Accounting for Intercorporate Investments
Question Bank
Course Introduction
Accounting for Intercorporate Investments explores the principles and practices used to account for investments corporations make in other entities. The course covers topics such as the acquisition and consolidation of subsidiaries, equity method investments, joint ventures, and the reporting of non-controlling interests. Students will learn how to prepare and analyze consolidated financial statements, evaluate the impact of different investment structures on financial reporting, and apply relevant international and national accounting standards. Through case studies and practical exercises, learners will gain a comprehensive understanding of the complexities involved in accounting for intercorporate relationships and their implications for both internal decision-making and external financial communication.
Recommended Textbook
Modern Advanced Accounting in Canada9th Edition by Darrell Herauf
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Chapter 1: Conceptual and Case Analysis Frameworks for Financial Reporting
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Q1) What approach did Canada first decide to take with respect to convergence with IFRS?
A) Harmonization of CPA Canada Handbook with IFRS.
B) Substituting IFRS for Canadian GAAP when approved by the IASB.
C) Adopting some but not necessarily all IFRSs by reviewing them on a case by case basis.
D) Reviewing them with all publically accountable entities to see which ones would be acceptable.
Answer: A
Q2) The formula for the current ratio is:
A) current assets - current liabilities
B) current assets/current liabilities
C) total debt/shareholders' equity
D) net income/shareholders' equity
Answer: B
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Chapter 2: Investments in Equity Securities
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Q1) Any unallocated positive acquisition differential is normally:
A) pro-rated across the Associate's identifiable net assets.
B) charged to Retained Earnings.
C) recorded as Goodwill.
D) expensed during the year following the acquisition.
Answer: C
Q2) The ________ investment must be shown as a current asset, whereas the other investments could be current or non-current, depending on management's intention.
A) fair value through profit or loss (FVTPL)
B) cost method
C) equity method
D) fair value through other comprehensive income (FVTOCI)
Answer: A
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Chapter 3: Business Combinations
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Q1) A Inc. is contemplating a business combination with B Inc. However, A Inc.'s management is uncertain as to whether it should purchase B's assets or a majority of B's voting shares. The fair market values of B's assets far exceed their book values. A's management should be advised that IN MOST CASES:
A) the purchase of B's shares would likely be the cheaper method of acquiring control; however, it would be less advantageous to the consolidated entity from tax standpoint. B) the purchase of B's shares would likely be the cheaper method of acquiring control. It would also be more advantageous to the consolidated entity from a tax standpoint.
C) the purchase of B's shares would likely be the costlier method of acquiring control; however, it would be more advantageous to the consolidated entity from a tax standpoint.
D) the purchase of B's shares would likely be the costlier method of acquiring control. It would also be less advantageous to the consolidated entity from a tax standpoint. Answer: A
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Chapter 4: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Any negative goodwill arising on the date of acquisition: A) is prorated among the parent company's identifiable net assets. B) is recognized as a gain on the date of acquisition. C) should be amortized over a predetermined period. D) is recognized as a gain on date of acquisition by both the parent and the non-controlling interest.
Q2) Major Corporation issues 1,000,000 common shares for all of the outstanding common shares of Minor Corporation on August 1, Year 1. The shares issued have a fair market value of $40.
In addition, the merger agreement provides that if the market price of Major's shares is below $60 two years from the date of the merger, Major will issue additional shares to the former shareholders of Minor Corporation in an amount that will compensate them for their loss of value.
Major predicts that there is a 25% probability that Major's shares will be trading at $59 per share and a 75% probability that they will be trading at greater than $60 per share two years from the date of the merger. Assume a discount rate of 7%.
Required:
Prepare the journal entry to record the issuance of the shares.
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Chapter 5: Consolidation Subsequent to Acquisition Date
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Q1) Testing intangible assets with indefinite useful lives for impairment:
A) occurs every year.
B) occurs when only there has been an indication of an impairment in the value of the asset such as a reduction in cash flow generation, idle assets, etc.
C) never occurs because the asset has an indefinite useful life.
D) occurs whenever required by the company's auditors.
Q2) If the parent company uses the equity method to record its investment in a subsidiary in its internal accounting records, which of the following statements is FALSE?
A) The parent's net income equals consolidated net income.
B) The parent's retained earnings will be equal to consolidated retained earnings.
C) Only the parent's share of the subsidiary's income, dividends and amortization of acquisition differential are recorded in the investor's records.
D) The parent's net income equals consolidated net income attributable to the shareholders of the parent.
Q3) Prepare a consolidated balance sheet for Par Inc. as at June 30, 2021.
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Chapter 6: Intercompany Inventory and Land Profits
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Q1) X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its investment in Y Inc.
What is the after-tax dollar value of X's unrealized profits during the year on its sales to Y?
A) $2,000
B) $1,000
C) $600
D) $400
Q2) Intercompany profits on sales of inventory are only realized:
A) once the seller receives payment for the sale.
B) once the inventory has been sold to outsiders.
C) when the inventory has been received by the purchaser.
D) when the inventory has been shipped to the purchaser.
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Page 8
Chapter 7: A Intercompany Profits in Depreciable Assets B
Intercompany
Bondholdings
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Q1) Duff Inc. owns 75% of Paddy Corp. and uses the Equity Method to account for its investment. Paddy purchased $120,000 face value of Duff's 12% par value bonds on January 1, 2020 for $100,000, when Duff's bond liability consisted of $240,000 par of 12% bonds maturing on January 1, 2030.
There was an unamortized bond discount of $20,000 attached to the bonds on that date. Interest payment dates are June 30 and December 31 each year. Straight line amortization is used.
Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company. During 2020, Paddy earned a net income of $80,000 and paid dividends of $20,000. What amount would be shown on Duff's 2020 Consolidated Statement of Financial Position under bonds payable?
A) $110,000
B) $111,000
C) $112,000
D) $220,000
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Chapter 8: Consolidated Cash Flows and Changes in Ownership
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Q1) ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting shares for $350,000 on January 1, 2020. On the date of acquisition, 123's common shares and retained earnings were valued at $120,000 and $180,000, respectively. 123's book values approximated its fair values on the acquisition date with the exception of a patent and a trademark, neither of which had been previously recorded. The fair values of the patent and trademark on the date of acquisition were $30,000 and $20,000 respectively.
On January 2, 2020, ABC sold 7,000 shares of 123 on the open market for $57,750. ABC Inc. uses the equity method to account for its investment in 123 Inc.
What percentage of its Investment in 123 was sold by ABC?
A) 14%
B) 50%
C) 56%
D) 20%
Q2) X owns 70% of Y, which in turn owns 25% of Z. X, also owns 20% of Z. Which of the following statements is correct?
A) X has direct control over Z.
B) X has indirect control over Z.
C) X has no control over Z.
D) X has contingent control over Z.
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Chapter 9: Other Consolidation Reporting Issues
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Q1) Globecorp International has six operating segments, the details of which are shown below. All figures shown are in thousands of dollars.
\(\begin{array}{|l|r|r|r|}
\hline \text { OperatingSegment } & \text { Revenues } & \text { Profits } & \text { Assets } \\
\hline \mathrm{A} 01 & \$ 6,000 & \$ 1,050 & \$ 12,000 \\
\hline \mathrm{B} 02 & \$ 4,800 & \$ 840 & \$ 10,500 \\
\hline \text { C03 } & \$ 3,600 & \$ 720 & \$ 7,500 \\\hline \text { D04 } & \$ 1,800 & \$
330 & \$ 4,500 \\
\hline \text { E05 } & \$ 2,550 & \$ 405 & \$ 4,200 \\
\hline \text { F06 } & \$ 900 & \$ 135 & \$ 1,800 \\
\hline \text { Total } & \$ 19,650 & \$ 3,480 & \$ 40,500\\ \hline
\end{array}\) Using ONLY the assets test, determine which of the following segments require separate disclosures.
Total assets add up to $40,500. $40,500 \(\times\) 10% = $4,050
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Chapter 10: Foreign Currency Transactions
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Q1) On July 1, 2020, CANCO purchased inventory from its main U.S. supplier, RNB Enterprises, at a cost of US$12,000. CANCO's year end is on July 31. Payment of US$12,000 for the inventory is due on August 31, 2020. Some important dates regarding this transaction, as well as the exchange rates in effect at each of these dates are shown below:
\[\begin{array} { | l | l | l }
\hline \text { Trarsaction date: July } 1,2020 : & \text { 1 U.S. Dollar } = \text { CDN } 1.370 \\
\hline\text { Year end July } 31,2020 : & \text { 1 U.S. Dollar } = \text { CDN } \$ 1.345 \\
\hline \text { Setternent date: August } 31,2020 : & \text { 1 U.S. Dollar } = \text { CDN } \$ 1.325 \\
\hline
\end{array}\] What would be the amount of the foreign exchange gain or loss recorded at the settlement date?
A) A CDN$300 exchange loss.
B) A CDN$240 exchange gain.
C) A CDN$300 exchange gain.
D) Nil. Any exchange gain or loss is deferred until settlement.
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Chapter 11: Translation and Consolidation of Foreign Operations
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Q1) Which of the following statements is correct?
A) If the functional currency of the foreign operation is different than the parent's functional currency, depreciation and amortization must be translated using closing rates.
B) If the functional currency of the foreign operation is different than the parent's functional currency, depreciation and amortization are translated using average rates.
C) If the functional currency of the foreign operation is different than the parent's functional currency, depreciation and amortization must be translated using historical rates.
D) If the functional currency of the foreign operation is the same as the parent's functional currency, depreciation and amortization must be translated using closing rates.
Q2) The risk exposure that occurs between the time of entering into a transaction and the time of settling it is referred to as:
A) translation (accounting) exposure.
B) transaction exposure.
C) economic exposure.
D) business risk.
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Chapter 12: Accounting for Not-For-Profit and Public Sector Organizations
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Q1) Which of the following statements is correct?
A) Endowments are donations that are received with the provision that it will be invested and only the investment income may be spent by the organization.
B) Endowments are unrestricted donations which can be used for any purposes that are consistent with the goals and objectives of the not-for-profit organization.
C) Endowments are provided as donations which only allow a not-for-profit organization to invest in other not-for-profit organizations only.
D) Endowments may be restricted and unrestricted funds which must be used in accordance with the wishes of the contributor and only available during the life of the donor.
Q2) A not-for-profit organization is required to record the donation of capital assets at: A) replacement cost.
B) fair value.
C) net realizable value.
D) the original cost to the donor of the capital asset.
Q3) Describe what fund accounting is and why is it used for not-for-profit organizations.
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