Course Introduction
Accounting Theory Review
Questions
Accounting Theory explores the fundamental principles, concepts, and frameworks that underpin the practice of accounting. This course examines the historical evolution of accounting thought, the development of various accounting models, and the theoretical basis for accounting standards and practices. Students will analyze the role of accounting in society, evaluate different approaches to accounting measurement and disclosure, and critically assess current debates and emerging issues in the field. By integrating academic research with real-world applications, the course equips students with the analytical tools necessary to understand and influence accounting policy and practice.
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) Which of the following statements about the adoption of IFRS is true?
A)Many European countries adopted IFRS prior to 2011.
B)Canada adopted IFRS in 2012.
C)All European and North American countries adopted IFRS in 2011.
D)All European, Asian, and African countries adopted IFRS in 2011.
Answer: A
Q2) Which of the following private companies is required to use IFRS?
A)Investment companies
B)Import/export companies
C)Manufacturing companies
D)Accounting firms
Answer: A
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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3
Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) What is securitization?
A)It is the process of issuing long-term debt for financing.
B)It is the process of issuing preferred and common shares for financing.
C)It is the process of transferring long-term liabilities to a structured entity.
D)It is the process of transferring receivables to a structured entity and issuing securities to finance those receivables.
Answer: D
Q2) Under which method does the statement of comprehensive income show "Equity in earnings of Subsidiary"?
A)Cost method
B)Equity method
C)Modified equity
D)Consolidation
Answer: B
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Page 4
Chapter 3: Business Combinations
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Q1) Perez Co. acquired Roo Co. in a business combination. Roo issued new shares to Perez's shareholders in exchange for their outstanding shares. What type of share exchange is this?
A)Direct exchange
B)Indirect exchange
C)Hostile takeover
D)Reverse takeover
Answer: D
Q2) Sya Ltd. acquired all the assets and liabilities of Littman Ltd. by issuing common shares to Littman. After this transaction, Littman owned 30% of Sya's outstanding shares. Which of the following statements is true?
A)Littman Ltd. ceases to exist.
B)Littman must record its receipt of Sya shares using the equity method.
C)Sya must prepare single-entity and consolidated financial statements.
D)Sya should not treat this transaction as an intercorporate investment.
Answer: D
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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) Which of the following consolidation adjustments will be required for a subsidiary that was acquired as a going concern, but will not be applicable for a parent-founded subsidiary?
A)Amortization of fair value increments on plant and equipment
B)Unrealized profits in ending inventory
C)Unrealized profits in beginning inventory
D)Future income tax on unrealized profits
Q2) A company has a subsidiary that has an intangible capital asset. It has not been recorded on the subsidiary's books, but at the date of acquisition, the asset had a fair value of $200,000 and an indefinite economic life. How should the company show the asset on its consolidated statement of financial position?
A)$200,000 less any impairment losses
B)$200,000 less accumulated amortization (calculated over 10 years)and any impairment losses
C)$200,000 less accumulated amortization (calculated over 40 years)and any impairment losses
D)The company should not show the asset on the consolidated financial statement as the subsidiary does not do so.
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Q1) At the time of acquisition, the fair values of these assets were higher than their carrying values and their tax bases. In Morin's consolidation each year, it must adjust for the deferred taxes that resulted from these temporary differences. Which of the following statements is true?
A)The consolidation adjustment will always result in an increase in the deferred tax liability.
B)The consolidation adjustment will always result in a decrease in the deferred tax liability.
C)The consolidation adjustment can result in either an increase or a decrease in the deferred tax liability.
D)The consolidation adjustment is required only if the tax basis changes.
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8
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Q1) 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
Q2) 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.
Q3) For private enterprises that have acquired goodwill in a business combination, how often should goodwill be tested for impairment?
A)At least once a year
B)At least once every two years
C)Whenever the parent company deems it necessary
D)Whenever there is a change in circumstances
Q4) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE). To view all questions and flashcards with answers, click on
Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) During 20X1, Siro sold $7,000 of goods, with a gross margin of 40%, to Portia. At the end of 20X1, $3,000 of the goods were still in Portia's inventory. What amount should be shown on the consolidated statement of financial position for the non-controlling interest at December 31, 20X1?
A)$ 720
B)$1,720
C)$3,480
D)$3,720
Q2) What is the purpose of showing an allocation of the net income between the parent and the subsidiary companies on the consolidated statement of comprehensive income?
A)To report the net income of the parent company to its shareholders
B)To report the net income of the subsidiary company to its shareholders
C)To report the net income of the parent and subsidiary companies to their respective shareholders
D)To report the net income of the parent and subsidiary companies to the tax department
Q3) Explain why a parent might want to own less than 100% of the shares of a subsidiary.
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Chapter 5: Appendix A: Step Purchases
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Q1) Dinh Co. acquired 60% of Ludo Ltd. five years ago. In the current year, Dinh purchased additional shares from the NCI to bring its holdings to 75%. How should the difference between the purchase consideration paid and the adjustment to the value of the NCI be treated?
A)It should be taken directly to equity, split equally between the shareholders of the parent and the NCI.
B)It should be taken directly to equity, split proportionately between the shareholders of the parent and the NCI.
C)It should be taken directly to equity, all attributed to the shareholders of the parent.
D)It should be taken directly to equity, all attributed to the NCI.
Q2) Under the entity method, the balance of the non-controlling interest at December 31, 20X7, was $660,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$30,000
B)$136,667
C)$220,000
D)$250,000
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11
Chapter 5: Appendix B: Decreases in Ownership Interest
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Q1) Gumble Ltd. has owned 65% of the common shares of Lopez for several years. This year, Gumble reduced its interest in Lopez to 10%. Which of the following statements is true?
A)Gumble must change from reporting under consolidation to the equity method.
B)Gumble must change from reporting under consolidation to the cost method.
C)Gumble must change from reporting under the equity method to the cost method.
D)Gumble is not required to change its reporting method.
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) Lobes Co. owns 65% of Banes Limited. During 20X5, Banes sold equipment to Lobes for a gain of $150,000, recognizing a gain on sale (before taxes)of $75,000. Lobes determined that the equipment had a useful life of 10 years, and took a full year's deprecation in 20X5. On April 1, 20X8, Lobes sold the equipment to an unaffiliated company for $110,000. Ignore any taxes.
Required:
Prepare the appropriate consolidation adjustments relating to the equipment for each year ending December 31, 20X5, to 20X8.
Q2) On the consolidated statement of financial position, which balances differ between the parent-company extension method and the entity method?
A)Retained earnings and goodwill
B)Retained earnings and non-controlling interest
C)Goodwill and non-controlling interest
D)Common shares and retained earnings
Q3) What is the amount of Goldberg's fair value increments?
A)$54,000
B)$70,000
C)$85,000
D)$121,000
Page 13
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Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) 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
Q2) 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.
Q3) Restricted shares may have a cocktail provision. When might a coattail provision take effect?
A)When a company increases its dividends
B)When a buyer tries to acquire control of a company
C)When a company reacquires some of its shares
D)When a company issues preferred shares
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) For gains on intercompany bond holdings, which method of allocating the gain emphasizes substance over form?
A)Allocating the gain to the parent company as the parent company has ultimate control
B)Allocating the gain to the bond purchasing company as the bonds will be retired under consolidation
C)Allocating the gain to the bond issuing company under the agency approach
D)Allocating the gain between the issuing and purchasing companies under the par-value approach
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Chapter 7: Segment and Interim Reporting
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Q1) 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
Q2) At least 75% of an organization's consolidated external revenues are disclosed by separate operating segments. The remaining segments do not meet any of the reportable segment thresholds. Which of the following is true about the remaining segments?
A)They must still be reported as separate segments.
B)They can be combined only if they have similar economic characteristics.
C)They can be combined only if the segments are horizontally or vertically integrated.
D)They can be combined and classified as "other."
Q3) Using all the applicable tests, which segments are reportable?
A)Segments B and C only
B)Segments B, C, and D only
C)Segment D only
D)All the segments are reportable.
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Page 16
Chapter 8: Foreign Currency Transactions and Hedges
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Q1) At December 31, what is the balance of Gillard's accounts receivable?
A)$515,100
B)$515,700
C)$516,450
D)$517,800
Q2) Under IFRS, which of the following statements is true?
A)The hedge of a forecasted transaction is accounted for using a fair-value hedge.
B)The hedge of a firm commitment is accounted for using a cash-flow hedge.
C)The gain or loss on a hedging instrument under a cash-flow hedge is first reported as other comprehensive income and then reclassified to income when the hedged item affects income.
D)The gain or loss on a hedging instrument under a fair-value hedge is first reported as other comprehensive income and then reclassified to income when the hedged item affects income.
Q3) Required:
Provide the journal entries for Bouchard (the seller)at each of the above dates, as required.
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Chapter 9: Reporting Foreign Operations
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Q1) ISP has a wholly owned subsidiary in China. This subsidiary is self-sufficient and does not rely on ISP for financing and sales. How should foreign exchange gains on translation of the subsidiary's statements to Canadian dollars be reported on ISP's consolidated financial statements?
A)Gains should be reported under shareholders' equity.
B)Gains should be reported on the statement of financial position as deferred credits and amortized in a systematic and rational manner.
C)Gains from current net assets should be credited to income, and any gains from long-term nonmonetary assets should be deferred and amortized.
D)Gains from current monetary assets should be credited to income and any gains from long-term monetary assets should be deferred and amortized.
Q2) Under the current-rate method, what is the translation gain or loss?
A)$(85,610)
B)$(35,375)
C)$35,375
D)$85,619
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Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) The Wellness Society, a not-for-profit organization, owns 5% of the shares of the Fitness Factory, a for-profit organization. The two organizations operate independently and have no board members in common. How should the Wellness Society account for its investment in the Fitness Factory?
A)Consolidation
B)The equity method
C)The cost method
D)Note disclosure only
Q2) When is an obligation recorded under an encumbrance system?
A)When a purchase requisition is issued
B)When a purchase order is issued
C)When goods or services are received
D)When payment is made
Q3) A not-for-profit organization is not required to capitalize and amortize its capital assets if the organization ________.
A)has assets that total less than $500,000
B)has a two-year average annual gross consolidated revenue of less than $500,000
C)has an annual change to net assets of less than $500,000
D)has less than 10 full-time employees
Page 19
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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) On what statement does the amortization of tangible capital assets appear as a reconciling item?
A)Statement of financial position
B)Statement of operations
C)Statement of changes in net debt
D)Statement of cash flows
Q2) One of the largest sources of revenue for governments is government transfers. Government transfers represent non-exchange revenue. Explain what "government transfer" is and why it is a non-exchange transaction. How are government transfers reported? Be sure to address reporting from the transferor and the recipient perspectives, separately.
Q3) According to the recommendations of the Public Sector Accounting Board, when should revenue be recognized related to funds received from external parties that have imposed restrictions that limit the use of the funds?
A)When the funds are pledged
B)When the funds are received
C)When the funds are committed
D)When the funds are used for the purpose(s)specified
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