Course Introduction
Accounting Theory Review
Questions
Accounting Theory explores the fundamental concepts, principles, and frameworks that underpin the practice of accounting. This course examines the historical development and philosophical foundations of accounting, analyzing different theoretical approaches and their relevance to current practice. Emphasis is placed on understanding the formulation and impact of accounting standards, as well as the role of ethics and regulatory bodies. Through the study of contentious issues, such as fair value accounting, measurement, and disclosure, students gain an in-depth appreciation of how accounting information influences business decisions and stakeholder behavior.
Recommended Textbook
Advanced Accounting 12th Edition by Paul M. Fischer
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Page 2
Chapter 1: Business Combinations: New Rules for a
Long-Standing Business Practice
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Q1) Orbit Inc.purchased Planet Co.on January 1, 2015.At that time an existing patent having a 5-year estimated life was assigned a provisional value of $10,000 and goodwill was assigned a value of $100,000.By the end of fiscal year 2015, better information was available that indicated the fair value of the patent was $20,000.How should intangible assets be reported at the beginning of fiscal year 2016??
A)?Goodwill $100,000 \(\quad \)Patent $10,000
B)?Goodwill $90,000 \(\quad \)\(\quad \)Patent $16,000
C)?Goodwill $84,000 \(\quad \)\(\quad \)Patent $16,000
D)?Goodwill $90,000 \(\quad \)\(\quad \)Patent $20,000
Answer: B
Q2) Goodwill results when:
A)a controlling interest is acquired.
B)the price of the acquisition exceeds the sum of the fair values of the net identifiable assets acquired.
C)the fair value of net assets acquired exceeds the acquisition price.
D)the price of the acquisition exceeds the book value of an acquired company.
Answer: B
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Page 3
Chapter 2: Consolidated Statements: Date of Acquisition
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Q1) Parr Company purchased 100% of the voting common stock of Super Company for $2,000,000.There are no liabilities.The following book and fair values pertaining to Super Company are available: \(\begin{array}{lrr}
& \text { Book Value } & \text { Fair Value } \\
\text { Current assets } & \$ 300,000 & \$ 600,000 \\
\text { Land and building } & 600,000 & 900,000 \\ \text { Machinery } & 500,000 & 600,000 \\ \text { Goodwill } & 100,000 & ? \end{array}\)
The amount of machinery that will be included in on the consolidated balance sheet is:
A)$560,000
B)$860,000
C)$600,000
D)$900,000
Answer: C
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4
Chapter 3: Consolidated Statements: Subsequent to Acquisition
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Q1) On January 1, 2016, Payne Corp.purchased 70% of Shayne Corp.'s $10 par common stock for $900,000.On this date, the carrying amount of Shayne's net assets was $1,000,000.The fair values of Shayne's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $200,000 in excess of the carrying amount.For the year ended December 31, 2016, Shayne had net income of $150,000 and paid cash dividends totaling $90,000.Excess attributable to plant assets is amortized over 10 years.
In the December 31, 2016, consolidated balance sheet, non-controlling interest should be reported at ____.
A)$282,714
B)$300,500
C)$397,714
D)$345,500
Answer: C
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5
Chapter 4: Intercompany Transactions: Merchandise, Plant
Assets, and Notes
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Q1) Sally Corporation, an 80%-owned subsidiary of Reynolds Company, buys half of its raw materials from Reynolds.The transfer price is exactly the same price as Sally pays to buy identical raw materials from outside suppliers and the same price as Reynolds sells the materials to unrelated customers.In preparing consolidated statements for Reynolds Company and Subsidiary Sally Corporation,
A)the intercompany transactions can be ignored because the transfer price represents arm's length bargaining.
B)any unrealized profit from intercompany sales remaining in Reynolds' ending inventory must be offset against the unrealized profit in Reynolds' beginning inventory.
C)any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated in its entirety.
D)eighty percent of any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated.
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6
Chapter 5: Intercompany Transactions: Bonds and Leases
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Q1) Under a sales-type lease between affiliated companies, how does the lessor treat the intercompany profit at the inception of the lease?
A)It is recognized at the inception of the lease.
B)It is deferred and amortized over the lessee's period of usage.
C)It is deferred and recognized at the end of the lease term.
D)There is no profit at the inception of the lease.
Q2) Intercompany debt that must be eliminated from consolidated financial statements may result from:
A)one member of a consolidated group selling its bonds directly to another member of the group.
B)one member of a consolidated group advancing funds to another member of the group so that the member may retire bonds it had issued to outside parties.
C)one member of a consolidated group purchasing bonds from outside parties as an investment that had been issued to outside parities by another member of the group. D)all of the above.
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Chapter 6: Cash Flow, Eps, and Taxation
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Q1) Which of the following is not true regarding diluted earnings per share (DEPS) when the subsidiary has outstanding dilutive securities which may require the issuance of subsidiary company shares only?
A)The calculation of consolidated DEPS becomes a two-stage process where the DEPS of the subsidiary must first be calculated.
B)The controlling interest's share of net income is divided by the number of outstanding parent shares.
C)Both the income of the parent and subsidiary would be the income as shown in their respective income distribution schedules, except for the inclusion of the parent's share of subsidiary income.
D)The DEPS of the subsidiary is a component of the calculation of consolidated DEPS.
Q2) Amortization of excesses in periods subsequent to the purchase would affect which sections of a consolidated statement of cash flows?
A)operating activity
B)financing activity
C)investing activity
D)all of the above
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Chapter 7: Special Issues in Accounting for an Investment
in a Subsidiary
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Q1) Company P owns a 90% interest in Company S.Company S has outstanding $100,000 of 10% bonds that were sold at face value and have 6 years to maturity as of the balance sheet date.Company P owns $70,000 of the bonds and has a remaining unamortized book value of $66,000.Company S bonds will be presented on the consolidated balance sheet as
A)bonds payable, $30,000.
B)bonds payable, $34,000.
C)bonds payable, $100,000.
D)bonds payable will not appear.
Q2) Pepin Company owns 75% of Savin Corp.Savin's net income in the current year was $60,000.Savin also has 10,000 shares of 4% cumulative preferred $10 par value stock outstanding.When Pepin purchased Savin, the excess purchase price of $50,000 was attributable to a patent having a life of 10 years.How much income is attributable to the controlling interest?
A)$45,000
B)$41,250
C)$37,250
D)$38,250
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Chapter 8: Subsidiary Equity Transactions, Indirect
Subsidiary Ownership, and Subsidiary Ownership of Parent Shares
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Q1) Able Company owns an 80% interest in Barns Company and a 20% interest in Carns Company.Barns owns a 40% interest in Carns Company.The reported income of Carns is $20,000 for 2019.Which of the following shows how it will be distributed? ?
\(\begin{array}{ccc}
&\text { Barns} & \text { Carns }\\
\text { Controlling } & \text { Non- } & \text { Non- } \\
\text { Interest } & \text { Controlling } & \text { Controlling } \end{array}\)
A)\(\begin{array}{lrr}
\$ 10,400 &&&& \$ 1,600 &&& \$ 8,000 \\\end{array}\)
B)\(\begin{array}{lrr} \$ 2,000 &&&& \$ 8,000 &&&& \$ 8,000 \\\end{array}\)
C)\(\begin{array}{lrr} \$ 12,000 &&& \$ 0 &&&&&& \$ 8,000 \\\end{array}\)
D)\(\begin{array}{lrr}\$ 10,400 &&& \$ 9,600 &&&& \$ 0 \end{array}\)
Q2) Which of the following situations is viewed as the parent having treasury stock?
A)A owns 80% of B, and B owns 70% of C.
B)A owns 80% of B and 20% of C; B owns 70% of C.
C)A owns 80% of B, and B owns 20% of A.
D)None of the above.
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Chapter 9: The International Accounting Environment
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Q1) RWB Corporation, a U.S.based company, bought inventory from a German company on June 5 for 12,000 euros, when $1 was equal to 1.20 euros.The company settled its payable with 12,000 euros on August 4 when $1 was equal to 1.25 euros.RWB's measurement currency is the U.S.dollar.RWB Corporation:
A)should record the inventory for $9,600.
B)is exposed to an economic loss on the transaction.
C)has an economic gain on the transaction.
D)should record the inventory for 12,000 euros.
Q2) Describe the concept of convergence as it pertains to the FASB and IASB and describe the ways in which this may be accomplished.
Q3) Which of the following is not a responsibility of the International Accounting Standards Board (IASB)?
A)To advise political bodies to enact legislation regulating international business.
B)To establish a single set of international financial reporting standards.
C)To achieve convergence of national accounting standards and IFRS.
D)All are objectives of the IASB.
Q4) Describe the complexities stemming from U.S.-based companies operating in an international environment.
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Chapter 10: Foreign Currency Transactions
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Q1) The best definition for direct quotes would be "direct quotes measure
A)how much foreign currency must be exchanged to receive 1 domestic currency."
B)current or spot rates."
C)how much domestic currency must be exchanged to receive 1 foreign currency."
D)exchange rates at a future point in time."
Q2) A derivative:
A)requires little or no initial investment.
B)derives its value from changes in its underlying rate.
C)can be settled for cash without having to buy or sell the related asset or liability.
D)All of the above.
Q3) Foreign currency transactions not involving a hedge should be accounted for using
A)the one-transaction method.
B)the two-transaction method.
C)a hybrid of the one- and two-transaction methods.
D)either the one- or the two-transaction method (allowed by the FASB).
Q4) Discuss the differences in using an option to hedge a foreign currency risk rather than a forward contract.
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Chapter 11: Translation of Foreign Financial Statements
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Q1) Kidney Company has a wholly-owned foreign subsidiary which has a $15,000 credit translation adjustment in the current year.Kidney has taken out a loan denominated in the foreign currency in which the subsidiary operates as a hedge of its net investment in the foreign entity.The value of the loan increased $18,000 in the current year.What is the impact of the change in the loan value?
A)Debit other comprehensive income $18,000.
B)Credit other comprehensive income $18,000.
C)Debit other comprehensive income $15,000; debit income $3,000.
D)Debit other comprehensive income $3,000; credit income $15,000.
Q2) Exchange rates will not usually directly affect the cash flows of the parent entity in which of the following cases?
A)The foreign entity operates in a currency other than its own.
B)The foreign entity operates in its local currency.
C)The foreign entity functions in a currency other than its local currency.
D)The foreign entity functions in the parent's currency.
Q3) Discuss the factors that may be considered in determining if a Mexican subsidiary of a U.S.firm has the peso or the dollar as its functional currency.The subsidiary only manufactures component parts that are shipped to the U.S.firm's final production plant in Detroit.
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Page 13
Chapter 12: Interim Reporting and Disclosures About
Segments of an Enterprise
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Q1) When a company makes a second quarter decision to discontinue a segment, the first quarter tax expense:
A)Results are not restated.
B)is split between the tax expense calculated on restated quarter one income from continuing operations and the discontinued segment by subtracting the tax expenses calculated on the restated first quarter income from the original tax expense calculated for the first quarter, before the decision was made.
C)is used to determine the incremental tax effect.
D)is recalculated using a new tax rate and first period results are restated.
Q2) The acquisition of a paper mill by a large publishing company is an example of
A)horizontal integration.
B)vertical integration.
C)diversification.
D)consolidation.
Q3) The primary emphasis of interim reporting is on:
A)interim cash flow
B)the interim statement of financial position
C)interim retained earnings
D)interim income data
Page 14
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Chapter 13: Partnerships: Characteristics, Formation, and
Accounting for Activities
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Q1) Partners X & Y have each invested $60,000.00 in a business.According to the articles of copartner ship Partner Y is to receive 20% interest on invested capital.How much of a distribution would Partner X receive?
A)The same
B)Undetermined
C)$12,000
D)None of the above
Q2) Unlike a corporation, the capital investment in a partnership generally is accounted for through two accounts for each partner, a temporary account referred to as the drawing account and a permanent account referred to as:
A)Stock
B)Cash
C)Capital
D)Salary
Q3) An LLC is a hybrid type of organization that has advantages of
A)Proprietor and partner
B)Partner and corporation
C)Proprietor and corporation
D)S corporation and C corporation
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Chapter 14: Partnerships: Ownership Changes and Liquidations
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Q1) This type of liquidation requires that all assets be realized before a distribution is made to partners, thus avoiding the possibility of a premature distribution.
A)Installment
B)Lump Sum
C)Distributive
D)Dissolutive
Q2) If a new partner were to purchase 99% of an existing partner's share of a business which account would be debited:
A)Existing Partners Drawing
B)New Partners Drawing
C)Existing Partners Capital
D)New Partners Capital
Q3) In the liquidation of a partnership all liquidation expense and gains form the conversion of partnership assets must be allocated to:
A)Creditors first
B)Banks first
C)Partners first
D)Investors first
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Chapter 15: Government and Not for Profit Accounting
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Q1) Fiduciary funds account for resources for which the government unit:
A)Reports under specific guidelines
B)Reports as strictly useful cash
C)Acts as a trustee
D)Acts as a holding account
Q2) Debt nancing incurred to acquire capital assets or other long-term economic bene ts through governmental funds is termed
A)general long-term capital debt.
B)general short term capital debt
C)General long term restricted cash
D)general long term asset
Q3) Corrections of previous years errors are made directly through which account:
A)Deferred Asset
B)Deferred Liability
C)Fund Balance- Unassigned
D)General Liability
Q4) Describe the three types of general ledger accounts and types of journal entries found in a government entity.
Q5) Identify the three fund types used in government accounting and their relevance:
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Chapter 16: Governmental Accounting: Other
Governmental Funds, Proprietary Funds, and Fiduciary Funds
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Q1) If general obligation debt is refunded to lower the interest rate and the proceeds are irrevocably placed with an escrow agent or trustee to pay off the old debt as it comes due, the government must
A)provide a general description of the transaction in the newspaper.
B)calculate the economic gain or Balance--Employer Contributions.
C)adjust the GLTDAG for the increase or decrease in the amount of long-term debt.
D)Both b and c are correct.
Q2) Which of the following is not a typical year-end statement for an Enterprise Fund?
A)Balance Sheet
B)Statement of Revenue, Expenses and Changes in Net Assets
C)Statement of Cash Flows
D)All of these financial statements would be used at year end by an Enterprise Fund.
Q3) Public Purpose Trusts are accounted for in the Permanent Funds, which are accounted for under the modified cash basis.
A)True
B)False
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Chapter 17: Financial Reporting Issues
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Q1) Which of the following could be considered a component unit of a primary government unit?
A)water utility enterprise
B)chamber of commerce
C)pension plan
D)affiliated booster club
Q2) GASB Statement No.34 requires the reporting for infrastructure assets.Special provisions for reporting include
A)mandatory straight line depreciation on all infrastructure assets
B)depreciation should not be recorded on any infrastructure assets
C)small government units do not have to report on infrastructure assets now or in the future
D)allowing various approaches to estimating infrastructure costs
Q3) Reciprocal interfund activities include all but which of the following?
A)interfund loans
B)interfund services between government and proprietary funds
C)advances to/from other funds
D)interfund reimbursements
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19
Chapter 18: Accounting for Private Not-For-Profit Organizations
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Q1) South City Shelter is a voluntary health and welfare organization that provides emergency shelter and health care for the homeless, as well as educational programs.South City Shelter incurred the following transactions:
?
a.A computer with a book value of $500 (original cost, $2,800) was sold for $650.?
?
b.Kitchen equipment with a book value of $1,100 (original cost, $3,500) was damaged in a fire and taken to the dump.?
?
c.Total depreciation for the year was $60,000.?
?
d.To close the depreciation expense, it was determined that 70% should be allocated to the Shelter Program, 15% to the Education Program, and 15% to the Health Care Program.? Required:
? Make the necessary journal entries to reflect the events.
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Chapter 19: Accounting for Not-For-Profit Colleges and Universities and Health Care Organizations
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Q1) Al Alumni donates $5,000,000 to Great University for a new Women's Studies program.Al wants the principal to remain intact but the investment earnings can be expended to support the Women's Studies Program.This donation would be accounted for in the
A)Quasi-Endowment Fund.
B)Endowment Fund.
C)Term Endowment Fund.
D)Agency Fund.
Q2) Atlee makes a cash gift to a not-for-profit hospital which is restricted by the donor to buy toys for the pediatric ward.It should be recorded in the:
A)General Fund.
B)Specific-Purpose Fund.
C)Endowment Fund.
D)Enterprise Fund.
Q3) Which university fund is most similar to the governmental general fund?
A)Agency
B)Annuity and Life income
C)Current unrestricted
D)Loan
Q4) Are not-for-profit universities required to use fund accounting?
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Chapter 20: Estates and Trusts: Their Nature and the
Accountants Role
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Q1) Planning for estate taxes should address:
A)Taking actions to benefit from a loss in property values.
B)Making gifts during one's lifetime.
C)Utilization of charitable contributions.
D)All of the above.
Q2) The starting point for the computation of federal estate tax is the gross estate.Which of the following statements is not true regarding the computation of the gross estate?
A)The gross estate for tax purposes is often greater than the estate for probate purposes
B)The taxable estate does not include transfers of property made during decedent's lifetime.
C)The gross estate for tax purposes also includes certain transfers by the deceased during life in which certain rights are retained by the decedent
D)The taxable estate can be reduced by certain allowable deductions
Q3) A trust created through a will is called a testamentary trust.
A)True
B)False
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22
Chapter 21: Debt Restructuring, Corporate Reorganizations, and Liquidations
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Q1) Differentiate by function the Accounting Statement of Affairs and the Statement of Realization and Liquidation.
Q2) On January 1, 2015, Duke Company negotiated an agreement to modify the terms of a $500,000 note with $38,000 of accrued interest.Payments of $35,000 including interest will be made each quarter end up to and including June 30, 2019.Which of the following is true about this troubled debt restructuring?
A)Interest expense will be recognized as it is incurred.
B)A gain of $88,000 will be recognized.
C)The present value of the payments must be calculated to determine if there is a gain or loss.
D)None of the above is true.
Q3) Land and buildings having a book value of $150,000 and a fair value of $185,000 are transferred to a creditor in a troubled debt restructuring to fully settle a loan of $200,000 plus accrued interest of $3,000.What is the amount of the gain on restructuring?
A)$35,000
B)$53,000
C)$15,000
D)$18,000
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Chapter 22: Derivatives and Related Accounting Issues
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Q1) The total value of a derivative is determined by the
A)number of units specified in the derivative and the price that relates to the asset or liability underlying the derivative.
B)change in the price or rate that relates to the asset or liability underlying the derivative.
C)price or rate that relates to the asset or liability underlying the derivative.
D)number of units that is specified in the derivative instrument.
Q2) Which of the following statements is true?
A)The ability to settle the derivative by actually buying or selling the related asset is referred to as net settlement.
B)The quantity or number of units specified by a derivative is known as the underlying.
C)A derivative instrument derives its value from a related asset or liability.
D)Usually, a derivative instrument requires little or no initial investment.
Q3) A hedge of a forecasted transaction is a cash flow hedge.
A)True
B)False
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Chapter 23: Equity Method for Unconsolidated Investments
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Q1) Under the equity method, investee dividends are recorded as a reduction of the investment account.
A)True
B)False
Q2) Company P uses the sophisticated equity method of accounting for its 30% investment in Company S's common stock.During 20X9, Company S reported net earnings of $650,000 and paid dividends of $150,000.Assume that all the undistributed earnings of Company S will be distributed as dividends in future periods.The dividends received from Company S are eligible for the 80% dividends received deduction.Company P's 20X9, tax rate is 30%.In its December 31, 20X9, balance sheet, the increase in the deferred tax liability from these transactions would be ____.
A)$7,500
B)$9,000
C)$150,000
D)$30,000
Q3) The market value of an investment is not a required disclosure for equity method investors.
A)True
B)False
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Page 25
Chapter 24: Variable Interest Entities
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Q1) The primary bene ciary has control of the variable interest entity (VIE) based on its power to control the activities of the VIE and the obligation to absorb losses and receive bene ts from the VIE.
A)True
B)False
Q2) If the VIE was not a business as de ned by ASC 819-10-20 which means it is likely a not for pro t entity, there is no goodwill recorded.
A)True
B)False
Q3) The primary bene ciary will likely record its share of VIE interest revenue on its books. A)True
B)False
Q4) The consolidation process for VIE's includes the elimination of all inter-entity transactions as would be the case for control based on stock ownership
A)True
B)False
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