will provide most of the labor for the construction. Labor donated by members who have construction experience or who are considered professional craftsmen at the prevailing wage for their trade or craft is $500,000. Labor donated by persons possessing non-building specialized skills (doctors, teachers, lawyers, etc.) at their prevailing wage rates is $700,000. Labor donated by non-professionals measured at the minimum wage is $300,000. The appraised value of the building when completed is $3 million. The architect was paid $700,000, the construction supervisor was paid $50,000 and the materials purchased for use in the building cost $1 million.

b. An investment advisor, a member of the Board of a not-for-profit entity, provides pro bono investment advise to the NFP. The NFP does not have a particularly large investment portfolio and without the advise of the Board member the NFP would probably invest its idle cash in certificates of deposits at an insured commercial bank to protect itself against loss of its principal. If the investment advisor had provided similar services to his customers he would have charged $2,000.

c. Members of a religious order provide professional nursing services for a health-care facility that is run by their order. The members are not compensated but their order provides lodging, food, and other necessities. The cost of the lodging, food, etc., is paid by the health-care entity and classified as Nursing Service Expense. At the end of the year the balance in the Nursing Service Expense account is $3 million. The value of the nursing services provided, measured at the prevailing wage for nurses, is $5 million.

2. A generous benefactor pledges $1 million to The R. J. Smith Foundation, a not-for-profit entity that promotes the arts. The gift is to be used to provide scholarships for talented musicians at a music camp operated by the Foundation. The gift was given in August, 2002 to support the Summer 2003 music program. The Foundation Director argues that the gift is a conditional restricted gift and therefore cannot be recognized as revenue in 2002. The accountant argues that the gift is an unconditional restricted gift and must be recognized in the current year. What is the basis for the Director’s argument? What is the basis for the accountant’s argument? In your answer provide an explanation of the terms conditional, unconditional, restricted and unrestricted.

Chapter 13

Special Issues for Not-for-Profit Health Care Providers and Institutions of Higher Education

TRUE/FALSE (CHAPTER 13)

1. The statement of financial position of a not-for-profit health care organization should distinguish among unrestricted, temporarily restricted, and permanently restricted net assets.

2. The statement of activities of a not-for-profit health care organization should classify the revenues as unrestricted, temporarily restricted, or permanently restricted, but should report expenses only as decreases in unrestricted resources.

3. Temporarily restricted funds related to plant and equipment generally account only for resources restricted to their purchase or construction, not for the plant and equipment itself, which are typically reported in the general operating fund.

4. Not-for-profit health care organizations must use exactly three funds to account for the three categories of restrictiveness.

5. In classifying expenses in the statement of activities of a not-for-profit health care organization, all expenses are reported exclusively within the temporarily restricted category.

6. Unlike businesses, not-for-profit health care providers often serve patients who they know will be unable to pay the amounts billed.

7. According to the AICPA audit guide, Health Care Organizations, revenue must be recorded using the patient discharge method.

8. The Hill-Burton Act stipulates that hospitals receiving federal construction funds must provide a certain amount of charity care.

9. Government hospitals are subject to the same FASB standards as private not-for-profit health care organizations.

10. Private not-for-profit colleges and universities are subject to the same FASB standards as other not-for-profit entities.

MULTIPLE CHOICE (CHAPTER 13)

1. For a not-for-profit hospital, which of the following financial statements is NOT required?
a) Statement of financial position.
b) Statement of activities.
c) Statement of cash flows.
d) Statement of functional expenses.

2. For a not-for-profit college or university, which of the following categories of net assets is NOT appropriate in its external financial statements?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) None. All of the above are appropriate.

3. New College, a private college, received a $1 million donation. The donor specified that the principal of her gift could not be used for program activities but the earnings on the principal must be used to provide scholarships to academically qualified students in the business school. The $1 million gift would increase which of the following categories of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Either (b) and (c).

4. Intermountain Hospital, a not-for-profit health care provider, issued $70 million in term bonds to finance construction of a new wing at its main hospital. Terms of the bond issue require that $5 million of the proceeds of the bond issue be invested in U.S. government securities. The $5 million must be held until maturity of the bonds. The $5 million will increase which class of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Either (b) or (c).

5. During the current year, Jones University received a $50,000 gift from an alumnae who specified that it must be used to pay travel costs for faculty to attend health care conferences in foreign countries. During the year the university spent $8,000 to support travel to a health care conference in Italy. The $8,000 disbursement will cause a NET decrease in which class of net assets?
a) Unrestricted net assets.
b) Temporarily restricted net assets.
c) Permanently restricted net assets.
d) Cannot be determined.

Use the following information to answer #6 and #7.
Kale Hospital, a not-for-profit entity, received a pledge from a donor in support of a fund raising effort by the Hospital to finance construction of a new facility for cancer treatment. The donor promised to pay $1 million in equal annual installments of $100,000 over the next 10 years. The present value of the gift at the risk-free interest rate is $736,000.

6. The amount of unrestricted revenue that should be recognized by Kale in the year of the gift is
a) $1 million.
b) $736,000.
c) $100,000.
d) $0.

7. The amount of restricted revenue that should be recognized by Kale in the year of the gift is
a) $1 million.
b) $736,000.
c) $100,000.
d) $0.

8. An accountant has encountered a perplexing financial reporting issue related to the hospital for which she is preparing financial statements. The issue is not specifically addressed by FASB statements. To which of the following sources would the accountant probably look for industry-specific guidance?
a) GASB Statements.
b) AICPA accounting and auditing guide, Not-for-Profit Organizations.
c) AICPA accounting and auditing guide, Health Care Organizations.
d) Pronouncements of the HFMA or AHA.

9. Which of the following entities should recognize depreciation expense on its operating statement?
a) Not-for-profit University.
b) Not-for-profit Foundation.
c) Not-for-profit Hospital.
d) All of the above.

10. In prior years, a not-for-profit hospital received funds from a donor who restricted the use of those funds to providing nursing scholarships. During the current year $8,000 of scholarships were awarded. These scholarships should be reported
a) As expenses in the unrestricted fund.
b) As reductions in the revenue section in the unrestricted fund.
c) As expenses in the temporarily restricted fund.
d) As expenses in the permanently restricted fund.

11. During the current year, St. Mary’s Hospital (a not-for-profit entity) earned, based on its normal billings rate, $1 million in patient service revenues. Many of these patients belong to a health plan that has an established pay schedule. Based on the specific services rendered to members of the plan, the hospital estimates that $.05 million will not be collectible from the plan or the patient. Some of the patients are Hospital employees. These employees are given a 50% discount on the services rendered. Employee discounts for the current year total $.01 million. Some of the patients are uninsured and the hospital estimates, that of the amount billed to the uninsured patients, $.2 million will not be collectible (bad debts). The amount of net patient service revenues for St. Mary’s Hospital for the current year is
a) $1 million.
b) $.94 million.
c) $.87 million.
d) $.74 million.

12. A consortium of physicians agree to provide services to the employees of a large County government. The agreement calls for monthly payments from the County to the consortium in the amount of $100,000 per month. County employees are not billed for services rendered by the consortium. All County employees are required to use the consortium under their health care program (any services rendered to County employees by other physicians are not covered under the health plan). During the period the consortium performed services for County employees for which it would have billed $85,000. The consortium referred patients to other health care providers for services they could not perform. The consortium estimates that it will be billed $5,000 for those services. The amount of revenue that should be recognized by the consortium is
a) $100,000.
b) $95,000.
c) $85,000.
d) $80,000.

13. A hospital estimates, based on past experience, that it will incur $5 million in malpractice claims as a result of services rendered in the current period. The hospital carries a malpractice insurance policy with a yearly $2 million deductible clause. The amount that should appear on its year-end financial statement as Claims Expense (Loss) should be
a) $0.
b) $2 million.
c) $3 million.
d) $5 million.

14. A hospital carried a 2-year malpractice insurance policy that allows for retroactive premium adjustments based on experience (claims actually incurred). The basic premium is $150,000 for the 2-year policy payable in advance. At the end of the first year the hospital estimates that it will have to pay an additional $40,000 in premiums as a result of claims filed in the current year and it estimates that it will incur additional premiums in the second year of $50,000 as a result of claims filed in the second year. The amount of insurance expense that should appear on the financial statements at the end of the first year should be
a) $75,000.
b) $115,000.
c) $150,000.
d) $240,000.

15. An accountant has encountered a perplexing financial reporting issue related to the private college for which he is preparing financial statements. The issue is not specifically addressed by FASB Statements. To what standards would the accountant now look for guidance?
a) GASB Statements.
b) AICPA accounting and auditing guide, Not-for-Profit Organizations.
c) AICPA accounting and auditing guide, Audits of Colleges and Universities and/or AICPA SOP 74-8, Financial Accounting and Financial Reporting by Colleges and Universities.
d) College textbooks.

16. A private not-for-profit college would include which of the following financial statements in is Basic Financial Statements?
a) Statement of Financial Position and Statement of Activities.
b) Statement of Financial Position, Statement of Activities, and Cash Flow Statement.
c) Statement of Financial Position, Statement of Activities, Cash Flow Statement, and a Statement of Functional Expenses.
d) Statement of Financial Position, Statement of Activities, and a Statement of Functional Expenses.

17. For financial reporting purposes, government hospitals are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) Hill-Burton Act.

18. For financial reporting purposes, private not-for-profit health care providers are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) Hill-Burton Act.

19. For financial reporting purposes, state supported colleges and universities are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) NACUBO.

20. For financial reporting purposes, private not-for-profit colleges and universities are within the jurisdiction of the
a) FASB.
b) GASB.
c) AICPA.
d) NACUBO.

PROBLEMS (CHAPTER 13)

1. St. Anthony’s hospital is a private not-for-profit entity that provides health care services to the citizens in the small rural community in which it is located. The most recent construction at the Hospital was financed using Hill-Burton funds. During the current month, St. Anthony’s engaged in the following transactions. Using the following information make the appropriate entries for St. Anthony’s for the current month.

a. The Hospital would have billed $1.2 million for services rendered to in-patients. The $1.2 million is based on the hospital’s established billing rate. Of this amount $800,000 will be billed to Delta Medical Group, a third-party payor that insurers many state employees, $150,000 will be billed to uninsured patients, $200,000 is provided to indigents and will be considered charity care, and $50,000 was for services rendered to Hospital employees.

b. Based on prior experience with uninsured patients, the Hospital estimates that $60,000 of the $150,000 will be uncollectible.

c. The Hospital recognizes the value of charity services rendered.

2. Richards College is a not-for-profit college. Record the following transactions for Richards College. The College has a June 30 fiscal year.

a. Tuition revenue for the Fall semester 2002 (August – December) was $4 million; tuition for the Spring semester 2003 (January – May) was $3.8 million; tuition for the Summer semester 2003 (June 1-August 15) was $1 million. All tuition received in cash.

b. Faculty salaries for the Fall semester were $3 million; for the Spring semester, $2.9 million; for the Summer semester were $.5 million. All salaries are paid at the end of the month earned. Salaries earned in summer are June $.2 million, July $2 and August .5 million.

c. During June $3.2 million of tuition applicable to the Fall 2003 was received in cash.

d. Fixed assets of the University have a historical cost of $120 million, estimated salvage value of $20 million and an estimated useful life of 50 years.

ESSAYS (CHAPTER 13)

1. Alpha Hospital is a recipient of Hill-Burton funds and must provide some hospital care for which it will not be compensated. During the current year Alpha Hospital provided $1 million in charity care. What is the current financial reporting requirement for charity care? Do you agree or disagree with the current financial reporting requirement? Why or why not? If you do not agree, how do you think charity care should be reported? If you agree with the current standards, what alternative reporting requirements do you believe will be proposed by those who do not agree with the current standards?

2. Neither the FASB nor the GASB pronouncements, nor the current AICPA not-for-profit audit guide, addresses the issue of tuition revenue. Thus, the 1973 AICPA college and university guide remains the most authoritative source of guidance for both government and not-for-profit institutions. What is the directive on how to report revenues and expenditures of an academic term, such as a summer session, which is conducted over a fiscal year-end?

Chapter 14

Auditing Governments and Not-for-Profit Organizations

TRUE/FALSE (CHAPTER 14)

1. In 1972, the GAO issued Government Auditing Standards known as the Blue Book.

2. Performance audits are intended to determine whether an entity’s financial statements are presented fairly in accordance to GAAP.

3. Agencies that provide funds to governments may stipulate that the audit be conducted in accordance with generally accepted government auditing standards (GAGAS).

4. GAO standards do not mandate a peer review process for audit organizations.

5. The Single Audit Act applies to organizations receiving more than $500,000 in federal assistance under more than one program be subject to a single audit.

6. A single audit has two main components: an audit of the financial statements and an audit of federal financial awards.

7. In a single audit, auditors are expected to provide an opinion on the financial statements and on the schedule of expenditures of federal awards.

8. Performance audits are most commonly conducted by external auditors.

9. The Sarbanes-Oxley Act has had no impact on governmental auditing.

10. Performance audits may be conducted by staff without training in accounting.

MULTIPLE CHOICE (CHAPTER 14)

1. In reporting the results of a performance audit, it is appropriate for the auditors to
a. conjecture as to the reasons for the program’s failure to achieve desired results
b. include the auditors’ response to management’s objections to the auditors’ findings
c. provide recommendations as to how the program can be improved
d. all of the above.

2. Government Auditing Standards must be adhered to in all financial audits except of
a. state and local governments
b. federal agencies
c. federally chartered banks
d. public corporations

3. In discerning the objectives of a program to be audited, the auditors should give the least credibility to
a. the legislation creating the program
b. the organization’s program budget
c. the organization’s mission statement and strategic plan
d. comments by the lower-level employees who actually depend on the program for their livelihoods.

4. ‘‘Generally accepted government auditing standards’’ (GAGAS) refers to standards incorporated in
a. the Yellow Book
b. the Yellow Book and OMB Circular A-133
c. the Yellow Book and the AICPA’s Professional Standards
d. the Yellow Book OMB Circular A-133, and the AICPA’s Professional Standards

5. Which of the following statements is incorrect about GAO standards pertaining to performance audits?
a. The GAO mandates that programs be audited annually by accounting trained professionals
b. Performance audits are normally carried out by internal audit departments
c. Performance audits focus on specific programs
d. The GAO does not specify when and how often a program, must be audited

6. Government Auditing Standards characterizes government engagements into which of the following three categories?
a. financial audits, compliance audits, and performance audits
b. financial audits, operational audits, and performance audits
c. financial audits, attest engagements, and performance audits
d. financial audits, efficiency and effectiveness audits, and compliance audits

7. The purpose of this is to avoid duplication of efforts in conducting governmental audits
a. AICPA’s Professional Standards
b. GAO’s Government Auditing Standards
c. Single Audit Act
d. OMB Circular A-133

8. The Yellow Book’s general standards are issued by the
a. GAO
b. FASB
c. AICPA
d. IRS

9. Which of the following is not reported upon in the Schedule of Findings and Questioned Costs?
a. reportable conditions related to internal control
b. material noncompliance with provisions of laws, regulations, contracts, or grant agreements
c. material examples of inefficiency and ineffectiveness in carrying out federally funded programs
d. federally reimbursed expenditures that are not adequately documented

10. Which of the following is not a General Auditing Standard for financial audits?
a. professional judgment
b. financial stability
c. independence
d. competence

11. Which of the following is a Yellow Book standard in respect to independence?
a. auditors may only audit one government agency during a fiscal year
b. auditors should not audit their own work
c. auditors may not advise in respect to computer installation
d. auditors may not audit public corporations

12. Federal funds must be used only for activities that are within the scope of the grant would be a(n)
a. optional activity
b. Yelllow Book mandate
c. allowable activity
d. prohibited activity

13. This law requires that the wages of laborers and mechanics employed by the contractors of federally funded projects be paid at prevailing local wage rates.
a. Davis-Bacon Act
b. Sarbanes-Oxley Act
c. Federal Wage and Hour Law
d. IRS Act

14. The process of specifically directing federal funds to a particular program is called:
a. allocation
b. earmarking
c. identification
d. subversion

15. Per the GAO standards, an auditor’s working papers must
a. be made public unless they contain information that would be harmful to national security
b. contain sufficient information to convince an auditor having no previous connection with the audit that the evidence supports the auditor’s conclusions and judgments
c. be retained by the auditor for a period of no less than 10 years
d. include documentation that the individual auditors on the engagement have satisfied the standards’ continuing professional education requirements

16. Auditors who perform government audits must complete 80 hours of continuing professional education every two years, of which ____ hours must be related directly to government auditing.
a. 24
b. 30
c. 16
d. 8

PROBLEMS (CHAPTER 14)

1. In a program review, auditors need to identify compliance requirements that are specific to the program itself and that are applicable to all federal award recipients. Identify and describe three general compliance requirements.

2. What reports result from single audits?

ESSAYS (CHAPTER 14)

1. How does Sarbanes-Oxley and IRS regulations affect governments and not-for-profits?

2. What are some questions that need to be addressed in assessing an ethical conflict?

Chapter 15

Financial Analysis

TRUE/FALSE (CHAPTER 15)

1. For financial analysis purposes, the Comprehensive Annual Financial Report alone can provide all the information resource providers and other interested parties might need.

2. A government’s economic condition is a broader concept than its financial position.

3. For financial analysis purposes, nonfinancial considerations are at least as important as the financial statements.

4. Bond rating agencies usually require governments to supplement their CAFRs with additional documents, such as budgets, long-range forecasts and plans, and economic reports.

5. By law, governments are prohibited from outsourcing certain activities such as clerical operations, and repair and maintenance services.

6. In the future, e-commerce will affect governments, just as it is now transforming businesses.

7. Budgets are generally on a cash or near-cash basis.

8. Governmental budgets must adhere to GAAP.

9. A widely used rule of thumb holds that two consecutive years of operating deficits connote serious fiscal stress.

10. For many analytical purposes, revenues and expenditures are best expressed per capita.

MULTIPLE CHOICE (CHAPTER 15)

1. The city council of the City of Highland Hills has adopted a policy of aggressively pursuing grants and other resource inflows from other levels of government. Over the past several years, the proportion of total City revenues that comes from other levels of government has been steadily increasing. As a consequent of these increased revenues, the City has begun offering a number of new services to the citizens of the City. In assessing the financial condition of the City of Highland Hills, an analyst would conclude which of the following?
a) The increasing reliance on intergovernmental revenues has increased the financial viability of the City.
b) The increasing reliance on intergovernmental revenues is a negative fiscal characteristic.
c) The increasing reliance on intergovernmental revenues is irrelevant in assessing the financial condition of the City.
d) The increasing reliance on intergovernmental revenues is a sign of poor management on the part of the City Council.

2. Which of the following is generally considered to be a positive fiscal characteristic for a City?
a) A high, or increasing, ratio of intergovernmental revenues to total revenues.
b) A low percentage of restricted revenues to total revenues.
c) A high proportion of one-time revenues to total revenues.
d) A low ratio of property tax revenues to total revenues.

3. Which of the following is generally considered to be a positive fiscal characteristic for a City?
a) An increasing amount of payroll costs.
b) An increasing amount of expenditures for specific functions.
c) An increasing percentage of nondiscretionary expenditures.
d) An increasing percentage of discretionary expenditures.

4. Which of the following would generally be considered to be an indication of future economic problems for a City?
a) A decreasing percentage of revenue raised by the City as a proportion of total appraised value of property.
b) A decreasing percentage of revenue raised by the City as a proportion of median family income.
c) An increasing population base.
d) An increasing industrial base in a variety of industries.

5. Accountants are actively involved in collecting and analyzing data to be used by public policy makers. Which of the following other groups might also be involved in the data collection and analysis process?
a) Statisticians.
b) Economists.
c) Program managers.
d) All of the above.

6. Which of the following groups is least likely to be involved in evaluating the efficiency and effectiveness of government programs?
a) Accountants.
b) Legislators.
c) Economists.
d) Statisticians.

7. Which of the following is an example of an efficiency measure?
a) Cost per client placed in an appropriate job.
b) Cost per ton of garbage collected.
c) Cost per gallon of water suitable for drinking.
d) Cost per child reading at grade level.

8. A private mail and package delivery service boasts that it can deliver the same material as the government-run mail and package delivery service for a fraction of the cost of the government-run service. Which of the following is the best course of action for the government?
a) The government should contract-out all of its mail and package delivery service.
b) The government should develop laws and regulations limiting competition with government-run services.
c) The government should renegotiate their contract with the labor union.
d) The government should determine if costs incurred by the government-run service are negatively impacted by social policy decisions made by the legislative body.

9. Which of the following events would be evidence that the audience criterion of a not-for-profit joint program and fund-raising activity has NOT been met? Each activity included both a program activity and a fund-raising solicitation.
a) American Heart Association mailed pamphlets encouraging heart-healthy diets to all telephone subscribers in a geographic area.
b) Citizen Against Centennial Highway conducted a door-to-door campaign in the area of a proposed new Interstate highway asking citizens to writing to federal, state, and local elected officials expressing opposition to the proposed location.
c) Citizens For 1% (an initiative to limit property tax rates) conducts a mass mailing to all homeowners in the City.
d) Citizens for Term Limits, a not-for-profit group organized to push for term limits for all elected officials, conducts a mailing to encourage citizens to write their legislatures expressing support for term limits. The mailings went to all citizens with incomes greater than $50,000.

10. Which of the following events would be evidence that the content criterion of a not-for-profit joint program and fund-raising activity had not been met? Each activity included both a program activity and a fund-raising solicitation.
a) A hospital sends a copy of the annual financial statement to all trustees, employees and previous donors.
b) Preserve the River mails information on the effects that dams on the river have to the river ecosystem.
c) American Heart Association sends information on heart healthy diets and encourages healthy lifestyles.
d) Citizens for Tax Credits, a not-for-profit entity supporting tax credits for families whose children attend private schools, conducts a mass mailing encouraging a letters to the editor letter-writing campaign.

11. If an activity that involves fund-raising as well as programmatic, management, or general functions meets one of the three broad criteria then all expenses of the joint activity must be
a) Charged to fund-raising.
b) Charged to programmatic.
c) Charged to management and general.
d) Allocated between fund-raising and either programmatic or management and general.

12. In performing a financial analysis of a city, the financial analyst
a) Needs only the financial statements.
b) Must combine financial statement information with financial information from other sources.
c) Must combine financial statement information with both financial and nonfinancial information from other sources.
d) Needs only nonfinancial information from other sources.

13. A government’s financial position is represented by
a) The status of its assets, liabilities, and net assets, as presented in its statement of net assets.
b) The status of its revenues and expenses, as presented in its statement of activities.
c) Both (a) and (b).
d) Neither (a) nor (b).

14. A government’s economic condition is a(n) ____________ concept than its financial position.
a) Easier.
b) Broader.
c) Narrower.
d) Equal to.

15. A government’s fiscal effort is the extent to which it is taking advantage of its
a) Taxpayers.
b) Governing bodies.
c) Fiscal capacity.
d) Employees.

16. Which of the following statements is true regarding the ratio analysis of Intergovernmental Revenues to Total Revenues?
a) A high, or, increasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a positive fiscal characteristic.
b) A low, or, decreasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a negative fiscal characteristic.
c) A low, or, increasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a negative fiscal characteristic.
d) A high, or, increasing, ratio of intergovernmental revenues to total revenues is a sign of risk and is generally considered a negative fiscal characteristic.

17. Which of the following statements is true regarding the ratio analysis of Restricted Revenues to Total Operating Revenues?
a) Higher percentages of restricted revenues are preferred to low percentages.
b) Higher percentages of total operating revenues are preferred to low percentages.
c) Lower percentages of restricted revenues are preferred to high percentages.
d) Lower percentages of total operating revenues are preferred to high percentages.

18. Which of the following statements is true regarding the ratio analysis of Property Tax Revenues to Total Operating Revenues?
a) Property taxes are considered a stable revenue source, and a high ratio or property tax revenues to other, less stable, revenues is a negative attribute.
b) Property taxes are considered a stable revenue source, and a high ratio or property tax revenues to other, less stable, revenues is a positive attribute.
c) Property taxes are considered an unstable revenue source, and a high ratio or property tax revenues to other, more stable, revenues is a negative attribute.
d) Property taxes are considered an unstable revenue source, and a high ratio or property tax revenues to other, more stable, revenues is a positive attribute.

19. Which of the following statements is true regarding the ratio analysis of Nondiscretionary Expenditures to Total Expenditures?
a) The higher the percentage of nondiscretionary expenditures, the less flexibility the government has to reduce (or limit increases in) spending.
b) The higher the percentage of nondiscretionary expenditures, the more flexibility the government has to reduce (or limit increases in) spending.
c) The lower the percentage of nondiscretionary expenditures, the less flexibility the government has to reduce (or limit increases in) spending.
d) The higher the percentage of nondiscretionary expenditures, the less flexibility the government has to increase spending.

20. Which of the following statements is true regarding the formula most often used by governments for the liquidity ratio?
a) Cash divided by current liabilities.
b) Receivables divided by current liabilities.
c) Receivables divided by payables.
d) Cash, short-term investments, and receivables divided by current liabilities.

PROBLEMS (CHAPTER 15)

1. Based on the data from the general fund presented below, assess (as best you can) the financial/fiscal condition of the City of Billmont. As much as possible, justify your answer with quantitative data.
(000 omitted)
Population (increasing slowly) 86
Value of taxable property $123,000
Total general fund revenues $ 23,000
General Fund tax revenue $ 11,000
Intergovernmental revenues $ 4,000
Miscellaneous revenues $ 8,000
Total General Fund expenditures $ 23,000
Current expenditures $ 21,300
Capital outlay $ 1,600
Debt service expenditures $ 100
Operating transfer in $ 600
Operating transfer out ($ 4,600)
Unreserved fund balance $ 13,000
Cash and investments $ 15,000
Total liabilities $ 1,400

2. For each of the following independent cases, indicate whether the costs of the joint activity should be considered fund-raising or not. Justify your decision based on the AICPA criteria.

a. Crowley’s Ridge Girl Scout Council conducted a mass mailing to all parents of girls enrolled in public school in their Council area. The mailing included information about girl scouting, benefits to girls participating in girl scouting, and information on how to enroll girls in scouting. The mailing also included a solicitation for donations and a return envelope for donations.

b. The State University Foundation conducted a mailing to all alumni of the University including an eight-page glossy report highlighting major accomplishments of University faculty and students during the past year. Also included was a solicitation for donations, a detailed list of proposed projects to be funded by donation, and a return envelope in which to mail the donation.

c. The Youth Ranch Foundation supports a residential program for troubled at-risk youth. The Foundation hired an organization to help them design a brochure to be mailed to all telephone subscribers within a 300-mile radius of the Ranch. The brochure depicts the Ranch facilities, explains how it serves the youth, and lists the names of supporters of the Ranch, including most of the law enforcement officers in the area. Also included is an appeal for donations and a return envelope. The designer of the brochure will be paid a percentage of funds raised by the mailing.

d. The Committee for Social Action sent a mass mailing to registered voters explaining the need for maintaining certain benefits for children whose parents will become ineligible for welfare benefits under proposed changes in the State welfare laws. The mailing includes copies of form letters to be mailed to State legislators and includes addresses for those legislators. The mailing includes a solicitation for donations and a return envelope.

ESSAYS (CHAPTER 15)

1. What is the difference between fiscal capacity and fiscal effort?

2. For a not-for-profit organization, what is the difference between operational efficiency and operational effectiveness?

BUS 230 Purchasing and Material Management – Strayer – A+ Graded

Click on the Link Below to Purchase Complete Test Bank (Chapter 1 – 17)

http://www.hwgala.com/BUS-230-Purchasing-and-Material-Management-Test-Bank-Strayer-248.htm

CHAPTER 1 PURCHASING AND SUPPLY MANAGEMENT

1. The design and management of seamless, value-added processes across organizational boundaries to meet the real needs of the end customer is called:

a. strategic sourcing.
b. value management.
c. customer relationship management.
d. supply chain management.
e. strategic process management.

2. As supply chains have become more global, the risk of supply disruptions has:

a. decreased because risk is spread among suppliers all over the world.
b. decreased because there are also more international laws and treaties.
c. stayed the same because the issues are similar wherever suppliers are located.
d. increased because other countries lack the business ethics of the U.S.
e. increased because of financial and exchange rate fluctuations.

3. Performance of the supply management function can be viewed in two contexts:

a. operational and trouble-avoidance.
b. operational and strategic.
c. operational and transactional.
d. strategic and opportunistic.
e. strategic and future-oriented.

4. The return on assets effect (ROA) quantifies and measures:

a. the indirect contribution of supply management to profitability.
b. any increase in sales that occurs at a greater rate than the cost of assets.
c. the impact of supply actions on inventory and the balance sheet.
d. reductions in the allocations to the operating budget of the supply department.
e. the effect on profitability of reduced spend compared to a sales increase.

5. Supply has the potential to contribute to:

a. cost management, profitability, return on assets, competitive position and corporate social policy.
b. cost management, profitability, return on assets and competitive position.
c. cost management, profitability and return on assets.
d. cost management and profitability.
e. cost management.

6. In manufacturing organizations, the dollars spent with suppliers fall into what range as a percent of revenues?

a. 65 to 75.
b. 50 to 80.
c. 45 to 75.
d. 30 to 60.
e. 25 to 35.

7. Supply management may indirectly contribute to the organization’s competitive advantage by:

a. the profit-leverage effect.
b. the return on assets effect.
c. reducing annual spend.
d. improving process efficiency.
e. all of the above.

8. Evidence of the growth and influence of supply management in an organization includes:

a. fewer activities under the management or control of supply.
b. more intense involvement in fewer supply chain activities.
c. involvement in strategic planning and mergers and acquisitions.
d. a clear delineation between supply and accounting.
e. merging of supply and accounts payable.

9. The profit-leverage effect of supply savings means that:

b. a reduction in money tied up in inventory improves profits.
c. a reduction in purchase spend increases profit more than an equal sales increase.
d. effective price negotiations with a supplier will lower the supplier’s profits.
e. the buyer gains leverage over suppliers when purchases are standardized.
f. efficient and effective supply management processes will increase profits.

10. The use of the concepts of purchasing, procurement, supply, and supply chain
management will vary from organization to organization depending on:

a. the organization’s stage of development and/or sophistication.
b. the industry in which they operate
c. the organization’s competitive position.
d. a and b.
e. a, b and c.

True and False

1. The true test of supply’s contribution is when the chief executive officer and the management team recognize the value of supply and suppliers in reducing prices paid for goods and services.
2. Sustainability initiatives include the effective and efficient capture and disposition of downstream products from customers and the reduction of the impact of the organization’s supply chains on the natural environment

3. Terms such as purchasing, procurement, supply, supply chain and logistics do not have standard definitions that are widely used across sectors and industries.

4. Reductions in inventory investment primarily come from getting users to reduce their demand for inventoried items.

5. Supply management has evolved from a transaction-based, tactical function to a process-oriented, strategic function.

6. One of the most important steps in achieving the potential of the supply function in a company is elevation of the chief supply officer to executive status.

7. The increase in outsourcing has resulted in an increase in the percentage of revenue paid out to suppliers.

8. Since labor and other costs greatly exceed outlays for purchased materials and services in most service organizations, supply is of little consequence in most service organizations.

9. Supply makes a limited contribution to organizational risk management since most supply decisions have few downside risks that might impact the organization’s strategy.

10. The total purchase sales ratio (the percentage of sales dollars paid out to suppliers) varies little from industry to industry.

CHAPTER 2

Supply Strategy

11. An effective supply strategy primarily focuses on linking:

a. current needs to current markets.
b. future needs to future markets.
c. current needs to future markets.
d. future needs to current markets.
e. current and future needs to current and future markets.

12. Organizational objectives and supply objectives typically are expressed:

a. differently, making it difficult to translate organizational objectives into supply objectives.
b. differently, providing the supply manager multiple opportunities to tap into organizational resources.
c. the same (survival, growth, financial, and environmental), making it easy to translate organizational objectives into supply objectives.
d. the same factors (quality, quantity, price, delivery and service), but long-term at the organizational level and short-term at the supply level.
e. in ways that are very specific to the organization, making it difficult to convey objectives to suppliers.

13. Which one of the following is NOT one of the six major supply strategy areas:

a. competitive-edge strategies.
b. environmental-change strategies.
c. new-product design strategies.
d. risk-management strategies.
e. cost-reduction strategies.

14. When developing supply strategies related to “how to buy,” decisions must be made
about:

i. systems and procedures
ii. goals and objectives.
iii. make or buy.
iv. large or small inventories.
v. none of the above.

15. The key question in strategic supply management is:

a. How can supply strategy be kept separate from and equal to organizational strategy?
b. How can first tier suppliers contribute to the buying organization’s objectives and strategy?
c. How can first, second, third- and subsequent tiers of suppliers contribute to the buying organization’s objectives and strategy?
d. How can the supply manager develop a network of suppliers that contribute to the buying organization’s strategies and goals?
e. How can supply and the supply chain contribute effectively to organizational objectives and strategy?

16. Three major challenges exist when setting supply objectives and strategies:

a. adopting efficient electronic transaction systems, designing effective strategic supply processes, and increasing internal compliance with both.
b. effectively interpreting corporate and supply objectives, selecting appropriate actions to achieve objectives, and integrating supply information into organizational strategies.
c. hiring professionals educated specifically in supply management, providing them with technical expertise, and developing leadership skills for the long-term.
d. emphasizing strategic cost management, involving key suppliers early in the process, and measuring the reduction in total cost of ownership.
e. identifying internal stakeholders, building consensus among these stakeholders, and selling top management on the results.

17. To effectively manage supply risks, the supply manager must:

a. inform the corporate risk officer of a potential risk, await instructions, and implement the directive.
b. seek input from senior executives in other functional areas, propose a risk mitigation plan, and await instructions from senior management.
c. identify and classify risks, assess the potential impact, and develop a risk mitigation strategy.
d. review the commodity strategy, revise it as needed, and implement the strategy revision.
e. confer with the organization’s management consultant, provide all requested data, and implement the consultant’s plan.

18. Linking supply strategy to corporate strategy is:

a. essential only in manufacturing, and most have the mechanisms to link them..
b. essential only in the service sector, and most lack the mechanisms to link them.
c. essential in all organizations, and most have the mechanisms to link them.
d. essential in all organizations, and many lack the mechanisms to link them.
e. non-essential in most types of organizations.

19. Strategic planning can be defined as:

a. how each functional area will achieve its specific goals and objectives.
b. a procedure for allocating resources to appropriate functions in the organization.
c. taking big risks to maximize current period benefits.
d. an action plan to achieve specific long-term goals and objectives.
e. an action plan to achieve specific operational and tactical goals.

20. Supply strategies that are based on changes in demand and supply are known as:
a. risk-management strategies.
b. assurance-of-supply strategies.
c. cost-reduction strategies.
d. environmental-change strategies.
e. supply chain support strategies.

True and False

1. The three levels of strategic planning are: function, unit, and corporate.

2. Environmental-change strategies are designed to anticipate and recognize shifts in the natural world that affect supply availability.
3. Even if a supply manager identifies and eliminates the causes of uncertainty and risk in the supply chain, the organization may still need to carry the same amount of inventory.

4. Risks in the supply chain can be classified into three main categories: (1) operational, (2) financial, and (3) strategic.

5. There is a growing emphasis on strategic supply management processes and less on purchase transactions.

6. A corporate risk management group headed by a chief risk officer has emerged in many organizations to assess total risk exposure and develop strategies to best manage all risks.

7. Assurance-of-supply strategies emphasize quality over all other considerations.

8. The most fundamental question facing an organization is whether to make or buy.

9. Supply managers may be able to provide information to identify risks to the organization and they can develop strategies to mitigate those risks.

10. Seldom do the actions of supply managers impact the organization’s reputation either positively or negatively.

Chapter 3

Supply Organization

21. Close to 70 percent of the value of any given requirement is established when needs are recognized and described. Therefore, the following functions should work together during need recognition and description:

a. the primary user and specifier.
b. the primary user and supply.
c. the primary user, design engineering and supply.
d. the primary user, design engineering, supply and accounting.
e. the primary user, design engineering, supply and all other relevant functional areas such as accounting/finance, marketing and operations.

22. A change in how supply is organized and structured is the result of:

a. the changing preference of the Chief Purchasing Officer.
b. an assessment of the best purchasing structure given the supply base.
c. a change in the overall corporate organizational structure.
d. a determination of the easiest change to manage internally.
e. a consensus among the supply management professionals in the company.

3. Which factors have a major influence on supply’s level in the organization:

a. the ratio of purchased material and services costs as a percentage of total costs or income.
b. the size of the supply base.
c. the nature of the products or services acquired.
d. the extent to which supply and suppliers can provide competitive advantage.
e. the credentials of the existing supply personnel.

a. a and b
b. c and d.
c. d and e
d. a, c and d.
e. a, d and e.

4. Organizations commit resources to cross-functional team development to:

a. give internal users ownership of tasks and problems.
b. achieve time, quality, or cost-reduction targets
c. promote diversity in the workplace.
d. give supply ownership of tasks and problems.
e. cross-train employees in case of downsizing.

5. Supply can provide an uninterrupted flow of materials, supplies and services by:

a. holding large inventories.
b. holding small inventories.
c. standardizing capital equipment, materials, MRO and services.
d. b and c.
e. a and c

6. A purchasing consortium:

a. speeds up the purchasing process, but does not usually result in price concessions from suppliers.
b. consists of two or more independent organizations that combine requirements for materials, services and capital goods to gain better pricing, service and technology from suppliers.
c. results in price concessions from suppliers, but usually does not speed up the purchasing process.
d. consists of two or more divisions of the same organization that combine requirements for materials, services and capital goods to gain better pricing, service and technology from suppliers.
e. is a form of collaborative purchasing used only by the public sector to deliver a wider range of services at a lower total cost.

7. Hybrid supply structures typically:

a. amplify the disadvantages of centralization.
b. amplify the advantages of decentralization.
c. capture the benefits of both centralized and decentralized structures.
d. are used in small to medium-sized organizations.
e. are used in service organizations of all sizes.

8. The organizational structure (centralized, decentralized, or hybrid) of the supply function:

a. has little influence on supply processes, internal cross-functional relationships, or the procedures and systems employed.
b. influences supply processes, internal cross-functional relationships, and the procedures and systems employed.
c. influences supply processes, but not internal cross-functional relationships, or the procedures and systems employed.
d. influences internal cross-functional relationships, and the procedures and systems employed, but not supply processes.
e. influences the procedures and systems employed, but not supply processes or internal cross-functional relationships.

9. Supply’s contribution to the organization’s competitive position depends on its ability to:

a. reduce costs.
b. enhance revenues.
c. manage assets.
d. a and c.
e. a, b and c.

10. Specialization within the supply function:

a. allows staff to develop expertise in particular areas.
b. is unnecessary because most tasks are transactional.
c. has no impact on talent management or organization within supply.
d. increases operating costs beyond the benefits of specialization.
e. is seldom required now that so many tasks are automated.

True and False

1. Eliminating process inefficiencies is the best way to accomplish supply objectives at the lowest total operating costs.

2. Decentralization refers to a supply organization that is physically located at corporate headquarters from which all organizational spending decisions are made.

3. There is an inherent conflict between supply’s objective to provide an uninterrupted flow of materials, supplies and services required to operate the organization and the objective to keep inventory investment and loss at a minimum.

4. Products, services and processes can be standardized and, if done effectively, will lower total cost of ownership.
5. The executive to whom the Chief Supply Officer reports has no relationship to the status of purchasing and the degree to which it is emphasized within the organization.

6. The supply process and structure for managing indirect spend is typically different than that for managing direct spend.

7. In a decentralized purchasing structure, those tasks which are more effectively handled at the business unit level include establishing policies, procedures, controls, and systems.

8. Some of the disadvantages of decentralization are narrow specialization and job boredom, lack of job flexibility, and a tendency to minimize legitimate differences in requirements.

9. Supply should obtain needed goods and services at the lowest total cost of ownership meaning that other cost factors—such as quality levels, after-sales service, warranties, inventory and spare parts requirements, and downtime—must be considered even though in the long term these factors seldom have a cost impact greater than the original purchase price.

10. The degree of centralization is reflected by the number of supply professionals working throughout all functional areas of the organization.

CHAPTER 4

Supply Processes and Technology

23. The greatest opportunity to affect value in the purchasing process is when:

a. the supplier(s) is selected.
b. price and terms are determined.
c. potential suppliers are analyzed.
d. needs are recognized and described.
e. the buyer follows-up and expedites the order.

24. If the buyer does not have a clear and unambiguous description or specification and wants to find out which suppliers can deliver the best value when and where needed, he or she will typically issue a:

a. request for quotation (RFQ).
b. request for proposal (RFP).
c. request for information (RFI).
d. request for bid (RFB).
e. request for suggestions (RFS).

25. The benefit(s) of participation in an e-marketplace include:

a. the ability to aggregate spend
b. the advantages from economies of scale.
c. visibility up- and downstream in the supply chain.
d. the ability to automate and facilitate transactions.
e. all of the above.

26. One purpose of a requisition is:

a. to give users a way to authorize buyers to acquire goods and services.
b. to solicit price quotes for goods or services from suppliers.
c. to give finance a way to have the final say in any decision to spend money.
d. to clarify the description of need before communicating with potential suppliers.
e. to request or requisition supplies from external suppliers.

27. Radio frequency identification (RFID) will:

a. eliminate bar coding and manual counting.
b. eliminate further investment in information technology.
c. supplement bar coding to reduce theft.
d. be more cost effective to implement than bar coding.
e. improve data capture but slow down inventory picking

28. Efficient and effective supply processes are needed because of:

a. the need for an audit trail.
b. the large volume of items and dollar value.
c. severe consequences of poor performance.
d. the potential contribution to organizational objectives.
e. all of the above.

29. Online auctions have been most effective when:

a. the good or service is unique or highly customized.
b. technological, logistical, and commercial specifications are ambiguous.
c. the market conditions favor buyers.
d. the organization owns the technology to run the auction.
e. there are a limited number of suppliers available.

29. Electronic data interchange (EDI) provides:

a. secure transmission of large amounts of data, but with slow turnaround.
b. secure transmission, greater accuracy and shorter process cycle time for all data.
c. slow processing of large amounts of data, but with greater accuracy.
d. longer process cycle time, but with greater accuracy.
e. secure and rapid transmission of small amounts of data.

30. Application software for the procurement process is available:

a. only through an enterprise resource planning (ERP) system.
b. only from a systems developer.
c. only from an application software provider (ASP).
d. from an ERP system or systems developer, but not from an ASP.
e. from an ERP system, a systems developer, or an ASP.

31. Effectively and efficiently applying technology to the supply management process will result in:

a. increased clerical effort because there is more data entry than in a manual system.
b. damaged buyer-supplier relationships because of the impersonal nature of electronic communication.
c. an ability to reduce the total cost of doing business by enabling just-in-time systems, bar-coding applications, integrated manufacturing, and electronic funds transfers.
d. poorer negotiation planning and preparation because of the time spent accessing and analyzing data.
e. a decline in operating performance because of the volume of information to be analyzed and considered before making a decision.

True and False

1. A process is a set of activities that has a beginning and an end, occurs in a specific sequence, and has inputs and outputs.

2. Poor internal compliance with supply processes may indicate that internal customers do not trust the supply process or the suppliers to live up to promises.

3. A maverick buyer is a talented member of the supply department whose creativity and innovations have saved the organization large sums of money.

4. A bill of material (BOM) includes a list of potential suppliers for each item needed to make one month’s scheduled production.

5. The terms and conditions included in a purchase order vary depending on the nature of the purchase and may relate to price, quality, and service.

6. An online catalog is a digitized version of a supplier’s catalog that cannot be customized to include the specific items, prices, and other terms and conditions negotiated by the buyer and seller.

7. A reverse auction is an online, real time, increasing price auction between multiple pre-qualified suppliers and a buying organization.

8. Before embarking on an e-commerce path, the supply leadership should decide what should be acquired through e-commerce and what tools should be used.
9. It is relatively difficult to develop a global database to consolidate volumes and sourcing strategy because common technical standards and government regulations do not exist across countries.

10. Information flows into the supply group from (1) other internal functions and (2) external sources; and information flows out from supply to (1) other internal functions and (2) suppliers.

CHAPTER 5

Make or Buy, Insourcing and Outsourcing

32. One of the most fundamental and critical decisions in any organization is, should we:

a. have a single source or multiple sources for a specific purchase?
b. order small quantities to avoid carrying costs or large quantities to get volume discounts?
c. switch suppliers because of a slight price discount from a potential supplier?
d. make or buy the needed good or service?
e. enter into a long- or short-term agreement with a supplier?

33. When a team has decided that a task or function currently performed by company employees is not a core competency, the team will probably recommend:

a. insourcing.
b. outsourcing.
c. continuing to make.
d. continuing to buy.
e. near-sourcing..

34. Deciding what represents a core competency in an organization is:

a. a decision best left to the organization’s Board of Directors.
b. a decision best left to the Chief Executive Officer.
c. always the same for companies in the same industry.
d. a fairly easy decision once organizational goals and objectives are known.
e. often a fairly complex decision and a function of many factors.

35. Outsourcing of services is:

a. unrealistic because of the difficulty in measuring and evaluating the performance of service providers.
b. realistic if the internal users and the buyer can carefully define service requirements and quality expectations.
c. declining in popularity because of buyers’ dissatisfaction with most third party service providers.
d. realistic because of the ease in measuring and evaluating performance of service providers.
e. realistic because it is relatively easy to define service requirements and measure the quality of a service provider.

36. Currently, managements tend toward:

a. making rather than buying.
b. buying parts and assembling them onsite.
c. insourcing entire operations.
d. outsourcing entire operations.
e. making anything that is low risk.

37. Outsourcing:

a. is often chosen as a way for the organization to reduce or control operating costs, improve company focus, and gain access to world-class capabilities.
b. is a low risk venture because the firm can always revert back to performing the function in-house at low cost.
c. occurs primarily in large manufacturing firms in the private sector, but is rarely practiced in public purchasing.
d. usually results in increased hiring to attain expertise that the organization does not already possess.
e. decisions are based on financial factors that most organizations can easily access through their accounting system.

38. In the outsourcing decisions in many organizations, supply has had:

a. a leadership role.
b. extensive involvement.
c. relatively moderate involvement.
d. limited involvement
e. virtually no involvement.

39. Supply managers believe they can add the most value to the outsourcing decision by:

a. advising the outsourcing team on relevant contractual terms and conditions.
b. reviewing the analysis conducted by the outsourcing team.
c. providing a comprehensive, competitive process.
d. being available if the internal users want their assistance.
e. managing the contract once the decision has been implemented.

40. Supply management:

a. has been outsourced in many organizations because it is not a core competency.
b. has been outsourced in many organizations because of its tactical nature.
c. has not been outsourced because the chief purchasing officer makes outsourcing decisions.
d. and logistics have not been outsourced because both are considered core competencies in most organizations.
e. is seldom outsourced in its entirety, but activities such as inventory monitoring, order placement, and order receiving are outsourced.

41. Subcontracting refers to the practice of:

a. a prime contractor bidding out part of a job to another contractor.
b. an organization hiring a contractor to perform a task it has been doing in house.
c. an organization hiring substitute labor to cover for a supplier’s labor shortage.
d. a prime contractor bidding on another contractor’s incomplete jobs.
e. a prime contractor hiring substitute labor during a strike.

Loss of control is:

a. seldom a concern when considering outsourcing.
b. a concern of the supplier in an outsourcing situation.
c. a concern within the buying organization when considering outsourcing.
d. one of the advantages of outsourcing.
e. one reason few organizations outsource services.

True and False

1. Insourcing and outsourcing occur when a newly formed company first decides what to make inhouse and what to buy from suppliers.

2. Some of the concerns about outsourcing are centered around layoffs, exposure to supplier’s risks, and unexpected fees.

3. Some of the reasons an organization may decide to make rather than buy are: greater supply assurance, stringent quality requirements, and very small quantity requirements.

4. The gray zone in make or buy provides the opportunity to test and learn without fully committing to make or buy.

5. Some of the reasons an organization may decide to buy rather than make are: greater supply assurance, stringent quality requirements, and very small quantity requirements.

6. Supply managers typically recommend insourcing.

7. Outsourcing is prevalent in both the private and public sectors.

8. Growth in outsourcing in the logistics area can be attributed to growing deregulation of transportation companies.
9. Subcontracts are useful when the work is easy to define, has a short time horizon, and is relatively inexpensive.

10. The logistics function and tasks such as freight auditing, leasing, and maintenance and repair are often outsourced because they typically do not represent core competencies.

CHAPTER 6

Need Identification and Specification

42. An advantage of buying by performance or function over other specification methods is that it provides:

a. evidence that the buyer has given thought and careful study to the need and the ways in which it may be satisfied.
b. the opportunity for the potential supplier to establish how to make the most suitable product.
c. the potential for equitable competition by ensuring that the suppliers are quoting for exactly the same material or service.
d. a standard for measuring and checking materials as supplied.
e. an opportunity to purchase identical requirements from a number of different sources of supply.

2. Supply’s growing involvement in the acquisition of services may be explained by:

a. declining technical knowledge of internal users of services.
b. the need for more of a personal relationship with the service supplier.
c. the fact that price and service-delivery requirements are complex.
d. the growing respect for supply managers as equals in the organization.
e. the high dollars spent on services and the opportunities to reduce costs.

3. Capital assets are long-term assets that:

a. are bought and sold in the regular course of business.
b. have an expected use of less than one year.
c. have an ongoing effect on the organization’s operations.
d. are generally expensed.
a. are acquired for fairly small sums of money.

4. When a specification is widely known, commonly recognized and readily available to every buyer, it is called a:

1. standard specification.
2. performance specification.
3. individual specification.
4. market grade specification.
5. customized specification.

5. Early supply involvement can be accomplished by:

a. staffing the engineering department with supply professionals.
b. using cross-functional teams on new product development.
c. encouraging internal customers to regularly interact with suppliers.
d. empowering internal customers to evaluate and select suppliers.
e. co-locating accounting staff in the purchasing/supply department.

6. Description by brand:

a. may be a preference of an internal user, but it is never a necessity.
b. is the least risky and lowest cost approach to attaining “best value.”
c. may be a necessity because the manufacturing process is secret.
d. should always be discouraged by the buyer.
e. indicates a supplier has unduly influenced someone in the buyer’s organization.

7. The purpose of identifying the function of an item to be required is:

a. to provide the mathematics for a suitable inspection program.
b. to assist in the determination of what represents acceptable value.
c. to avoid having to purchase a branded item.
d. to avoid substitution.
e. to avoid engineering-purchasing arguments.

8. A buyer may be compelled to purchase by specification when:

a. a high degree of supplier expertise or skill is required and difficult to define.
b. the internal user’s preferences are impossible to overcome.
c. a supplier holds a needed patent.
d. an opportunity exists to purchase identical requirements from several sources.
e. the buyer wants the supplier to decide how to make the most suitable product.

9. Standardization:

a. means agreement on definite sizes, design, and quality.
b. is essentially a marketing and sales concept.
c. is a reduction in the number of sizes and designs.
d. is a selective and commercial problem.
e. is an attempt to concentrate production on the most important sizes.

10. Supply chain risks include:

a. interruptions to the flow of goods or services.
b. actions that lower the company’s attractiveness to the investment community.
c. lack of regulatory compliance.
d. a and c
e. a, b, and c

True and False

1. Quality as a term covers both functionality: “Does it do the job we want
done?” and conformance to specification: “Does it fit the specification agreed to?”

2. MRO stands for Maintenance, Resale, and Operating Supplies.

3. Capital items can be depreciated, are often bought under a separate budgetary allocation, and may require special financing arrangements.

4. Equipment, real estate, and construction are examples of capital acquisitions, but information technology is not.

5. Assets may be tangible or intangible.

6. Packaging is an easy category to buy because it has few disposal, environmental, and transportation implications.

7. Buying capital equipment differs from other types of purchases because determination of final cost includes estimates over the life of the equipment.

8. New technology frequently permits an organization to gain competitive advantage on the bases of different products and services at significantly lower cost.

9. For non-repetitive requirements, a system or process of acquisition can be designed.

10. The price of a semiprocessed material—steel sheets instead of ingots, frozen pork bellies instead of hogs, cocoa butter instead of beans—tends to move in the opposite direction of the price of the basic raw material.

CHAPTER 7

Quality

43. Determination of the “best buy” is based on:

a. technical considerations.
b. quality issues.
c. a balance between price and quality.
d. an individual buyer’s perceptions.
e. a balance of requirements of marketing, engineering, operations, and supply

2. ISO 9001:2008 provides a tested framework for a systematic approach to consistently delivering product that satisfies customers’ expectations by managing:

a. supplier relationships.
b. total cost of ownership.
c. process capability.
d. six sigma.
e. organizational processes.

3. A sampling technique that is based on the cumulative effect of information that every additional item in the sample adds as it is inspected is called:

a. random sampling.
b. sequential sampling.
c. 100 percent testing.
d. cumulative sampling.
e. additive testing.

4. A process is capable when:

1. the supplier can predict the future distributions about the mean.
2. common causes are eliminated through process change.
3. it averages a set number of standard deviations within the specifications.
4. it produces the same exact result each time the activity is performed.
5. random causes are detected by statistical process controls and eliminated.

5. The role and responsibilities of supply may contribute to the containment of the cost of poor quality by addressing:

a. prevention costs
b. appraisal costs
c. internal costs
d. external costs
e. all of the above.

6. A six sigma (6σ) approach to quality:

a. focuses on preventing defects by using customer feedback.
b. means there are no more than 6 defects per million opportunities.
c. was developed by Japanese companies in the 1950s..
d. is very close to zero defects.
e. has soft goals such as happier customers and employees.

7. Upper (UCL) and lower control limits (LCL):

a. are set by design engineers to a specific product specification.
b. are dependent on a specific process.
c. set by a machine operator based on the daily production requirements.
d. require operator action when the process is outside normal operating range.
e. are a critical factor in the success of a TQM program.

8. Quality control in services is:

a. relatively difficult compared to quality control of goods.
b. especially difficult if the service is highly tangible.
c. performed exactly the same as it is for goods.
d. impossible to quantify if the service is highly intangible.
e. is most easily done on the buyer’s premises.

9. A supplier certification program:

a. adds cost to the supplier, but provides few benefits to the supplier.
b. may enable the buyer and seller to lower costs and improve quality.
c. may improve quality, but at best will not raise costs.
d. always improves quality, but usually at a higher purchase price.
e. typically cost more to implement than the value of the quality improvement.

10. Deming’s 14 points stress the importance of:

a. minimizing total cost with a single source.
b. incoming inspection in quality assurance.
c. top management in quality control.
d. annual rating or merit systems.
e. specialized education for high potential employees

True and False

1. It is unreasonable to expect a supplier to both improve quality and lower costs.

2. Any output produced within a range between the upper and lower specification limit is considered within tolerance.

3. Reliability refers to the match between a commercially available material, good or service and the intended function.

4. External failure costs are incurred when poor-quality goods or services are passed on to the customer and include costs of returns, warranty costs, and management time handling customer complaints.

5. Kaizen is a Japanese term for process control.

6. Total quality management (TQM) is a philosophy and system of management focused on long-term success through customer satisfaction.

7. One type of formal service quality evaluation process measures the gap between service expectations along defined dimensions and the perceptions of actual service performance.

8. Suitability is the mathematical probability that a product will function for a stipulated period of time.

9. Statistical process control (SPC) is a technique for testing a random sample of output from a process in order to detect if nonrandom, assignable changes in the process are occurring.

10. A Six sigma (6s) approach to quality focuses on preventing defects by using customer feedback to reduce variation and waste.

CHAPTER 8

Quantity and Inventory

1. Inventory use that is determined directly by customer orders is called:

a. derived demand.
b. dependent demand
c. anticipated demand.
d. independent demand.
a. scheduled demand.

2. “A” items in ABC analysis are:

a. reviewed infrequently.
b. particularly critical in financial terms.
c. normally carried in large quantities.
d. ordered infrequently.
a. commonly managed by carrying inventory.

3. When the carrying cost of inventory is expressed as a percentage:

a. it is usually the same as the borrowing cost of the organization.
b. the lower it is, the lower the economic order quantity.
c. it usually exceeds 57.5 percent per year.
d. it must exclude the insurance cost of inventory.
e. it is multiplied by the material unit cost to calculate the per unit carrying cost.

4. On an annual requirement of 100 items spread evenly throughout the year, any purchaser has an opportunity of buying all 100 units at a price of $100 each, or buying 10 units at a time at a price of $120. If the inventory carrying cost is 25 percent per year and assuming no ordering costs:

a. buying 100 at a time will save the company $2,500 per year.
b. buying 100 at a time will save the company $2,000 per year.
c. buying 100 at a time will save the company $1,100 a year.
d. buying 100 at a time will save the company $900 per year.
e. buying 100 at a time will save the company $200 a year.

5. Closed-loop MRP:

a. is a system which closes the loop between the supplier and the purchaser.
b. requires a feedback loop between purchasing and accounting.
c. provides a feedback loop between capacity and the master production schedule.
d. requires a check between the master production schedule and inventory.
e. allows a unit manager to sequence jobs done in that department.

6. A buffer inventory:

a. protects against uncertainties in supply and demand.
b. is accumulated for a well-defined future need.
c. is held in anticipation of future needs.
d. covers demand that is expected in the future.
e. is carried to soften the impact of a significant price increase.

7. Stockout costs:

a. are easy to assess in most organizations.
b. can vary depending on whether it is a seller’s or a buyer’s market.
c. are about equal to or less than the cost of carrying additional inventory.
d. do not include present and future lost contribution on lost sales and customer goodwill because these are difficult to quantify.
e. are higher when it is a seller’s market.

8. Which statement is most accurate when thinking about deciding how much to buy::

a. managers seldom make purchase decisions until they are absolutely sure of the volume required.
b. balancing price, volume, carrying cost, and the cost of stockouts is key to successfully determining how much to buy at any point in time.
c. forecasts of future demand, lead times, and prices are usually fairly accurate.
d. the costs of placing orders and holding inventory are so low they do not significantly affect the decision of how much to buy
e. the price premium to attain the desired quantity is usually less than the costs of not having materials available when needed.

9. When a retailer uses daily sales of each product to identify patterns and to forecast inventory requirements, this is an example of:

a. a deterministic model.
b. a causal model.
c. a time series forecasting technique.
d. a qualitative forecasting technique.
e. a repetitive pattern modeling tool.

10. The three main inputs of a material requirements planning (MRP) system are:

a. an accurate bill of material, a master production schedule, and the inventory record.
b. required human resources, required machine resources, and available resources.
c. required manufacturing resources, a master production schedule, and required human resources.
d. results from Pareto analysis, inventory records and a master production schedule.
e. inventory records, annual sales forecast, and a master production schedule.

True and False

1. In fixed period inventory models, orders are placed when the reorder point is reached.

2. MRP II systems link the organization’s planning processes with its financial system to produce “what if” scenarios to help achieve sales and profitability projections.

3. In Kanban systems large raw material inventories are unnecessary.

4. JIT requires infrequent deliveries of relatively large quantities in compliance with quality standards.

5. Service coverage is the ability of purchasing to meet the needs of its internal customers.

6. ABC analysis categorizes purchases or inventory into different groups, normally based on the value or impact on the profitability of the organization.

7. Dependent demand items are part of a larger component or product, and use is derived from the production schedule for the larger component.

8. For the supply management function, time-based strategies that impact competitive advantage relate to cycle time reductions and greater coordination of materials and information flows.

9. CPFR is a business practice in which multiple trading partners agree to exchange knowledge and share risks to generate the most accurate forecast possible and develop effective replenishment plans.

10. The basic elements of inventory carrying costs are capital costs, inventory service costs, storage space costs, and projected costs of lost sales..

CHAPTER 9

Delivery

44. One of the advantages of integrated carriers (truck-air) like UPS and Federal Express is that they:

a. utilize commercial airlines for air service.
b. outsource much of their air network..
c. own their own aircraft.
d. rely more on air than ground transportation.
e. outsource much of their ground network.

45. Outsourcing or using third party logistics services has:

a. remained flat due to increased challenges of international logistics.
b. become increasingly popular with small organizations, but not large ones.
c. declined in popularity due to declining service provider performance.
d. declined as transportation has been re-regulated.
e. increased as organizations focus on core competencies.

46. Organizations operating under a just-in-time system, require:

i. international coverage.
ii. heightened security.
iii. lowest price.
iv. on-time deliveries.
v. real-time package tracking.

47. When assessing the quality of a telecommunications provider, a key indicator of superior quality to a competitor is the ability to:

a. own and operate the largest network of land and sea cable.
b. compress more high resolution information on the same bandwidth.
c. have the leanest network of repeater stations.
d. have the most extensive intermodal operations.
e. own radio frequencies with greater range.

48.Fuel efficiency and energy consumption considerations:

a. have no impact on transportation strategy in most organizations.
b. are a factor in transportation strategy development in many organizations.
c. encourage shippers to focus on increasing LTL shipments.
d. lead to disintermediation in the supply chain.
e. result in lower use of third party logistics providers.

49. Over the past two decades, logistics costs as a percent of the U.S. gross domestic product (GDP) have:

a. been extremely volatile due to international events.
b. increased due to transportation deregulation and technology investments.
c. declined due to deregulation, technology investment, and e-commerce.
d. doubled due to growth in international sourcing.
e. remained constant due to a stagnant global economy.

50. When selecting freight carriers, buyers are most concerned with:

a. best overall value.
b. intermodal capabilities.
c. supply chain and delivery speed.
d. geographic coverage.
e. shipment security.

51. Transportation rates:

a. are established primarily through negotiation.
b. are established primarily by government regulation.
c. are lower for LTL than TL shipments.
d. typically decrease as delivery speed increases.
e. typically do not change when smaller shipments are consolidated.

52. Supply’s involvement in transportation decisions is:

a. insignificant and declining due to the growth of supply chain management.
b. growing due to the increase in the number of railroads and trucking companies throughout the world..
c. growing due to the deterioration of roads, bridges, and highways in North America.
d. declining due to the growth of outsourcing transportation decisions to third party logistics providers.
e. growing in terms of direct functional responsibility and cross-functional efforts to devise solutions with logistics services providers.

10. The selection of the FOB point is important to the purchaser, for it determines:

a. who pays the carrier.
b. when legal title to goods being shipped passes to the buyer.
c. who is responsible for preparing and pursuing loss or damage claims.
d. who routes the freight.
e. all of the above.

True and False

1. The bill of lading is the key document in the movement of goods.

2. One of the advantages of shipping by air carrier is that it is inexpensive compared to other modes of transportation.
3. One of the disadvantages of intermodal frieght services is higher damage rates due to more handling.

4. Transportation costs increase as distance, quantity, and speed increase.

5. Third-party logistics service providers are carriers that always own assets (trucks, airplanes, railcars) and act as intermediaries between trading partners, for example, shippers and carriers.

6. When contracting with logistics services providers, supply managers are limited by Federal regulations in their use of standard supply techniques such as negotiation, systems contracts, and supplier evalaution.

7. Carriers for RF waves are air, copper wire and fiberoptic cable.

8. Two effective cost reduction strategies are partnering agreements with logistics services provider and long-term contracts.

9. Radio frequency (RF) waves are a mode of transportation for information.

10. A mode of transportation is any means of conveyance (truck, auto, taxi, bus, railroad, ship, airplane) of people or property.

CHAPTER 10

Price

53. Identical prices received from various sources should:

1. be expected when the specification is highly customized.
2. always make the buyer suspicious of collusion.
3. only draw attention if the buyer is dissatisfied with the price quoted.
4. draw attention if the specification is complex or detailed.
5. result in the buyer taking legal action against all bidders.

54. Most direct costs are:

1. variable costs.
2. overhead costs.
3. general and administrative costs.
4. semivariable costs.
5. fixed costs.

55. If the buyer wants to motivate the seller to manage total costs, the best type of contract is:

a. firm-fixed-price (FFP).
b. cost-plus-incentive-fee (CPIF)
c. firm-fixed-price plus incentive fee (FFPIF).
d. cost-plus-fixed-fee (CPFF).
e. cost-no-fee (CNF).

56. The market approach to pricing:

1. means prices are set to cover direct costs, contribute to indirect, and attain a profit.
2. is the only defensible pricing mechanism for ethical companies to use.
3. implies that prices are set based on what the market will bear.
4. means that prices are adjusted regularly to ensure that the selling organization recoups all its market costs.
5. implies that market analysis is the only technique that should be employed to negotiate prices.

57. The prime function of an organized commodity exchange is to furnish an established marketplace where:

a. the forces of supply and demand operate freely.
b. commodity prices can be controlled.
c. sellers of the same commodity can come together to set prices.
d. products that are difficult to grade can be traded.
e. there are only a limited number of buyers and sellers.

58. Forward buying:

1. offsets transactions to protect against price and exchange risks
2. involves no risk for the buying organization.
3. involves purchasing for known or estimated near-term requirements.
4. is the same as speculation.
5. seeks to take advantage of price movements.

59. Items for which prices are comparatively low, and the cost of price reduction efforts may exceed any price savings realized, are called:

1. sensitive commodities.
2. raw materials.
3. special items.
4. standard production items.
5. MRO items.

60. A fair price:

a. is based on market conditions, and cost structure has no bearing on the determination of a fair price.
b. is the lowest price that ensures a continuous supply of the proper quality where and when needed and at which the supplier makes a reasonable profit.
c. is based on the cost to produce an item or service without consideration for the supplier’s profit margin.
d. is an amount arrived at through negotiations where the seller’s price is a starting point..
e. is when all sellers of equal goods or services receive the same per unit price.

61. A cash discount allows:

a. the seller to secure prompt payment, but has no benefits for the buyer.
b. the buyer to pay a lower price per unit, but has no benefits for the seller.
c. the seller to secure prompt payment, and the buyer to pay a lower price per unit.
d. the seller to demand payment in cash on demand (C.O.D.) upon receipt of goods.
1. the buyer to always calculate the discount based on the delivery date.

62. In the event the bidder does not make proper payment to its suppliers, the bond that protects the buyer against liens that might be granted to these suppliers, is called a:

a. performance bond.
b. surety bond.
c. bid bond
d. payment bond.
e. lien bond.

True and False

1. A cash discount of 2/10, N/30 (2 percent cash discount if payment is made in 10 days, with the gross amount due in 30 days) is the equivalent of approximately a 36 percent interest rate.

2. Governments play a role in establishing prices by establishing production and import quotas and by regulating the ways that buyers and sellers are allowed to behave in agreeing on prices.

3. To be fair, the basis and terms of cancellation should be agreed on in advance and made part of the terms and conditions of the purchase order.

4. Competitive bidding, in general, is the least efficient means of obtaining a fair price for items bought.

5. Online reverse auctions are useful means of price determination for special items.

6. For goods bought on a non-recurring basis, the contract may provide for a reduction in price should the buyer ever again purchase the item.

7. Canceling a contract for a technicality when market prices are falling is considered a perfectly acceptable and ethical practice.
8. An escalator clause provides for an increase, as well as a decrease, in price if costs change.

9. One justification for a quantity discount is that the buyer should not pay more than the actual cost of packing, crating, and transportation.

10. The Robinson-Patman and Sherman Antitrust Acts are primarily designed to prevent the stronger party from imposing too onerous conditions on the weaker one and preventing collusion so that competition will be maintained. .

CHAPTER 11

Cost Management

63. Target pricing:

a. starts with the supplier’s price, and works to determine the selling price of the buying organization’s end product or service.
b. starts with the selling price of an organization’s end product minus the operating profit to establish the target cost.
c. starts with the selling price of an organization’s end product minus actual manufacturing, overhead, and materials costs to determine operating profit.
d. starts with the supplier’s price, and works to determine the supplier’s true cost structure.
e. starts with the buyer’s lowest reasonable price target, and works to a negotiated price agreed on by the buyer and the supplier.

64. Activity based costing attempts to:

a. correct the distortions built into product costing by the way that direct costs are allocated.
b. correct the distortions built into product costing by the way that the learning curve is applied to direct labor costs.
c. turn indirect costs into direct costs by tracking the cost drivers behind indirect costs.
d. turn direct costs into indirect costs by tracking the cost drivers behind direct costs.
e. introduce a new way to allocate direct costs that more accurately captures labor and material usage.

65. An externally focused process of analyzing costs in terms of the overall value chain is called:

a. strategic cost management.
b. supply chain management.
c. total cost management.
d. profit leverage effect.
e. activity based costing.
66. Target pricing may result in companywide cost reductions in:

i. design to cost.
ii. manufacture to cost.
iii. purchase to cost.
iv. a and b.
v. a, b, and c.

67. Sources of sustainable competitive advantage include:

a. product differentiation (where customers have low price sensitivity),
b. low cost (where customers have high price sensitivity),
c. a combination of product differentiation and cost-leadership.
d. a, b and c
i. none of the above

68. When developing a negotiation strategy, the negotiator should assess the positions of strength of both (all) parties to:

a. decide if negotiation makes sense.
b. establish negotiation points.
c. avoid setting unrealistic expectations.
d. b and c.
e. a, b, and c.

69. In portfolio analysis, the goal when purchasing strategic goods or services is to:

a. assure quality at expected levels.
b. assure continuous supply at lowest cost of ownership.
c. minimize acquisition time and cost.
d. minimize acquisition time and cost and price per unit.
e. reduce or eliminate customization.

70. In portfolio analysis, the goal when purchasing leverage items is:

a. minimize total cost of ownership.
b. minimize acquisition time and cost and price per unit..
c. reduce or eliminate customization.
d. assure continuous supply at lowest total cost of ownership.
e. assure quality at expected levels.

71. Although associated with a number of factors, the learning curve normally is most closely identified with the analysis of:

i. tooling costs.
ii. profit rates.
iii. overhead costs.
iv. direct labor costs.
v. direct material costs.

72. When estimating the costs of a manufacturing supplier:

a. prices of raw materials are not commonly accessible.
b. equipment depreciation is typically the largest single cost element in overhead.
c. material costs are difficult to estimate.
d. direct labor costs are the easiest costs to estimate.
e. labor rates are typically uniform across different plant locations.

True and False

10. Besides price determination, there are very few areas in supply management where negotiation is a useful and cost-effective tool.

11. Activity based costing primarily is an accounting process that has little practical value for buyers.

12. Value engineering (VE) and value analysis (VA) refer to the same process, but VE is applied to the design stage, and VA is applied to redesign.

13. When cost analysis is applied to a supplier’s price, the buyer focuses on identifying an overall cost reduction target with little insight into specific cost elements.

14. If the goal of negotiation is performance, then the process and tactics used during the negotiation are important because they have great impact on the intention to perform.

15. Educating suppliers about the buying organization’s operations is an example of a transaction cost in the total cost of ownership model.

16. In negotiation, a fact is any piece of information on which the buyer believes he or she can negotiate an agreement with the supplier.

17. Value methodology is a systematic approach to analyzing the functions of a product, part, service, or process to satisfy all needed quality and user requirements at optimum total cost of ownership.

18. A unique cost model is one that applies to a variety of common supply situations.

19. In planning for negotiation, a factor or item of information over which disagreement is expected is known as an issue.

CHAPTER 12

Supplier Selection

73. Small suppliers:

a. are most suited for large dollar value “A” requirements.
b. usually represent very low risk to the purchaser.
c. tend to have a strong financial base.
d. often provide the greatest responsiveness and flexibility.
e. tend to have an extensive management structure.

74. Reverse marketing is:

a. encouraged by the rapid rate of technological change, growth in international trade, and the need to extract competitive advantage from supply chains.
b. when the buying organization has decided to stop making something inhouse and identifies a supplier from its existing supply base.
c. is an aggressive, marketing-initiated, approach to finding and developing world class suppliers.
d. requires that the marketing department in the buyer’s organization fully understand the needs of supply.
a. is most appropriate when the product is fairly standard and available from multiple local suppliers.

75. Decision trees:
a. may be useful in making effective supplier selection decisions the first-time a buying decision is made, but not on repetitive purchases.
b. may be useful in making effective supplier selection decisions when making repetitive purchases, but not special, one-time purchases.
c. may be useful in making effective supplier selection decisions if probabilities of success and failure are assessed for each option.
d. are of limited value because options can only be evaluated qualitatively, not quantitatively.
e. cannot reflect past decisions so they are useless as a decision tool when making repetitive purchases.

76. Portfolio or quadrant analysis:

a. may be used to develop longer-term strategies for moving categories of spend into a more desirable location on the spend map.
b. may be used to justify, clarify or revise existing commodity strategies.
c. is based on the Pareto curve.
d. a and b.
e. a, b and c.

77. To avoid risk, a buyer can:

a. hedge in a commodities market.
b. require bid or performance bonds.
c. decide not to do business in certain countries.
d. a and b.
e. a, b, and c.

78. Which of the following statements supports single sourcing:

a. there is a need to reduce supplier dependence on the buying organization.
b. there is a high probability of a devastating natural disaster.
c. there is a patent involved.
d. there is volatility in the supply market.
e. concerns exist about supplier capacity for future volume.

79. In the portfolio matrix, characteristics of goods and services in the leverage quadrant are:

a. competitive supply market, substitution is possible, price per unit is important.
b. competitive supply market, substitution is possible, and total cost is a primary focus.
c. few suppliers with adequate capability so substitution and switching are difficult.
d. item substitution is possible, switching is difficult, and many suppliers are available.
e. item substitution and supplier switching are possible, but few suppliers are capable.

80. Assessment of a potential supplier’s financial situation:

a. is usually unnecessary because it is highly unlikely that a supplier will go out of business, and, even if they do, it is relatively easy to replace a supplier.
b. may yield substantial opportunities for negotiating favorable terms for both buying and selling organizations.
c. is best left to the finance department which will alert supply to any issues that might adversely affect a pending deal.
d. is always necessary and follows a strict protocol no matter what type of purchase or dollar value.
e. seldom relies on financial information provided by the supplier..

81. Distributors, wholesalers, and retailers:

a. never add enough value to a buyer to make it worth doing business with them.
b. may be able to deliver at a lower cost than the manufacturer.
c. may provide valuable services such as prompt delivery and filling emergency orders, but they cannot offer a better price than the manufacturer.
d. have an indefensible value proposition in the typical modern supply chain.
e. typically carry a very limited supply in an effort to keep inventory costs low.

82. Supply management’s role in environmental considerations is:

a. expanding because purchasing has primary responsibility for specification writing.
b. limited because environmental issues have little impact on the acquisition cycle.
c. expanding because the goal of zero environmental impact affects the buying cycle.
d. limited by the product design developed by design engineers.
e. limited to compliance with government laws and regulations.

True and False

1. The preferred hierarchy of supply chain strategies is (1) source reduction—design or use less, (2) reuse—multiple use of same item such as a package or container, (3) recycle—reprocess into raw material, (4) incinerate—at least extract energy, but create CO2 pollution at a minimum, (5) landfill—require space and transportation to store with potential impact on land and water.

2. The question of how much of a premium should be paid to conform with political directives such as Buy Local or Buy American is the subject of much ongoing debate.

3. Although online searching is commonplace in many areas of business, it has not become a common tool for gathering information on potential suppliers

4. Supplier development initiatives may be focused on (1) persuading an existing supplier to expand into new areas that meet the needs of the buying organization, and (2) locating a new, untried/unknown company and identifying potential areas of business.

5. The buyer’s assessment of the risk associated with a supplier is influenced by whether it is a non-critical, leverage, bottleneck, or strategic purchase.

6. Site visits to suppliers are of little use to supply managers because of their subjective nature.

7. Buyers should always expect to receive samples free of charge from suppliers.

8. Loss exposure can be reduced by matching decisions about packaging, transportation, and security levels with the risk of loss.

9. Social problems should not be addressed through supply policy and practice.

10. In the context of supplier selection decisions, the term local is typically defined as suppliers within a 100 mile radius of the buying organization.

CHAPTER 13

Supplier Evaluation and Supplier Relations

83. A weighted point evaluation system:

a. is seldom used because the costs usually outweigh the benefits.
b. includes evaluation criteria, an importance factor for each, and a rating system.
c. includes efficiency and effectiveness metrics weighted by users perceptions.
d. is the most commonly used process because of ease of design and use.
e. allows each rater to weight the criteria, but all raters user the same rating scales.

84. To select a potential supplier-partner, the buyer should consider:

a. both hard and soft factors with an eye toward long-term outcomes.
b. both hard and soft factors with an eye toward short-term outcomes.
c. soft factors such as congruence of management values and compatibility.
d. hard factors such as quality, quantity, cost, and technology.
e. the willingness of the supplier to quickly change processes for results.

85. A goal of supply chain management is to:

a. gain competitive advantage by acquiring confidential information from chain members.
b. drive down prices through competitive online bidding.
c. push inventory as far down the supply chain as possible.
d. reduce uncertainty and risks between and among members of the supply chain.
e. increase competition by increasing the number of suppliers in the supply chain.

86. Which of the following is a result of forming a buyer-supplier partnership:

a. the amount of time committed to the buyer-supplier relationship is greatly reduced.
b. buyer-supplier relationships are greatly improved at the expense of internal relationships.
c. the buying organization can enjoy the benefits of horizontal integration without the disadvantages.
d. the design process and the introduction of new designs is faster due to earlier supplier and supply involvement.
e. significant quality improvements occur and total cost typically increases.

87. One of the assumptions on which the purchasing-supplier satisfaction model is based is that:

a. the satisfaction level cannot be assessed well enough to draw definitive conclusions.
b. the purchaser and supplier always have the same perceptions of the same relationship.
c. attempts to move to a different position fall only in the win-lose and win-win categories.
d. there are few tools and techniques available to move positions or improve stability.
e. an unsatisfied party may use various tools to improve the relationship.

88. Reverse marketing is:

e. discouraged by the rapid rate of technological change and growth in international trade.
f. when the buying organization has decided to stop making something in house and identifies a supplier from its existing supply base.
g. is an aggressive, purchaser-initiated, approach to finding and developing world class suppliers.
h. requires that the marketer fully understand the needs of the buying organization now and in the future.
i. is most appropriate when the product is fairly standard and available from multiple local suppliers.

89. To enhance the chance for successful strategic alliances, the supply manager must:

a. ensure that price formulation and price escalator clauses are included in the contract terms and conditions.
b. clearly establish what is required from the supplier and the penalties for failure to perform.
c. reinforce the notion that the supply manager can easily switch to another alliance if the supplier fails to perform.
d. analyze the supplier’s capability for e-procurement and ensure that the supplier can effectively and efficiently manage online catalogs.
e. identify suppliers whose management views on quality and productivity match those of the buying organization and have both parties establish expectations.

90. Trends in supply management include:

a. switching suppliers frequently through online auctions to get price discounts.
b. limiting the number of suppliers and focusing on results from key suppliers.
c. increasing the number of suppliers and developing closer relationships.
d. negotiating shorter term contracts with fewer suppliers to increase leverage.
e. greater concentration of the supplier selection decision in procurement.

91. Early supply and supplier involvement (ESI):

a. pulls both the buyer and supplier into the need recognition and description stages of the acquisition process.
b. pulls the buyer into relationship management stage and pulls the supplier into need recognition and description.
c. pulls the buyer into the need recognition and description stages and pulls the supplier into the measurement stage.
d. pulls the buyer into the measurement stage and pulls the supplier into the need recognition and description stages.
e. pulls both the buyer and supplier into the process of measuring results and developing action plans for performance improvement.

92. Supply chain management effectiveness is driven primarily by the organization’s ability to manage the:

a. internal link between supply management and its internal customers.
b. internal link between supply management and senior management.
c. internal and external links of customers, the buying organization and suppliers.
d. external link between a buying organization and its key suppliers.
e. external link between a buying organization and its key customers.

True and False

11. Taking negative measures to shift the satisfaction level in the buyer-seller relationship will have little impact on short term objectives, but will positively affect the relationship in the long-term.

12. The perception of a buyer-seller relationship is based on both the results and the process used to attain them.

13. An unwillingness to single source and enter into a buyer-supplier partnership is indefensible in a progressive purchasing and supply management organization.

14. Buyer-supplier relationships fall somewhere on a continuum from traditional, adversarial relationships to fully integrated, seamless relationships.

15. Exceptional suppliers anticipate the operational and strategic needs of the purchaser, and are capable of meeting and exceeding them.

16. Supplier goodwill can be measured regularly through surveys conducted by third party research organizations.

17. Strategic supply management focuses on only those suppliers of high dollar or high value goods and services.

18. Adversarial negotiations and decisions based on total cost of ownership are hallmarks of a successful buyer-supplier partnership.

19. Early supplier involvement only extends to an organization’s first tier suppliers because it is the responsibility of these suppliers to manage subsequent tiers of suppliers.
20. Supply management is critical to effectively managing supply chains, but demand management is not.

CHAPTER 14

Global Supply Management

93. When there is a large number of common requirements across facilities or
business units, and the supply base is dispersed geographically, an appropriate global sourcing structure is:

a. a global commodity management organization.
b. regional purchasing offices that manage the region’s spend for every commodity.
c. a centralized international purchasing office equidistant from key suppliers.
d. a centrally managed global sourcing office located in the corporate headquarters.
e. a decentralized structure where purchasing managers are at each facility.

94. A foreign trade zone (FTZ) in the U. S.:

1. facilitates rapid calculation of import duties.
2. facilitates rapid calculation and payment of import duties.
3. creates and maintains jobs in the United States that might have gone offshore.
4. is completely different in purpose from a maquiladora in Mexico.
a. must use only goods made in the U. S. according to the Buy America Act.

95. When sourcing internationally:

a. the buyer should learn about the culture, customs, norms, taboos, and history of the supplier’s country.
b. the need for personal space is generally the same in most regions of the world.
c. the global availability and use of email, fax, and phone has largely eliminated communication barriers.
d. differing cultural and social norms will have little impact since most businesspeople are accustomed to working with North Americans.
1. the buyer should immediately establish an informal first-name basis with the supplier’s representatives.

96. The United Nations Convention for the International Sale of Goods (CISG):

1. is automatically applied if both nations have adopted the CISG, unless another body of law is agreed upon in the contract.
2. is automatically applied if both nations have adopted the CISG, and there can be no exceptions.
3. replaces the UCC as the worldwide body of law governing international trade.
4. should always be the preference for a buyer from the United States.
5. always puts the United States buyer at an advantage.

97. Which of the following would encourage countertrade?

1. excess foreign exchange.
2. readily available credit.
3. a strong base of suppliers.
4. the need to develop export markets for new products.
5. a well-developed domestic economy.

98. In international buying, the entity that makes a contract with the buyer and then buys the product in its name from the foreign supplier, takes title, delivers to the place agreed on with the buyer, and then bills the buyer for the agreed-on price, is a(n):

a. import broker.
b. sales agent.
c. import merchant.
d. trading company.
e. foreign import agent.

99. The Foreign Corrupt Practices Act (FCPA):

a. allows payment to facilitate the performance of normal duties.
b. attempts to persuade other nations to adopt U.S. rules regarding payments to officials.
c. allows U.S. firms to prosecute foreign nationals on bribery charges.
d. allows U.S. firms to make payments to facilitate normal duties and to make payments to obtain special advantages.
e. allows foreign nationals to offer payments to U.S. government officials to expedite trade agreements.

100. When comparing the total cost of ownership from an international supplier to that of a domestic supplier, the international supplier’s:

a. lower labor costs are easily eroded by additional shipping and insurance costs.
b. price will be higher if the U.S. dollar is strengthening on the exchange rate.
c. lower labor costs offset the high cost of inefficient equipment and processes.
d. lower labor rates must be considered in the context of productivity and quality.
e. prices are carefully controlled by the U.S. government to prevent dumping.

101. The most-cited reason for international trade is:

1. better quality.
2. better overall value.
3. more advanced technology.
4. lower total costs.
5. lower price.

102. When dealing with an international supplier, a knowledgeable buyer:

a. normally will attempt to negotiate a cost-plus-incentive-fee contract.
b. will attempt to price in Euro Dollars.
c. will normally price in the currency of the seller’s country.
d. will always state the price in U.S. dollars.
e. may decide to deal in international currency options.

True and False

1. The NAFTA, the EU, ASEAN and the WTO are all examples of Free Trade Agreements which were designed to facilitate trade between and among member countries.

2. The governing convention on shipping terms and responsibilities involved in international transportation is called ITAPS (International Transport and Payment Specifications.)

3. Even though the economy of Mexico relies heavily on the jobs generated by maquiladoras, the government of Mexico has not set wage rates equal to those of India and China.

4. Countertrade historically has been very uncommon in the sale by U.S. firms of armaments to other nations, but very common in civilian procurement projects.

5. When one condition of the countertrade agreement is that government and/or military-related exports be purchased, this is a swap trade arrangement.

6. The primary reasons for using a foreign trade zone (FTZ) are (1) to avoid, postpone, or reduce duties on imported goods, and (2) to create economic benefits for the local community through job creation.

7. A temporary importation bond (TIB) allows certain classes of merchandise, to be imported into the U. S. with the net effect that no duty is paid on the merchandise,
provided it is reexported.

8. Three approaches to global sourcing are to establish (1) global purchasing offices, (2) International Commodity Organizations (ICOs), or (3) Regional Purchasing Offices (RPOs).

9. It is rare for international trade disputes to be settled through international arbitration partly because the costs of arbitration exceed the costs of litigation.

10. The growth in international trade has come from an increase in the international sale of services as well as goods.

CHAPTER 15

Legal and Ethics

103. When it comes to product liability, supply management:

a. lowers risk by ensuring that suppliers deliver defect-free goods.
b. has little or no role since this is essentially a legal action.
c. has responsibility only to the internal customer, not the final customer.
d. is liable depending on the type of warranty agreed to in the contract.
e. is responsible for establishing the cost of the actual damage.

104. The authority that is necessary, usual, and proper to carry through to completion the express authority conferred, is called:

a. apparent authority.
b. implied authority.
c. express authority.
d. direct authority.
e. performance authority.

105. Which of the following is a factor in determining the validity of a contract?

a. incompetent parties.
b. offer and acceptance.
c. employment in the purchasing department.
d. amount over $500.
e. due process.

106. The Sarbanes-Oxley Act:

a. has no impact on the supply management process.
b. requires the Chief Purchasing Officer to sign off on every contract.
c. requires listing off-balance sheet items such as long-term purchase agreements.
d. requires supply management to report directly to the Chief Financial Officer.
e. affects internal accounting procedures of privately-held companies.

107. The legal authority of a salesperson normally is:

a. the same as that of a buyer.
b. to make legally-binding contracts for $500 or less.
c. to make legally binding contracts for sales over $5,000.
d. to solicit orders and get ratification and acceptance from his or her employer.
e. based on the length of time the salesperson has been employed.

108. When the goods fit the ordinary purpose for which goods of that description are used in the trade, there is a(n):

a. implied warranty of merchantability.
b. express warranty.
c. warranty of title.
d. implied warranty of fitness for a particular purpose.
e. implicit warranty.

109. Corporate social responsibility:

a. is another name for ethics.
b. is another name for supplier diversity programs.
c. requires sacrificing financial gain for the greater good of the community.
d. refers to individual, not corporate, decisions and actions.
e. extends beyond ethics to include community, environment, and human rights.

110. Commercial bribery:

a. usually involves only one company offering bribes.
b. may become an industry practice.
c. is outlawed in very few countries.
d. is outlawed throughout the West, but not in Asia.
e. legal rulings rest on the doctrine of promissory estoppel.

111. In a contractual dispute between buyer and seller, the process of elevating the discussion from buyer and sales representative up through the organization and out to an unbiased referee is called:

a. arbitration.
b. mediation.
c. internal escalation.
d. negotiation.
e. adjudication.

112. If a termination for convenience clause is included in a services contract:

a. its validity depends on whether the contract is in the private or public sector.
b. it is easy to determine if it is exercised in bad faith or an abuse of discretion.
c. if exercised in bad faith, it may mean the termination is a breach of contract.
d. specifically identifies events that will trigger termination.
e. it defines what constitutes sufficient cause to terminate.

True and False

1. In many organizations, standards of conduct for purchasing personnel stress the need to avoid all appearances of impropriety.

2. Normally, if an offer to buy or sell is made, the contract is completed once the legal documents are in the hands of both parties.

3. If a supplier fails to deliver goods which meet the contract agreement, one of the buyer’s options is to reject the whole shipment.

4. Reciprocity, the practice of requiring a supplier to purchase a set amount from the buying firm, is legal domestically, but not internationally.

5. The Uniform Commercial Code (UCC) covers the purchase of goods and services, if the goods portion of the contract is more than 50 percent of the contract value.

6. Mediation and arbitration are examples of alternative legal means of settling disputes.

7. When an employee who is not a legal agent of the company agrees to buy something from a salesperson and the item is received and the company pays the invoice, the employee is exercising implied authority.

8. Payment made to a supplier does not automatically constitute an acceptance of the goods.

9. In the U. S., product liability is generally considered a strict liability offense which means that the defendant is liable when it is shown that the product was defective.

10. Under the Uniform Commercial Code, when the buyer has examined the goods as fully as he or she has desired, there is a warranty with regard to defects which an examination ought to have revealed to him or her.

CHAPTER 16

Other Supply Responsibilities

113. Investment recovery is often assigned to:

a. supply managers because they have knowledge supply markets and price trends.
b. salespeople because they have contact with buyers who may use the material.
c. marketing managers because they have information on internal users.
d. engineers who can suggest possible uses of the material within the organization.
e. financial analysts because they set the target return on all investments.

114. Efforts to deal with hazardous waste include a focus on:

a. highly visible sources of pollution, e.g. smoke stacks.
b. less visible uncontrolled sites, e.g. buried waste.
c. recycling.
d. substitution of non-hazardous materials for hazardous materials.
e. all of the above.
115. The potential benefits of having accounts payable report to the same executive as supply include:

a. familiarity with the supplier
b. familiarity with the order.
c. opportunities to reduce transaction costs and headcount.
d. the ability for supply to ensure that payments for suppliers are made on time.
e. all of the above.

116. Reducing the obsolescence and waste of maintenance, repair, and operating (MRO) supplies through better materials and inventory management will:

a. reduce the costs of disposing of MRO items that are obsolete or waste.
b. reduce carrying cost by lowering inventory levels, especially of obsolete items.
c. improve environmental performance by reducing waste that goes into landfills or incinerators.
d. simultaneously reduce costs and improve environmental performance.
e. have little impact because MRO is a small percentage of annual spend and the items usually have low environmental low-impact.

117. Warehousing and inventory storage:

a. can either be an internal function or outsourced to a third-party logistics firm.
b. typically has little communication with supply management.
c. may have direct responsibility for organizational purchasing decisions.
d. outsourcing decisions typically are made by the finance department.
e. is seldom outsourced.

118. One of the reasons why companies are paying more attention to the effective, efficient, and profitable recovery and disposal of scrap, surplus, obsolete, and waste materials is that:

a. consumers overwhelmingly demand environmental responsibility.
b. it is easy to administer and highly profitable.
c. most organizations generate little scrap, surplus, obsolete and waste materials.
d. disposal costs are rising and environmental legislation is strengthening.
e. disposal is a fairly simple problem that is easily resolved.

119. The role and importance of investment recovery in an organization is driven in large part by the:

a. CEO’s perspective on environmental issues.
b. Chief Purchasing Officer’s clout or leverage with other executives.
c. projected dollar value of the potential revenue recovery or cost reduction.
d. salespeople who encourage the inclusion of buy-back programs of key materials.
e. internal level of knowledge about disposal channels and suppliers.

120. Coordinating inbound and outbound transportation:

a. has little application in an effective and efficient supply organization.
b. is done by cross-functional teams in most organizations.
c. helps to reduce costs and improve utilization of related assets and resources.
d. provides the basic elements of a global supply network.
e. is used extensively in Europe, but has not migrated to the U.S.

121. Production planning:

a. focuses on long-term schedules to control inventory and production.
b. requires coordinating the delivery and storage of key raw materials.
c. cannot involve supply because of fears of undue influence from suppliers.
d. relies heavily on forecasts from purchasing and supply management.
e. is a discrete activity with little coordination with other functions.

122. Supply can contribute to the organization’s environmental management program by:

a. developing sourcing and usage alternatives for hazardous materials.
b. focusing on substitution of non-hazardous materials for hazardous materials.
c. encouraging and participating in designing products that do not use or generate hazardous waste.
d. a and b.
e. a, b and c.

True and False

1. Production planning relies heavily on forecasts from operations to anticipate demand for products and services..

2. To ensure maximum return for its investment, the process and procedures for selling scrap and surplus must cover a broad range of activities including segregation and storage, weighing and measuring, delivery, negotiation, supplier selection, and payment.

3. If material has been declared surplus, the only option is to sell it.

4. Obsolete is in the eyes of the beholder. Something that has been declared obsolete in one organization may be perfectly acceptable and useable in another.

5. It makes no sense to assign responsibility for disposal to the supply management function because the personnel usually have no selling experience.

6. The total cost of hazardous waste for a company does not include the costs of new plant and equipment to reduce waste and deal with contaminated plants.

7. Escalator clauses in contracts for scrap disposal are necessary because the prices of primary metals fluctuate.
8. An organization’s Enterprise Resource Planning (ERP) system may be used to develop a national or global database for company personnel at different locations to post and purchase spare parts, obsolete materials, and surplus.

9. Waste is created when a change in the production process occurs, or when a better material is substituted for the material originally used.

10. As more people come to believe that it makes economic sense to practice environmentally sound operations, business and government may be able to work together for common goals.

CHAPTER 17

SUPPLY FUNCTION EVALUATION AND TRENDS

123. Research on the supply management process focuses on:

a. developing a strategy to reduce cost or ensure supply.
b. improving buyer-seller relationships.
c. deciding whether to single or multiple source.
d. conducting cost analysis to identify unnecessary costs.
e. increasing efficiency by automating where possible.

124. Purchasing performance benchmarking attempts to:

a. analyze a firm’s own internal trends.
b. provide industrywide standards for overall firm performance.
c. determine what results have been achieved by purchasing and supply activities.
d. determine how an organization achieves results in purchasing and supply.
e. provide baseline metrics to compare companies’ supply performance.

125. The budget which begins with an estimate of expected operations, based on sales forecasts and plans, is called the:

a. operating budget.
b. capital budget.
c. cash flow budget.
d. materials purchase budget.
e. organizational budget.

126. When cross-functional teams are used to conduct research, it is best if:

a. the team has strong leadership.
b. the team has total autonomy to decide objectives and set expectations.
c. team members are randomly selected from departments.
d. performance evaluation and reward systems foster individual contributions.
e. each team member develops time management skills to handle the assignment.

127. In terms of measuring and validating supply savings:

1. information systems easily capture savings.
2. static markets, technologies, and volumes facilitate the process.
3. in many cases there is an inability to convert savings into profit.
4. management usually recognizes cumulative savings.
5. there is a universal definition of supply savings.

128. Supply can play a leadership role in corporate social responsibility (CSR) by:

1. instituting third party workplace audits of suppliers in developing countries.
2. knowing the providence of products in the supply chain.
3. considering the organization’s carbon footprint in supply decisions.
4. designing closed loop supply chains.
5. all of the above.

129. The assessment of a supplier’s financial capacity:

1. enables the development of risk minimization strategies.
2. predicts the probability of the supplier encountering financial problems.
3. is done primarily to ensure the supplier has the cash to pay its bills.
4. usually is unnecessary if the supplier has been in business for more than 5 years.
5. is required before a contract can be ratified.

130. A comprehensive commodity study should result in a(n):

a. thorough analysis of sources used over time.
b. strategy to lower cost and assure supply.
c. review of past predictions and variances from actual prices paid.
d. assessment of the performance of the commodity manager.
e. trend analysis of volume requirements over time.

131. Trends in supply organization and leadership include:

a. more chief purchasing officers with extensive supply experience.
b. less emphasis on teams.
c. global projects requiring cross-cultural skills.
d. merging of strategic and tactical roles in supply.
e. emphasis on “hard skills” such as finance.

132. An efficiency-oriented performance metric:

a. evaluates the quality of supplier relationships.
b. measures end customer satisfaction.
c. measures direct contributions to profit.
d. calculates the average dollar cost of a purchase order.
e. measures number of defects caused by poor incoming quality.

True and False

1. The perceptions that non-supply managers have of supply are shaped by interactions with and observations of supply, tangible experiences with supply on a day-to-day basis, and the extent to which supply is seen as contributing to the firm’s mission.

2. Value engineering is done on purchased items used in the ongoing production process, while value analysis is done in the design stage where items are being specified.

3.Triple bottom line reporting refers to an organization’s social, environmental, and financial performance.

4. Effectiveness metrics which emphasize price may lead to behavior that drives up total cost of ownership.

5. The supply planning process is initiated by the supply manager’s assessment of the supply base.

6. Industry benchmarking allows an individual company to compare itself to its major competitor.

7. Financial efficiency is indicated by the asset and inventory turnover ratios.

8. Supplier performance management systems should be designed to capture and communicate the failures of suppliers so penalties can be assessed.

9. Supply management’s contribution may be measured along three dimensions: revenue enhancement, asset management, and cost management.

10. Internal validation of supply’s financial contribution increases joint ownership of goals and outcomes.

BUS 300 Public Relations – Strayer – A+ Graded

Click on the Link Below to Purchase Complete Test Bank (Chapter 1 – 15)

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Chapter 1 What is Public Relations, Anyway?

1) In March 2012, the Public Relations Society of America reached a common definition for public relations. Which of the following represents the winning definition?
A) “Like beauty, the definition of ‘public relations’ is in the eye of the beholder.”
B) “Public relations is a strategic communication process that builds mutually beneficial relationships between organizations and their publics.”
C) “Public relations is a planned process to influence public opinion, through sound character and proper performance, based on mutually satisfactory two-way communication.”
D) “Public relations revolutionizes the way organizations and individuals communicate to their key constituent publics around the world.”

2) Letters unearthed at Al Qaeda terrorist-in-chief Osama bin Laden’s last stand were a testimony to the accepted notion that public relations has become one of society’s most potent forces. Which of the following were among his most pressing concerns?
A) Ways to improve news media coverage
B) His place in history
C) Al Qaeda’s image and a possible name change to give the group a more religious ring
D) All of the above

3) The strength of the public relations field stems from
A) its roots in democracy.
B) its significance in enhancing democracy.
C) its significance in altering the ranks of management.
D) its significance in protecting management from encroachment by unqualified leaders.

4) As society is overwhelmed by communications, what is the challenge for the communicator?
A) To bombard the target audience with messages of every variety (traditional and nontraditional) at the same time
B) To make billions of dollars when there are 320,000 public relations professionals
C) To convince people that public relations is important
D) To cut through communications that come from many sources to deliver an argument that is persuasive, believable and actionable.

5) How many communications professionals are employed by the Department of Defense?
A) 1,000
B) 4,500
C) 7,000
D) 9,250

6) The fundamental mandate of public relations is
A) strategy
B) communications
C) relationships
D) character

7) In John Marston’s R-A-C-E process, the key step is
A) solid strategy.
B) reasoned research.
C) proper action.
D) careful evaluation.

8) Which of the following distinguishes the R-O-S-I-E formula from other formulae that summarize the PR process?
A) encompasses more clear objectives
B) encompasses a more managerial approach
C) encompasses more implementation of a predetermined plan
D) encompasses more scientific evaluation

9) Applying the widely repeated definition of public relations developed by the late Denny Griswold to serve an organization properly, practitioners ought to serve as
A) counsels to chief legal officers.
B) honest brokers to top management.
C) advisers to human resources directors.
D) consultants to directors of marketing.

10) Which process emphasizes planning as a necessary step preceding the activation of a communications initiative?
A) R-P-I-E
B) P-P-I-E
C) R-A-C-E
D) P-A-C-E

11) Which of the following are among the five actions Professor Melvin Sharpe indicates can “harmonize” relations between individuals and organizations?
A) measured remarks that foster credibility
B) environmental research and evaluation that help determine actions or adjustments
C) continuous one-way communication
D) credible actions favoring only the organization

12) Professional practitioners who understand the management “interpreter” perspective of public relations
A) recognize the value of insights from Leon Hess on this perspective.
B) recognize that management takes precedence over public attitudes and beliefs.
C) recognize the need to be able to create management policy.
D) recognize the importance of communicating organizational policy accurately and candidly.

13) GM’s handling of charges by Ralph Nader that their Corvair was “unsafe at any speed” is an example of corporate public relations professionals failure to
A) interpret and convey to management what the public really thinks.
B) interpret and convey to the public why management feels the way is does.
C) interpret how corporate influence can change public opinion.
D) interpret how public influence can be ignored if it is in the best interest of shareowners.

14) Savvy individuals and institutions must recognize the importance
A) of appropriate use of modern technology in communicating with one another.
B) of recognizing the role each plays in modern society.
C) of effectively interpreting the institution’s philosophies, policies, practices, and views to the public.
D) of hiring professional communicators to act as mouthpieces.

15) John Galliano, creative director of the Dior fashion house, was fired because
A) he revealed Dior’s history serving the wives of Nazi officers
B) he was not as talented as he used to be
C) his talent was less important than the credibility and reputation of the House of Dior
D) he got into a fight with someone who made anti-Semitic remarks

16) To effectively communicate with a public, it is important to recognize that
A) all publics have the same needs.
B) all publics are most interested in the technology you use.
C) all publics have their own special needs and require different types of communication.
D) all publics have overlapping organizational needs.

17) Which of the following has increased the interdependence between people and organizations and the concern in organizations for managing extensive webs of interrelationships?
A) organizational changes
B) technology changes
C) priority changes
D) subordinate changes

18) For a group of people to become a public, which of the following does NOT occur?
A) confront a similar indeterminate situation
B) recognize what is problematic and indeterminate in a situation
C) decide to organize to confront a problem
D) seek outside counsel on whether to unite

19) Publics that are classified as internal publics include
A) stockholders and the board of directors
B) customers and suppliers
C) legislators and the general public
D) senior citizens and homosexuals

20) Public relations consultants for politicians should point out the importance of the uncommitted public because
A) that public rarely decides to vote.
B) that public can swing a vote.
C) that public is the most difficult to persuade.
D) that public needs to have their beliefs reinforced.

21) A major difference between public relations and marketing/advertising is
A) marketing and advertising promote an organization
B) public relations promotes an entire organization, including its people, products, and services
C) marketing and advertising promote an organization’s individuals rather than its products or services
D) public relations promotes only a product or a service

22) A function related to public relations that includes creating sales literature, meeting displays and promotions is
A) media relations.
B) publicity.
C) marketing communications.
D) investor relations.

23) The government affairs function of public relations
A) deals with customers who want sales information.
B) deals with officials at the local, state, and federal levels.
C) deals with investors who want information about the annual meeting.
D) deals with behavioral beliefs.

24) Twisting messages to create the impression of performance is
A) an agreed-upon ethical practice in public relations.
B) how to preserve hard-earned credibility.
C) how to provide reporters with balanced information.
D) a manifestation of spin.

25) What is the cardinal rule for public relations practitioners?
A) never, ever lie
B) don’t get caught
C) spin the issue to sway public opinion
D) be considerate of how your words will influence the public

22) In a 2004 study by the search firm Heyman Associates, which of the following was NOT a characteristic of successful PR leaders?
A) inner strength
B) teamliness
C) proactivity and passion
D) relationship building

23) Which is NOT a key technical skill a public relations professional should possess?
A) knowledge of communications, including how media work
B) knowledge of what’s happening around you
C) knowledge of how management shapes policy
D) knowledge of what the public’s “right to know” is

24) To be successful, a public relations professional should have the predisposition to
A) disclose rather than withhold information.
B) avoid responding to false accusations from an irate consumer.
C) avoid confronting situations before they escalate.
D) disclose how business works.

25) Which of the following is NOT among six requisite “attitudes” an effective public relations practitioner should have?
A) to have a counseling orientation
B) to project an aura of skepticism
C) to do the right thing
D) to be risk averse

26) Public relations is an industry that is growing in numbers as well as respect.

27) Annual revenue for the PR industry is estimated at well under $1 billion dollars.

28) An indication of the heightened stature of public relations is the increased desire of companies, nonprofits, governments, religious institutions, sports teams and leagues, arts organizations to communicate their stories.

29) The American Management Association adapted the following definition for the function: “Public Relations is a strategic communication process that builds mutually beneficial relationships between organizations and their publics.”

30) Some might say PR should really stand for performance recognition because positive action communicated straightforwardly will yield positive results.

31) Regardless of what definition you choose for public relations, Fraser Seitel contends that in order to be successful, professionals must always have a planned process to influence attitudes and actions of the targeted public

32) Despite the model of success established by Leon Hess as CEO of an oil company and the NFL’s Jets, today’s CEOs and their companies cannot ignore the need for public relations.

33) How effective a public relations department is depends on the level of access it has to management.

34) As interpreters of the public for management, public relations professionals need to learn what the public senses about the organization and alert management to those findings.

35) Presidents Clinton and Bush, and CEOs of Citigroup, AIG, Washington Mutual, Bear Stearns, Lehman Brothers, Countrywide Financial, Goldman Sachs and Bank of America all tested the limits of public relations by not being candid with their publics.

36) Recent technological changes, including satellite links for TV, social media, blogs and mobile devices, drive home the importance of recognizing the interrelationships of publics.

37) Because there are so many different publics, public relations professionals often serve as mediators between management and these constituent groups upon whom organizations depend.

38) External publics for publicly traded companies include the board of directors and shareowners.

39) Media relations is the fundamental public relations skills, because dealing with the press is more important than writing.

40) One of the more recent functions practitioners have is the social media interface for an organization.

41) Spin boils down to outright lying in order to cover up what actually happened in a situation.

42) Counter the claim that public relations is a dying industry.

43) Define or describe what public relations is.

44) To develop a public relations program, which process approach would you choose for a client, and why?

45) Describe what the role of interpreter in public relations entails.

46) List and describe various ways you might categorize publics.

47) List and briefly describe five of the functions of public relations that were mentioned in your book.

48) Describe spin and explain why its most virulent form is not part of public relations.

49) In the 2004 study of agency, corporate, and nonprofit public relations leaders sponsored by search firm Heyman Associates, what seven areas characterized a successful public relations career?
50) List and briefly describe the technical skills that are important to the practice of public relations.

Chapter 2 The Growth of Public Relations

1) Which major trend below is contributing to the evolution of the practice of public relations in the U.S.?
A) increasing numbers of mom-and-pop retail, startup companies
B) increasing pressure to become a profession like law or accounting
C) increasing public awareness and media sophistication
D) increasing numbers of institutes of higher learning on the Internet

2) John D. Rockefeller Jr. was widely attacked when
A) a dozen women and small children were killed in the Ludlow massacre
B) Johnson & Johnson’s products were sabotaged, resulting in the murder of company customers
C) the Creel Committee was formed to channel patriotic sentiments of Americans in support of the U.S. role in the war
D) he spoke out against the marriage of Khloe Kardashian and Lamar Odom

3) Professor Marshall McLuhan has become known for
A) predicting unimaginable growth in computer-related equipment.
B) predicting the world would become a “global village.”
C) predicting the death of the newspaper.
D) predicting the emergence of mass communication.

4) Which of the following is NOT a major trend contributing to the evolution of the practice of public relations?
A) growth in use of traditional distribution systems, including cars, trucks, and airlines
B) growth of big institutions
C) growth in public awareness and media sophistication
D) growth in consumer use of the Internet and social media

5) Which of the following is NOT among the incidences of societal change, conflict or confrontation that have had an impact on the growth of public relations in the U.S.?
A) unhappiness with large institutions
B) minority and women’s rights movements
C) consumerism
D) passage of the Social Security Act

6) Archaeologists inform us that public relations has roots in
A) Iraq, where bulletins informed farmers how to grow more food.
B) England, where 18th century bulletins hailed the coming of the British Industrial Revolution.
C) Rome, where tablets paid tribute to new rulers
D) China, where during the Ming Dynasty, peasants wrote messages on the Great Wall.

7) Which of the following is NOT true of the Sophists?
A) They were masters of rhetoric and reasoning.
B) They established a model for today’s lobbyists.
C) They gathered in the amphitheaters to extol the virtues of political candidates.
D) They were not elected to leadership positions because they were good speakers.

8) The word “propaganda” originated with
A) the Creel Committee during World War II.
B) Pope Gregory XV, who established a College in 17th Century Rome to spread the word about Catholicism.
C) Sophists, who walked around telling citizens of Rome who to vote for.
D) the farmers who grew grapes in ancient Italy.

9) American flirtations with public relations techniques began around the founding of the ________ when ________.
A) Massachusetts Bay Colony; George Washington set the Pilgrims free
B) republic; colonists disgraced themselves by reminding loyalists that: “Taxation without representation is tyranny”
C) republic; colonists tried to persuade King George III that they deserved the same rights as subjects in England
D) Associated Press; the Committees of Correspondence disseminated pro-British information

10) Thomas Paine, an early practitioner of public relations, wrote periodic essays that urged colonists to band together, including those contained in
A) the Crisis papers
B) The Federalist Papers
C) Publius
D) the Globe

11) Using a variety of persuasive techniques and even a pseudonym, Publius, ________ advocated for ratification of the Constitution.
A) the Committee of Correspondents
B) Alexander Hamilton, John Jay, and James Madison
C) the Adams Tea Company
D) Thomas Paine

12) Some scholars consider ________ the forerunner to today’s White House press secretary because of the duties he performed for Andrew Jackson.
A) Phineas T. Bluster
B) Larry Speakes
C) Lindsay Trump
D) Amos Kendall

13) The growth of public relations as an accepted business-like practice in the United States of America stems from
A) the British Industrial Revolution.
B) the American Industrial Revolution.
C) the efforts of people like Samuel Adams and Amos Kendall.
D) the hype of P.T. Barnum.

14) Known as the ________ they were a group of ________ who tackled the abuses of American industrialists, exposing deplorable and unsafe conditions.
A) Barnumites; press agents
B) muckrakers; journalists
C) publicity bureau; press agents
D) lobbyists; sophists

15) A principal contribution to the field of public relations made by Ivy Ledbetter Lee was
A) recognition that the public needed to be informed.
B) devotion to assisting “robber barons” in damning the public.
C) support for techniques employed by Barnum.
D) an enduring belief in muckraking.

16) Principles developed by Ivy Lee in working with the press on behalf of business included
A) recognition that any publicity was good as long as a client’s name was spelled correctly.
B) commitment to present his client’s point of view honestly, accurately, and forcefully.
C) formation of third-front organizations.
D) creation of “people in the street” interviews.

17) Ivy Lee faced public criticism in the late 1920s for
A) advising John D. Rockefeller Jr. to humanize his family by presenting them in real-life situations
B) advocating in favor of Barnum’s public-be-fooled approach
C) advocating in favor of Vanderbilt’s public-be-damned philosophy
D) advising the Dye Trust, which was an agent for Adolf Hitler’s policies

18) During World War I and World War II, public relations techniques to help mobilize United States citizens to support war efforts were used by the
A) Committees on Correspondence and the Associated Press.
B) Creel Committee and Office of War Information.
C) Central Intelligence Agency and the United States Information Agency.
D) Truman and Nixon administrations.

19) Perhaps one reason publicity and press agentry are too often considered synonymous stems from
A) formation of the first public relations firm called the Publicity Bureau that specialized in general press agentry.
B) launching of the firm led by Ivy Lee that specialized in counseling top management in the value of building public confidence and trust.
C) development of corporate guidelines set down by Arthur Page and Paul Garrett.
D) efforts by Edward Bernays and Doris Fleischman to introduce social psychology techniques in developing strategic communications advice.

20) Which of the following is NOT a significant contribution by Edward L. Bernays to the field of public relations?
A) “recruiting” the first distinguished female practitioner, Doris E. Fleischman
B) teaching the first course in public relations
C) publishing the landmark consumerism book Unsafe at Any Speed
D) introducing the importance of seeking public relations counsel

21) ________, one of the earliest African American counselors, wrote two books on African American consumerism and advised companies on multicultural relations.
A) Knowlton Hill
B) D. Parke Gibson
C) Carl Byoir
D) George Creel

22) Among the earliest public relations counselors to emphasize marketing-oriented public relations was
A) Carl Byoir.
B) Harold Burson.
C) D. Parke Gibson.
D) Arthur W. Page.

23) Which of the following major public relations counseling firms did Omicom Group purchase?
A) Young & Rubican
B) J. Walter Thompson
C) Fleishman-Hillard
D) Burson-Marsteller

24) The era right after World War II can be described as an era when the public held corporations and their leaders in
A) high esteem.
B) low esteem.
C) virtual esteem.
D) none of the above

25) Which of the following is NOT a principle developed by Arthur W. Page for successful corporate public relations?
A) to create a system that draws questions and criticism from employees and outside publics up through the organization to management
B) to make sure management softens bad news, especially for employees
C) to prepare “contact employees” with knowledge needed to be reasonable and polite with the public
D) to create a system that informs all employees about an organization’s policies and practices

26) Paul Garrett was an early corporate public relations luminary in his role as
A) CEO of General Motors
B) the first director of public relations for General Motors
C) CEO of Lehman Brothers
D) the first director of public relations for Lehman Brothers

27) Which of the following is a factor that shaped how Public Relations came of age?
A) growth of large institutions
B) heightened public awareness and media sophistication
C) societal change, conflict and confrontation
D) All of the above

28) Which of the following has made knowledge of and facility with the Internet a front-burner necessity for practitioners?
A) cable
B) social media participation
C) mobile phones
D) videodisk technology

29) In the 21st century, recognition of the value of knowing what public relations is about comes from
A) more than 200 journalism or communications programs offering a public relations concentration.
B) business schools making public relations education an essential part of their curriculum.
C) managing editors of print media admitting that more than 70 percent of what is reported as news comes from public-relations generated information.
D) practitioners acknowledging their foundation in the art and skills needed was derived from their public relations courses.

30) What devastating public relations problem did Johnson & Johnson face on September 30, 1982?
A) management learned extra-strength Tylenol had been used as a murder weapon to kill three people in Chicago.
B) people did not like their new packaging so they lost market share.
C) people did not like their shift from capsules to caplets so they lost market share.
D) management learned extra-strength Tylenol had been used as a murder weapon to kill a woman in Yonkers.

31) What did Johnson & Johnson do in response to the product tampering crisis in 1982?
A) recalled a lot of 93,000 bottles of extra-strength Tylenol associated with the reported Chicago murders.
B) recalled 31 million bottles of extra-strength Tylenol capsules
C) welcomed investigative news program 60 Minutes
D) all of the above

32) The practice of public relations began long before fields like law, accounting, and medicine were recognized.

33) Sophistication in technology and the media’s use of it have led to fulfillment of Marshall McLuhan’s prediction that the world would become a “global village.”

34) A key trend contributing to the evolution of public relations is the growing power of public opinion to act as a positive force in shaping democratic societies.

33) The stage for today’s lobbyist was set by the Sophists hired to fight verbal battles for politicians in ancient Rome.

34) Some critics say the most horrific scandal in the history of the Roman Catholic Church is their handling of reports about priests accused of sexually abusing parishioners.

35) Samuel Adams combined weaponry of sword and pen by organizing the Associated Press to do battle with King George.

36) Pamphlets, a strategic vehicle used today in public relations, were used by Thomas Paine to rally support for unity among American colonists.

37) A 1791 document fittingly in its first order of business safeguarded, among other things, the principle that provides public relations practitioners certain inalienable rights, including freedom of speech and press.

38) Much of what Amos Kendall did in the “kitchen cabinet” of President Andrew Jackson is similar to what a presidential press secretary does today.

39) Techniques to attract press coverage used by Phineas T. Barnum are representative of the “public be informed” era that contributed to a positive image of the practice of public relations.

40) Today, press-agent techniques are employed to hype a range of headline seekers.

41) The adversarial relationship between so-called “robber barons” and “muckrakers” led to the need for hired professionals to explain what industrialists had been unable to convey.

42) Ida Tarbell and Upton Sinclair were among early pioneers in the field of public relations.

43) Some observers of the public relations field call Ivy Ledbetter Lee the “real father of modern public relations” despite the significant pioneering efforts of Edward Bernays in the field.

44) OWI was a government-sanctioned agency during the Civil War that mobilized the citizens of the South to support war efforts of the North against the British.

45) Growth in numbers of people utilizing techniques associated with public relations for World War II led to a growth in numbers of people practicing public relations in peacetime.

46) While in the 1990s public relations counseling businesses grew and merged into international superagencies, today the public relations counseling business has a diverse mix of huge national agencies, medium-sized regional firms, and one-person local agencies.

47) Despite how effective and visionary Paul Garrett was as a General Motors public relations practitioner, he suffered from the universal complaint of corporate PR people, he felt like “an outsider.”

48) The impact of the Internet on helping public relations come to age has been phenomenal.

49) List the major trends that have helped the practice of public relations come of age in the United States of America.

50) In what ways has technology fostered evolution of modern-day public relations practice?

51) List and explain principles and techniques still used by today’s public relations practitioners that have roots in ancient times.

52) Describe some of the functions performed by Amos Kendall that are currently practiced by communications assistants of the President of the United States.

53) Discuss contributions made by Ivy Ledbetter Lee to the field of public relations.

54) Discuss contributions by Edward L. Bernays to making the practice of public relations more professional.

55) What events or indications are there that challenge leaders and governments to recognize the growing power of global media, public opinion, and democracy?

Chapter 3 Communication

1) The “father of the communication satellite” is
A) Sir Jimmy Wales.
B) Sir Lawrence Essjay.
C) Sir Arthur C. Clarke.
D) Sir Larry Sanger.

2) Which of the following does NOT pertain to Wikipedia?
A) launched by Jimmy Wales and Larry Sanger.
B) least popular general reference site on the Internet.
C) fastest-growing general reference site on the Internet.
D) depends on “correctors” to edit its copy.

3) First and foremost, the public relations practitioner is
A) a professional communicator.
B) respected management.
C) a supervisor who depends on e-mail to communicate.
D) a trusted adviser.

4) Which of the following is critical to the communication process?
A) to send as many messages as time will allow
B) to make oneself understood
C) to exchange information
D) to impart ideas

5) Which of the following describes communication?
A) one person has to send a message to another and the message is not read or regarded.
B) one person has to send a message to another and the message is not understood.
C) One person sends a message to another and the message is regarded and understood.
D) All of the above

6) Before public relations practitioners can earn the respect of management and become trusted advisors, they must:
A) be adept at accounting.
B) be the best communicator in the organization.
C) be competent at one of the following: writing, speaking, listening, promoting or counseling.
D) be able to convert personal thoughts into words.

7) Typical goals for communication include
A) to command.
B) to challenge accepted precepts.
C) to persuade, inform, and motivate.
D) to seek understanding.

8) The communication goal that relates to understanding a group in opposition idea is:
A) to build mutual understanding.
B) to motivate.
C) to persuade.
D) to inform.

9) The communication goal that relates to educating a particular public is:
A) to build mutual understanding.
B) to motivate.
C) to persuade.
D) to inform.

10) ________ is a typical goal of communication when someone seeks to explain benefits the opposition can gain from reconsidering an idea.
A) To inform
B) To manipulate
C) To build mutual understanding
D) To strategize

11) The theory of communication that states an organization beams a message first to mass media outlets that deliver the message to mass receivers (readers, listeners and viewers) for their response is:
A) dissonance theory
B) SEMDR theory
C) concentric-circle theory
D) two-step flow theory

12) Pat Jackson’s models of communication for public relations emphasized
A) building awareness.
B) triggering an event.
C) adapting to new behaviors.
D) setting clear strategic goals and identifying key stakeholders.

13) The theory of communication that states people seek out massages that they agree with and avoid messages they disagree with is:
A) dissonance theory
B) SEMDR theory
C) concentric-circle theory
D) two-step flow theory

14) In the S-E-M-D-R and S-M-R models, the S and M, respectively, stand for
A) sender; mode.
B) source; medium.
C) source; message.
D) sender; message.

15) The spiral of silence suggests:
A) communications that work well depend on silence and nonparticipation of a huge, silent majority
B) people seek out messages that are consonant to their own attitudes and avoid messages that are dissonant to their own attitudes
C) public relations comes into play in the encoding and decoding stage of the communications process
D) ideas evolve gradually to the public at large by moving in concentric circles from great thinkers to great disciples to great disseminators to lesser disseminators to politically active to politically inert.

16) The overall study of how communication is used to direct and control is called
A) cybernetics.
B) two-step flow.
C) mass targeting.
D) concentric-circle adaptation.

17) Which of the following does NOT pertain to the spiral of silence theory of communication?
A) originated with Elisabeth Noelle-Neumann
B) the “silent majority” can isolate others from communicating
C) a “silent majority” may go along with ideas they otherwise might not have believed
D) how well communication works depends on nonparticipation of a huge majority

18) Professor Everett Rogers predicted the unprecedented ________________ of the Internet as a communications vehicle that spans cultures and geographies.
A) constructivism
B) coordinated management of meaning
C) diffusion
D) convergence

19) Which of the following is true about public relations models introduced by Grunig & Hunt?
A) the press agent/publicity model focuses on two-way communication.
B) the public information model focuses on two-way communication.
C) the asymmetric and symmetric models focus on one-way communication.
D) the asymmetric and symmetric models focus on two-way communication.

20) Constructivism suggests that knowledge is constructed. Which of the following statements is NOT true under constructivism?
A) the cognitive process that precedes communication is more important than the communication
B) it is important to have knowledge of the receiver and his or her beliefs
C) the sender should transmit or dispense information and expect receivers to act on it
D) the sender should challenge preconceived notions to convert audience members by altering their views.

21) Which of the following describes the coordinated management of meaning theory?
A) communication is the simple transmission of ideas
B) communication is a complex, interconnected series of events with each participant affected by the other
C) communication is beamed one-way from a source to a receiver with the express intention of winning favorable media attention
D) communication is propaganda that is used to inform the receivers

22) The study of what words really mean is called
A) dictionation.
B) semantics.
C) transmission.
D) adaptation.

23) Public relations professionals who encode a client’s message must understand
A) the significance of words on the message conveyed to the ultimate receiver.
B) words and phrases quickly change meaning and drop out of favor.
C) the true meaning of words that make up the message.
D) all of the above.

24) The “content is the message”
A) says the content is most important.
B) says the medium chosen to convey the message is more important than the content of the message or the person delivering the message.
C) is associated with the communication theorist Marshall McLuhan.
D) says the speaker’s words, face, body, eyes, attitude, timing, wit and presence form a composite that influences the listener.

25) The “medium is the message”
A) says the content is most important.
B) says the medium chosen to convey the message is more important than the content of the message or the person delivering the message.
C) is associated with the communication theorist Elmo Roper.
D) is why public relations people insist on accuracy and truthfulness.

26) Believing the smooth, confident speaking style of Barack Obama helped him win the presidency is acknowledgement of the theory that
A) the “medium is the message.”
B) the “content is the message.”
C) the “person is the message.”
D) “political correctness is the message.”

27) How a receiver decodes a message depends greatly on the receiver’s
A) precognitions, predilections and perceptions.
B) use of social media.
C) charisma.
D) credibility.

28) In decoding, which of the following does NOT influence translation of a message?
A) stereotypes
B) semantics
C) symbols
D) symmetry

29) When the media use terms, such as Gen-Xers, policy wonks, bankers, and feminist, they are resorting to using
A) semantics.
B) stereotypes.
C) peer pressure.
D) symbols.

30) Andy picked up a brochure at the checkout counter in a sporting goods store because the cover had what appeared to be a logo for his favorite team. Upon a closer look, he realized the logo was for a team in a different sport, a sport he did not follow. He interpreted the message incorrectly because of
A) a stereotype.
B) a symbol.
C) peer pressure.
D) media.

31) The two basic assumptions that underlie most research on ____________________ include: (1) the press and the media do not reflect reality; they filter and shape it; and (2) media concentration on a few issues and subjects leads the public to perceive those issues as more important than other issues.
A) agenda setting
B) trend setting
C) peer pressure
D) media

32) Feedback is critical to communication because from it
A) the source can learn whether a receiver understands a message.
B) the receiver can learn how to avoid future messages.
C) the source learns how to avoid messages from the receiver.
D) the source and the receiver learn what type noise to include in a message

33) Which of the following occurs if a message is clearly understood?
A) A public changes its attitude.
B) A public does nothing.
C) A public crystallizes its attitude.
D) Any of the above.

34) Rajiv kept forgetting to e-mail his family back home, even though he felt he should when he was on his computer every evening. Finally, his wife scanned in a photograph of his mother and father. Now, the photo will pop up every time he boots up. The first time Rajiv sees the photo, he goes right to his e-mail and sends his folks a quick message. The photo
A) created a wedge of doubt.
B) crystallized an attitude.
C) changed an attitude.
D) did nothing.

35) The professor listened to the student’s explanation why the paper was late. The student claimed that the campus-wide computer system crashed overnight. Upon checking, the professor confirmed what the student had said, illustrating that a message initially
A) can create a wedge of doubt.
B) can change an attitude.
C) may do nothing.
D) motivates someone to take a desired action.

36) Public relations practitioners’ knowledge, training, and ability to communicate well should set them apart from other employees in an organization.

37) Planned communication requires a goal, objective, and purpose.

38) To achieve the various goals associated with communication, Pat Jackson emphasized the need to have an integrated, strategically planned approach.

39) The only communication goal in public relations is to inform.

40) The two-step flow theory in communication credited the mass media with being the dominant influence on public opinion.

41) Pollster Elmo Roper developed the concentric-circle theory of communication.

42) How communication is used for direction and control is called cybernetics.

43) From the S-E-M-D-R communication process, practitioners should realize the critical role encoding and decoding have in their efforts to communicate a message to a public.

44) To understand semantics, you should know the difference between words that connote and words that denote.

45) The proponent most often associated with the “medium of the message” is Fraser Seitel.

46) Charisma is a key component that helps give credence to the idea that “the person is the message.”

47) Stereotyping, symbols, semantics, peer groups, and the media influence personal biases.

48) Most people are susceptible to stereotypes, which can influence communication.

49) If used properly, symbols can effectively help persuade.

50) If a word you choose in a presentation has a contrasting meaning for different people in the audience, your problem is one of semantics.

51) You’re communicating even when there is no receiver who might hear and understand your message.

52) Communication that changes attitudes is very difficult to achieve and rarely occurs.

53) Amount of sales, number of letters to editors, or number of votes obtained are ways to determine whether communication objectives have been met.

54) Describe why knowing about and how to communicate is critical for public relation practitioners.

55) List the typical goals public relations professionals see for communication.

56) Define and discuss what semantics is and how it can affect a message.

57) Communication theorists say there are explanations for what constitutes a message. Name the most popular and describe them.

58) Name and describe three factors that nurture personal biases.

59. Name four different effects that may occur is communication is clearly understood.

Chapter 4 Public Opinion

1) Which of the following does NOT describe public opinion?
A) elusive and fragile
B) combustible and changing
C) fleeting and vulnerable
D) staid and immutable

2) As a general rule, those who examine public opinion recognize that
A) it is easy to move people toward a strong opinion.
B) it is difficult to move people toward a strong opinion.
C) it is easy to move people toward a weak opinion.
D) it is difficult to move them away from a weak opinion.

3) Which is NOT a description of public opinion?
A) a term describing an ill-defined, mercurial and changeable group of individual judgments
B) not the name of something, but the classification of a number of somethings
C) the aggregate of many individual opinions on a particular issue that affects a group of people
D) trying to influence what an individual thinks about a topic

4) Which of the following does NOT describe public opinion?
A) a predisposition to think a particular way about a particular topic
B) the aggregate of many individual opinions on a particular subject that affects a group of people
C) a representative consensus
D) expression of an attitude on a particular subject

5) The primary focus of the practice of public relations is:
A) trying to influence an individual’s attitude – how he or she thinks on a given topic
B) tracking public opinion
C) burning incense to the unknown god of public opinion
D) detecting vulnerabilities of culture driven by media, fueled by the Internet and dominated by celebrity

6) For a long time, scholars believed attitudes were
A) actions people take based on an opinion.
B) predispositions to think a certain way about a certain topic.
C) judgments people make after people take action.
D) responses people have to strong opinions.

7) Research indicates that an attitude is likely
A) a bias toward something.
B) an evaluation made about a specific problem or issue.
C) a bias against something.
D) an aggregate opinion.

8) Experiences that influence attitudes include
A) religion.
B) social class.
C) educational.
D) all of the above

9) If your parents have owned only SUVs since you can recall, when you go to purchase your first vehicle as a new parent, it is likely that you will first consider buying an SUV because your attitude has been influenced most by the ________ characteristic.
A) cultural
B) familial
C) personal
D) race

10) Former Vice President Spiro T. Agnew called ________ the “silent majority.”
A) people who are strongly committed
B) people who are strongly uncommitted
C) people who are in the middle
D) people who have cognitive dissonance

11) We credit ________ with developing the theory of cognitive dissonance.
A) Leon Festinger
B) Harwood Childs
C) Joseph Kraft
D) Herman C. Boyle

12) The theory of cognitive dissonance indicates that people
A) tend to seek information contrary to their opinions.
B) tend to seek information that supports their points of view.
C) tend to avoid information that crystallizes their points of view.
D) tend to avoid information that reinforces their opinions.

13) Social judgment theory suggests
A) people don’t have a range of opinions on a specific topic.
B) people have a range of opinions on a specific topic that is not anchored by a clear attitude.
C) people don’t have a “latitude of acceptance” within which they may change their opinion.
D) people have a “latitude of acceptance” within which they may change their opinion.

14) Persuading a person to move from a latent state of attitude formation to a more aware state and, finally, to an active state is a matter of ________.
A) personality
B) dissonance
C) motivation
D) chance
15) In the hierarchy of needs theory, the second level focuses on
A) love needs.
B) self-aggrandizement.
C) self-actualization.
D) safety needs.

16) “Being all you can be” is what Abraham Maslow would likely describe as fulfilling the ________ need.
A) self-actualization
B) self-esteem
C) safety
D) physiological

17) The ________ model tackles what motivates people to change their attitude..
A) cognitive consonance
B) persuasion
C) elaboration likelihood
D) “muddled middle”

18) Classic persuasion theory indicates that a person who carefully considers an argument alertly, actively, and creatively is
A) in a heuristic mode.
B) in a cognitive dissonant mode.
C) in a systematic mode.
D) in a differentiation mode.

19) From classic persuasion theory, we learn that a person who skims the surface and doesn’t focus on the intricacies of an argument is
A) in a heuristic mode.
B) in a cognitive dissonant mode.
C) in a systematic mode.
D) In a differentiation mode.

20) Which of the following is NOT one of the types of “evidence” that will persuade?
A) facts
B) emotions
C) personalizing
D) activity

20) Which of the “Laws of Public Opinion” is described by the following: “Events of unusual magnitude are likely to swing public opinion temporarily from one extreme to another. Opinion doesn’t become stabilized until the implications of events are seen in some perspective.”
A) Opinion is highly sensitive to important events
B) Opinion is generally determined more by events than by words – unless those words are themselves interpreted as an event
C) At critical times, people become more sensitive to the adequacy of their leadership. If they have confidence it in, they are willing to assign more than usual responsibility to it; if they lack confidence in it, they are less tolerant than usual.
D) Once self-interest is involved, opinions are slow to change.

21) A President trying to gain support for an assault on terrorism would likely use an ________ appeal.
A) economic
B) efficient
C) emotional
D) evidential

22) Using your experiences, especially when they reflect how you’ve overcome obstacles, is an appeal based largely on
A) logic.
B) personalizing.
C) incontrovertible facts and statistics.
D) the “you” factor.

23) The so-called “Laws of Public Opinion” were developed by
A) Hadley Cantrill.
B) Harwood Childs.
C) Abraham Maslow.
D) Leon Festinger.

24) Among the “Laws of Public Opinion,” one places emphasis on
A) the power of words alone.
B) the power of hardheaded common sense.
C) the power of unusual events to create stable opinions in the moment they occur.
D) the power of methods to achieve goals.

25) What was one of the reasons Occupy Wall Street had mixed results?
A) quickly issuing news releases about too many issues
B) partnerships with local residents and merchants
C) people were unaware of their slogan, “the other 99 percent”
D) they were not concerned enough about publicity

26) Which of the following is NOT true regarding what organizations have come to realize?
A) Improving their image often means operating without implicit trust of the public.
B) A favorable image can disappear in an instant when there are negative perceptions about the organization.
C) Touting good works is critically important.
D) Improving their image means operating with implicit trust of the public.

27) Apple, Google, and The Coca-Cola Company have
A) been vilified for ignoring their social responsibilities.
B) been exonerated for telling the truth to the media.
C) been judged to have the highest reputation among 60 well-known companies.
D) been role models for knowing how to present financial information.

28) ________ aligns communications with an organization’s character and action.
A) Litigation publicity
B) Reputation management
C) Systematic argumentation
D) Relationship management

29) ________ is a front-line responsibility of public relations.
A) Litigation publicity
B) Motivation management
C) Reputation management
D) Heuristic argumentation

30) Which of the following is NOT a prediction made by futurist John Naisbitt?
A) There will be shift from public housing to more home ownership.
B) There will be a downward trend in population growth in Asia.
C) Inflation and interest rates will be held in check.
D) There will be a shift from welfare to workfare.

31) Positive public opinion about high-profile people diminishes when their words don’t align with their actions.

32) Generally, it’s easy to move people toward a strong opinion on almost anything.

33) If an opinion becomes strong enough, it can lead people to behavioral or verbal actions.

34) Public opinion is the aggregate of many individual opinions on a particular issue that affects a group of people.

35) Research suggests attitudes may more likely be evaluations people make about specific problems or issues.

36) Social class is no longer a major characteristic in the U.S.A. that influences attitudes.

37) On a given issue, the “muddled middle” is either positive, nonexistent, or negative.

38) On a political issue, people may be strongly for, strongly against, passive, neutral, or indifferent toward it.

39) Based on the theory that Leon Festinger developed in a campaign, individuals likely would seek information that supports their own points of view.

40) According to social judgment theory, people may have a range of opinions on a certain subject, anchored by a clear attitude.

41) Abraham Maslow developed a theory that indicates each of us is moved by different drives and needs.

42) According to the elaboration likelihood model of motivation, if we’re interested and focused enough on a message, we take a “peripheral” route to a decision.

43) Persuasion can include advising, reasoning, and even arm-twisting.

44) The goal of most public relations efforts is to influence people to take a desired action regardless of whether they are “systematic” or “heuristic” thinkers.

45) Business leaders are quite comfortable using emotion in attempts to persuade.

46) Words have more influence on opinions than events.

47) People in a society that provides educational opportunities and easy access to information develop “hardheaded commonsense.”

48) Most organizations today and the people who manage them have adopted the philosophy “The public be damned!”

49) Public opinion can seriously affect the success of enormous, well-established organizations when the public decides they or their executives have violated the public’s trust.

50) During the past decade, both managing relationships and reputations have become front-line responsibilities of public relations.

51) Why must public relations professionals understand public opinion?

52) Based on Hadley Cantril’s “Laws of Public Opinion,” explain the role of events in helping to form opinions.

53) Discuss the importance of image to an organization.

54) What is relationship management and why is it so important?

Chapter 5 Management

1) Which of the following CEO responsibilities does NOT correspond with those of public relations professionals?
A) sets overarching strategy and policies
B) boosts the reputation of the organization
C) focuses on developing key messages to be communicated to various publics
D) defends reputation of the organization

2) Similar to other top-level managers, public relations managers need to
A) plan
B) budget
C) set objectives
D) all of the above

3) Which of the following is NOT a “coveted ability” in the practice of public relations?
A) to be glib
B) to plan methodically
C) to think “on your feet”
D) to think strategically

4) The “boundary role”
A) is an example of an upper management theory.
B) shows how public relations practitioners have one foot inside and one foot outside the organization.
C) does not show how important the public relations function can be in building relationships inside and outside an organization.
D) does not show how public relations practitioners have one foot inside and one foot outside the organization.

5) Professors James Grunig and Todd Hunt said public relations practitioners perform what organizational theorists call a(n) ________ role.
A) communications
B) strategic
C) boundary
D) environmental

6) To truly be the “interpreter” for management philosophy, policy and programs, who should the public relations director report to?
A) The Chief Marketing Officer
B) The Chief Executive Officer
C) The Chief Operating Officer
D) The Chief Financial Officer

7) If public relations is to be the “interpreter” for management philosophy, policy, and programs, then the director for the function should report to the
A) vice-president of human relations.
B) vice-president of philanthropy.
C) CEO.
D) vice-president of marketing.

8) For public relations to be the “conscience of the corporation,” practitioners must
A) have enough autonomy to deal openly and honestly with management.
B) have a CEO like Dave Dinesan.
C) ignore goals and objectives of advertising and marketing managers.
D) put the demand on advertising and marketing managers to promote a product that ignores demands of publics to act in a socially responsible way.

9) Which of the following dictates overall business objectives?
A) the broad environment in which the business operates
B) public relations strategies
C) public relations programs
D) marketing and advertising strategies

10) Which of the following dictates public relations objectives and strategies?
A) public relations programs
B) the broad environment in which the business operates
C) the overall objectives of the business
D) the advertising and marketing strategies above all else

11) For the public relations function to be equal in stature to other management functions, which of the following is essential?
A) knowledge of budget planning
B) commitment to set realizable objectives
C) control of a multi-million dollar budget
D) acceptance of accountability

12) Among the most essential steps in the public relations management process is
A) the ability to set overall organizational objectives.
B) the ability to set overall organizational strategies.
C) the ability to define a public relations problem or an opportunity.
D) the ability to research overall organizational problems.

13) The section of a public relations plan that provides an overview is referred to as
A) the management briefing.
B) the executive summary.
C) the situation analysis.
D) the message statement.

14) Which of the following would NOT be in a four-part skeleton of a typical public relations plan?
A) admission standards
B) situation analysis
C) proposal
D) implementation

15) Planning for a public relations program is important, but principally a program is assessed in terms of its
A) publicity value and practice.
B) performance and publicity value.
C) actions and performance.
D) programming and publicity value.

16) Procedures for implementing MBO programs differ in all of the following ways EXCEPT
A) conferring between subordinates and superiors in order to agree on achievable goals
B) determining the operational budget in order to achieve organizational objectives.
C) assessing periodically the progress toward achieving goals
D) specifying the organization’s goals using objectives that measure the organization’s performance

17) For agencies, budgeting relies on which of the following?
A) estimating extent of management expectations
B) estimating extent of cost and availability of resources
C) estimating the response from staff members
D) estimating its impact on the targeted publics

18) Key steps in budgeting do NOT involve which of the following?
A) estimating cost and availability of personnel needed to achieve each required activity
B) estimating cost and availability of purchases to achieve each required activity
C) estimating the extent of necessary resources essential to achieving objectives
D) allowing for open bidding

19) When an agency pays in advance for larger expense items like printing, photography, graphics and design, it is standard industry practice to markup such expenses by a factor of approximately
A) 12.5%
B) 15%
C) 17.65%
D) 19%

20) Most agencies frown on pay-for-performance contracts because
A) it is difficult to measure the depth of coverage
B) there are no guarantees that their efforts will be successful
C) it is difficult to measure circulation or audience rating of the venue
D) it is harder to charge a retainer and bill for staff time than it is to waive fees if no coverage is achieved

21) The overriding rule when it comes to agency budgeting is to
A) keep confidential the exact price of services.
B) keep billing the clients until they pay, or charge them a premium of 2 percent.
C) keep only the vendors who agree to provide you a percent of the billable expense.
D) keep the client aware of how charges are being applied.

22) Which of the following is NOT among the broad categories of tasks performed by public relations professionals?
A) providing communication services to external and internal audiences
B) identifying and analyzing public issues
C) setting corporate policy
D) coordinating graphic services and web design

23) Which of the following are among various internal communication duties performed by public relations professionals?
A) coordinating relationships with media for news coverage
B) reaching personnel through the intranet, newsletters, and meetings to explain company policies and benefits
C) coordinating relationships with outside specialty groups such as graphic services
D) coordinating activities with regulatory agencies concerned about employee safety

24) Among various public relations duties, which of the following would likely be done by investor relations people?
A) maintaining contact with security analysts
B) supporting activities with customers and potential customers
C) coordinating relationships with suppliers
D) contacting member of legislature to lobby for better health care insurance policies

25) Among various duties, which of the following would likely be done by public affairs people?
A) coordinating relationships with suppliers
B) managing gift-giving policies
C) coordinating activities with legislators on local, state, and federal levels
D) supporting activities to convince prospective customers to try the organization’s products

26) PERT and Gantt are tools that can help public relations practitioners use to
A) visualize tasks to be performed in a campaign or project.
B) designate who’s responsible for each task in a campaign.
C) chart costs of various tasks.
D) determine whether all goals and objectives are being met.

27) Public relations professionals who support the primary business of the organization are in ________ positions.
A) management
B) staff
C) line
D) supervisory

28) Today, about ________ of the practitioners in corporate public relations departments report to the chairman, president, and/or CEO.
A) 10 percent
B) 25 percent
C) 50 percent
D) 75 percent

29) Agencies can be characterized as having which of the following?
A) an outside looking-in perspective
B) an inside looking-out perspective
C) a tunnel vision perspective
D) a mindfulness perspective

30) Advantages agencies often have over in-house public relations talent include
A) their detached, inside-out focus.
B) the higher regard management has for them over inside practitioners.
C) their familiarity with the culture of an organization.
D) their opportunity to stay above the politics of the organization.

31) Agencies generally organize based on
A) amount the client is willing to pay
B) industry functions
C) resource management
D) synergies with advertising agencies

32) Which of the following is NOT an objective of reputation management?
A) persuading publics to support an organization when it is attacked
B) persuading consumers to buy and recommend that others buy an organization’s services, products, and policies
C) persuading competent job seekers to enlist others as employees
D) persuading competent job seekers to become employees

33) Public relations counseling opportunities are likely to grow in which of the following nonprofit areas?
A) child-protective services
B) law enforcement agencies, particularly city police departments
C) hospitals, educational institutions, and museums
D) high-tech think tanks

34) According to a 2010 report by the U.S. Bureau of Labor Statistics, annual “median annual salary” in major categories of public relations
A) stayed about the same as in a previous survey.
B) ranged from about $75,000 to under $120,000.
C) increased about 35 percent over what was recorded in a previous survey.
D) were best in Victoria, Texas; San Jose, California; and Washington, D.C..

35) According to a 2012 survey of 148 “chief communications officers (CCO)”, which of the following is true today about the salaries of senior-most communication executives at Fortune 500 companies?
A) The percentage of people from diverse cultures in the population are employed at about the same percentage figure in the public relations field.
B) Two-thirds of those polled earned $175,000 and $349,000 a year.
C) Fewer women than men are entering the field.
D) The number of men enrolled in public relations programs in higher learning institutions continues to increase at a higher rate now than in the 1990s.

36) PRSA’s “2010 Work, Life & Gender Survey” indicated that the average income for men in public relations was about $120,000, while the figure for women was about ________________.
A) $50,000
B) $72,000
C) $89,000
D) $122,000

37) The goal of staff public relations professionals working inside an organization is different than the goal of professionals working in a public relations agency.

38) Quick response to crises is important, but the ability to think strategically and to plan are just as important in the practice of public relations.

39) Grunig and Hunt developed the “boundary role” that helps explain key functions public relations people perform inside and outside an organization.

40) When a public relations department reports to the director of marketing or advertising, the department’s focus is still on the entire organization and not just on promoting or selling a particular product or service.

41) If one of the functions of public relations is that of “interpreter” for management policies and programs, in order to perform that function effectively, the public relations director ought to report to the CEO.

42) In order to fulfill the role of corporate conscience, public relations professionals should have enough autonomy to deal honestly and openly with management.

43) The overriding charge of the public relations function is to enhance an organization’s credibility by ensuring that corporate actions are in the public interest.

44) Overall business objectives should not dictate specific public relations objectives and strategies.

45) To at least have equal stature to other management processes, public relations practitioners should set objectives, formulate strategies and plan for effectiveness.

46) A comprehensive public relations plan clearly states tactics against which objectives can be measured and evaluated.

47) Regardless of how important planning a public relations campaign is, the public relations function is assessed primarily in terms of actions, performance, and practice.

48) One way to think about objectives is that they are to goals what tactics are to strategy.

49) Gilbert Gottfried was fired as a spokesperson for Aflac insurance company after he made jokes about September 11th.

50) Administrative budgeting appears to be the rule in public relations agencies.

51) Pay-for-performance budgeting means clients, for example, pay just for what is delivered in terms of depth of media coverage and the audience rating or circulation of the media..

52) The range of duties and responsibilities for practitioners is as diverse as the different publics and institutions with whom it deals.

53) Planning, coordinating, and staffing open houses, tours, and volunteer efforts traditionally fall in the realm of community relations.

54) PERT and Gantt were an agency which discovered the value of visualization in setting budgets.

55) Typically, public relations professionals either work in a staff or line position.

56) In a government organization, subordinates in the equivalent of what a non-governmental organization would call a public relations department typically report to the secretary of that government agency.

57) Omnicom, Weber-Shandwick Worldwide, and Burson-Marsteller are among the largest communications holding companies that have bought up some of the world’s largest public relations firms since 1990.

58) A major criticism leveled at an outside public relations agency versus an organization’s internal department is that an agency typically suffers from “tunnel vision” and will often have a difficult time presenting management with an objective viewpoint.

59) In recent years, the most difficult part of public relations work has shifted from retaining clients to attracting clients.

60) While reputation management has been declared a new approach to public relations, in truth, for about a century that has been the mandate of most public relations professionals.

61) One of the public relations skills that is likely to be in demand is in the employee communications area because so many organizations have broken promises made to their personnel.

62) Specialists in reputation management and crisis management earn high salaries.

63) The profession continues to do an outstanding job to recruit and hire people who are African American, Hispanic, or Asian and to pay them and women as much as their male Caucasian counterparts.

64) Elaborate on the knowledge and skills public relations practitioners need to qualify them as members of management.

65) Describe and discuss the “boundary role” theory of public relations management.

66) The skeleton for a typical public relations campaign plan requires the practitioner to address essential elements. Note at least four and explain what they are about.

67) Discuss the type of budgeting approach typically followed by most corporate public relations departments and the key steps to effective, efficient budgeting.

Chapter 6 Ethics

1) Which of the following is at the heart of the ethical practice of public relations?
A) brokering agreements with media to refrain from reporting news
B) stonewalling when it is in the best interest of a client
C) doing the right thing
D) avoiding telling the truth

2) The cardinal rule of public relations is
A) to lie when it is in the best interest of the client.
B) to write a tell-all book revealing why your CEO lied.
C) to seek special media coverage based on revealing “confidential” information.
D) to never lie.

3) Which of the following is NOT a factor in a person’s ethical construct and approach?
A) professional background
B) educational background
C) religious background
D) cultural background

4) Mill’s approach to ethics recommended
A) doing that which is between two extremes.
B) doing that which brings the greatest happiness for the greatest number.
C) doing that which could become accepted practice.
D) doing that which demonstrates loving your neighbor as yourself.

5) The “golden rule” prescribes
A) doing that which demonstrates loving your neighbor as yourself.
B) doing that which brings the greatest happiness for the greatest number.
C) doing that which does the least harm to the least number.
D) doing that which could become accepted practice.

6) The “golden mean” of moral virtue advocates
A) doing that which does the least harm to the greatest number.
B) doing that which brings the greatest happiness for the greatest number.
C) doing that which is found between two extremes.
D) doing that which you deem to be the societal standard.

7) Which of the following is NOT a basic value that the PRSA code of ethics addresses?
A) honesty
B) loyalty
C) fairness
D) authenticity

8) Professional ethics
A) is often called “applied ethics.”
B) suggests that distinctly different professional conduct is acceptable.
C) precludes the need for a formal code of ethics.
D) is another name for business ethics.

9) As the “conscience” of an organization, public relations practitioners
A) should advocate to divulge “everything” about the organizations for which they work.
B) should remember to ask, “Are we doing the right thing?”
C) should advocate to impose rigorous regulations against corporate criminals.
D) should ignore criticism that business ethics are non-existent.

10) Which of the following does NOT appear to apply to the state of ethics in business?
A) summer 2012 was characterized as a “summer of shame”
B) doing what is in the best long-term interest of the organization
C) confidence in business has deteriorated
D) is a classic oxymoron

11) A 2011 survey by the Ethics Resource Center found that although employees seemed more ethical in their own jobs
A) only 2 percent said CEOs were “very trustworthy.”
B) about two thirds said wrongdoing was not widespread in industry.
C) one-third of U.S. employees said their own managers “didn’t exercise ethical behavior”
D) about half said CEOs deserve what others may call “exorbitant” compensation.

12) Which of the following is a reason to have a corporate code of ethics?
A) to avoid having to respond to media inquiries about transgressions
B) to increase profits for publicly-owned businesses
C) to increase public confidence
D) to influence legislators to pass more up-to-date reform bills

13) Who said that “an organization is the lengthened shadow of a …” person?
A) Kenneth Lay
B) Ralph Waldo Emerson
C) Martha Stewart
D) Henry Paulson

14) The essence of corporate social responsibility is
A) to increase profitability so the tax rate can be lowered.
B) to manage business processes so there is a positive impact on society.
C) to act only if it is worth the time to enhance the social image of an organization.
D) to avoid having to respond to being asked about transgressions.

15) Which of the following would NOT be a socially responsible activity of a business?
A) providing a healthy and safe working environment
B) avoiding discrimination in hiring, promoting, and retaining the best people available
C) ignoring outlandish claims about “global warming” by delivering ergonomically correct products and services
D) manufacturing safe products that perform well and do not negatively impact the environment

16) Which of the following indicates the degree to which an organization is socially responsible?
A) adhering to standards for a safe, clean environment
B) following social investing advice suggested only by certified financial planners
C) supporting not-for-profit organizations that advocate only foreign investments
D) making efforts to hire only people who have been underrepresented in your organization

17) Which of the following is NOT identified as part of being socially responsible?
A) providing opportunities for physically challenged people
B) establishing work/life standards
C) practicing fair pricing
D) practicing cooperative government relations

18) An organization’s social responsibility image is often determined by
A) its desire to earn a profit above all else.
B) its focus on being the number one patron of the arts.
C) its attention to be ethical and to improve the quality of life for people.
D) its focus on looking good rather than doing the right thing.

19) Which of the following is NOT true about the state of ethics in government?
A) repeated instances of conflicts of interest
B) a record two years, from 2006-2008, when no politicians were exposed for unethical practices
C) questions about former Vice President Dick Cheney’s connections to energy corporations
D) polls indicating “low trust” of Congress

20) If journalists were to follow the Code of Ethics published by the Society of Professional Journalists, they would
A) fulfill their readers’ morbid curiosity for details about people with various addictions.
B) fight for the right to publish unofficial charges affecting a person’s reputation or moral character.
C) guard against invading a person’s right to privacy.
D) reveal everything about officials accused of malpractices without giving them a chance to rebut.

21) Standards of practice in the SPJ Code of Ethics for journalists include everything EXCEPT
A) concern for anonymity.
B) concern for objectivity.
C) concern for fairness.
D) concern for accuracy.

22) What impacts the ethical state of electronic journalism?
A) respect for the well-being of persons reported on
B) drive to quickly announce information rather than to accurately report news
C) devotion to balanced, fair reporting
D) drive to avoid playing hardball just for ratings

23) Which of the following is NOT an indication of the sorry state of ethical practices in TV reporting?
A) curious criticism by The New York Times for Judith Miller’s “cozy” relationship with news sources at the White House
B) network news organizations paying news sources
C) coverage of national issues that intensify the heat but shed little light
D) late-night comedians’ ability to land newsworthy people whom TV journalists can’t

24) Which of the following is a characteristic of the attorney/adversary model of ethics?
A) the only obligation of practitioners is to do what is in the public interest
B) the emphasis on collaboration regardless of the record of other parties
C) there is an obligation to consider any outside view beyond that of a client
D) recognizes the advocacy perspective in adversarial climates

25) The two-way communication model for ethics
A) was developed by Barney and Black.
B) was developed by Hunt.
C) is based on collaboration and allows for listening and give-and-take.
D) assumes counterbalancing messages will be provided by the sender and receiver.

26) The enlightened self-interest model for ethical practice is based on the principle of
A) balancing the role of department advocate with the needs of the organization.
B) realizing that an organization does well by doing good.
C) advocating for society is more important than advocating for the organization.
D) assuming counterbalancing messages are in the best interest of an organization.

27) The responsible advocacy model of ethics
A) is not based on ideals of professional responsibility.
B) fails to reconcile the the practitioner’s role of being the “interpreter” with the role of being the “social conscience.”
C) states that practitioners’ first loyalty may be to stockholders, but they also must voice opinions of the organization.
D) was developed by Kathy Fitzpatrick and Candace Gauthier.

28) Which of the various ethical models in your text does PRSA endorse?
A) responsible advocacy
B) attorney/adversary
C) enlightened self-interest
D) two-way communication

29) Which ethical core value would practitioners demonstrate if they sought information even for a rude reporter?
A) honesty
B) fairness
C) expertise
D) loyalty

30) Which core value do professionals demonstrate when they reason against “rock-headed” policy ideas presented by, for example, human resources personnel on behalf of the CEO?
A) fairness
B) advocacy
C) independence
D) honesty

31) Walmart cut its ties with Mercury Public Relations after a junior staff member at the L.A. public relations firm showed up at an anti-Walmart union news conference, posing as a reporter.

32) The deontological approach to ethics means doing what is proper even if the world might perish.

33) Ethical scandals continue to occur in fields from government to business to education to public relations.

34) Aristotle said that the golden rule of moral virtue is found between two extremes.

35) Following utilitarianism means considering the “greater good” rather than what may be best for the individual.

36) The code of conduct for the Public Relations Society of America indicates that honesty and fairness are at the heart of the practice of public relations.

37) By posing the critical question “Are we doing the right thing?” to management, public relations practitioners become the “conscience” of an organization.

38) The bottom line for public relations professionals is to counsel and do what is in the long-term best interest of an organization.

39) CEOs in handcuffs and others exiting mismanaged businesses but with exorbitant payouts have spoiled the ethical landscape of business in the early 21st century.

40) A corporate code of conduct formally states the values and business practices to be followed by employees and agents of an organization.

41) Reasons corporations have adopted codes of conduct range from trying to increase public confidence to having a means to respond to transgressions.

42) A socially responsible organization strives to deliver quality products and services that have a positive impact on society.

43) Republican and Democratic Congressmen and governors are among the poster boys for the “sleaze factor in government”.

44) At the heart of the Code of Ethics for the Society of Professional Journalists is demonstration of respect for the dignity, privacy, rights, and well-being of people whom they encounter while seeking and presenting news.

45) Among newspapers that have been embarrassed by plagiarism are the Washington Post, Boston Globe, and even the New York Times.

46) Jim Grunig created the enlightened self-interest model for ethical behavior in public relations to advocate that for business to do well, it must do good.

47) The responsible advocacy model for ethical behavior advocates practitioners must remember their first loyalty is to stakeholders, but they must also voice the perspectives of their clients.

48) From the new PRSA code of ethics, we realize that advocacy means protecting the confidentiality of client information unless the client advises otherwise.

49) Among the great challenges in the 21st century for the public relations profession is to alter the mind set that public relations specialists are not “transparent.”

50) After examining various breaches in ethical conduct in business, government, media, and in the practice of public relations, a fair conclusion is that responsibility for acting ethically rests ultimately on individuals not organizations.

51) Describe the classic schools of ethics that you typically follow as you go about your day-to-day business, indicating why that works for you.

52) Briefly describe what the Public Relations Society of America’s Member Code of Ethics introduced in 2000 is and some of its principles.

53) Discuss briefly the state of business ethics in recent times, including 2012, the “summer of shame”.

54) List and explain at least three challenges journalists working in various media face today.

55) Explain what encompasses the values of honesty and loyalty in the code of ethics developed and published in 2000 for members of the PRSA.

Chapter 7 The Law

1) How did Taco Bell respond to a lawsuit that claimed its taco mixture had more fiber than meat?
A) It ignored the claims and asked for a private hearing
B) It made a video thanking the people for suing them
C) They decreased the amount of fiber in their taco mixture
D) They sued Facebook and YouTube

2) How does advice to clients from lawyers differ from advice given clients by public relations practitioners?
A) Lawyers advise clients what they should do, within the letter of legal requirements, to defend themselves in the court of public opinion.
B) Public relations practitioners advise clients what they must do to defend themselves in a court of law.
C) Lawyers advise clients what they should do, within the letter of legal requirements, to defend themselves in a court of law.
D) Public relations practitioners advise clients what they should do to defend themselves in the court of public opinion.

3) Which principle established in the U.S. Constitution often leads to conflicts between lawyers and public relations practitioners?
A) freedom to own firearms
B) freedom of speech
C) freedom to own property
D) freedom to use the employer’s Internet connection

4) Careful analysis of law and ethics leads to the conclusion that
A) many illegal activities are also unethical.
B) ethics lays the foundation for laws.
C) lawyers are at heart ethicists.
D) legal advice and ethical advice are essentially the same.

5) Which of the following is NOT true about the First Amendment?
A) Discussions about law and public relations should start with it.
B) A court did not follow it in the Judith Miller case.
C) Public relations practitioners should disregard it as they go about their business.
D) Even the U.S. government must act responsibly under it.

6) One person’s definition of obscenity
A) may force the media to disregard deep-held beliefs.
B) may force a defendant to use “no comment” as a legitimate response to media inquiries.
C) may force courts to suppress information.
D) may force another person to claim there is a violation in freedom of expression.

7) In 2006, cartoons about the prophet Muhammad run by an obscure Danish newspaper were
A) for much of the Western world, a violation of the First amendment.
B) for much of the Western world, an example of “freedom of expression.”
C) for most Muslims, an example of public relations at its worst.
D) for most Muslims, an example of “freedom of expression.”

8) The umbrella term to describe slander and libel is
A) “freedom of expression.”
B) obscenity.
C) defamation.
D) tastelessness.

9) Which of the following may NOT constitute defamation of character in the U.S.?
A) A falsehood about someone is communicated through print, broadcast, or other electronic means.
B) Media libel or slander a celebrity who is identified, or who could easily be identified.
C) An ordinary citizen experiences injury – in the form of losses in money, reputation or mental stability – based on what was written or said.
D) Media libel or slander an ordinary citizen who is identified, or who could easily be identified.

10) The $50 million case of Israeli General Ariel Sharon against Time magazine
A) was about obscenity.
B) was a slander case challenging the right of people to bear arms.
C) was a case in which the jury felt Time was negligent but had not acted with “malice.”
D) was about a paper covering an attempt of a police officer to cover up what had transpired.

11) In the 21st century, with more and more cable and radio talk shows and hosts and guests saying what they want,
A) defamation has become more complex but less devastating.
B) defamation is less complex and more global.
C) defamation is more devastating and more complex.
D) defamation is no longer an issue.

12) Assume an employee is fired for committing an illegal act. The employer announces the cause for the firing in an accurately written e-mail. The court agrees the content of the e-mail is true; yet, it rules that the employee was libeled. The ruling challenges the long-standing belief that
A) written statements about people on behalf of the client are private.
B) be aware of the power of an e-mail.
C) the power of an e-mail should not doubted.
D) truth is a defense against libel.

13) A passerby filmed for the movie “Borat” sued the producer Sacha Baron Cohen for defamation, but lost because
A) ironic commentary can be a defense against alleged defamation.
B) proof of vulgarity can be used to win a defamation case.
C) freedom to mock an ordinary citizen is not a legitimate defense against alleged defamation.
D) ordinary citizens can win defamation suits against movie producers.

14) Every public company has an obligation to deal frankly, comprehensively, and immediately with any information that is considered ________ for a decision to buy, sell, or even hold the organization’s stock.
A) inside information
B) material
C) immaterial
D) a mandate

15) The overriding concern the SEC has is that
A) all companies have the right to know as soon as possible whether they will be hauled into court.
B) all public relations practitioners should be the first to receive material information.
C) all investors have an opportunity to learn about material information as promptly as possible.
D) management, then public relations practitioners, then other employee are guaranteed access to material information before outside investors.

16) To comply with the SEC’s overriding concern for investors, public relations practitioners
A) can trade on insider information in unusual circumstances.
B) can act only on public information when trading securities.
C) must be very selective in providing historic stock information to investors.
D) can provide material information to celebrities before the general public.

17) Which among the following did NOT force the SEC to reexamine and intensify its focus on disclosure?
A) realities of the “Great Depression” of the 21st century
B) extended securities trading times
C) instantaneous online trading
D) mergers, takeovers, and consolidations

18) The SEC in 2000 adopted Regulation FD that
A) is designed to increase selective disclosure.
B) requires companies to pull back on wide dissemination of any material announcement.
C) requires issuance of a news release within 48 hours of any information that may have slipped out to an analyst.
D) requires companies to widely disseminate any material announcement.

19) The Sarbanes-Oxley Act, passed in 2002,
A) has been well received by companies willing to communicate financial information.
B) bolstered Regulation FD.
C) nullified Regulation FD.
D) mandated that publicly traded companies make full financial disclosure by submitting a semi-annual report on the effectiveness of their internal accounting controls.

20) In 2012, Governor Nikki R. Haley of South Carolina was cleared of charges that she violated ethics rules when she
A) Spoke out against Casey Anthony
B) Lobbied on behalf of two businesses she worked for when she was a state representative
C) Perjured herself during lobbying activities
D) Conspired to bribe public officials

21) A body of law that is particularly relevant to public relations writers centers around
A) licensing.
B) professional accreditation.
C) copyright.
D) rules for timely disclosure.

22) According to the Copyright Act of 1976, an “original work of authorship” has protection from the moment the work is in which of the following “fixed forms”?
A) a musical work
B) antiques
C) a short slogan
D) a symbol

23) Under copyright laws, owners of copyright have the
A) exclusive right to determine fair use.
B) exclusive right to authorize what is fair use.
C) exclusive right to authorize others to prepare derivative works based on the copyrighted material.
D) exclusive right to reproduce and authorize others to reproduce their work.

24) A word, symbol, or slogan – used alone or in combination – to identify a product or sponsor is
A) protected under copyright law.
B) covered under trademark law.
C) not protected under trademark law.
D) eligible for copyright after 17 years.

25) When copyrighted material is used for purposes of criticism, news reporting, teaching, scholarship, and research, that constitutes
A) fair use.
B) infringement.
C) commissioned work.
D) publicity.

26) Understanding and following the letter of copyright laws is critical to practitioners, especially in dealing with ______________________, because some of these professionals retain the right to copyright their work.
A) a printer
B) their employer
C) freelance writers
D) the Associated Press

27) A major premise in American law is that
A) all speech is created equal.
B) there is no degree of differences in types of speech.
C) all speech must be measured.
D) all speech is not created equal

28) Despite various efforts, in which of the following areas of speech and the Internet has legislation NOT been successful?
A) full disclosure
B) “indecent”speech
C) copyrighted music
D) e-fraud

29) A complex legal issue in Internet law is cybersquatting, which
A) is a technique used by Wendy’s to shakedown other fast-food vendors.
B) is a technique to grab domain names in bad faith.
C) is used to “shake down” illegal registrants of domain names.
D) is a technique that amazon.com introduced when it went online.

30) One type of e-fraud is “click fraud”, in which
A) an effort is made to register multiple clicks to get a higher search engine ranking.
B) companies strip logos or promise inheritances via email.
C) companies sue employees who anonymously post on blogs.
D) amazon.com sells more products.

31) Social media has introduced an issue with employee relations, which has increased the number of companies
A) encouraging employees to criticize the company on Facebook.
B) asking for access to social media to monitor activities.
C) deliberately using their social media policies to limit discussions about wages and unionization
D) refusing to discuss employment matters.

32) Litigation public relations is an outgrowth of all the media attention given to legal proceedings and requires intelligent use of acceptable, ethical public relations practices, including
A) developing a message strategy for use only at the beginning of a case.
B) advocating for lengthening the time a case is in court.
C) trying for settlement after the case is decided.
D) keeping a positive focus and battling “nicely” because the less combative, the better.

33) One of the ways supporters of people who are being prosecuted help influence public opinion is
A) setting up a blog to provide information to the public.
B) trying to make the litigation as invisible as possible.
C) come up with positive things to say about the prosecutor.
D) ignoring the internet and cable to focus on network television.

34) Public relations practitioners advise clients what they must do to defend themselves in the court of public opinion.

35) Normally, lawyers suggest that the less said by an organization prior to its day in court, the better.

36) While legal and public relations advice may differ, an effective manager today considers both before making a decision.

37) As the Kobe Bryant case demonstrated, when an organization or individual’s integrity is being challenged, there is value in going public early on.

38) Among the frontline responsibilities for public relations is defense of the First Amendment.

39) WikiLeaks worked with international newspapers to publish secret U.S. State Department diplomatic cables because, according to Julian Assange, the public had a right to know.

40) Laws regarding rights to privacy are similar for people in the limelight as they are for the ordinary citizen.

41) With growing numbers of blogs, podcasts, and cable and talk radio shows, the nature of defamation is more complex, more global.

42) Rule 10b-5 of the Securities and Exchange Act is an antifraud statute that, among many things, prohibits investor relations people from disseminating false information.

43) Regulation FD requires any publicly traded organization to widely disseminate any material announcement.

44) Whether or not writers register their manuscript with the Copyright Office or even publish, the law of copyright provides basic, automatic protection for writers.

44) Copyright laws cover a symbol or slogan, used alone or in combination, that identifies a product or its sponsor.

45) Under copyright laws, what constitutes “fair use” is not subject to interpretation..

46) The Supreme Court ruled in favor of the Child Online Protection Act of 1998 which made it a federal crime to “knowingly communicate” on the Internet “for commercial purposes material considered harmful to minors.”

47) Metallica, backed by large music companies, defeated Napster in its legal battle to allow users free exchange of music files via a central Internet server.

48) Cybersquatting and “click fraud” are just two examples of legal issues surrounding the World Wide Web.

49) Cybersquatting boils down to tormenting or “shaking down” rightful registrants of names for a Web domain.

50) Because of the proliferation of news coverage, especially over cable, it is more difficult for a jury to be objective in a high-profile legal case.

51) Knowledge of litigation public relations is essential for trial lawyers hoping to provide a client every advantage.

52) Why should public relations practitioners be aware of various laws?

53) Discuss and distinguish libel from slander as it pertains to ordinary citizens.

54) What are some regulations mandated by the Securities and Exchange Commission (SEC) that a practitioner should know?

55) Discuss Supreme Court rulings on censorship of material on the Internet targeted at persons under 18 years old.

56) Especially with the media incessantly jabbering, what have lawyers learned from public relations?

Chapter 8 Research

1) From plotting a political campaign to promoting a product to confronting a crisis, the first step in solving any public relations challenge is _____________________.
A) to conduct research
B) to plan a programmatic initiative
C) to go with your gut
D) to ask your team what their intuition is

2) Which of the following does NOT pertain to research?
A) what public relations programs should start with
B) a foundation for public relations solutions
C) what several four-step processes to solve problems start with
D) what budgeting for public relations ends with

3) If public relations practitioners expect to receive support from management for a proposed program, they should expect to share which of the following?
A) their intuition about the desired market segment
B) their instincts about the likes and dislikes of a target audience
C) their data that helps pinpoint which messages are most effective with targeted audiences
D) their positive attitude indicating a proposed message strategy will work

4) In professional work, research should be applied
A) only during the initial phase.
B) at all phases of a program.
C) only prior to programming.
D) only at the end.

5) The word research commonly conjures up methods, including all EXCEPT
A) interviews.
B) intuitive information.
C) test scores.
D) questionnaires.

6) Which of the following is NOT a guiding principle in setting standards for public relations research?
A) to distinguish short-term outcomes from long-term outputs
B) to use various evaluation techniques to determine effectiveness
C) to distinguish between public relations effectiveness and advertising effectiveness
D) to establish clear program objectives directly to business goals

7) Characteristics related to applied research include all of the following EXCEPT
A) to solve practical problems.
B) to develop message strategies.
C) to help build theories.
D) to determine whether a program has achieved its objectives.

8) From theoretical research in communications, we have learned that
A) the most persuasive communication comes from multiple sources of moderate credibility.
B) the most persuasive communication comes from multiple sources of high credibility.
C) the less complex a persuasive message is, the less credible it is.
D) the more complex a persuasive message is, the more credible it is.

9) Which of the following is NOT characteristic of secondary research?
A) It is very expensive.
B) It focuses on someone else’s primary research.
C) It is referred to as “desk research.”
D) It includes online databases.

10) Among the primary forms of public relations research, ________ tend to reveal differences in the ways management and target audiences view communications materials, media, messages, and methods.
A) surveys
B) communication audits
C) published company accounts
D) unobtrusive audits

11) Elements in a survey include
A) a sample.
B) a snapshot of a current condition.
C) an analysis of the hypothesis.
D) a cause and effect.

12) Which of the following is NOT a characteristic of a sample?
A) It can only be formal.
B) It ought to be representative of the total population.
C) It must be representative of the total public whose views are sought.
D) It must be scientific.

13) Two essential properties of a random sample are that
A) its selection must be formal and scientific.
B) its selection is based on equality and independence.
C) its selection must be unobtrusive and results-oriented.
D) its selection must be representative of the population and specific target audience.

14) Of the types of random sampling used, ________ sampling is a procedure that surveys different segments of the targeted population.
A) cluster
B) systemic random
C) stratified random
D) simple random

15) A type of random sample that journalists use to elicit ideas and points of views from persons on the street is a
A) convenience sample.
B) volunteer sample.
C) quota sample.
D) cluster sample.

16) Suggestions for an effective questionnaire include
A) avoid pre-testing.
B) ask loaded, double-barreled questions.
C) keep it short.
D) use only open-ended rather than closed-ended questions.

17) In public relations research, the most frequently used type of convenience sample is a
A) cluster sample.
B) quota sample.
C) stratified sample.
D) focus group.

5

18) Which of the following techniques does NOT help lead to a higher response rate for a questionnaire?
A) Attach a letter explaining how important the respondents’ answers are.
B) Avoid sending out reminders to respond.
C) Hand stamp rather than meter envelopes.
D) Send a follow-up reminder postcard three days after the original questionnaire.

19) Interviews are a type of
A) personal, firsthand research.
B) unobtrusive measure.
C) communications audit.
D) secondhand research.

20) Types of interviews include all of the following EXCEPT
A) focus groups.
B) Delphi panels.
C) communications audits.
D) drop-off.

21) Which of the following involves researchers delivering short questionnaires to people they approach in shopping malls or retail outlets?
A) Drop Off Interviews.
B) Delphi Panels.
C) Intercept Interviews.
D) Focus Groups.

22) Who provided research for an article in The New York Times titled “America’s 10 Most Sleep-Deprived Jobs”?
A) Home health aides
B) Sleepy’s mattress chain
C) Teachers
D) Lawyers

23) The type of interview where opinion leaders are asked repeated waves of questions is a
A) Delphi panel.
B) drop-off interview.
C) intercept interview.
D) telephone interview.

24) Which is NOT a problem to be considered in order to do a results analysis?
A) reliability
B) validity
C) the questionnaire
D) statistically significant margins of sampling error

25) A communications audit is designed to help an organization
A) determine the validity of findings from a telephone interview.
B) determine the reliability of findings from TV interviews.
C) determine communications needs, policies, practices, and capabilities.
D) determine the statistical significance of the margins of sampling error

26) Which of the following is a type of unobtrusive method of data collection?
A) content analysis
B) intercept interview
C) Delphi panel
D) Internet interview

27) Characteristics of evaluation do NOT include
A) using techniques that measure results against established objectives.
B) selecting outcomes randomly.
C) providing data that answers the “accountability questions.”
D) reinforcing promises made to management to secure their “buy-in.”

28) Which of the following are NOT among the four most common techniques to measure public relations outcomes?
A) retention and recall measurement
B) awareness and comprehension measurement
C) analysis and synthesis measurement
D) behavior measurements

29) In terms of consumer-generated media, Web analytics measure
A) costs per contact.
B) where visitors are from.
C) how often they move beyond the homepage.
D) what portions of sites are ignored.

30) Which of the following is NOT one of the targets for Search Engine Optimization?
A) image search
B) cost per click search
C) local search
D) video search

32) When Janice and her team answer questions like “Why are we on the Web?” and “What are we attempting to communicate?”, which factor associated with web research are they considering?
A) Establishing objectives
B) Determining criteria
C) Determining benchmarks
D) Selecting the right measurement tool

33) When Janice and her team project the hits the website will receive based on competitive data, which factor associated with web research are they considering?
A) Establishing objectives
B) Determining criteria
C) Determining benchmarks
D) Selecting the right measurement tool

34) To be certain public relations advice for management is headed in the right direction, it must be based on hard data.

35) Managements prefer public relations professionals demonstrate only how their efforts contribute to overall organizational goals rather than to the bottom line.

36) Research is the systematic collection and interpretation of information that increases understanding.

37) Credit for establishing guidelines for setting standards of research in the field of public relations goes to the Public Relations Society of America.

38) Applied research is neither strategic nor evaluative but instead is theoretical.

39) Theoretical research solves practical problems in public relations.

40) Because of limited budgets, secondary research makes sense when launching a research effort.

41) Content analysis and readability studies are among the unobtrusive research methods used by public relations practitioners.

42) Descriptive surveys are concerned with cause and effect.

43) Cross-sectional sampling is either random or nonrandom.

44) To increase the likelihood that a person responds to a questionnaire, attach a letter explaining how important the respondents’ answers are, plus let them know they will remain anonymous.

45) One of the least frequently used interview types in public relations is the focus group.

46) An intercept interview is a popular approach used to capture consumers’ attitudes, perceptions, preferences and behavior.

47) Copy testing is an obtrusive method of data collection.

48) “Outcome” evaluation includes measurement of messages received by target audiences.

49) The ultimate test of measuring the effectiveness of a public relations effort is attitude measurement.

50) Hits and eyeballs are the most popular terms discussed in assessing the impact of the Web for research.

51) Why is research even more important today to public relations practitioners than it was just a decade ago?

52) Describe and differentiate between output and outcome elements in public relations research.

53) What is a sample? What are the two cross-sectional approaches used, and how many people would you need to sample in a population of 500,000 to arrive at a 5 percent margin of error?

54) Describe a communications audit and explain how it is used.

55) What factors should a public relations firm take into consideration when preparing for Internet evaluation?

Chapter 9 Media Relations

1) Which of the following does NOT characterize News on the Internet?
A) More pervasive
B) Less intrusive
C) More accessible to the masses
D) More likely to cause problems for public relations professionals

2) Which of the following characterize the media that today’s public relations practitioners must deal with?
A) They have qualms about using anonymous sources.
B) They are less aggressive, less opinionated, less willing to throw themselves into story coverage.
C) They are aggressive, opinionated and throw themselves into story coverage.
D) They are truth-minded.

3) Before the 21st century, most public relations practitioners came from the world of
A) business.
B) politics.
C) journalism.
D) law.

4) Ari Fleischer, first press secretary to President George W. Bush, viewed the press as
A) having gone well beyond their role as devil’s advocate.
B) being so negative that they only look for “bad news.”
C) trying to fix “broken eggs.”
D) being concerned with “informing” the public about all the news.

5) In pursuing their “freedom” under the First Amendment,” media have increasingly done all the following EXCEPT
A) played “devils advocate.”
B) regularly challenged authority with pointed, nasty, even hostile questions.
C) avoided “breaking eggs” in their pursuit
D) independently ferreted out the truth.

6) Objectivity, a goal journalists presumably strive for and public relations practitioners should help media professionals achieve, is ideally
A) an attempt at pure and complete neutrality.
B) an attempt to be fair, to remain neutral.
C) an attempt to include enough biased notions so a story is believable.
D) an attempt to satisfy conservative critics of the so-called “liberal media.”

7) One Washington Post columnist blamed the American public for the fact that the relationship between the media and public relations people is comparable to that of bitter enemies, saying:
A) the public wants the truth
B) the public wants trash
C) the public wants friendly adversaries
D) the public wants reciprocity

8) Reasons why print media are an important medium for public relations professionals include
A) limited opportunities for original use of news releases on network and cable TV.
B) online databases, blogs and other Web-based media use organization-originate material destined for print usage.
C) many journalists at newspapers and magazines still use news releases.
D) all of the above.

9) Which of the following is NOT true about newspapers?
A) by the summer of 2012, print circulation was stabilizing and newspaper reading on the Internet climbed
B) They are sources of news for electronic news directors and bloggers.
C) About ten percent of the nation’s daily newspapers have implemented some form of paid digital content.
D) They attract about 66 million daily visitors to the Web.

10) In the United States, there are roughly ________ daily newspapers and ________ magazines.
A) 1,000; 10,000
B) 1,350; 21,000
C) 19,000; 1,500
D) 6,000; 15,000

11) Which of the following is NOT an accurate characterization of electronic media?
A) In the first decade of the 21st century, there was a dramatic increase in numbers of Americans turning to broadcast network newscasts.
B) On-demand viewing services resulted in a drop of daily cable watchers in 2010.
C) 24/7 cable news means Americans are being bombarded with televising of unrelated events.
D) Talk radio has become an enormous social and political force.

12) Among the factors the Internet has NOT added to complicate relationships between practitioners and journalists is
A) “new-age news sources.”
B) expansion of the online edition of many newspapers.
C) the collapse of longstanding standards and ascendancy of rumor mongering.
D) improvement in longstanding standards of objectivity.

13) Which of the following is good advice for public relations people who want to know how to deal effectively and ethically with people representing the various types of media?
A) Treat them first and foremost professionally.
B) Treat them like all other journalists in any medium.
C) Treat their skepticism with skepticism, realizing that doesn’t come with the territory.
D) Treat them with respect because you and they understand what news is.

14) The cardinal rule for dealing professionally and ethically with media is
A) to cop an attitude.
B) to never lie.
C) to make them realize if the story is good, the company will continue to advertise with them.
D) to remind them that you promised your management a placement.

15) Which of the following is NOT among the guaranteed benefits of paid advertising?
A) control over content as submitted
B) location where the content will appear
C) credibility of what does appear in print media
D) frequency

16) Which of the following is a benefit publicity has over guarantees associated with advertising?
A) reach
B) third-party endorsement
C) placement of information provided to media
D) frequency

17) Publicity can be very useful especially in
A) explaining how easy it is to use a simple product or service.
B) minimizing the effect of a big budget.
C) announcing a new product or service and re-energizing an old product or service.
D) responding to praise from adversaries.

18) The activity of trying to place positive publicity in media, of convincing an editor to consider the publicity as newsworthy, is called
A) selling.
B) advocating.
C) pitching.
D) positioning.

19) In order to achieve placement of a written release, which of the following should you avoid?
A) directing a release to a specific beat reporter
B) frequently using “exclusives”
C) determining how best to contact a reporter or editor by asking them for their preference
D) calling a reporter or editor yourself, rather than have an assistant make the call

20) If you are seeking online publicity,
A) Change how you deliver and format a news release.
B) Take advantage of the nature of the medium and write a long announcement.
C) Virtually ignore the importance of a site’s library.
D) Bypass whenever possible use of news wires.

21) Which of the following is NOT true of online news releases?
A) Paid wires guarantee the use of your material.
B) They have a shorter life than offline releases.
C) Web events need to be big to attract publicity.
D) The closer you are to online reporters, the more fairly they will treat you.

22) Which of the following activities are likely to attract online publicity?
A) promotion of members in your organization
B) television appearances or book tours
C) long, well-written product announcements
D) “big” events like concerts broadcast online

23) Which of the following wire services does NOT guarantee use of your materials?
A) Internet Wire
B) Associated
C) Business Wire
D) PR Newswire

24) A task that may be seen as the most essential task of public relations people in the eyes of those for who public relations people work is
A) easing discomfort with their personal appearance.
B) placating executives with easy practice questions.
C) to coordinate interviews for their executives with the media.
D) setting an agenda for meetings.

25) A reason executives tend to be uncomfortable about interviews is due to their
A) discomfort with their personal appearance.
B) distrust of liberals.
C) inexperience of being put on the spot.
D) failure of public relations professionals to help prepare them.

26) The first question before engaging in a media interview is:
A) What purpose will this serve the organization?
B) How many questions will s/he ask me?
C) What should I wear?
D) Will it put me on the spot?

27) In interviews, the interviewers seek
A) someone with whom they can have an intellectual conversation.
B) someone who can provide material for a “good story.”
C) someone with whom they can develop a lasting friendship.
D) someone who will make them look good.

28) In interviews, the interviewee seeks
A) to have an intellectual conversation with the interviewer.
B) to intelligently respond to all questions on any topic.
C) to convey the key message.
D) to provide material for a “good story.”

29) What should the interviewee know about the interviewer before the interview?
A) his/her point of view.
B) his/her interests.
C) his/her likely questions.
D) all of the above

30) A key point to remember when dealing with reporters, especially in interviews, is
A) saying “no comment” is an indication that you may be hiding something.
B) debating a reporter if you disagree with their premise establishes respect.
C) even if you don’t know the correct answer to a question, provide them something.
D) answer hypothetical questions to indicate just how well-informed you are.

31) For a successful a media interview,
A) bluff if you don’t know an answer.
B) welcome naïve questions.
C) look to go off the record.
D) provide promised information whenever you have time to.

32) Because of the prominence of 24/7 cable news, talk radio, and the blogosphere, it’s never been easier to develop solid media relations.

33) The “devil’s advocate” role is the key to why many people don’t like the press.

34) If the fact that the “acceptable rate of accuracy” is 70 percent among Internet journalists is an indication, then dealing with some media has become risky.

35) In the old days, print reporters wouldn’t risk their “objectivity” to voice their opinions on television while today, reporters and news organizations like getting attention for their opinions.

36) The role a journalist fulfills in working with or dealing with officials is that of a skeptic.

37) Spokespersons who effectively substantiate the official organizational view and demonstrate its merits should reasonably expect media to avoid editorial distortion in presenting the information.

38) Public relations people still consider print media important because they still typically use more material presented them than do network or cable TV.

39) Jon Stewart showed up fourth on a national poll of “most admired journalists.”

40) New-age news sources include the Drudge Report and Salon.

41) Manipulating the media is a goal of effective media relations.

42) Good media relations require a formal media relations policy and following sound principles of dealing fairly, honestly, and intelligently with their representatives.

43) The cardinal rule in dealing with the media is to make sure they know who is in charge.

44) A major and distinct advantage advertising has over publicity is its frequency.

45) Publicity differs dramatically from advertising but typically costs dramatically more than advertising.

46) The reason publicity is considered more credible than advertising is that it has passed the standards of a third party, the media.

47) Pitching in public relations is similar to throwing a curveball in baseball: The idea is to trick the recipient into accepting whatever you throw at them.

48) The downside to promising one paper an exclusive is how that might affect your relationships with other newspapers.

49) When all is said and done about the Internet, for public relations practitioners it is still about building relationships.

50) For online publicity placement, public relations practitioners ought to make good use of paid news wires because they guarantee the use of your material and then provide newsrooms with content.

51) Since the Internet has become a more commonplace communication medium, the bar for what qualifies as a Web-worthy event has been lowered.

52) Coordinating media interviews for their management is a key role that public relations practitioners have.

53) Two keys to effective interviews – interviews that help further good media relations – are to bluff and go off the record.

54) How does online media affect public relations?

55) What is the role of media that public relations practitioners need to understand?

56) Why is targeting newspapers and magazines in a public relations campaign still worthwhile?

57) Discuss how advertising differs from publicity.

58) Discuss steps you should take to insure a successful interview.

Chapter 10 Social Media

1) Indications of the significance of social media include all the following EXCEPT
A) appointment of the first White House Director of New Media.
B) appointment of blogger Karen Hughes as chief communications officer by President George W. Bush.
C) Facebook was valued at $104 billion after one trading day.
D) role of Twitter in reporting the death of Osama Bin Laden.

2) Despite all the clamor about social media, public relations practitioners must seriously bear in mind, social media is only
A) a fad.
B) a trend.
C) a strategy.
D) a tool.

3) Technically, the ________ is a cooperatively run, globally distributed collection of computer networks that exchange information via a common set of rules.
A) ARPANET
B) World Wide Web
C) Internet
D) Hypertext Markup Language

4) The worldwide growth in Internet users from 2007 to 2012 was 2.27 billion. Which area dominated the growth?
A) Asia
B) The Middle East
C) Europe
D) Oceania

5) Among the giant survivors of the “great high-tech s” of the 1990s is
A) eBay.
B) Google.
C) Twitter.
D) YouTube.

6) Which of the following is NOT true regarding the Internet and the practice of public relations?
A) The number of Internet-oriented agencies continues to grow dramatically.
B) The Internet is a great potential repository of education-based information.
C) Many agencies have interactive specialists and groups.
D) A handful of firms specialize in Internet-related communications.

7) For public relations professionals, journalists
A) are no longer the most important source for helping their messages be heard.
B) are the primary source for research.
C) are still their primary “customers.”
D) are online but prefer receiving correspondence via “snail mail.”

8) Which of the following is NOT a reason to expect growth in the use of the Internet by public relations professionals?
A) need for customization
B) quest for conversation
C) need for real-time performance
D) demand by consumers to be sold rather than educated

9) Because today’s consumers are more media-savvy, better-educated, and generally smarter, they expect the Internet to provide
A) more hype.
B) more self-promotions.
C) more education-based information.
D) more self-promotion.

10) The Website serves as an organization’s “first face” to the public. Which of the following is NOT important on a Website?
A) make Websites as navigable as possible
B) make Website information “static”
C) create a clearly identifiable “Media” icon and organized subsections.
D) speak in the organization’s own voice

11) How is stickiness measured?
A) by asking people about their goals
B) amount of time visitors spend at a site and how many pages they visit
C) by how many times a visitor goes to a competitive site
D) by which locations on a site visitors click first

12) Which of the following is NOT a strategic question one would want answered in order to prepare a winning Website?
A) How far back should we list our chronological press releases?
B) How will we track use?
C) How interactive will it be?
D) How will it enhance design?

13) Which of the following is the principal benefit from having a Web site?
A) access to the oldest social media tool
B) ability to offer information to the public in an organized, consolidated manner
C) elimination of roadblocks to reaching potential or current customers
D) elimination of way to monitor what others are saying about your organization

14) What is SEO?
A) sales employment opportunities
B) search engine options
C) search engine optimization
D) sales enjoyment optimization

15) If public relations professionals expect to benefit from their Web site, they
A) should strive to make it as easily navigable as possible.
B) should strive to make it “static.”
C) should strive to make it less available to media members.
D) should strive to make vehicles such as news clips and publications unavailable.

16) How much time visitors spend and how many pages they view on a Web site is a characteristic of
A) interactivity.
B) stickiness.
C) static.
D) linkedness.

17) Which of the following are among strategic questions to answer in order to create a winning Web site?
A) Should we allow access by the mass media?
B) Should we make it interactive?
C) Should we measure site performance?
D) Should we know our ultimate goals?

18) Which of the following do NOT pertain to e-mail?
A) pervasive tool for internal organizational communication
B) viable alternative to face-to-face communication in organizations
C) most popular form of social communication among teenagers
D) least popular form of social communication among teenagers

19) Which of the following do NOT pertain to how e-mail has affected employee communication?
A) managers can deliver concerns quickly with less effort
B) managers can deliver praise quickly with less effort
C) interferes with workflow
D) tends to help lead to more honest and immediate feedback than previous traditional approaches

20) Characteristics to make an e-mail newsletter useful for customers would include
A) keep them lengthy.
B) disseminate them at regular intervals.
C) avoid having links to product offers.
D) block access to links for even more extensive articles.

21) Which of the following pertain generally to IM?
A) a form of information management used in business
B) is an offline, linear form of communication
C) especially popular among Generation Next
D) limits accessibility to one other person

22) Which of the following pertains generally to texting?
A) allows for sending messages of 160 or more characters
B) common in business-to-business communication
C) least common is person-to-person messaging
D) is the most widely used mobile data service

23) Which of the following does NOT pertain generally to blogs?
A) sometimes called Weblog
B) gains respect through support of geezers
C) embraced by professional communicators, including those from broadcast and print media
D) is an online diary

24) Which of the following do NOT pertain to blogs and public relations?
A) need to identify, monitor, and build relationships with the influential bloggers
B) need to understand principles that make it a distinct type of social media
C) those that have earned credibility are as important as traditional reporters
D) is a no-risk communications vehicle

25) Which of the following pertain to CEO blogs?
A) has received rave reviews from various publics
B) typically turns negative public relations positive almost instantly
C) among the newest phenomena in the blogosphere
D) the vehicle of choice among most public relations practitioners for disseminating news

26) The theoretical of social networks stemmed from?
A) an article by the CEO of Sun Microsytems
B) an article by a telecommunications professor at MIT Media Labs
C) the CEO of Marriott International
D) an article by a former employee at AT&T Labs Research

27) The early description of what is now generally referred to as “social networking” sites include
A) “dumb transport”
B) “stupid network”
C) “intelligent transport”
D) “intelligent network”

28) Which of the following does NOT represent a social media network that has stood the test of time?
A) Facebook
B) LinkedIn
C) Friendster
D) YouTube

29) Which of the following is among the most well-known social networking sites?
A) SpaceMan
B) Twitter
C) BookFace
D) InLink

30) Which of the is the biggest social networking service, with 900 members around the world, one-quarter of everyone on the Internet, and growing by 5% every month?
A) Facebook
B) Twitter
C) LinkedIn
D) YouTube

31) Which of the following is NOT one of the functions Facebook serves for public relations?
A) attract attention.
B) static information.
C) two-way communication.
D) conversation monitor.

32) Public relations practitioners have found that Twitter can be
A) a vehicle to direct Twitters to Web sites.
B) a vehicle to direct Twitters to products.
C) a means to do some cybersquatting.
D) a way to tap into conversations about particular subjects.

33) Which of the following is described as “Facebook for the professional set”?
A) Picasa
B) Zoomer
C) LinkedIn
D) RevvedUp

34) Which of the following is NOT one of the services LinkedIn provides for public relations professionals?
A) Notes
B) Groups
C) Polls
D) Carb Lunch

35) Which of the following is an example of how YouTube helped public relations professionals?
A) Domino’s CEO quick response to a video
B) the positive response to U.S. General Services Administration’s rap about their junket
C) Lady Gaga’s video about not eating
D) Ketchum public relations vice president’s response to Memphis

36) Which of the following is NOT an up-and-coming social networking site?
A) Instagram.
B) Foursquare.
C) Yikes.
D) Pinterest.

37) Which of the following is one the priority areas to track in social media analytics?
A) Reach and impressions.
B) Number of social media outlets.
C) Social media inputs.
D) Amount of printed matter.

38) Which of the following is an easy way to distribute content on the Internet, similar to a newsgroup?
A) QR Code
B) LBS
C) RSS Feed
D) Podcast.

39) Which of the following is NOT an example of the dark side of social media for public relations professionals?
A) blog usage by discontented shareholders, stock manipulators, and angry customers
B) secure, unedited sites where employees can discuss corporate policies and strategies
C) urban legends about corporate horror stories spread by email
D) rogue websites that confront organizations with negative information

40) Because of its immediacy and pervasiveness, the Internet has replaced human relationships as the essence of societal communication, and as the essence of public relations practice.

41) The Internet is a cooperatively run, globally distributed collection of computer networks that exchanges information via a common set of rules.

42) Many Internet businesses rose in the 1990s only to flame out in the early 21st century.

43) A major reason Internet uses by public relations practitioners will grow relates to the “quest for conversation.”

44) In the Internet Age, if public relations practitioners strive to be effective they will NOT give into customizing their communications.

45) A Web site is an organization’s “first face.”

46) A Web site permits an organization to speak in its own voice.

47) A “media friendly” Web site should have a clearly identifiable “media” icon and organized subsections.

48) An organization’s Web site provides the most important interface for various publics.

49) After first contacting a public relations professional, the second place journalists turn for background information about an organization is their Web site.

50) “What’s the purpose of a Web site” and “Who should be responsible for it” are among significant questions a single proprietor public relations operation needs to answer before entering that aspect of cyberspace.

51) Because evaluation is a critical question in the public relations process, a practitioner ought to determine how usage of the Web site will be tracked.

52) E-mail has become a pervasive internal communications vehicle largely replacing traditional print and fax technology as a method for rapid delivery of information.

53) Instant messaging is the most pervasive of communications vehicles used in business communication.

54) Like instant messaging, texting has become an important employee communications vehicle.

55) Blogs have continued to be a tool of so-called fringe media.

56) Audiences see through a company’s “traditional ‘ad speak'” and have begun to consider blogs as a type of third-party “endorser” of products and services.

57) A blog gains respect through the support of “sneezers” or early adopters within a social group.

58) While the verdict on the effectiveness of CEO blogs is still out, it is apparent that they can serve as a public relations vehicle for disseminating news.

59) YouTube is the biggest social networking service.

60) One of the community-building purposes of Facebook is to network with the media.

61) In 2012, Twitter broke the news about singer Whitney Houston’s death 27 minutes before mainstream media reported the story.

62) Social media engagement includes sales, blog posts, comment, and retweets.

63) With the various sites and practices that the Internet permits, good advice for public relations people regarding the Internet is to stay alert and monitor their own and the various sites on the Net.

64) Rogue websites like Walmartsucks.com are put up by the companies so people have a place to vent their frustrations.

65) Do the Internet and social media hold promises for the future of public relations? If so, why?

66) Summarize some of the overall benefits public relations practitioners have already derived from their ventures into cyberspace.

67) If public relations practitioners are considering establishing a Web presence for themselves as well as their clients, list some major questions that should be answered.

68) Distinguish instant messaging from texting.

69) Discuss the evolution of blogging and its impact and prospect to affect the practice of public relations.

70) Define social networks, social networking, and social media, and discuss their relevancy to the practice of public relations.

71) Name and briefly describe the dark side of online communications for public relations professionals.

Chapter 11 Employee Relations

1) During the past 20 years, surveys about workforce contentment indicate
A) employees have never been more satisfied.
B) employees are increasingly disenchanted with their jobs and employers.
C) higher paid employees have never been more satisfied with their jobs.
D) nearly half of surveyed employees “trusted management to communicate honestly.”

2) In the first six months of 2012, nearly __________________ people lost their jobs.
A) 2,200
B) 77,000
C) 770,000
D) 1 million

3) Which of the following is NOT characteristic of what American workers have faced recently?
A) waves of downsizings and layoffs
B) widened gap between executive compensation and pay of common workers
C) actions by management that increase loyalty
D) corporate emphasis on globalization

4) According to a well-regarded survey, what percentage of corporate CEOs reported spending more of their time communicating with employees.
A) 30%
B) 40%
C) 50%
D) 60%

5) Because of what has happened to American workers in the first decade of the 21st century, which of the following is NOT true?
A) There is increased value placed on “intellectual capital.”
B) There is need for employee empowerment.
C) There is “trust gap” between management and workers.
D) There is less need than ever for meaningful, effective employee communication.

6) There is no “general public,” but there is an “employee public” that
A) has numerous subgroups.
B) has indistinguishable concerns.
C) has similar interests.
D) has concern only for a fair day’s pay for a fair day’s work.

7) Which of the following is NOT a trait of today’s employees?
A) they are younger
B) they are said to be more diverse, ambitious and career-oriented
C) they have more loyalty than their predecessors
D) they are less complacent

8) Which of the following traits in today’s employees require smart managements to strive for candor?
A) their younger age
B) their being hard-nosed
C) their ambition
D) their increased complacency

9) Which of the following leads employees to think “the grass is greener elsewhere”?
A) knowing what it takes to move ahead
B) understanding how compensation programs work
C) not knowing where they stand in the eyes of management
D) sensitivity to their peers’ problems

10) If communication is to reinforce a consistent management message, it
A) must be complex.
B) must be credible.
C) must spell out in every detail the purpose behind the message.
D) must have a friendly tone.

11) One of the six criteria that shape the best companies to work for in America was:
A) attention to clarity.
B) keeping upper management distant and behind the scenes.
C) prioritizing external over internal communication.
D) keeping a stern tone.

12) The hands-down most effective method of employee communications is:
A) text messaging.
B) company newsletter.
C) face-to-face communication.
D) evaluations.

13) Suggestions to improve employee relations include
A) involving employees in the process by asking for their ideas and opinions.
B) ways to demonstrate what a great workplace workers are in.
C) covering up any negative comments about an employee’s performance.
D) advocating for employees who want anti-activist communication.

14) In S-H-O-C, a four-step communications approach, what does the S stand for?
A) Strategic
B) Straight
C) Service
D) Separate

15) In S-H-O-C, a four-step communications approach, what does the H stand for?
A) Hear
B) Honest
C) Hidden
D) Held

16) In S-H-O-C, a four-step communications approach, what does the C stand for?
A) Communication
B) Confidence
C) Consistent
D) Celebrations

17) Voice is a principle of good communications that can enhance “getting through” to employees. It refers to
A) speaking neither too loudly nor too softly when conveying negative news.
B) giving those with divergent opinions as much recognition as possible.
C) allowing those who wish to share their opinions to be heard and to be part of decision making.
D) recognizing that money and benefits are the ultimate motivator.

18) One overriding principle for good internal communication is to
A) be truthful.
B) soften the blow of bad news.
C) use human resources jargon in explaining benefits .
D) squash dissent.

19) Employees would trust management more if they
A) were less visible.
B) didn’t seek to empower the workforce.
C) communicated more frequently and earlier.
D) avoided sharing bad news.

20) Which of the following acronyms is indicative of how management can build trust through communication?
A) R-H-R-V
B) S-H-O-C
C) E-V-P-A
D) H-V-A-C

21) For a well-conceived and well-designed employee communications program to work, it must
A) promise lots.
B) evoke passion.
C) be well-financed.
D) be steadily consistent.

22) Critical questions to answer before doing an internal communications audit include
A) When was the last time we did one of these?
B) Why should we do one of these now?
C) How responsive are internal communications efforts to employee needs and concerns?
D) Do we have enough money in the budget?

23) Online communications vehicles include all of the following EXCEPT
A) blogs.
B) intranet.
C) printed newsletters sent to employees’ homes.
D) Instant messaging.

24) Which of the following would NOT be an advantage to online communications vehicles?
A) more immediate than earlier print vehicles
B) more likely to be listened to, read, and acted on
C) adds to increased loss of employees’ “voice” for people without a computer
D) reach employees where they are

25) An intranet is
A) an external vehicle that allows for exchange of information via a cooperatively run and globally distributed collection of computer networks.
B) an external vehicle that integrates communication with outsiders so they have more insight about workflow, process management, and infrastructure.
C) an internal vehicle that integrates communication with workflow, process management, and infrastructure.
D) a dynamic Web site to which all employees can add information.

26) Defenders of print vehicles suggest
A) they are valuable as a link to the Internet.
B) they help create the “climate” management endorses.
C) they not be used to convey comprehensive information.
D) they be used to sell, sell, sell.

27) The organization originally devoted just to internal communications was the
A) Public Relations Society of America.
B) International Associations of Business Communicators.
C) American Marketing Association.
D) American Advertising Federation.

28) Traditional staples of employee communications have included all the following EXCEPT
A) bulletin boards.
B) suggestion boxes.
C) “town hall” meetings.
D) Delta lunches.

29) Which of the following is considered the most “ancient” of employee communications vehicles?
A) town hall meetings
B) bulletin boards
C) suggestion boxes
D) internal videos

30) Which of the following are among the traditional staples of employee communications programs?
A) bulletin boards.
B) Delta breakfasts.
C) suggestion boxes.
D) internal videos

31) Despite all the emphasis on social media, ________ communications, preferably from a supervisor, is considered the best communication vehicle to reach employees.
A) intranet
B) town hall
C) face-to-face
D) grapevine

32) Which of the following is NOT required if social media are to be effective in a work environment?
A) They must adapt to the business culture.
B) They must be entertaining.
C) They must be informative.
D) They must have a business purpose.

33) Although it may be treacherous at times, the ________ can be a valuable communications vehicle.
A) face-to-face communications
B) intranet communications
C) town hall meetings
D) grapevine

34) An environmental scan of the workplace in the U.S. would lead to this conclusion: Overwhelmingly, employees are content with what they do for a living and with their employers.

35) A well-regarded survey indicates that more than half of CEOs are spending more time communicating with their employees.

36) Rapid changes in technology and globalization require that even more attention be paid to communicating honestly and openly with employees in order to gain their respect and loyalty.

37) Once considered less important, glamorous, or critical, employee communications has become increasingly more important.

38) Despite all the negative phenomena that have affected employees, there still isn’t enough value placed on “intellectual capital.”

39) Because the new business environment is so complex, staff members are calling for less of a voice in decision making, less empowerment.

40) Employees, especially in times of high unemployment, indicate their biggest concern is: knowing where they stand.

41) Management’s giving priority to internal communication is NOT among the six criteria discussed in 100 Best Companies to Work For in America that have stood the test of time.

42) The overriding challenge that confronts today’s internal communicators is to convince employees that management not only wants to communicate with them, but also wants to do it in a truthful, frank, and direct manner.

43) Employees might be shocked if more managements took the S-H-O-C approach as a first step to rebuild employee trust.

44) An intranet is a dynamic Web site to which employees add pages, modify content, and comment on what’s already on the site.

45) To have any hope for a successful intranet, you must set clearly defined objectives yet allow for growth and evolution as new needs appear.

46) Despite the growing use of online vehicles for internal communications, defenders of print argue that it helps create a “climate” that has the stamp of management.

47) Because they were such an old type of employee communications vehicles, bulletin boards have virtually disappeared.

48) A suggestion box system still can provide employees a way to receive feedback from management.

49) For internal video to be accepted by employees today, it must be of broadcast quality.

50) Hands down, the most effective method of employee communications is face-to-face communication between supervisors and their subordinates.

51) Procter & Gamble blocked Netflix and Pandora because movie watching and song downloads were slowing down Internet service.

52) The best social media policies are based on common sense.

53) Despite the diabolical image of the grapevine, the reality is that it can be a helpful vehicle in an effective employee communications program.

54) Why is there currently an even greater need for effective employee communications?

55) The 100 Best Companies to Work For in America had six criteria that have stood the test of time. What are they?

56) Describe some ways management can increase trust among its employees.

57) Describe the S-H-O-C approach to management communication.

58) Name the growing online, internal communications vehicles and briefly describe how each is used.

59) Name and briefly describe some things intranet creators should keep in mind.

60) What is the “grapevine,” and how is it used in employee communications?

Chapter 12 Government Relations

1) Which of the following was not one of the gaffes that occurred during the Romney campaign’s summer 2012 overseas trip?
A) he told an interviewer that the British were rightfully concerned about security preparations for the summer Olympics.
B) he complimented Israel on their successful culture, which the Palestinians did not like.
C) he criticized President Obama while on foreign soil
D) his press secretary told a New York Times reporter to kiss his posterior

2) In which was social media used effectively by Barack Obama in the 2008 race for the presidency?
A) to stop news coverage by the media
B) to announce his choice for Vice President
C) to censor China
D) to circulate the results of the Edelman Trust Barometer

3) The reason the practice of “public relations” has been virtually barred from the federal government?
A) a remark made by President Dwight D. Eisenhower
B) the 1913 Gillette Amendment
C) the Congressional gag law
D) handling of the media by Press Secretary Ari Fleisher

4) Indications that there has been growth in public relations-type jobs in government include all the following EXCEPT?
A) number of new federal regulatory agencies that have sprung up since the 1970s
B) repeal of the Gillette Amendment
C) number of government agencies or programs that regulate business
D) increased opportunities in Department of Defense

5) Titles used at the federal government level to describe public relations-related activities include all EXCEPT
A) public affairs officer.
B) public relations practitioner.
C) press secretary.
D) communications specialist.

6) In 2005, a GAO report revealed that the Bush administration paid _______________ on advertising and public relations contracts over a two-and-a-half-year period.
A) $1 million
B) $1.6 million
C) $1 billion
D) $1.6 billion

7) Public affairs functions for the State Department do NOT include
A) responsibility for press briefings.
B) advertising and recruiting volunteers for the armed services.
C) maintaining content for the Department homepage.
D) operating foreign press centers around the nation .

8) The United States Information Agency
A) is part of the Department of Defense.
B) was part of the General Accounting Office.
C) was created by President Dwight D. Eisenhower.
D) has been an arm of the Central Intelligence Agency.

9) In the 21st century, challenges for the USIA include all EXCEPT
A) maintaining its position in the executive branch.
B) developing worldwide information programs to address environmental issues.
C) supporting the war on drugs in producer and consumer countries.
D) building intellectual and institutional foundations of democracy in societies around the globe.

10) Which of the following is NOT a communication initiative of the State Department?
A) TV Marti
B) maintaining the Armed Forces Radio and Television Service
C) Voice of America
D) libraries and books

11) AFIS is responsible for
A) coordinating public affairs operations for each of the various branches of the military.
B) periodically auditing and refining operations in each branch of the military.
C) making sure to select the best representatives of the media for embedding.
D) maintaining Stars and Stripes.

12) What is the name of the newspaper AFIS is responsible for maintaining?
A) Stars and Stripes
B) Armed Forces News
C) Defense Information
D) DOD News

13) Despite the Gillette Amendment, the public relations clout of the president includes all the following EXCEPT
A) traveling with his own media entourage.
B) exerting influence on the nation’s agenda by controlling the “bully pulpit.”
C) stifling the media’s search for truth.
D) his every statement or move intriguing the media.

14) Key principles used by President Ronald Reagan and his communications advisers to “manage the news” did NOT include
A) repeating the same message often.
B) going with the flow
C) staying on the offensive.
D) controlling the flow of information.

15) Which of the following is NOT an example of a situation that made a president’s relationship with the media sour.
A) September 11th
B) Monica Lewinsky
C) “Mission Accomplished”
D) Hurricane Katrina

16) Despite a number of embarrassing events during his administration, President Bill Clinton remained quite popular because he
A) had a professorial manner.
B) had an easygoing, “just plain folks” demeanor.
C) like Joe/Jane Six Pack he was unable to grasp issues easily.
D) displayed confidence by uttering, “You Betcha!”

17) The event that helped awaken good communications instincts in President George W. Bush was
A) Iran-Contra.
B) Desert Storm.
C) September 11, 2001.
D) Hurricane Katrina.

18) Which of the following events led to “sour” media relations for George W. Bush?
A) firing Press Secretary Ari Fleisher
B) premature announcement of “Mission Accomplished” in Iraq as well as mishandling the impact of Hurricane Katrina
C) frequent press conferences at the Texas White in Crawford
D) hiring the likeable Tony Snow as press secretary

19) Observers say the second-most difficult position in any president’s administration is
A) Vice President.
B) Federal Reserve Chairman.
C) Secretary of State.
D) Press Secretary.

20) Chief among the responsibilities of the president’s press secretary is
A) covering up for the administration’s errors.
B) communicating accurately the policies and practices of the President.
C) reporting what the President says without really knowing that is what he had said or would say.
D) making a decision about a policy when cornered by media.

21) The White House press secretary who resigned because his convictions differed with President Gerald Ford was
A) Jerald ter Horst.
B) Ron Nessen.
C) Spiro Agnew.
D) George Stephanopoulos.

22) The columnist who viewed the responsibilities of the press secretary as two-way, similar to the interpreter-advocate role performed by corporate public relations people, was
A) Larry Speakes.
B) Jody Powell.
C) William Safire.
D) Marlin Fitzwater.

23) Which of the following press secretaries who served President Clinton had a refreshing perspective and went on to be a cable talk show host, magazine editor, and political analyst?
A) Richard Morris
B) Dee Dee Myers
C) Marvin Fitzwalters
D) Joe Lockhart

24) The former press secretary who said, “I may be crazy, but I like working with reporters” was
A) Scott McClellan.
B) Ron Nessen.
C) Ari Fleischer.
D) Mike McCurry.

25) Who was President Barack Obama’s first Press Secretary?
A) Robert Gibbs
B) Jay Carney
C) Scott McClellan
D) Tony Snow

26) What happens in government is so significant to an organization that the number of corporations and trade associations with ________ units has grown steadily in recent years.
A) media relations
B) government relations
C) employee relations
D) not-for-profit

27) Which of the following is NOT true about just how big a business lobbying is?
A) About $8 million a day is spent lobbying federal government.
B) State lobbyists are far and away lots less active than federal lobbyists.
C) About $3 billion a year is spent lobbying the federal government.
D) the number of federal registered lobbyists totals 11,268.

28) The Lobbying Disclosure Act of 1995 reformed earlier lobbying laws and focused on
A) broadening activities that constitute lobbying.
B) redefining a lobbying contact as any contact made via the Internet.
C) prohibiting former employees of the federal government from registering as lobbyists.
D) mandating that anyone who speaks to a federal official about legislation must register.

29) Under the 1995 disclosure rules, a “lobbyist” is
A) anyone who pays for meals for Congressional aides.
B) anyone who is paid by a third party to make more than one “lobbying contact.”
C) anyone who does research or provides background for lobbying purposes.
D) anyone who asks a government official to recognize a client in the Congressional Record.

30) The task of a lobbyist is ultimately rooted in the ________, which provides citizens the right to petition the government.
A) Fifth Amendment
B) Twenty-third Amendment
C) First Amendment
D) Sixth Amendment

31) Which of the following is NOT among activities lobbyists engage in?
A) acting as a lead or link – a conduit – for a client’s sales staff
B) advocating for or against pending legislation with members of Congress
C) interpreting government actions for a client and client actions for a legislator
D) repealing the rights of only lawyers to be lobbyists

32) The dramatic impact the ________ can have on a presidential race was verified by the political campaign put together by candidate Barack Obama.
A) trial by news releases
B) foreign governments
C) Internet
D) PACs

33) Which of the following Web sites has been called “one of the most . . . influential organizations in U. S. politics”?
A) SorosOff.com
B) GOPAC.gov
C) MoveOn.org
D) MyVote.com

34) Which of the following is NOT among the largest PACS in the nation campaigning to have their candidates elected??
A) American Management Association
B) National Rifle Association
C) American Medical Association
D) American Federation of Teachers

35) Which of the following presidents deserves credit for New Federalism or the shift of political power from the federal to the state and local levels?
A) George H. W. Bush
B) Ronald Reagan
C) Bill Clinton
D) George W. Bush

36) President George W. Bush indicated his belief in the importance of coordinating his administration’s foreign policy message and image abroad by creating a permanent Office of Global Communications.

37) Because Congress feared that then-President, Theodore Roosevelt, would win public support for his programs through use of a network of people who practice “public relations,” they passed the Gillett Amendment in 1913 that barred use of the “practice” in federal government.

38) While Congress passed a law that did not allow government people engaged in the “practice of public relations,” in fact, there are thousands of public relations-related jobs at the federal level.

39) According to various government reports, billions of dollars were spent on advertising and public relations contracts by the Bush Administration during his first term.

40) The Department of Defense communications include 3,727 communicators in the Army.

41) As of 1999, the USIA became an important function of the Department of Defense.

42) Among the major vehicles that the USIA employs to spread the “gospel of America” are Radio Marti, beamed into Cuba, and the Voice of America, directed at other international audiences.

43) Despite early 20th century efforts by Congress to limit the persuasive powers of the President of the United States, the nation’s chief executive today wields unbridled public relations clout and controls the “bully pulpit.”

44) President Ronald Reagan’s approach to communications was so effective that he is still called the “Great Communicator.”

45) The main role the presidential press secretary serves is to be the chief public relations spokesperson for a President’s administration.

46) The press secretary who was universally hailed by media for his professionalism during most of his tenure was Larry Speakes, who had been a Hill & Knowlton executive.

47) The first woman to serve as presidential press secretary to President Clinton was Mary Matlin.

48) Today, there are 300 members of “the imperial press corps” looking to the presidential press secretary for news.

49) The number of registered lobbyists in Washington has increased to 11,268.

50) One of the functions lobbyists service is a publicity springboard.

51) Informing and persuading are at the heart of what lobbyists do.

52) The campaign Al Gore ran against George W. Bush established him as the first “digital presidential candidate.”

53) Among the most controversial political developments in recent years is the rise of PACs and their role in elections.

54) As a result of 9/11, President Ronald Reagan initiated New Federalism – calling for a shift of political debate and public policy decisions to be made at state and local levels.

55) Among frontline responsibilities for a public relations practitioner at the local government level are to inform constituents about legislative and regulatory changes as well as about various government procedures.

56) How did September 11, 2001, change the communications approach of the Bush Administration?

57) What is the USIA, when was it created and by whom? What is its role, and which government department today has responsibility for it?

58) If the Office of the President has any chance to maintain a solid image with media and the public, it must “manage the news” by following the principles used by President Ronald Reagan’s communications advisers. They include

59) The essence of a lobbyist’s job is to inform and persuade. List the specific activities most lobbyists take part in to do their jobs.

Chapter 13 Community Relations

1) The result of the Susan G. Komen Race for the Cure’s policy barring grants to organizations that were under investigation by local, state or federal authorities was:
A) the resignation of Vice President Karen Handel
B) the resignation of CEO Nancy Brinker
C) the loss of support from charitable donors
D) all of the above

2) What percentage of the U.S. population was represented by Hispanics in 2010?
A) 5%
B) 12%
C) 16%
D) 21%

3) What is the fastest-growing racial or ethnic group in the United States?
A) Hispanics
B) Asians
C) American Indians/Alaska Natives
D) White, Non-Hispanic

4) Which of the following does NOT describe aspects of the U.S. population?
A) More than half of the children born in 2012 were of “minority” racial or ethnic heritage.
B) Hispanics comprised about 16 percent of the US population in 2010.
C) Multiracial Americans are the fastest growing US demographic group.
D) Asians comprised 15 percent of the US population in 2010.

5) The majority of immigrants to the U.S. flock to which states listed below?
A) Rhode Island, Massachusetts, and New York
B) Florida, California, and New Hampshire.
C) California, New York, and Texas.
D) Colorado, California, and Nevada

6) Which of the following is an indication of the economic impact of ethnic minority populations on the U.S.?
A) They own 20 percent of the small business firms.
B) They own more than 25 percent of the small business firms.
C) They spend nearly one trillion of the $4 trillion spent
D) Their buying power has dramatically decreased.

7) Which of the following do NOT pertain to minority populations and the media in the U.S.?
A) Hispanic buying power in the top 20 US markets approximates $850 billion out of total US consumer spending of $10 trillion.
B) Procter & Gamble spent $150 million on ads targeting African Americans in 2009.
C) DirectTV spent $133 million on ads in Hispanic media during 2009.
D) The Asian population is the only race or ethnic market that is both rapidly growing and affluent.

8) As arbiters of communications in organizations, it’s been the charge of public relations people to
A) deal in an enlightened manner with the realities of a multicultural society.
B) sensitize the rest of the world to multicultural needs of Americans.
C) make an impact on renewing the energies of various ethnic communities.
D) enhance the power of the disenfranchised.

9) During the 1980s, corporations prided themselves on their commitment to
A) recognize diversity.
B) forego making larger profits.
C) social responsibility.
D) sponsor major artists’ endeavors.

10) Which “front-burner mandate” of corporations in the 1990s and early 2000s negatively affected their commitments to social responsibility?
A) a shift in attention to making as much money as possible
B) meeting only demands of the Board of Directors
C) being responsible only to diverse, multicultural communities
D) recognizing only needs of shareowners

11) Indications that corporate social responsibility has become broadly accepted among enlightened organizations include their:
A) funding clean water and air projects
B) enforcing policies in the interest of all employees
C) searching for more jobs for more minorities
D) enhancing the quality of life for the poor and hungry

12) In 2012, 13 companies donated more than $100 million in cash. How much did Walmart donate?
A) $242 million.
B) $337 million.
C) $342 million.
D) $420 million.

13) The commitment corporations have to make financial contributions in a community’s interest very much depend on
A) profits.
B) voluntarism.
C) enlightened self-interest.
D) the CSR policy.

14) One major aspect of “giving back” is support for
A) enlightened self-interest.
B) voluntarism.
C) “bringing a child to work” days.
D) expanding the number of philharmonic orchestras nationwide.

15) Peaceful coexistence between organizations and communities where they operate requires which of the following skills?
A) negotiating or mediating if there’s a significant problem between organizations, communities, and their members
B) taking for granted what communities likely know and think about a specific organization
C) keeping confidential what the organizations’ points of view are on public matters
D) protecting confidentialities the organization has disclosed

16) Enlightened community relations are hinged upon which of the following?
A) researching, analyzing, and understanding the power structure of communities
B) understanding the makeup and expectations of communities and vice versa
C) organizations communicating their points of view in an authoritarian fashion
D) each power base making sure it demonstrates who is in charge

17) Tangible commodities that communities expect from resident organizations include all of the following EXCEPT
A) taxes.
B) employment.
C) wages.
D) participation.

18) Which of the following is NOT a intangible commodity communities expect from neighborly organizations?
A) employment
B) stability
C) pride
D) appearance

19) Which of the following DON’T businesses require or expect of a community where they operate?
A) adequate municipal services
B) tax laws that stymie expansion
C) good labor supply
D) reasonable degree of support for the business and its products

21) Research indicates that winning community support for organizations is
A) quite easy.
B) somewhat easy.
C) no easy matter.
D) very difficult

22) Which of the following is a typical community relations objective?
A) tell the community about the firm’s operations.
B) correct misunderstandings, reply to criticism, remove disaffection that may exist.
C) gain favorable opinion of the community.
D) all of the above.

23) The Web has the ability to further human relations and progress across communities and for the larger society because
A) it is anonymous and acrimonious
B) it expands educational and commercial opportunities
C) it is heartless
D) Websites like GreaterGood.com are thriving

24) Which of the following qualify as typical objectives of a community relations program?
A) to promote better local and county government
B) to avoid collaboration with other businesses on beneficial community projects because of potential conflicts of interest
C) to discourage employees from serving on administrative boards of various community-based human service providers because of potential conflicts of interest
D) to strive to gain favorable opinion from the community, particularly during difficult times

25) Which of the following would NOT qualify as typical objectives of a community relations program?
A) to make every effort to always share confidential matters to community leaders
B) to cooperate with other businesses on beneficial community projects
C) to correct misunderstandings
D) to support health programs with money and human resources

26) Which of the following do NOT pertain to the role the Internet can have concerning community relations?
A) The Internet is inherently a community.
B) The Internet links like-minded interests in virtual communities.
C) The Internet actually has limited value in furthering potential for socially responsible actions.
D) The Internet can do much for social good based on the idea that community members may live continents away.

27) Some efforts indicating the immense potential the Internet can bring to further human relations and progress across communities include all EXCEPT which of the following?
A) the effort made by Black Entertainment Television through its Web site to bring “connectivity, content, and commerce” to the African-American community
B) AOL’s joining with various musical artists to present Live 8
C) Time Warner’s efforts to attract more African Americans to use AOL.
D) the efforts of GreaterGood.com

28) Indications that minorities are heading toward becoming the majority in the U.S. include
A) dramatic growth in the Asian.
B) dramatic growth in the African-American community.
C) dramatic growth in the Hispanic community.
D) dramatic growth in the Pacific Islander community.

29) Once “considered a minority,” women have made great strides in all the following ways EXCEPT
A) leveling the playing field between their roles and compensation for them.
B) gaining equal pay for the same jobs
C) being a CEO at large corporations.
D) serving as advisors to presidential candidates and even the President.

30) Which of the following depicts the Hispanic population in the U.S.?
A) There are currently 60 million Hispanics in the United States.
B) By 2050, they will likely comprise about 33 percent of the U.S. population.
C) They tend to ignore the media, especially radio and television.
D) They recently have not exercised their voting rights.

31) To stay informed, the Hispanic population in the U.S. depends most on
A) magazines.
B) newspapers.
C) radio and TV.
D) the Internet and its Web sites.

32) Characteristics attributable to the black population in the U.S. include
A) their disposable income has decreased considerably in recent years.
B) their socioeconomic status has increased primarily because of large increases in women’s incomes.
C) nearly one-third of the growth in their population comes from foreign born people.
D) median family income is 78 percent of white families of the same age.

33) Regarding the black population, the public relations field
A) needs to attract sufficient numbers to it.
B) needs to discontinue its current outreach efforts.
C) needs to remind representatives from this community about the value of public relations.
D) needs to establish a an award that recognizes the efforts of D. Parke Gibson.

34) The main purpose of Bridges TV was
A) to emphasize the importance of Asian careers and material success
B) to employ American journalists
C) to build “bridges of understanding between American Muslims and mainstream America.”
D) to serve Asian immigrants from mainland China.

35) Which of the following would NOT apply to the Muslim population in the U.S.?
A) estimated that 2.6 million live in the U.S.
B) least misunderstood and put-upon public here
C) can access their information from Al Jazeera or PTV
D) Bridges TV serves to help bring understanding between American Muslims and mainstream America.

36) Which of the following is a characteristic of the gay population in the U.S.?
A) are no longer a target of opprobrium and opportunity
B) average household income is three times higher than the national average
C) estimated at 15 million members
D) are rarely included in TV network scripted programs

37) Public relations practitioners continue to build relationships and are targeting communications at
A) members of Automobile Association of America.
B) senior citizens and retired people.
C) members of MENSA.
D) members of the American Retired Persons Organization.

38) Which of the following does NOT characterize nonprofit organizations?
A) champion multiculturalism in their respective communities
B) are the principal source of employment for the majority of people in their community
C) serve cultural, educational, religious, and social needs in their communities
D) serve as the primary source for employment of recent public relations graduates

39) Which of the following is a public relations practice in the nonprofit sector?
A) avoid using media advocacy to raise public awareness
B) has abundant financial resources for key activities
C) has limited funding for key activities
D) they use controversial communication tactics to raise public awareness

40) Positioning, especially for a nonprofit organization, means
A) valuing advertising.
B) knowing what position you own.
C) ignoring the competition and their positions.
D) being all things to all people.

41) In nonprofit public relations campaigns, strategic planning encompasses all EXCEPT which of the following?
A) defining issues
B) framing issues
C) using bluster
D) targeting messages

42) The buying power of the minority population has decreased despite its growth in numbers.

43) The dramatic growth in Spanish-language media in the U.S. during the past 25 years reflects the dramatic growth in the Hispanic population.

44) Because they are arbiters of communications, public relations people need to be sensitive to the new realities of multiculturalism.

45) Enforcing policies in the interests of all employees and enhancing the quality of life for everyone are examples of social responsibility.

46) In 2007, for the first time, charitable giving exceeded $300 billion.

47) Voluntarism is an important element of “giving back.”

48) Fostering positive reactions in its community is a goal of a community affairs program.

49) An organization’s ability to negotiate an agreement between itself and the community and its constituents is a fundamental for achieving peaceful coexistence.

50) Appropriately participating as a “citizen” and being economically stable are among tangible commodities a community expects from resident organizations.

51) Bringing pride to a city or region is an intangible contribution an organization makes.

52) When an organization doesn’t receive a reasonable level of support for its business and its products, that is a clear indication there are community relations problems.

53) Immigration has been, and will continue to be, the main factor in population growth of minorities in the U.S.

54) The “mommy track” and “mommy wars,” and glass ceilings and pink-collar ghettos still affect employment of women as much as they used to, especially in the public relations field.

55) Based on current projections, people of Spanish heritage will comprise at least 33 percent of the U.S. population in 2050.

56) One of the major challenges for the field of public relations has been how to attract more African Americans.

57) Building bridges of understanding between mainstream America and the American Muslim population is among the major community relations challenges.

58) Based on various demographics, the gay community is a very attractive target for all kinds of marketers.

59) Senior citizens – the over-50 crowd – are among the important diverse communities to whom public relations professionals must be sensitive.

60) A major difference between the corporate sector and nonprofits is the willingness to use media advocacy or provocative techniques to be noticed.

61) The need to position one nonprofit from among other nonprofit organizations indicates the days of being “all things to all people” are over.

62) Since 1976, which group of immigrants has grown dramatically, and how has that growth manifested itself in the U.S.?

63) Identify three trends that characterize corporate giving in the second decade of the 21st century.

64) List some of the typical objectives for an effective community relations effort.

65) There are many differences and similarities in the public relations field as they pertain to for-profit and not-for-profit organizations. Pinpoint and discuss one major area that differentiates them.

Chapter 14 International Consumer Relations

1) In 2012, U.S. online shoppers were expected to spend upwards of ____________ on books, apparel, computers, etc.
A) $120 billion
B) $224 billion
C) $320 billion
D) $400 billion

2) At the core of international consumer relations lies an attitude of delivering dependable products in a manner that is _______________________________________.
A) service-oriented and ethical
B) the minimum quality people are willing to pay for
C) obscure so it is difficult for consumers to know how to complain
D) highly processed

3) How many people worldwide now belong to the consumer class?
A) 240 million
B) 120 million
C) nearly 2 billion
D) nearly 3 billion

4) A reason public relations has become an international phenomenon is the
A) ease in smoothing out conflicts over trade across international boundaries.
B) communications power of the Internet.
C) ease in translatability of different languages.
D) rise in civility between people of different cultures and religions.

5) A typical goal of consumer relations is to keep former customers because
A) most product complaints are made by new customers.
B) most service complaints come from new customers.
C) most requests for product upgrades come from prospective customers.
D) most sales are made to established customers.

6) Which of the following is NOT a typical goal of a customer relations professional?
A) Keeping old customers
B) Attracting new customers
C) Marketing new items or services
D) Increasing costs to the organization

7) Another name for consumer-generated media is
A) online consumer word-of-mouth.
B) blogs.
C) Usenet newsgroups.
D) message boards.

8) Which is NOT one of the sources from which consumer generated media originates:
A) message boards and forums.
B) blogs.
C) public discussions.
D) town hall meetings.

9) The term “bedbug letter” refers to
A) a type of response that landlords provide to complaining tenants.
B) a response to consumer complaints, dating back to the heyday of railroads.
C) a pro-forma response to complaints used by the pest control industry.
D) a vehicle ombudsmen use to respond to repeat complaints.

10) The risk of consumer complaints in greater in the present environment because
A) complaints can go viral.
B) 80% of people complain
C) consumers have more confidence in call center employees
D) there are more performance deficiencies

11) Ombudsman is a
A) government official in Sweden and also New Zealand appointed to investigate abuses made by public officials.
B) person in some organizations charged with superficially investigating complaints made against the firm and its managers.
C) category of difficulties customers are having with products or services.
D) service provided by a service center on a first-come, first-served basis.

12) Consumerism in the U.S. first emerged when
A) Congress established the Interstate Commerce Commission (ICC) in 1928.
B) Ralph Nader wrote the 1964 best-seller, Unsafe at Any Speed.
C) Congress enacted the Criminal Fraud Statute in 1872.
D) President Harry S. Truman in 1948 laid down the Bill of Rights as part of a consumer constitution.

13) Consumer rights spelled out by President John F. Kennedy in the early 1960s included
A) the right to protection from goods that are hazardous to health, to life.
B) the right to a sympathetic response from an organization that provides a faulty product.
C) the right to sue a company for its shoddy advertising for its goods and services.
D) the right to a full response from a company regarding its return policy.

14) Government officials who are concerned about consumer rights and protection focus on product
A) variety and pricing.
B) labeling and packaging.
C) litigation time limits.
D) registration of letters of complaint.

15) The Consumer Financial Protection Bureau was created in the wake of the 2011 Wall Street scandals to
A) reduce the federal budget deficit
B) make consumer financial products and services more transparent
C) oversee international interests
D) protect stock holder rights

16) The Internet has
A) become a medium for consumer activism.
B) become a medium where consumers can take legal action against manufacturers who abuse consumer rights.
C) become a medium that screens so-called “wildfire e-mail campaigns.”
D) become a medium where manufacturers who have abused consumer rights can seek recourse.

17) Which of the following is NOT a consumer relations function in companies?
A) to develop guidelines to evaluate services and products for management
B) to develop field-training programs
C) to develop methods to counter consumer activists’ efforts for boycotts
D) to develop consumer programs that meet consumer needs while helping to increase sales

18) Ways to mollify customer criticism can include all the following EXCEPT
A) providing prompt replies.
B) providing consumer training in proper use of products.
C) providing personalized replies.
D) providing free samples.

19) American companies have ________ of the 10 most powerful brands in the world.
A) nine
B) five
C) ten
D) eight

20) To avert troubles and reinforce the idea that they are responsible and concerned local residents, all foreign companies operating internationally should
A) focus on communicating just how responsible they are as concerned local companies.
B) continue to lead by example that they think and act globally.
C) publicize how they are the single-most important standard bearer for their host countries.
D) take proper actions first followed by appropriate communication.

21) According to Interbrand’s annual list of the 100 most valuable global brands, how many of the top 10 were not American?
A) half
B) one
C) two
D) all

22) The most striking example of Internet activism stemmed from
A) consumers who traveled via Alaska Airlines
B) political activists throughout the Middle East who brought down dictators
C) Ralph Nader’s Unsafe at Any Speed
D) Chinese anger about Coca-Cola translating to “bite the wax tadpole”

23) Spread of Web capabilities and globalization have introduced news pressures on consumer relations, making companies even more aware that they must walk a fine line between behaving “responsibly” and marketing their products.

24) After all is said and done, the primary purpose of consumer relations is to build sales.

25) Today, expeditious complaint handling is done more by ombudspersons than people at remote call centers.

26) Consumers apparently place much trust in consumer-generated media, making that a source consumer relations people must understand and try to manage.

27) Research indicates that about 40 percent of dissatisfied customers lodge complaints.

28) Today, it is more likely that the “ombudsperson” is someone at a call center.

29) Consumerism began with passage by Congress in 1972 of the Criminal Fraud Statute.

30) People and nations worldwide becoming more closely connected is a major reason for increased emphasis on international public relations.

31) Repairing rifts between Westerners and people from other cultures is a key challenge for practitioners of public relations.

32) Companies that are responsible and concerned about local residents should lead by doing what’s appropriate and then communicate what they did, and not the other way around.

33) “What’s in a name?” is a mantra public relations people ought to help marketing people answer whenever they begin planning a major product introduction around the globe.

34) Jet Blue Airways’ “Customer Bill of Rights” is typical of the enlightened attitude companies have toward customers today.

35) In the second decade of the 21st century, in spite of heightened competition, scarcer resources and more immediate and public ways to complain, the consumer is no longer “king”.

36) Briefly describe how General Mills utilized burnouts Cheech and Chong to promote their Fiber One brownies.

37) Describe the “consumer class” and note the implications for public relations professionals.

38) Provide an example of how multinational companies have used public relations techniques to help distinguish its products from the competition.

39) How do public relations solutions help organizations cut through the clutter?

40) What are some typical goals of consumer relations professionals?

41) What are some of the sources of consumer-generated media (CGM)?

42) Briefly describe the history of consumerism in the United States.

43) If you had the opportunity to devise a consumer’s bill of rights, what would you include?

44. Why do multinational corporations, in particular, have to be sensitive to how their actions might affect people of different cultures in different geographies?

45. How do smart multinational corporations reinforce the notion that they are responsible and concerned residents of local communities?

46. Describe the history and the role of Consumers Union.

47. How has consumer relations evolved at companies?

04

48. Why did JetBlue initiate its Customer Bill of Rights?

49. What was Linsanity?

50. What is the difference between global PR and execution of PR in local markets around the world?

Chapter 15 Public Relations Writing

1) The key to the practice of public relations remains
A) knowing protocol in international relations.
B) navigating the politics of bureaucracies.
C) communicating effectively in writing and speaking.
D) setting goals and objectives.

2) Which of the following is NOT an objective of public relations writing?
A) to motivate
B) to inform
C) to persuade
D) to differentiate

3) A hallmark of the practice of public relations is
A) knowing protocol in international relations.
B) navigating the politics of bureaucracies.
C) communicating effectively in writing for the ear and eye.
D) understanding the power of “cat and mouse disclosure.”

4) Like public relations teachers, supervisors and executive recruiters indicate that
A) public relations people excel at writing well.
B) public relations people, largely, are horrible writers.
C) public relations people ignore opportunities to improve their writing skills.
D) public relations people fail to recognize the added value knowing how to write will have for their career.

5) Which of the following is NOT true about public relations and “writing for the eye”?
A) Most public relations people today have been trained in it.
B) It traditionally was among the strongest public relations skills.
C) Most practitioners had come from print journalism.
D) A background in print is a necessary prerequisite for the field.

6) Among the most important bits of advice about writing for the ear is
A) use passive verbs.
B) be brief.
C) avoid using contractions.
D) use complex sentence structure.

7) Which of the following is a main trait needed to be an effective public relations writer?
A) knowledge of basic writing principles
B) good eye-hand coordination for keyboarding
C) skill at surfing the Internet
D) ability to multitask

8) Which of the following is NOT an advantage a reader has over a listener?
A) opportunity to scan material
B) opportunity to study specific words and phrases
C) opportunity to see something only once
D) opportunity to dart ahead

9) Which of the following is a major challenge of writing for a listener?
A) to provide lots of statistics
B) to grab the attention of the listener quickly
C) to provide information that is easily reviewed
D) to present lots of incidentals

10) Which of the following is NOT a fundamental for effective writing?
A) to think before writing
B) to draft and redraft till you have a polished, finished product
C) to write your material for all audiences rather than one specific audience
D) to write tightly

11) The four-part formula for writers includes which of the following:
A) start with an idea before you start writing
B) avoid making drafts
C) add fancy words and abstract ideas
D) target as many people as possible

12) Which of the following was NOT part of Sir Winston Churchill’s writing formula?
A) He got straight to the point
B) He used complex words
C) He painted pictures
D) He told the truth

13) According to Rudolf Flesch, keys to making writing more readable include all EXCEPT
A) use language readers understand.
B) use brief, clear sentences.
C) use words that demonstrate your knowledge of languages other than English.
D) cover only one item per paragraph.

14) Which of the following does NOT pertain to the inverted pyramid?
A) an exercise in creative writing
B) where to put the Flesch formula into action
C) the climax of a story is at the beginning
D) provides details to key questions in descending order

15) A lead is
A) what graphic artists call space between type-set words.
B) another name for the inverted pyramid.
C) the first one or two sentences, or first paragraph in a news story.
D) the dramatic close in a news release

16) In public relations writing, ________ is often maligned but valuable and earns the “granddaddy” award.
A) a backgrounder
B) a photo opportunity
C) a news release
D) a media alert

17) The overriding purpose of a news release is
A) to stimulate editors to consider covering the story.
B) to inform a targeted public rather than the media about what your organization is doing.
C) to have a document of record about what an organization is doing.
D) to justify the public relations function in an organization.

18) A major element that helps media editors decide whether to even read a news release is
A) how closely public relations writers follow accepted news release format.
B) how much attention is given to localizing the material.
C) a clear indication of the release date.
D) who to contact if there are questions.

19) A research scientist working for your company finds a cure for cancer, and you’re asked to write the release. The newsworthy element inherent in the story is
A) oddity.
B) impact.
C) prominence.
D) conflict.

20) A new chief executive for your organization has been named, so the news release depends on the ________ factor for its news value.
A) impact
B) oddity
C) known principal
D) conflict

21) A story that touches on an emotional experience is using the ________ angle.
A) oddity
B) crisis
C) impact
D) human interest

22) Of the following items, which one should a professional news release NOT include?
A) clear focus on one central subject
B) proven news value items
C) hyperbole
D) a “boilerplate”

23) A news release that has news value must
A) be newsworthy in the context of the organization.
B) must be subjective.
C) must be void of attribution
D) must include hyperbole

24) Public relations and journalism students are taught that the lead should include
A) all elements indicated in the subhead.
B) the 5 Ws and occasionally the H.
C) a well-written quote above all else.
D) extensive details.

25) Which of the following is a time-honored essential that will help news releases get considered for inclusion in print?
A) Relevance to the readers of the target media
B) Include as many different subjects as possible
C) Use buzzwords and hyperbole
D) Use inflated superlatives in quotes

26) Which of the following characterizes “style” in writing?
A) must be flexible
B) is more critical than content
C) uses language that hasn’t changed over time
D) can be overlooked in the interest putting out the story

27) The news style that most public relations writers follow has been established by the
A) American Psychology Association.
B) New York Times.
C) Associated Press.
D) B & C

28) The style for capitalization writers in public relations follow for publication is
A) up style.
B) down style.
C) mid-English style
D) abbreviated style

29) The rule to follow regarding numbers indicates that numbers till ________ should be spelled out.
A) 11
B) nine
C) 10
D) eight

30) An absolute way to avoid misspellings,
A) always find an alternative word.
B) verify words in a dictionary.
C) use a spell checker on your software.
D) always use the second spelling offered in a dictionary.

31) Social media news releases do all the following EXCEPT
A) satisfy traditionalist professors of public relations.
B) bypass traditional journalists.
C) directly reach key constituents.
D) reach bloggers and podcasters.

32) Which of the following pertain to Internet news releases?
A) should not be sent via e-mail
B) succinctness and brevity are essential
C) should be sent via “snail mail”
D) can ignore newsworthiness criteria

33) Which of the following do NOT conform to the rule for writing Internet news releases?
A) list only one reporter on the “to” line
B) link attachments to only the URL
C) remember readability rules
D) list several reporters on the “to” line

34) Which of the following rules about editing do not apply to Internet newswriting?
A) follow the A’s and B’s of writing
B) carefully self-edit
C) remember to throw in passive verbs whenever possible
D) avoid redundancies

35) The ability to write clearly, easily, coherently, and quickly distinguishes practitioners of public relations from other functionaries in an organization.

36) Not knowing how to communicate well, especially how to write – how to express ideas on paper – can reduce advancement opportunities for people in public relations.

37) A frequent complaint from prospective employers about candidates for their public relations department is that they are “horrible writers.”

38) Knowing differences in writing for the eye and for the eye and ear are critical if you expect to be an effective public relations writer.

39) An advantage readers have over listeners pertains to the fact that they have time to ponder the words they encounter.

40) An advantage listeners have over readers pertains to the ease with which they can concentrate on what they heard.

41) Whether you’re a novelist or public relations writer, essentials or basics for effective writing include having an idea you want to express and stating it simply and clearly for a particular audience.

42) One of the critical basics to remember about writing effectively is to know your audience.

43) Rudolf Flesch suggested that readability comes down to writing that is easily understood by a targeted audience.

44) Flesch believed that leaving out the word “that” can make writing even more readable.

45) Use of the inverted pyramid makes journalists and public relations writers similar to novelists because it forces them to reveal the so-called climax early in their materials.

46) The lead is the most critical component in the structure of a news release.

47) Newsworthy, localized news releases stand a better chance of being considered by editors.

48) A news release that makes an announcement that affects society depends on impact for its newsworthiness.

49) A solid news release should eschew jargon and hyperbole.

50) “Boiler plate” in a news release provides the date and place from which a news release is written.

51) Proper use of style indicates the leveCl of competency and professionalism of writers and organizations submitting material to a media editor.

52) “Nourishing quotes” are quotes that count or that advance a story.

53) Issuing a release that had no news to announce would have led to a loss of credibility, but the Internet has changed that.

54) Trying to stimulate a “conversation” is a legitimate reason to send a social media release to a Web site.

55) Hammering home the headline and following the W format are among requisites for an Internet news release.

56) Careful self-editing is critical to presenting a professionally developed piece of writing.

57) When you’re asked to write for a reader versus for a listener, what should you remember?

58) If you were a disciple of Rudolf Flesch advising a recent college graduate about how to succeed in public relations writing by really trying, what advice would you offer?

59) If you expect to have success issuing news releases that are likely to be considered for placement, what should you remember?

60) What would you tell a student aspiring to enter the world of public relations to know about social media and writing for it?

Chapter 17 Integrated Marketing Communications

1) Which of the following techniques have been used to promote companies?
A) advertising in space
B) product placement in television shows
C) product placement in books
D) all of the above

2) Which of the following is NOT a technique used in integrated marketing communications?
A) product placement in movies and TV shows
B) celebrity spokespersons
C) third-party sponsorship
D) sponsorship of sporting events

3) When public relations and publicity, advertising, sales promotion and marketing intersect, that’s referred to as
A) database marketing.
B) integrated marketing.
C) cross promotion.
D) sales promotion.

4) Motivating prospective customers to action describes what ________ is effective at doing.
A) sales promotion
B) traditional marketing
C) traditional advertising
D) public relations

5) If public relations practitioners see themselves as key players in IMC, they must
A) touch consumers one on one.
B) establish credibility.
C) motivate prospective customers.
D) build brand awareness.

6) A major difference between public relations and marketing is that
A) the focus in marketing is on selling the organization’s image; in public relations the focus is on selling an organization’s service above all else.
B) there virtually is no difference between the two.
C) the focus in public relations is on marketing an organization; in marketing it’s on selling a service or product.
D) the focus on value rather than price is the province of marketing; in public relations it’s on price rather than value.

7) A major difference between public relations and advertising is
A) advertising is about selling an organization; in public relations it’s about selling products and services.
B) public relations strives for unbiased, objective, third-party messengers to relay information about an organization as well as its products and services; in advertising the choice of media helps accomplish that.
C) there virtually is no difference between the two.
D) advertising focuses on paying for time or space that allows them to put across their organization’s messages about its products and services; in public relations credibility helps to earn media recognition.

8) Which of the following is NOT and should NOT be part of what public relations practitioners do in an IMC project or campaign?
A) write product publicity
B) create paid spots for radio and TV featuring products and services
C) use appropriate celebrity spokespersons to gain media attention
D) use special events to create buzz

9) Which of the following attitudes of marketing people have changed?
A) treating public relations as merely an ancillary part of the marketing mix
B) making sure products and services meet the desires and needs of customers
C) pricing products and services competitively
D) assuring products are distributed widely

10) Which of the following does NOT pertain to Philip Kotler?
A) premier thinker in the marketing world
B) advocate of the 4 Ps
C) dismisses the value of public relations in the marketing mix
D) believes public relations is a fifth P in the marketing mix

11) Which of the following statements about product publicity is FALSE?
A) It’s what public relations is all about.
B) It’s the essence of the value of integrating public relations and marketing.
C) It’s an important adjunct to advertising.
D) It’s the basis for much of what consumers know or believe about products.

12) In which of the following areas is product publicity NOT very effective?
A) tying a product to a unique representative
B) explaining a complicated product
C) competing against better funded products
D) meeting sales quotas

13) If the effectiveness of publicity is exemplified by how long a company can tie its product to an iconic figure, then ________ appears to hold a record.
A) Burger King’s “King”
B) The Muppet’s Miss Piggy
C) Ronald McDonald
D) Morris the Cat

14) A sign of just how significant tying mascots to products can be is
A) the well-known, annual kennel show in New York City.
B) Snapple and Balloons Over Broadway.
C) General Mills creating Green Giant Food Company and a related Web site.
D) Morris the Cat as a spokesperson for PETA.

15) Third-party endorsement is essentially
A) what media give to a company, its products, and services by mentioning them as news.
B) what advertisers earn the minute they pay and place their ads and spots.
C) what the King brings to the product he advertises.
D) what the late Michael Jackson brought to Pepsi and other products he endorsed.

16) Advertising is NOT held in as high esteem as marketing people would hope because
A) it rarely is as creative today as it was 25 years ago.
B) there’s a stigma about the message being created and paid for by the sender.
C) it is not written or talked about as much in media as publicity items.
D) it is perceived as news.

17) A practice among some news editors because of the proliferating raft of product placements in the media is to
A) mention brands or companies in news columns.
B) delete mention of brands or companies in news columns.
C) flip a coin whether or not to mention a brand or company in a news column.
D) ignore their publisher and treat well those who treat news reporters professionally.

18) A public relations practice that media scorn is
A) finding legitimate news angles that earn product or company mentions in media.
B) creating a differentiable identity for a client.
C) placing well-known people on TV but failing to disclose they are representing a particular company.
D) pitching features that have a promotional angle.

19) Branding is about
A) creation of a position or differentiable identity for a company or product.
B) what public relations is all about.
C) what advertising is all about.
D) what marketing is all about.

20) To establish a unique brand, IMC must do all the following EXCEPT
A) be aggressive.
B) create an urban legend on the Internet.
C) be early.
D) create a distinct personality.

21) The “law of primacy” is essential in
A) establishing the impression that you were first in a product category.
B) establishing credibility.
C) gaining credibility with media.
D) earning prime placement in media.

22) Showing Beanie Babies and Cabbage Patch Dolls with a client’s new product for a photograph is an example of which principle of building a brand?
A) being early.
B) being memorable.
C) using heritage.
D) being aggressive.

23) Types of subjects associated with public relations include all EXCEPT which of the following?
A) those that focus solely on selling the product or service
B) those that trumpet why people should think about an issue
C) those that reinforce a company’s reputation by showing the company’s core values without focusing on selling a product or service
D) those that support causes in the public’s interest

24) Which of the following companies initiated nonproduct advertising that is associated with the term public relations advertising?
A) Mobil Corporation
B) Warner & Swasey
C) Friendly’s Ice Cream Corporation
D) Pepsi-Cola

25) Issue advertising was spearheaded by which of the following?
A) Warner & Swasey
B) Mobil Corporation
C) Friendly’s Ice Cream Corporation
D) Pepsi-Cola

26) Typical topics of traditional public relations advertising focus on all the following EXCEPT
A) organizational resources.
B) growth of the firm.
C) product advertising.
D) organization name changes.

27) If you’ve received publicity in a magazine or newspaper, what can you produce to extend the impact from that coverage?
A) a brochure
B) an article reprint
C) a PSA
D) a backgrounder

28) If you expected to receive maximum value from an article reprint you would do all of the following EXCEPT
A) integrate it with other information on similar or related subjects.
B) select target publics and send it to specific people.
C) seek permission months after the article appeared to have a press run of the article for use by the sales staff as a “door opener” with targeted sales prospects.
D) plan ahead by ordering it before the publication goes to press.

29) One of the principal forums for generating solid publicity can be a trade show because
A) it provides an opportunity to showcase what’s new to a captive, interested audience, including trade book reporters.
B) it generates information about your company that is sure to gain attention from media based where the show is held.
C) it’s always worth more than the cost in time, money, and human resources.
D) it generates sales leads for the public relations department.

30) Which of the following is NOT among criteria that celebrity spokespersons should meet?
A) being articulate
B) being a college graduate
C) being of high moral character
D) being thoroughly knowledgeable about the subject or product

31) A reason cause-related marketing is likely to continue to grow in this century is
A) the high cost of advertising.
B) so many middle-aged baby boomers are more concerned about issues.
C) the natural and apparent connections between causes and companies.
D) the high cost of sales promotions.

32) Which of the following is NOT an example of an in-kind promotion?
A) providing samples and gifts of products and services with sales literature
B) providing posters of products or services for well-trafficked venues
C) one that anonymously supports causes in the public’s interest
D) providing services or products as prizes for a charity for mention in promotional materials

33) Which of the following is NOT an example of 21st century promotional innovation associated with integrated marketing?
A) infomercials
B) brand integration in the action on a television program
C) buzz marketing
D) news releases

34) Which of the following is NOT characteristic of buzz marketing?
A) began with teens
B) can be anywhere from 10 seconds to 60 minutes
C) enlists “trend setters”
D) another name for word-of-mouth

35) Which of the following is NOT a “venue” for integrated marketing?
A) sports teams
B) airsickness bags
C) a house of worship
D) songs

36) Integrated marketing communications (IMC) is no longer where advertising, sales promotion, and marketing intersect with publicity to promote organizations, their services and products.

37) Neither advertising nor marketing is dead, but integrating them with public relations and publicity is very much the rule in many organizations.

38) Public relations focuses on selling an organization while advertising focuses on marketing an organization.

39) Clutter or noise interferes with whether organizations actually make customers aware of their products through marketing and advertising.

40) Marketing guru Philip Kotler advocated for expanding the traditional 4 Ps of marketing, indicating public relations is the fifth P.

41) For many people, the essence of the value of integrating marketing with public relations comes from product publicity.

42) The public is well aware that much of what it has come to know and believe about a wide variety of products and services comes via publicity covered in the media.

43) Publicity can be used to explain a complicated product.

44) Publicity is not valuable in tying a unique representative to a product.

45) Media avoid mention of a company or its brand in a news story to create the impression that they generated the facts, ideas, and photo situations, but so very often, practitioners plant the seeds for many stories.

46) Branding is differentiating the identity of the position of a company and/or its products and services.

47) Using heritage is not a key to branding because it is so difficult to capitalize on traditions and history associated with a product or organization.

48) Image advertising, institutional advertising, and issues advertising are all variations of public relations advertising.

49) Public relations advertising can be used by an organization to effectively convey messages about mergers and diversification.

50) Article reprints can be strategically used in efforts to add maximum sales punch for the marketing organization.

51) One essential aspect regarding participation in a trade show comes when the show is concluded, evaluating the merits of that participation.

52) In addition to spokespersons being articulate, fast on their feet, and thoroughly knowledgeable about an organization, they must be upfront about their being paid advocates for an organization.

53) Cause-related marketing ties together fund-raising efforts of nonprofit groups with objectives of corporate sponsors.

54) An in-kind promotion occurs when a company provides a service, product, or other consideration in exchange for publicity.

55) Despite infomercials being considered the Rodney Dangerfield of marketing, they are effective.

56) Another term for word-of-mouth marketing is buzz marketing.

57) Some 21st century venues for integrated marketing include blogs and even parts of people’s anatomy.

58) Provide some evidence that today sure ain’t “your mother’s marketing” environment.

59) Who is Philip Kotler, and how significant is he to the practice of public relations?

60) Indicate ways publicity can be quite effective in the marketing mix.

61) Discuss how trade shows provide opportunities for public relations people to shine and demonstrate just how integral the public relations function is to marketing.

62) What does cause-related marketing offer public relations people that other items in the promotion part of the marketing mix don’t usually offer?

Chapter 17 Crisis Management

1) The speed of the Internet, pervasiveness of social media and viral communications mean people and companies are
A) more visible.
B) a blink away from real or faux crisis.
C) less vulnerable.
D) more glamorous.

2) What Warner Brothers movie’s public relations team hand to manage a crisis after a gunman opened fire at its premiere in Aurora, CO?
A) The Dark Knight Rises
B) Gangster Squad
C) Argo
D) The Great Gatsby

3) To ________, crisis is “unplanned visibility.”
A) Lance Armstrong
B) Edward Bernays
C) W. Howard Chase
D) James Lukaszewaski

4) In the 21st century, among the highest-paid, most well-regarded public relations practitioners are those who attempt to manage
A) investor relations.
B) community relations.
C) crises.
D) media relations.

5) Exponential expansion of the number and depth of crises affecting various institutions and prominent people in American society has occurred because of all the following EXCEPT
A) talk radio.
B) balanced and objective journalism.
C) 24/7 cable news and commentary.
D) instantaneous Internet communication.

6) Which element of society was NOT listed as having endured a poorly-handled crisis in the 21st Century?
A) government
B) journalism
C) Hollywood
D) religion

7) Who is credited with coining the term issues management?
A) W. Howard Chase
B) James Lukaszewski
C) Richard Scrushy
D) Hillard Fleishman

8) Which of the following is NOT an element of issues management?
A) anticipate emerging issues
B) deal with opportunities and vulnerabilities
C) implementation of a costs-benefits analysis
D) plan from the outside in

9) In a summary of the goals of issues management which of the following would NOT be included?
A) to help reduce risk
B) to help reduce organizational assets
C) to help manage image
D) to help preserve markets

10) Issues management does NOT encompass which of the following?
A) anticipating emerging issues
B) identifying issue selectively
C) bottom-line orientation
D) assault of the dominant coalition

11) Which of the following is NOT key to effective issues management?
A) evaluating costs solely in dollars without recognizing impact on reputation
B) anticipating issues before they arise
C) operating with consent of top management
D) dealing with vulnerabilities and opportunities

12) Research findings that are important to consider in developing a risk communication strategy include all the following EXCEPT
A) when stressed, a person’s ability to hear, understand, and remember decreases.
B) when stressed, people miss up to 80 percent of message content.
C) of the 20 percent that people hear, most content is negative.
D) when stressed, a person’s ability to hear, understand, and remember increases.

13) To better manage what must be conveyed as part of risk communication, the person charged with responding ought to follow a seven-step process called
A) message ideation.
B) message assessment.
C) message mapping.
D) message management.

14) Which of the following is NOT a standard requirement for message maps?
A) three key messages
B) seven to 12 words in a message
C) twelve to 17 words in a message
D) three supporting facts for each key message

15) Message maps generally adhere to all of the following standard requirements EXCEPT:
A) three key messages
B) seven to 12 words per message
C) three supporting facts for each key message
D) three media outlets per message

16) Which of the following is NOT a warning sign of a crisis?
A) surprise
B) insufficient information
C) escalating events
D) decreased outside scrutiny

17) Which of the following is one of the five planning issues associated with heightened crisis preparedness?
A) Define the risk for each potentially impacted audience
B) Describe the actions that might mitigate the risk for each risk defined
C) Identify the cause of the risk
D) All of the above

18) Which of the following does most public relations professionals consider the cardinal rule for communications during a crisis?
A) apologize
B) say no comment
C) tell it all and tell it fast
D) use an inexperience spokesperson

19) Based on the definition of a crisis provided in the Harvard Business Review, when one occurs, you should
A) provide dramatic, even extraordinary, intervention.
B) identify the stakeholders.
C) analyze concerns.
D) ask outside experts to assist you.

20) If a crisis occurs, typically you will have to handle
A) a siege mentality, especially amplified by your legal advisors.
B) a sense of calm heretofore unknown.
C) masses of information.
D) increased internal scrutiny.

21) In a crisis, which of the following is NOT likely to be a behavior of most reporters?
A) to point a finger
B) to be empathetic
C) to ascribe blame
D) to fulfill their role as a guardian of the public trust

22) The first planning issue in preparing how to handle a crisis is to
A) describe the actions that mitigate the risk.
B) identify the cause of the risk.
C) define the risk for each likely affected audience.
D) demonstrate responsible management action.

23) The most essential step in planning how to handle a crisis is to
A) identify the cause of the risk.
B) describe actions that mitigate the risk.
C) create a consistent message.
D) demonstrate responsible management action.

24) In contrast to advice lawyers typically offer about a crisis, public relations people would advise that you
A) tell as little as possible as often as possible.
B) simply say nothing, especially why you are saying nothing.
C) provide prompt, frank, and full information.
D) speculate so the media have something substantive for their deadline.

25) Research by the public relations agency Porter Novelli about communicating in a crisis indicates that
A) like fish that’s a day old, a delayed response is likely to disturb media.
B) upwards of 65 percent of people hear “no comment” in a crisis and figure the person or organization is guilty.
C) most public relations people advise management to wait until things simmer down before responding.
D) adding a little emotion to your response is okay.

26) In the heat of a crisis, public relations professionals must remember the cold truth about their goals, which include all of the following EXCEPT
A) terminate the crisis quickly.
B) limit damage.
C) build a case for who or what was to blame.
D) restore credibility.

27) A crisis means that in dealing with media, you must establish “battlefield rules” that include all EXCEPT which of the following?
A) Establish gatekeeper headquarters.
B) Speculate even if it hurts.
C) Feed the media beast with verifiable numbers and information.
D) Try to find something that allows them to advance the story.

28) Paramount in all advice offered about handling media in a crisis, above all else
A) never, never lie.
B) softly make your point once and move on.
C) engage the media in a battle, even war, so they know who’s in charge.
D) go off the record.

29) In no small measure the Internet and social media force people and organizations to have savvy crisis management counsel.

30) Changes in technology and attitudes among traditional and nontraditional journalists and commentators have exponentially expanded the communications challenges facing people and institutions.

31) Given the numbers and depth of scandals in government, politics, business, education, religion, and even in charitable institutions, the issues management domain is more important.

32) Analyzing and delimiting the impact identified issues may have on a person or organization is one of the five steps in the issues management process.

33) The term issues management is another term for image management.

34) Anticipating emerging issues is really part of pre-crisis planning more than of crisis planning itself.

35) To do risk management well, you must have empathy for peoples’ intense emotions that typically arise because they don’t fully know or understand the science that underlies the potential impact of your organization’s actions.

36) The term crisis is associated with a major accident or disaster.

37) Responsible management of a crisis can pay either dividends or be quite costly for years to come as the commissioner of Major League Baseball, and CEOs of Johnson & Johnson and Exxon would attest.

38) Despite all the preparation, there still is an element of surprise and even a loss of control that practitioners will likely encounter as they try to manage a crisis.

39) Heightened preparedness for a crisis includes defining of and describing actions to mitigate risks.

40) Because lawyers operate primarily in a court of public opinion, they have learned that in a crisis it is best to quietly say as little as possible as soon as possible.

41) Generally, in a crisis, when public relations people respond intelligently and quickly with honest information, rumors usually stop.

42) In a crisis, public relations practitioners may like to think of media as friendly adversaries, but they must anticipate a “feeding frenzy” and adopt “battlefield rules.”

43) Even though media may have a “box score” mentality in covering a crisis, a public relations practitioner should avoid speculation.

44) In simple terms, successful communications tactics in a crisis revolve around keeping to the facts, being open and concerned but not defensive, and maintaining credibility.

45) During a crisis, it is important to create a vacuum of information. If you feed the media beast, it will last longer.

46) Being defensive is a good way to set boundaries for the media.

47) The rule of thumb during a crisis is to communicate well with mainstream media and monitor social media 24/7.

48) Some companies use a dark website which becomes live and contained relevant information for the outside world when a crisis strikes.

49) Name some of the communications phenomena that currently affect the need to manage crisis.

50) What, according to W. Howard Chase who coined the term, is issues management?

51) By following the definition for a crisis provided in the Harvard Business Review, what should you expect or do?

52) When lawyers provide you advice for how to communicate a crisis, what will they likely advise?

53) To be prepared for a crisis, what five planning issues would you consider?

54) What are the goals of crisis management?

55) What is the point of a dark website? How is it used?

Chapter 18 Launching a Career

1) To land a job in public relations today, savvy applicants will likely find which of the following effective?
A) networking in the traditional way
B) emailing a resume
C) networking using social media
D) mailing a cover letter and resume

2) When economic times have been rough, the “first jobs to go” were traditionally in
A) finance.
B) accounting.
C) public relations.
D) media.

3) After the recent debacles, especially in banking and investment, and with the penetration of social media, what does the public expect from all corporations?
A) more happy talk
B) more silence
C) more arrogance
D) more candid communications

4) During these difficult economic times, corporations and their leaders ought to follow which of following pieces of advice?
A) the public will be damned.
B) the public must be informed.
C) the public will be silenced.
D) the public must be fooled.

5) In a recent study conducted by the University of South Carolina about the recession and its impact on public relations and communication functions, all the following were true EXCEPT
A) compensation was frozen.
B) compensation was reduced.
C) headcount was not reduced.
D) recruiting for those positions was postponed.

6) Which of the following can help college students get a jump on the competition?
A) Improve your communication skills
B) Start networking
C) Focus
D) all of the above

7) Which is NOT a way to get a jump on the competition?
A) Start networking
B) Look at companies you like
C) See what’s available after graduation
D) Intern

8) The key to organizing a job search, in bad or good times, is
A) honesty.
B) candor.
C) organization.
D) transparency.

9) The main problem for job seekers is to
A) have a successful interview.
B) find a way through the door.
C) remember to market themselves.
D) show their portfolio.

10) What qualifies Martin Arnold to offer job search advice to public relations students?
A) a director of human resources
B) a CEO
C) a director of IMC
D) an experienced public relations executive and teacher

11) Which of the following is the first step in an effective job search, according to Martin Arnold?
A) Find the name of the person to whom you should talk.
B) Remember to take charge of the interview.
C) Determine what your interests are.
D) Dispatch a personal letter.

12) Which of the following bits of advice from Martin Arnold pertain to the first step in his suggested job search process?
A) Avoid wearing bling to the first interview.
B) Determine where you would like to work.
C) Prepare and practice a two-minute “elevator speech.”
D) Send a “bread-and-butter” letter after the interview.

13) Simple advice for the second step in the job search process suggested by Arnold boils down to
A) get a name.
B) mail a cover letter and resume.
C) call, call, call.
D) use e-mail to the Human Resources Department.

14) Which of the following techniques would NOT, according to Arnold, help you avoid the “dead letter response” in a job search?
A) network to find the name of the person to address your job pitch to
B) use a “professionals on staff” directory
C) failing to use a specific name to address correspondence to
D) call the reception desk and ask how to spell the name of the director in the department you want to work in

15) You found the name of the person to address in correspondence, following the Arnold process, next you would do all the following EXCEPT
A) introduce yourself, your reason for choosing the company, and why you would appreciate the opportunity to speak with her/him.
B) ask the correspondent to call you.
C) request a time to discuss the person’s experiences and outlook about the field of public relations.
D) indicate you will follow up to set a mutually convenient time for a discussion.

16) Sadly, which of the key steps in Arnold’s suggested job search process is too often not actually done?
A) the 30-second elevator “speech”
B) making that follow-up “call” to set up an interview
C) taking control of the interview
D) the search for a specific name of the person to contact

17) Which of the following is a resume “DON’T” according to resume consultant Paulette Barrett?
A) Identify three impressions you want to create immediately
B) Identify achievements that will make someone say “tell me more”
C) Include an objective statement
D) List your professional awards, educational achievements and community service

18) Your author indicates that only 10 percent of the time do job seekers
A) even have the good fortune to secure a job interview.
B) have the opportunity to set the agenda.
C) receive a job offer after an interview.
D) realize they are responsible for controlling the interview agenda.

19) In the game plan for an effective interview experience, which should you NOT do?
A) Ask questions and provide answers that demonstrate you prepared.
B) Avoid asking for names of other contacts who might be helpful.
C) Follow up as you indicated at the end of the interview.
D) Wait for the interviewer to lead.

20) All the following are true regarding the hiring process EXCEPT
A) people want to work with people they like.
B) it is important to know about the company.
C) expect speedy responses to inquiries.
D) it is important to keep in touch

21) Which of the following is NOT a key to a successful public relations career?
A) gain diversity of experience.
B) the right first job.
C) relationship building.
D) intangibles.

22) Which of the following was NOT indicated as a key factor in a successful public relations career described in a survey of 97 highest-level public relations leaders?
A) communications skills
B) compassion
C) diversity of experience
D) performance

23) In a survey of 97 highest-level public relations leaders, they said public relations people must be: “self-starters, go getters, risk-takers, opportunity seekers with boundless energy, great curiosity.” They were actually describing which of the seven key factors?
A) timeliness
B) diversity of experience
C) proactivity and passion
D) intangibles

24) In a survey of 97 highest level public relations leaders, nearly half of those interviewed indicated
A) positive personal character traits were the most desired characteristic among job candidates.
B) diversity of experience was the second most sought-after qualification.
C) the most significant limitation candidates have is their inability to describe the value of public relations for an organization.
D) the major challenge for all people in the field boils down to just doing their job well in these difficult times.

25) According to Bill Heyman, founder, president and CEO of Heyman Associates, what is the best preparation for public relations employment?
A) Become a strong writer
B) Be prepared to accept a low starting salary
C) Focus on perks
D) Learn about health care

26) If you are trying to launch a career in public relations, traditional networking and other skills have given way to social media networking.

27) Instead of cutting staffs, most companies chose to freeze or reduce public relations compensation rather than cutting headcount.

28) Public relations agencies are good at understanding the changing dynamics of the market place and earned media like social media.

29) During the current economic downturn, public relations people still are among “the first to go”.

30) One of the questions employers may ask themselves about a candidate is “Can he or she help my company adapt by not only doing the job today but also reinventing the job for tomorrow?”

31) A study conducted by the University of Southern California indicates that as the current recession has worn on, most U.S. companies have chosen to cut the number of public relations professionals.

32) It is no longer important to network when you are trying to get a jump on the competition for a job.

33) Internships are an important way to get your foot in the door.

34) “Organization” is the principal requirement in organizing a job search.

35) Getting through the door is the main problem in finding a job with a targeted prospective employer.

36) The field of public relations has become less competitive because it no longer is enticing lawyers and journalists.

37) Former public relations executive and teacher Martin Arnold tells students who aspire to work in public relations to investigate organizations that have job possibilities in their keenest areas of interest.

38) Martin Arnold indicates that despite job applicants writing in letters of , they rarely call, even though they plan to do so.

39) In a 30-second elevator speech, job candidates must introduce themselves, and explain what they are doing and what they are trying to achieve.

40) It is important to have an anecdote about each post on your resume.

41) Employers like to see an objective statement because they care what you want more than they care what you are going to do for them.

42) Notable achievements should be at the end of your resume.

43) If applicants land an interview, they should not try to control the agenda.

44) A second suggested step in the script or plan for an effective interview is to lead with your knowledge, your strengths, which comes down to demonstrating you’ve done your homework.

45) Periodically check back with the appropriate person after the interview to see where you stand in the job hiring process.

46) After you land a job, it is not too early to map your career advancement path.

47) Recruiter William C. Herman and Professor Bruce Berger conducted a study to define what it takes to make it to the top of the public relations ladder.

48) In the Heyman-Berger study, the subjects indicated that building a track record of results was a key to being successful.

49) Describe some major differences, today, that apply to launching a career in public relations. In fact, describe how social media might be used.

50) Is there any “good news” for people either in or aspiring to be in public relations even during these “bad news” economic times?

51) List some essential aspects for organizing an effective job search.

52) What are some valuable tips to remember regarding job interviews?

53) Describe the Heyman-Berger Study.

54) List the seven keys pinpointed in the Heyman-Berger study and provide some commentary about each.

BUS 309 Business Ethics – Strayer – A+ Graded

Click on the Link Below to Purchase Complete Test Bank (Chapter 1 – 11)

http://www.hwgala.com/BUS-309-Business-Ethics-Test-Bank-Strayer-250.htm

Chapter 1—The Nature of Morality

MULTIPLE CHOICE

1. Which of the following characteristics distinguishes moral standards from other sorts of standards?
a. moral standards are purely optional
b. moral standards take priority over other standards, including self-interest
c. moral standards cannot be justified by reasons
d. moral standards must be set or validated by some authoritative body

2. Choose the statement that gives the most accurate description of etiquette:
a. the rules of etiquette are a fundamental branch of morality
b. conformity with the rules of etiquette is sufficient for moral conduct
c. etiquette refers to a special code of social behavior or courtesy
d. the rules of etiquette are backed by statutory law

3. Our relationship with the law is best described by which of the following?
a. To a significant extent, law codifies a society’s customs, norms, and moral values.
b. The law is a completely adequate guide to the moral standards that we should follow.
c. The law makes all immoral conduct illegal.
d. Violating the law is always immoral.

4. Which of the following is not one of the four basic kinds of law?
a. statutes b. constitutional law c. common law d. contractual law

5. A proper perspective of religion and morality is
a. only religion can tell us what is right and wrong
b. it’s not true that morality must be based on religion
c. religion never influences people’s moral beliefs
d. without religion, people wouldn’t have a reason to act morally

6. When religion and morality are considered,
a. the moral instructions of the world’s great religions are often general and imprecise.
b. most people act rightly only because their religion tells them to.
c. atheists are likely to be less moral than religious people.
d. in practice, people who share a religion will agree on all moral questions.

7. The divine command theory implies that
a. God commands us to do whatever our reason tells us is right.
b. God forbids stealing because stealing is wrong.
c. God leaves right and wrong up to us.
d. stealing is wrong only because God commands us not to steal.

8. Ethical relativism supports the theory that
a. what is morally right is what society says is morally right.
b. there are no moral values whatsoever.
c. morality is relative to the goal of promoting human well-being.
d. different societies have different ideas about right and wrong.

9. When ethical relativism is put into practice, it implies that
a. societies never share any moral values in common.
b. in ethics, sometimes the minority is right.
c. we cannot say that slavery is wrong if the society in question believes it is right.
d. as societies evolve, their morality improves.

10. Accepting a moral principle
a. is a purely intellectual act like accepting a scientific hypothesis.
b. generally involves a desire to follow that principle for its own sake.
c. means you will never go against that principle.
d. is a religiously based act of faith.

11. The example of Huckleberry Finn shows
a. one should always obey one’s conscience.
b. when in doubt, one should ignore one’s conscience.
c. we shouldn’t rely uncritically on what our conscience says.
d. unlike most people, Huckleberry Finn lacked a conscience.

12. Morality and self-interest
a. can sometimes conflict. c. can never come into genuine conflict.
b. boil down to the same thing. d. are in basic, irreconcilable conflict.

13. How did Aristotle view morality?
a. It’s necessary for us to try to be virtuous or excellent human beings.
b. Moral judgments are true because God commands them of us.
c. Moral judgments are determined differently by each culture.
d. It’s never right to help ourselves when we can help other people instead.

14. The code or principles of conduct that a person accepts
a. constitute the whole of his or her morality.
b. can be distinguished from the person’s morality in a broader sense that includes his or her values, ideals, and aspirations.
c. rarely guide his or her conduct in practice.
d. are always attained from his or her religion.

15. The famous experiments by social psychologist Solomon Asch show
a. the truth of utilitarianism.
b. the power of peer pressure has been greatly exaggerated.
c. business organizations put more pressure on individual integrity than do other kinds of organization.
d. even temporary groups can pressure people to conform.

16. The authors use the murder of Kitty Genovese to illustrate
a. ethical relativism. c. groupthink.
b. bystander apathy. d. the paradox of hedonism.

17. If an argument is valid, then
a. the argument is sound.
b. the argument’s conclusion must be true.
c. the argument’s premises are true.
d. its conclusion must be true, if its premises are.

18. Good moral judgments should be logical and
a. justified by fallacies.
b. proven beyond reasonable doubt.
c. based on facts and acceptable moral principles.
d. coincide with what most scientifically trained people think.

19. Philosophical discussion of moral issues typically involves
a. the revision and modification of arguments.
b. proof beyond a reasonable doubt.
c. circular reasoning.
d. determining what the majority thinks.

20. The following is a logical fact.
a. All valid arguments are sound arguments.
b. All sound arguments are valid arguments.
c. A sound argument may have a false conclusion.
d. A sound argument may have a false premise.

21. Choose the statement that is a true reflection of moral behavior.
a. Conscience is a perfectly reliable guide for moral behavior.
b. Peer pressure has no effect on whether or not people behave morally.
c. Bystander apathy appears to result in part from diffusion of responsibility.
d. All moral behavior is motivated from religious faith.

22. What criteria concerning moral judgments should we agree with?
a. As long as your conduct is legal, then it will be moral.
b. If you follow the rules of etiquette, your conduct will be moral.
c. Moral standards typically concern behavior that can be of serious consequence to human welfare.
d. If your conduct follows the guidelines of professional codes of ethics, it will be moral.

23. Which statement is true concerning moral principles and self interests?
a. Statutes are laws applied in the English-speaking world before there were any common laws.
b. Philosophers agree that morality is based on the commands of God.
c. “Groupthink” is a positive and necessary characteristic of all groups.
d. Morality serves to restrain our purely self-interested desires so that we can all live together.

24. Which of the following is an accurate statement?
a. There is a complete list of adequacy criteria for moral judgments that philosophers all agree on.
b. Professional codes are the rules that are supposed to govern the conduct of members of a given profession.
c. Professional codes of ethics provide a complete and reliable guide to one’s moral obligations.
d. People who are exclusively concerned with their own interests tend to have happier and more satisfying lives than those whose desires extend beyond themselves.

TRUE/FALSE

1. In business and elsewhere, an action can be legal and morally wrong.

2. For philosophers, the important question is not how we come to have the particular moral principles we have, but whether we can justify them.

3. Organizational norms always and inevitably lead to groupthink.

4. Enron executives acted wrongly simply because they broke the law.

5. If you do the right thing only because you think you will profit from it, then you are truly motivated by moral concerns.

6. Ethical relativism is the theory that what is right is determined by what a culture or society says is right.

7. If your conduct is legal, it will also be moral.

8. An organization is a group of people working together to achieve a common purpose.

9. Moral standards concern behavior that can be of serious consequence to human welfare.

10. Rules of etiquette are always moral rules.

11. An individual does not have to follow the code of one’s profession.

12. Bystander apathy appears to result in part from diffusion of responsibility.

13. Most people don’t distinguish between a person’s “morals” and his or her “ethics.”

14. Business ethics is the study of what constitutes right and wrong, or good and bad, human conduct in a business context.

15. “Etiquette” designates a special realm of morality.

16. There are four basic kinds of law: statutes, regulations, common law, and constitutional law.

17. In theory and practice, law codifies customs, ideals, beliefs, and a society’s moral values.

18. According to divine command theory, if something is wrong, then the only reason it is wro