Accounting for Equity and Liabilities
Mock Exam
Course Introduction
This course delves into the principles and practices related to accounting for equity and liabilities in business organizations. Students will explore the accounting treatment and reporting requirements for various forms of equity including share capital, reserves, and retained earnings as well as current and long-term liabilities such as loans, bonds, and other obligations. The course emphasizes the recognition, measurement, presentation, and disclosure of these financial statement elements in accordance with prevailing accounting standards. Learners will gain practical skills in journalizing, classifying, and reporting transactions, interpreting financial statements, and analyzing the impact of equity and liability decisions on the financial health of an organization.
Recommended Textbook
Intermediate Accounting 2nd Edition Volume II by Kin Lo George Fisher
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Chapter 11: Current Liabilities and Contingencies
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Sample Questions
Q1) Which statement about contingencies is correct?
A)If the future outcome is possible and reliably measurable,a provision is recorded.
B)If the future outcome is probable and reliably measurable,a provision is recorded.
C)If the future outcome is probable,a provision is recorded even if it is not reliably measurable.
D)If the future outcome is possible,a provision is recorded even if it is not reliably measurable.
Q2) Which statement about deferred revenue is correct?
A)Deferred revenue is always a non-current liability.
B)Deferred revenue could arise from loyalty programs.
C)Deferred revenue is measured using expected values.
D)Deferred revenue arises when the goods are shipped.
Q3) Which is a reason to use the net method to record purchase discounts?
A)Cost-benefit factor is greater for the net method.
B)Reporting "purchase discounts lost" signifies inefficient business practices.
C)Given the materiality of the amounts involved,the net method is used.
D)The net method is technically superior to the gross method.
Q4) Explain the meaning of "provision" and give an example.
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Chapter 12: Non-Current Financial Liabilities
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Sample Questions
Q1) Bold Accountants Co.sells $6,000,000 of 10-year,6% bonds priced to yield 5.5%.The bonds are dated and issued on January 1,2017.Interest is payable on January 1 and July 1 each year.Bold's year-end is June 30.
Required:
Prepare entries for
a.The issuance of the bonds.
b.Accrual of interest and related amortization on June 30,2017.
c.Payment of interest on July 1,2017.
d.Payment of interest and related amortization on January 1,2018.
Q2) Offsetting is the practice of showing the net amount of related assets and liabilities on the balance sheet,rather than showing each of the components separately.State and explain the pros and cons of offsetting assets against liabilities.
Q3) Which statement is correct about financial leverage?
A)Leverage can increase an investor's returns but also increases the risk of loss.
B)Leverage can decrease an investor's returns and also decrease the risk of loss.
C)Leverage decreases the payments that a company makes on an ongoing basis.
D)Leverage decreases the debt level relative to a company's equity base.
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Chapter 13: Equities
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Sample Questions
Q1) Which statement about a "stock split" is correct?
A)The economic position of the investors is diluted after a stock split.
B)The economic position of the investors is increased after a stock split.
C)The economic position of the investors is decreased after a stock split.
D)The economic position of the investors is unaffected after a stock split.
Q2) List the five classes of transactions that explain the change in equity on the statement of changes in equity.
Q3) What is the primary difference between common and preferred shares?
Q4) Which statement is correct?
A)Equity holders are concerned more about the debt accounts in the financial statements.
B)Equity holders are concerned about the debt and equity accounts in the financial statements.
C)Debt holders are concerned about the debt and equity accounts in the financial statements.
D)Debt holders are concerned more about the equity accounts in the financial statements.
Q5) Contrast the different treatment between IFRS and ASPE with respect to property dividends.
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Chapter 14: Complex Financial Instruments
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Sample Questions
Q1) What is a derivative and what are two reasons why parties would enter into a derivative contract?
Q2) Which statement best explains the accounting for compound instruments?
A)Once separated,each component is accounted for at fair value with changes recorded through income.
B)Once separated,each component is accounted for in accordance with its substance.
C)Once separated,each component is accounted for at amortized cost.
D)Once separated,each component is accounted for at historical cost.
Q3) What is a "put" option?
A)A contract that gives the holder the right to sell an instrument at a pre-specified price.
B)A contract that is derived from some other underlying quantity,index,asset or event.
C)A contract that gives the holder the right to acquire an instrument at a pre-specified price.
D)A contract that gives the holder the right to buy or sell something at a specified price.
Q4) Contrast options with warrants.
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Chapter 15: Earnings Per Share
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Q1) Which statement is correct about the "net income attributable to ordinary shareholders"?
A)Other comprehensive income (OCI)is included in this calculation.
B)Other comprehensive income (OCI)is excluded from this calculation.
C)Dividends to preferred shareholders are added to the net income.
D)Dividends to common shareholders are added to the net income
Q2) Which statement is correct about the "if-converted" method for EPS?
A)This method assumes the convertible security is converted into ordinary shares at the end of the fiscal period.
B)This method assumes the convertible security is converted into ordinary shares at the beginning of the fiscal period.
C)This method assumes the convertible security is converted into ordinary shares evenly over the fiscal period.
D)This method assumes the convertible security is converted into ordinary shares at the mid-point of the fiscal period.
Q3) Explain why dividends to preferred shareholders are adjusted in the numerator of the EPS calculation.
Q4) Contrast the terms "income effect" and "tax effect."
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Page 7
Chapter 16: Accounting for Income Taxes
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Q1) A company earns $490,000 in pre-tax income,while its tax return shows taxable income of $380,000.At a tax rate of 35%,how much is the income tax expense under the taxes payable method permitted under ASPE?
Q2) Which statement is accurate?
A)The taxes payable method is also known as the "deferral method."
B)The deferral method and the accrual method are "tax allocation" approaches.
C)The income statement approach is also known as the "accrual method."
D)The balance sheet approach is also known as the "deferral method."
Q3) Why does Capital Cost Allowance (CCA)usually exceed the amount of depreciation for tax purposes?
Q4) In the first two years of operations,a company reports taxable income of $200,000 and $250,000,respectively.In these two years,the company paid $45,000 and $56,000,respectively,in income taxes.It is now the end of the third year,and the company has a loss of $420,000 for tax purposes.The company carries losses to the earliest year possible.The tax rate is currently 25%.
Required:
Compute the amount of income tax payable or receivable in the current (third)year.
Q5) Why does the tax system appear to treat profits and losses asymmetrically?
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Chapter 17: Pensions and Other Employee Future Benefits
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Q1) Feldman has a defined benefit pension plan.The company's balance sheet shows a defined benefit liability of $770,000 at year-end.The company's records show that the company had amended the pension plan two years ago,giving rise to $600,000 of additional benefits to employees.These additional benefits vest 10 years after the plan amendment.The balance of unamortized actuarial gains at year-end is $340,000.The pension plan has $35,000,000 of assets at market value.
Required:
Determine the value of the accrued benefit obligation for Feldman's pension plan.
Q2) What is the key objective in the accounting for defined benefit plans that is achieved by estimating and recording current service cost?
Q3) A company reported $430,000 of pension expense in its income statement.The balance sheet showed that the pension liability increased by $29,000 over the year. Required: How much cash was paid to the pension trustee during the period?
Q4) What is the fundamental difference between a defined contribution and a defined benefit pension plan?
Q5) Summarize the three steps in the accounting for defined benefit pension plans. To view all questions and flashcards with answers, click on the resource link above.
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Chapter 18: Accounting for Leases
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Q1) On January 1,2017,Brownee Company entered a lease to rent office space.The lease requires $350,000 per year,at the end of each year,for 20 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 40 years,and its current fair value is estimated to be $6 million.The incremental borrowing rate is 5%.
Required:
Classify this lease and record the journal entries for the first year of the lease.
Q2) Why do the supporting indicators for lease classification use "major part" and "substantially all" rather than "all" in reference to the amount of time and value contained in the lease?
Q3) In general,which statement is correct?
A)Lessees prefer finance leases.
B)Lessees prefer operating leases.
C)Operating leases are more favourable to the lessor in the short term.
D)Finance leases are more favourable to the lessee in the short term.
Q4) List factors that impact the degree to which this agency cost is a factor.
Q5) Compare the impact of finance leases and operating leases to the balance sheet and income statement of the lessee.
Q6) Why do lessors prefer financing lease treatment over operating lease treatment?
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Chapter 19: Statement of Cash Flows
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Q1) George Corp.'s policy is to report all cash inflows from interest and dividends in the investing section and cash outflows arising from interest and dividends in the financing section.Angela's activities for the year ended December 31,2016 included the following:
Declared a $12,000 cash dividend payable on January 15,2017.
Acquired an automobile costing $30,000 under a finance lease.
Declared and issued a stock dividend valued at $15,000.
Issued $330,000 in ordinary shares.
Accounts payable increased $18,000 during the year.
Paid $980,000 to repurchase bonds.The book value of the bonds was $1,010,000. Made a $15,000 principal payment on a bank loan.
Interest expense for the period was $8,000.The interest payable account increased $2,000.
Required:
a.Prepare the cash flows from financing activities section of the statement of cash flows. b.Identify how the activities listed above that are not financing activities would be reported in the statement of cash flows assuming that the statement is prepared using the indirect method.
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Chapter 20: Accounting Changes
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Sample Questions
Q1) Cantac Construction purchased a piece of equipment for $40 million in early 2017.The company depreciates the equipment using the straight-line method over its useful life of 20 years,when it will have zero residual value.Cantac's income tax rate is 40%.At the end of 2020,after four years of depreciation,the company wrote down the carrying amount of the equipment from $32 million to $24 million after performing an impairment test on the cash generating unit (CGU)to which the equipment belonged.As a result of the impairment,the annual depreciation declined from $2 million to $1.5 million.In 2023,prior to recording depreciation for that year,the company's staff discovered an error in one of the formulas in the spreadsheet used to compute the value in use for the impairment test carried out at the end of 2020.Removing the error in the spreadsheet,the value in use for the CGU exceeded its carrying value.Therefore,the CGU was in fact not impaired,and Cantac should not have recorded an impairment writedown on the demolition equipment at the end of 2020.
Required: Prepare the journal entries to correct the error including subsequent years' depreciation and related tax effects.
Q2) What is the essential characteristic that distinguishes a change in accounting policy from either an error correction or a change in estimate?
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