Course Introduction
Accounting Theory Exam
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Accounting Theory explores the foundational principles, concepts, and frameworks that underpin accounting practices and financial reporting. The course analyzes the development of accounting thought, the objectives and challenges of financial accounting, and the rationale for various methods and standards. Students examine the role of accounting theory in shaping regulatory policies, ethical considerations, and decision-making processes. Emphasis is placed on understanding how theoretical perspectives inform real-world accounting issues, controversies, and emerging trends in both national and international contexts.
Recommended Textbook
Advanced Financial Accounting 7th Edition by Thomas H. Beechy
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Page 2
Chapter 1: Setting the Stage
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Q1) Why has the reputation of U.S. accounting standards decreased in recent years?
A)The U.S. deficit is at a record high.
B)Many U.S. businesses have declared bankruptcy.
C)There have been some notable American accounting scandals, such as Enron.
D)Lengthy prison sentences have been given to unethical American executives, such as Bernie Madoff.
Answer: C
Q2) What is the effect of a nation's high inflation on its business enterprises?
A)There would not be any impact on the long-term earnings of companies.
B)It could cause a revaluation of assets.
C)It could decrease companies' reliance on net monetary liabilities.
D)It could lead companies to hold more monetary investments.
Answer: B
Q3) What accounting standards should government NFP organizations follow?
A)CICA Handbook, Part III only
B)CICA Public Sector Accounting Handbook only
C)Choice of CICA Handbook, Part III or CICA Public Sector Accounting Handbook
D)Choice of CICA Handbook, Part III; CICA Public Sector Accounting Handbook; or IFRS
Answer: C
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Page 3
Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) On whose books are the consolidating adjusting entries recorded?
A)In the general journal of both the parent and subsidiary companies
B)In the general journal of the parent company and on the consolidated worksheet
C)In the general journal of both the parent and subsidiary companies and on the consolidated worksheet
D)Only on the consolidated worksheet
Answer: D
Q2) O'Reilly Ltd. incorporated O'Reilly R&D Co. to conduct research and development activities. O'Reilly R&D is a(n)________.
A)associated company
B)joint venture
C)structured entity
D)passive investment
Answer: C
Q3) In Canada, what entities must be included in consolidated financial statements?
A)Subsidiaries only
B)All subsidiaries, except for ones in unrelated industries
C)All domestic subsidiaries
D)All subsidiaries and structured entities
Answer: D
Page 4
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Chapter 3: Business Combinations
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Q1) How should negative goodwill be shown on the consolidated financial statements of the acquirer?
A)As a gain on the statement of comprehensive income
B)As a loss on the statement of comprehensive income
C)As a liability on the statement of financial position
D)As a separate amount under shareholders' equity on the statement of financial position
Answer: A
Q2) Which of the following is not a reason why a private enterprise may be acquired as a bargain purchase?
A)It is a family business and the next generation does not want to continue the business.
B)The owner has health problems and does not have a successor.
C)The business only has equity financing and has no debt financing.
D)The owner is no longer interested in the business.
Answer: C
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5
Chapter 3: Appendix A: AIncome Tax Allocation
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Q1) Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the effect of recognizing the deferred tax in accounting for the acquisition?
A)Increase in liabilities and goodwill
B)Decrease in liabilities and goodwill
C)Decrease in liabilities and increase in goodwill
D)Increase in liabilities and decrease in goodwill
Q2) Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the amount of the deferred tax liability on Castle's consolidated SFP?
A)$40,000
B)$60,000
C)$100,000
D)$280,000
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Chapter 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) In consolidating parent-founded subsidiaries, what account is used to offset the parent company's "Investment in Subsidiary" account?
A)Retained earnings
B)Goodwill
C)Paid-in-capital accounts
D)No offset is necessary
Q2) What adjustment should be made to the consolidated financial statements for the year ended December 31, 20X6, for the fair value increment related to the capital assets?
A)The retained earnings at January 1, 20X6, will be increased by $20,000.
B)Amortization expense on the capital assets for 20X6 will be increased by $2,500.
C)Amortization expense on the capital assets for 20X6 will be increased by $7,500.
D)Retained earnings at the end of 20X6 will be increased by $12,500.
Q3) What does "one-line consolidation" refer to?
A)Cost method
B)Equity method
C)Direct method of consolidation
D)Worksheet method of consolidation
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Page 7
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Q1) Which of the following statements is true with respect to adjusting the deferred tax account on consolidation?
A)Deferred taxes only need to be adjusted for unrealized profits in inventory at the end of the year.
B)Deferred taxes only need to be adjusted for unrealized profits in inventory at the beginning of the year.
C)Deferred taxes need to be adjusted for unrealized profits in inventory at both the beginning and the end of the year.
D)Deferred taxes do not need to be adjusted for unrealized profits.
Q2) What deferred income tax adjustment must Morin make for its consolidated financial statements?
A)Adjustment for any changes in temporary differences due to the difference between carrying values and tax bases of Lightfoot's depreciable capital assets
B)Adjustment for any changes in temporary differences due to the amortization of fair value increments
C)Adjustment for any changes in temporary differences due to the amortization of goodwill
D)No adjustment is necessary.
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Sample Questions
Q1) Proudfoot Ltd. acquired all the shares of Jacob Ltd. several years ago. In conducting its goodwill impairment test for the current year, Proudfoot has determined that there has been an impairment related to revalued assets. On Proudfoot's consolidated financial statements, where should this impairment be reported?
A)As part of profit or loss
B)As part of other comprehensive income
C)As an adjustment to retained earnings
D)As a separate amount under shareholders' equity
Q2) Under IFRS, how often should goodwill acquired in a business combination be tested for impairment?
A)Whenever there is an indication of impairment
B)Whenever there is a change in circumstances in the business
C)At least once a year
D)At least once every two years
Q3) How should goodwill acquired in a business combination be allocated?
A)Proportionately to assets
B)Proportionately to fair-value increments
C)To cash-generating units
D)It is not allocated.
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Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Amber Ltd. purchased 80% of Patel Ltd. for $1,000,000. At the time of acquisition, the carrying value of Patel's net identifiable assets was $1,000,000 and the fair value was $1,350,000. What is the amount of the goodwill under the entity method?
A)$(100,000)
B)$100,000
C)$280,000
D)$350,000
Q2) Which of the following statements about IFRS 3, Business Combinations is true?
A)IFRS 3 allows organizations to use either the parent-company method or the entity method.
B)IFRS 3 allows organizations to use either the parent-company extension method or the entity method.
C)IFRS 3 allows organizations to use either the parent-company method or the parent-company extension method.
D)IFRS 3 allows organizations to use either the parent-company method, the parent-company extension method, or the entity method.
Q3) Explain why a parent might want to own less than 100% of the shares of a subsidiary.
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Page 10
Chapter 5: Appendix A: Step Purchases
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Q1) Husch Ltd. acquired 35% of the common shares of Megia Ltd. on June 30, 20X1. Husch uses the equity method to record its investment. On June 30, 20X8, Husch acquired another 40% of Megia's common shares. At June 30, 20X8, how should the original 35% ownership be treated?
A)The original valuation of the 35% is added to the valuation of the 40%.
B)The original 35% investment is deemed to have been disposed of and reacquired at the fair value at June 30, 20X8, and added to the new acquisition.
C)The carrying value of the original 35% at June 30, 20X8, is added to the new acquisition.
D)The original 35% is irrelevant to the new acquisition and should be ignored.
Q2) Under the parent-company extension method, the balance of the non-controlling interest at December 31, 20X7, was $600,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$50,000
B)$66,667
C)$200,000
D)$250,000
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Chapter 5: Appendix B: Decreases in Ownership Interest
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Q1) When a subsidiary issues shares, ________.
A)no gain or loss is recognized
B)a gain or loss is always recognized
C)this reduces the NCI
D)this may increase the NCI
Q2) A parent company reduced its ownership in its subsidiary from 80% to 15%. How should this be reported on the parent's consolidated financial statements?
A)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at fair value
B)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at book value
C)As a write-down to the retained interest
D)As an adjustment to the shareholders' equity
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12
Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Ten years later, Belzer is still using the equipment. In preparing its consolidated financial statements, Belzer should credit the equipment account by $35,000. What account(s)should be debited in this journal entry?
A)Opening consolidated retained earnings by $35,000
B)Opening consolidated retained earnings by $24,500 and NCI by $10,500
C)Depreciation expense by $35,000
D)Accumulated depreciation by $35,000
Q2) In 2008, Teal paid out dividends of $100,000. In preparing Mallard's consolidated financial statements, what elimination is required for the dividends?
A)Reduce dividends declared by $75,000; reduce dividend income by $75,000.
B)Reduce dividends declared by $100,000; reduce dividend income by $100,000.
C)Reduce dividends declared by $100,000; reduce dividend income by $75,000; reduce non-controlling interest by $25,000.
D)Reduce dividend declared by $100,000; reduce dividend income by $75,000; increase non-controlling interest by $25,000.
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Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) Under IFRS, which of the following statements is true?
A)Preferred shares must be classified as debt.
B)Preferred shares must be classified as equity.
C)Preferred shares can be classified as debt or equity depending on the rights attached to them.
D)Preferred shares can be classified as debt or equity at the option of the issuing company.
Q2) Ngo Ltd.'s subsidiary has restricted shares. What must Ngo look at in determining non-controlling interest?
A)Number of shares only
B)Participation in earnings only
C)Participation in dividends only
D)Participation in earnings and dividends
Q3) A parent company owns a subsidiary's preferred and common shares. How should the acquisition of the preferred shares be treated?
A)In the same manner as common shares
B)As a retirement of shares
C)As an expense
D)As a deduction from retained earnings
Page 14
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Chapter 6: Appendix B: Intercompany Bond Holdings
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Q1) Basaraba Ltd. Owns 80% of the outstanding common shares of Gill Ltd. Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. Under the agency approach to dealing with a gain on elimination of intercompany bond holdings, which of the following statements is true?
A)The gain would be assigned to Basaraba.
B)The gain would be assigned to Gill.
C)The gain is assigned partially to Basaraba and partially to Gill.
D)The gain is eliminated on consolidation.
Q2) A subsidiary has purchased some bonds from its parent company. Under the par-value method, the non-controlling interest is allocated its share of the difference between ________.
A)the bond's market value and face value
B)the bond's face value and its carrying value on the subsidiary's books
C)the bond's market value and its carrying value on the subsidiary's books
D)the bond's par value and carrying value
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Chapter 7: Segment and Interim Reporting
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Q1) Yang Ltd. will issue interim financial statements for its second quarter. Which statement(s)must report details of the second quarter as well as for the year to date?
A)Statement of comprehensive income only
B)Statement of changes in equity only
C)Statement of comprehensive income and statement of changes in equity only
D)Statement of comprehensive income, statement of changes in equity, and statement of cash flows only
Q2) In Canada and the United States, at a minimum, how often are interim financial statements required to be issued?
A)Monthly
B)Bi-monthly
C)Quarterly
D)Semi-annually
Q3) The thresholds for segmental financial reporting exclude ________.
A)10% of total internal and external revenues
B)10% of total internal and external expenses
C)10% of total assets
D)10% of the absolute value of the larger of aggregate segment profits or aggregate segment losses
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Page 16
Chapter 8: Foreign Currency Transactions and Hedges
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Q1) Which of the following items is a non-monetary item?
A)Cash
B)Accounts receivable
C)Inventory
D)Accounts payable
Q2) At December 31, what is the balance of Gillard's accounts receivable?
A)$515,100
B)$515,700
C)$516,450
D)$517,800
Q3) Under IFRS, which of the following statements about hedging a foreign currency risk of an accepted purchase order is true?
A)It must be accounted for using a fair-value hedge.
B)It must be accounted for using a cash-flow hedge.
C)It can be accounted for using either a fair-value hedge or a cash-flow hedge.
D)It is not eligible for hedge accounting until it becomes an accounts payable.
Q4) Required:
The company uses the gross method to record hedging transactions. Prepare the journal entries that HCB should make to record the events described above.
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Chapter 9: Reporting Foreign Operations
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Q1) Bralta is the Brazilian subsidiary of Altapro Co., a Canadian company. Bralta had net assets at June 30, 20X4, of R$1,100,000. What is the cost of sales under the temporal method?
A)$801,406
B)$804,160
C)$807,946
D)$809,896
Q2) Which of the following statements about the temporal method is true?
A)The accounting exposure is always a net asset balance.
B)The accounting exposure is always a net liability balance.
C)The proportionate amounts of various assets and liabilities change after the statement of financial position is translated.
D)The temporal method and the current rate method both yield the same exchange gain or loss.
Q3) Under the current-rate method, what is the translation gain or loss?
A)$(85,610)
B)$(35,375)
C)$35,375
D)$85,619
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Page 18
Chapter
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Q1) When budgetary control accounts are first set up, ________.
A)budgeted revenues are credited and budgeted expenditures are debited
B)actual revenues are credited and actual expenditures are debited
C)budgeted revenues are debited and budgeted expenditures are credited
D)actual revenues are debited and actual expenditures are credited
Q2) One of the programs that the Tyger Society operates is a drug and alcohol awareness program for junior high school students across Canada. This is an example of
A)business goods and services
B)private goods and services
C)collective goods and services
D)government goods and services
Q3) The disbursement basis for recognizing resource outflows uses which of the following bases?
A)The full accrual basis
B)The accrual basis only as applied to liabilities
C)The accrual basis only as applied to expenses
D)The cash basis
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Chapter 10: Appendix A: Fund Accounting
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Q1) The Khoo Music Society, a not-for-profit organization, is purchasing musical instruments to donate to some local schools. Khoo ordered the instruments on August 1, 20X1, and requested the following delivery schedule: \(\begin{array}{|l|c|c|}
\hline\text { September } 15,20 \mathrm{X} 1 & \text { woodwinds } & (\$ 3,000) \\
\hline \text { October } 15,20 \mathrm{X} 1 & \text { strings } & (\$ 5,000) \\
\hline \text { October } 31,20\mathrm{X} 1 & \text { brass } & (\$ 6,000) \\
\hline \text { November } 15,20\mathrm{X} 1 & \text { drums } & (\$ 6,000) \\
\hline
\end{array}\) Khoo uses an encumbrance system and has properly recorded the necessary journal entry at August 1, 20X1. At November 15, 20X1, which of the following accounts should be debited and which statement will be affected?
A)Estimated commitments/statement of operations
B)Encumbrances-instruments/statement of operations
C)Estimated commitments/statement of financial position
D)Encumbrances-instruments/statement of financial position
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Chapter 11: Public Sector Financial Reporting
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Q1) Which of the following statements about the valuation of Crown property on the statement of financial position is true?
A)Crown property is valued at acquisition cost.
B)Crown property is valued at fair market value.
C)Crown property is valued at its depreciated value.
D)Crown property is not recognized on the financial statements.
Q2) One of the objectives of government is to provide services to the public. In order to meet legislated social goals, another major goal of government is to ________.
A)create a surplus
B)reduce taxation
C)redistribute wealth
D)increase Crown assets
Q3) What is impairment testing of tangible capital assets based on?
A)Impairment of future cash flows
B)Impairment of future service potential
C)Impairment of anticipated residual value
D)Impairment of net present value
Q4) Clearly distinguish between a government business organization and a non-business government organization.
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