Accounting Theory Exam
Solutions
Course Introduction
Accounting Theory explores the fundamental principles, frameworks, and concepts that underpin the practice and development of accounting. The course examines the evolution of accounting standards, the objectives of financial reporting, and the impact of political, economic, and social factors on accounting policy choices. Students will analyze different theoretical approaches, such as positive and normative accounting theories, and consider their implications for professional ethics and decision-making. Through case studies and critical evaluation, the course prepares students to interpret current accounting issues, assess regulatory changes, and understand the role of accounting in society.
Recommended Textbook
Intermediate Accounting Volume 2 3rd Edition by Kin Lo
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10 Chapters
1033 Verified Questions
1033 Flashcards
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Page 2
Chapter 1: Current Liabilities and Contingencies
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) Which statement about contingencies is correct?
A) If the future outcome is probable and reliably measurable, a provision is recorded.
B) If the future outcome is probable, disclosure is required if it is reliably measurable.
C) If the future outcome is probable, but not reliably measurable, no action is required.
D) If the future outcome is probable, a provision is required, even if it is not reliably measurable,
Answer: A
Q2) Which statement is correct about financial and non-financial liabilities?
A) A non-financial liability is a contractual obligation to deliver cash to another party.
B) A non-financial liability does not meet all of the criteria for a "liability."
C) The two liabilities may be valued differently for financial reporting purposes.
D) A non-financial liability is measured at fair value rather than amortized cost.
Answer: C
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3
Chapter 2: Non-Current Financial Liabilities
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) What is the role of debt rating agencies and what two benefits result from their rating a company?
Answer: Their role is to provide an independent and impartial evaluation of the riskiness of debt securities to assist investors in making educated decisions.Similar to an external audit,this evaluation by independent rating agencies (a)helps to reduce information asymmetry between bond issuers and investors which in turn (b)can reduce the cost of financing.
Q2) Cindy Corp sold $400,000 of three-year bonds for $300,500.Interest is of 7.5% is payable annually.What is the effective rate of interest (round to 2 decimal places)?
A) 19.15%
B) 14.57%
C) 13.88%
D) 7.50%
Answer: A
Q3) What does an "AAA" credit rating mean?
Answer: The company's debt is of superior quality with a very low probability of default.
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Chapter 3: Equities
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Sample Questions
Q1) Which statement is correct regarding dividend entitlement?
A) Cumulative preferred shares do not have any rights to missed dividend payments.
B) Non-cumulative preferred shares must be paid all missed dividend payments when dividends are declared.
C) A corporation need only pay dividends when it declares them to be payable.
D) A company can avoid paying dividends in arrears on cumulative preferred shares if it is to pay dividends on common shares.
Answer: C
Q2) Which statement is correct respecting a company's repurchase of its own shares?
A) It provides a tax disadvantage to the shareholder.
B) It enables the company to acquire stock for distribution as compensation to employees.
C) It provides a negative signal to the market.
D) It causes earnings per share to decrease.
Answer: B
Q3) When is a corporation legally obligated (liable)to pay dividends?
Answer: A corporation is legally obligated to pay cash dividends when it declares them to be payable.
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Chapter 6: Accounting for Income Taxes
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Sample Questions
Q1) In the first year of operations,a company reports taxable income of $125,000 and paid $31,250 of income taxes.It is now the end of the second year,and the company has a loss of $175,000 for tax purposes.The company's management believes it is probable the company will be able to use up its tax losses.The tax rate is currently 40%.
Required:
Compute the amounts of income tax receivable and/ or deferred income tax asset in the current (second)year.
Q2) When will a terminal loss occur?
A) When proceeds of disposal are less than undepreciated capital cost.
B) When proceeds of disposal are between undepreciated capital cost and original cost.
C) When proceeds of disposal are more than undepreciated capital cost.
D) When proceeds of disposal are less than original cost.
Q3) Which method does not use "temporary differences" to account for income tax expense?
A) The taxes payable method.
B) The deferral method.
C) The accrual method.
D) The tax allocation method.
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Chapter 7: Pensions and Other Employee Future Benefits
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Sample Questions
Q1) A company has a defined benefit pension asset of $1,650,000 at the end of the year.The company contributes $5,500,000 to the pension during the year and records a pension expense of $8,200,000.
Required:
Determine the value of the defined benefit pension liability at beginning of the year.
Q2) A company has a defined benefit pension liability of $1,050,000 at the beginning of the year.The company contributes $5,500,000 to the pension during the year and records a pension expense of $8,200,000.
Required:
Determine the value of the defined benefit pension liability at year-end.
Q3) Which statement explains the risk involved in "defined contribution plans"?
A) Poor returns on the pension investments reduce the benefits for future retirees.
B) High returns on the pension investments increase the benefit payments for the employer.
C) The plan specifies the fixed benefits that future retirees will receive.
D) The plan provides benefits to future retirees depending on their years of service.
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Chapter 8: Accounting for Leases
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Sample Questions
Q1) On January 1,2017,Travic Company entered a lease to rent office space.The lease requires Travic to pay $390,000 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 30 years,and its current fair value is estimated to be $6 million.Travic's incremental borrowing rate is 10%.
Required:
Classify this lease for Travic Company and record the journal entries for the first year of the lease.
Q2) Company A and Company B operate in the same industry,where leasing assets is common practice.Company A engages in more finance leases than Company B.Company B's leases are classified as operating leases.Which of the following statements is correct?
A) Company A will appear stronger financially than company B.
B) Company A will appear weaker financially than company B.
C) The leasing type does not make a difference and both companies will appear equal financially.
D) Company B will appear weaker financially than company A.
Q3) List factors that impact the degree to which this agency cost is a factor.
Q4) Why do lessors generally prefer finance lease treatment? Explain.
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Chapter 9: Statement of Cash Flows
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Sample Questions
Q1) What are the options for recording interest and dividends received and interest and dividends paid on the cash flow statement according to Accounting Standards for Private Enterprises (ASPE)?
Q2) What guidance does IFRS provide with respect to reporting bank overdrafts on the statement of cash flows?
Q3) Which of the following is a financing activity?
A) Collection of accounts receivable.
B) Collection of loans receivable
C) Receipt of bank loan.
D) Sale of a machine.
Q4) How do companies account for allowance for doubtful accounts on the cash flow statement?
Q5) Which of the following is an operating activity?
A) Receipt of customer deposit.
B) Proceeds from mortgage issue.
C) Purchase of land.
D) Redemption of preferred shares.
Q6) List three reasons why the statement of cash flows is a useful component of an enterprise's financial statements.
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Chapter 10: Accounting Changes
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Sample Questions
Q1) Define "a retrospective adjustment."
Q2) How should enterprises reflect changes in accounting standards?
Q3) For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years as at the beginning of the year,the accountant should do (or not do)the following:
A) Compute current year depreciation as (carrying amount - residual value) divided by 20 years.
B) Do not adjust prior year's depreciation.
C) Adjust the amount of accumulated depreciation as at the beginning of the year.
D) Compute current year depreciation as (carrying amount) × 15/20.
Q4) The discussion in IAS 16 paragraphs 60-62 indicates that a change in depreciation method is usually a change in accounting estimate.Explain the logic behind why a change in depreciation method is normally considered a change in estimate.
Q5) Why is the retrospective approach conceptually appropriate for changes in accounting policy?
Q6) Define the term "prospective adjustment." Which type of accounting changes is it applied to?
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Page 12