Accounting for Government and Not-for-Profit Entities Pre-Test Questions - 1777 Verified Questions
Accounting for Government and Not-for-Profit Entities
Pre-Test Questions
Course Introduction
This course provides an in-depth exploration of accounting principles and financial reporting unique to government and not-for-profit organizations. Students will examine fund accounting, budgeting, and financial statement preparation in accordance with GASB and FASB standards. Topics also include regulation, revenue recognition, expenditure control, and issues related to transparency and accountability. Through practical examples and case studies, students will develop the skills necessary to analyze, interpret, and communicate financial information in public sector and nonprofit environments.
Chapter 1: The Equity Method of Accounting for Investments
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Q1) When should an investor not use the equity method for an investment of 21% in another corporation?
Answer: When the investor does not have significant influence with regard to the investee.
Q2) On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What was the balance in the investment account before the shares were sold?
A) $1,560,000.
B) $1,600,000.
C) $1,700,000.
D) $1,800,000.
E) $1,860,000.
Answer: A
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Chapter 2: Consolidation of Financial Information
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Q1) How would you account for in-process research and development acquired in a business combination accounted for as an acquisition?
Answer: In-Process Research and Development is capitalized as an asset of the combination and reported as intangible assets with indefinite lives subject to impairment reviews.
Q2) Peterman Co. owns 55% of Samson Co. Under what circumstances would Peterman not be required to prepare consolidated financial statements?
Answer: Peterman would not be required to prepare consolidated financial statements if control of Samson is temporary or if, despite majority ownership, Peterman does not have control over Samson. A lack of control might exist if Samson is in a country that imposes restrictions on Peterman's actions.
Q3) For acquisition accounting, why are assets and liabilities of the subsidiary consolidated at fair value?
Answer: The acquisition transaction is assumed to occur through an orderly transaction between market participants at the measurement date of the acquisition. Thus identified assets and liabilities acquired have been assigned fair value for the transfer to the acquirer and this is a relevant and faithful representation for consolidation.
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Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. What will Harrison record as its Investment in Rhine on January 1, 2012?
A) $400,000.
B) $403,142.
C) $406,000.
D) $409,142.
E) $416,500.
Answer: B
Q2) Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate incorporation. How would this loan be treated on a consolidated balance sheet?
Answer: The loan represents an intra-entity payable for Hans and receivable for Dutch, and each receivable and payable would be eliminated in preparing a consolidated balance sheet.
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) On January 1, 2014, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2014 and $126,000 in 2015 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2014 and $364,000 in 2015. Use the economic unit concept to account for this acquisition. Prepare a proper presentation of consolidated net income for 2014.
Q2) Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2014. During 2014, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of excess cost allocations totaled $60,000 in 2014. What is the effect of including Harbor in consolidated net income for 2014?
A) $350,000.
B) $308,000.
C) $500,000.
D) $440,000.
E) $290,000.
Q3) What is preacquisition income?
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Q1) Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2013. During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario still had $60,000 of the goods in its inventory at the end of the year. The amount of unrealized intra-entity profit that should be eliminated in the consolidation process at the end of 2013 is
A) $15,000.
B) $20,000.
C) $32,500.
D) $30,000.
E) $110,000.
Q2) Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2012, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2012, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare any 2013 consolidation worksheet entries that would be required regarding the 2012 inventory transfer.
Q3) When is the gain on an intra-entity transfer of land realized?
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Q1) Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock. Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Stoop's annual after-tax interest expense for the bonds was $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2013. Stoop's diluted earnings per share (rounded) is calculated to be
A) $5.62.
B) $3.26.
C) $3.11.
D) $5.03.
E) $4.28.
Q2) Parent Corporation acquired some of its subsidiary's bonds on the open bond market, paying a price $40,000 higher than the bonds' carrying value. How should the difference between the purchase price and the carrying value be accounted for?
Q3) What documents or other sources of information would be used to prepare a consolidated statement of cash flows?
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Q1) Under current U.S. tax law for consolidated tax returns:
A) One entity in the group can use another entity's net operating loss carry-forward to its advantage.
B) The parent can use the net operating loss carry-forward of another entity in the group.
C) A net operating loss carry-forward if an entity will be unusable when consolidated tax returns are prepared.
D) A net operating loss carry-forward of an entity in the group can only be used by that entity.
E) Since the tax return is for all entities in one consolidated group, the net operating loss carry-forward of one entity must be pro-rated to all other entities in the group.
Q2) What are the benefits or advantages of filing a consolidated income tax return?
Q3) Wilkins Inc. owned 60% of Motumbo Co. During the current year, Motumbo reported net income of $280,000 but paid a total cash dividend of only $56,000.
Required:
Assuming an income tax rate of 30%, what amount of Deferred Income Tax Liability arising this year must be recognized in the consolidated balance sheet?
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Chapter 8: Segment and Interim Reporting
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Q1) What related items need to be disclosed in regard to total segment assets?
Q2) What is the appropriate treatment in an interim financial report for variances arising from the use of a standard costing system?
A) The variances are always ignored for interim reporting.
B) The variances should always be reflected in gross profit on an interim income statement.
C) The variances expected to be absorbed by year-end should not be reflected in the interim statement.
D) The variances should always be reflected in the interim income statement but not the interim balance sheet.
E) The variances should only be reflected in the interim balance sheet.
Q3) How should contingencies be reported in an interim report?
A) Disclosed the same way as they are disclosed in annual reports.
B) Disclosed in the interim period discovered, and ignored in all future periods.
C) Recorded as gains or losses as incurred.
D) Recorded as gains or losses only if material.
E) Ignored.
Q4) What is meant by the term: disaggregated financial information?
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) Williams Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094, and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income?
A) Discount revenue.
B) Premium revenue.
C) Discount expense.
D) Premium expense.
E) Both discount revenue and premium expense.
Q2) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?
Q3) What is the purpose of a hedge of foreign exchange risk?
Q4) How is the fair value of a Forward Contract determined by U.S. GAAP?
Q5) What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates?
Q6) What is the major assumption underlying the one-transaction perspective?
Q7) What is meant by the spot rate?
Q8) What factors create a foreign exchange gain? Page 11
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) Under the current rate method, property, plant & equipment would be translated at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q2) In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities?
A) the exchange rate in effect when each asset or liability was acquired.
B) the average exchange rate for the current year.
C) a calculated exchange rate based on market value.
D) the exchange rate in effect as of the balance sheet date.
E) the exchange rate in effect at the start of the current year.
Q3) Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2013, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?
Q4) Contrast the purpose of remeasurement with the purpose of translation.
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) Which of the following statements is false regarding a country's legal system?
A) The two major types of legal systems are common law and codified Roman law.
B) Common law originated in the Roman jus civile.
C) Code law countries tend to have more statutes governing a wider range of human activity.
D) Accounting law is rather general in code law countries.
E) A nongovernmental organization is more likely to develop in a common law country than in a code law country.
Q2) What are measurement differences in international reporting and what would be an example of a difference?
Q3) How did the early International Accounting Standards (IAS) obtain support from a sufficient number of board members?
Q4) What are the three authoritative pronouncements that make up the International Financial Reporting Standards (IFRS)?
Q5) What were the major objectives of the Treaty of Rome?
Q6) What are the two major types of legal systems used around the world?
Q7) What accounting topics were covered under the FASB short-term convergence project?
Q8) Which two EU directives have helped harmonize accounting standards? Page 14
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) What is shelf registration?
Q2) Regulation S-X specifies:
A) requirements for the nonfinancial information to be filed with the SEC.
B) which form a company must file to register new securities.
C) that the financial statements included in a company's annual report must be audited.
D) the form and content of financial statements to be filed with the SEC.
E) the internal controls a publicly traded company must maintain.
Q3) What is the primary focus of the Sarbanes-Oxley Act?
A) Accounting standards and the registration of securities.
B) Regulation of the continuous reporting by publicly owned companies.
C) Accounting standards and registration of investment companies that engage in investing and trading in securities.
D) Accounting standards and penalties against persons who profit from illegal use of inside information.
E) Regulation of independent audit firms and audit standards.
Q4) What is a proxy? Briefly explain the importance of a proxy solicitation.
Q5) What is a wrap-around filing?
Q6) What was the purpose of the Securities Exchange Act of 1934?
Page 16
Q7) What are the four interconnected goals that the SEC has tried to achieve?
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) Which statement is false regarding a plan for reorganization?
A) The plan is the heart of every Chapter 7 bankruptcy.
B) The provisions of the plan specify the treatment of all creditors and equity holders upon approval by the Court.
C) The plan shapes the financial structure of the entity that emerges.
D) The plan may contain numerous provisions as solutions to financial difficulties.
E) The plan may contain provisions for changes in the management of the company.
Q2) What information is included on the statement of realization and liquidation?
Q3) What is the meaning of the phrase debtor in possession?
Q4) What is the purpose of Chapter 7 of the Bankruptcy Reform Act?
Q5) What are the four categories of debts in a Statement of Financial Affairs?
Q6) What are free assets?
A) assets for which net realizable value is greater than historical cost.
B) assets for which no market exists.
C) assets for which replacement cost is greater than historical cost.
D) assets available to be distributed for liabilities with priority and for other unsecured obligations.
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E) assets available to be distributed to stockholders.
Q7) What is the role of the trustee in the liquidation of a company?
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Chapter 14: Partnerships: Formation and Operation
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Q1) Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses:
- 12% interest on the yearly beginning capital balance
- $10 per hour of work that can be billed to the partnership's clients
- the remainder divided in a 3:2 ratio
The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month.
For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2012 and 2013.
Determine the balance in both capital accounts at the end of 2013 to the nearest dollar.
Q2) By what methods can a person gain admittance to a partnership?
Q3) Why are the terms of the Articles of Partnership important to partners?
Q4) What events cause the dissolution of a partnership?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) Gonda, Herron, and Morse is considering possible liquidation because partner Morse is personally insolvent. The partners have the following capital balances: $60,000, $70,000, and $40,000, respectively, and share profits and losses 30%, 45%, and 25%, respectively. The partnership has $200,000 in noncash assets that can be sold for $150,000. The partnership has $10,000 cash on hand, and $40,000 in liabilities. What is the minimum that partner Morse's creditors would receive if they have filed a claim for $50,000?
A) $0.
B) $27,500.
C) $45,000.
D) $47,500.
E) $50,000.
Q2) Which item is not shown on the schedule of partnership liquidation?
A) Current cash balances.
B) Property owned by the partnership.
C) Liabilities still to be paid.
D) Personal assets of the partners.
E) Current capital balances of the partners.
Q3) What events or circumstances might force the termination of a partnership and liquidation of its assets?
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Chapter 16: Accounting for State and Local Governments
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Q1) The Town of Anthrop receives a $10,000 grant to make the Town Hall handicapped-accessible.
Required:
Prepare the journal entry, and identify the fund in which it is recorded, to record the receipt of the grant.
Q2) Which of the following funds is most likely created with an endowed gift?
A) Enterprise Fund.
B) Internal Service Fund.
C) Debt Service Fund.
D) Capital Projects Fund.
E) Permanent Fund.
Q3) The Town of Anthrop has recorded the receipt of a $10,000 grant to make its Town Hall handicapped-accessible. The town now spends $10,000 to make the Town Hall handicapped-accessible.
Required:
Prepare the journal entry (or entries), and identify the fund for recording, to record that the town spends $10,000 of a grant it received to make the Town Hall handicapped-accessible.
Q4) What are the five types of governmental funds?
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Chapter 17: Accounting for State and Local Governments
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Q1) What information is required in the financial section of a state or local government's CAFR?
Q2) Jones College, a public institution of higher education, must prepare financial statements
A) As if the college was an enterprise fund.
B) Following the same rules as state and local governments.
C) According to GAAP.
D) As if the college was a fiduciary fund.
E) In the same manner as private colleges and universities.
Q3) How is the Statement of Cash Flows for Proprietary Funds similar and dissimilar to a Statement of Cash Flows for a for-profit business?
Q4) What are the three broad sections of a state or local government's CAFR?
A) Introductory, financial, and statistical.
B) Financial statements, notes to the financial statements, and component units.
C) Introductory, statistical, and component units.
D) Component units, financial, and statistical.
E) Financial statements, notes to the financial statements, and statistical.
Q5) What three criteria must be met to identify a governmental unit as a primary government?
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Chapter 18: Accounting and Reporting for Private
Not-For-Profit Organizations
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Q1) In accruing patient charges for the current month, which one of the following accounts should a hospital credit?
A) Accounts Payable.
B) Deferred Revenue.
C) Unearned Revenue.
D) Patient Service Revenues.
E) Accounts Receivable.
Q2) What is the appropriate account to debit when reducing net patient service revenue as a result of arrangements with third party payors?
A) Contractual Adjustments.
B) Allowance for uncollectible and reduced accounts.
C) Patient Service Revenues.
D) Account Receivable-Patients.
E) Accounts Receivable-Third Party.
Q3) What is the main source of financial support for most voluntary health and welfare organizations?
Q4) What financial statements would normally be prepared by a voluntary health and welfare organization?
Q5) What are the objectives of accounting for a not-for-profit organization?
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Chapter 19: Accounting for Estates and Trusts
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Q1) After expenses of administering an estate, which claims would be next in a typical order of priority to establish which creditors will get paid?
(1) funeral expenses
(2) medical expenses of the last illness
(3) debts and taxes given preference under laws
(4) all other claims.
A) 1 and 2.
B) 2 and 3.
C) 3 and 4.
D) 1 and 4.
E) 2 and 4.
Q2) The party to receive a distribution of principal from an estate is legally called a(n):
A) Principal grantee.
B) Corpus benefitor.
C) Estate receiver.
D) Remainderman.
E) Estate distributee.
Q3) What are the four levels of claims in the order of priority of the Uniform Probate Code?
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