Course Introduction
Accounting Theory Test
Preparation
Accounting Theory explores the foundational concepts, principles, and frameworks that underpin accounting practices and standards. This course examines the evolution and purpose of accounting theories, the development of accounting regulations, and the application of various theoretical approaches to contemporary accounting issues. Students will analyze the roles of ethics, decision-making, and information asymmetry in accounting, and critique the impact of social, economic, and political factors on accounting standards and reporting. The course aims to provide a solid theoretical base for interpreting and resolving complex accounting problems in practice.
Recommended Textbook
Advanced Accounting 13th Edition by Floyd A. Beams
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Page 2
Chapter 1: Business Combinations
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Sample Questions
Q1) Under the acquisition method a combination is recorded using the fair-value principle.
A)True
B)False
Answer: True
Q2) Under the current GAAP,Goodwill arising from a business combination is
A)charged to Retained Earnings after the acquisition is completed.
B)amortized over 40 years or its useful life,whichever is longer.
C)amortized over 40 years or its useful life,whichever is shorter.
D)never amortized.
Answer: D
Q3) Historically,much of the controversy concerning accounting requirements for business combinations involved the ________ method.
A)purchase
B)pooling of interests
C)equity
D)acquisition
Answer: B
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3
Chapter 2: Stock Investments - Investor Accounting and Reporting
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Sample Questions
Q1) Goodwill that has an indefinite useful life is not amortized. A)True
B)False
Answer: True
Q2) Assume that Pansy has significant influence and uses the equity method of accounting for its investment in Sunflower.The balance in the Investment in Sunflower account at December 31,2015 was
A)$78,200.
B)$80,000.
C)$81,800.
D)$83,300.
Answer: C
Q3) Assume that Pansy Incorporated used the cost method of accounting for its investment in Sunflower.The balance in the Investment in Sunflower account at December 31,2015 was
A)$76,700.
B)$80,000.
C)$83,300.
D)$95,000.
Answer: B
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Chapter 3: An Introduction to Consolidated Financial Statements
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Q1) From the standpoint of accounting theory,which of the following statements is the best justification for the preparation of consolidated financial statements?
A)In substance the companies are separate,but in form the companies are one entity.
B)In substance the companies are one entity,but in form they are separate.
C)In substance and form the companies are one entity.
D)In substance and form the companies are separate entities.
Answer: B
Q2) The acquisitions method for consolidation requires that all assets and liabilities of the subsidiary are reported using 100% of fair values at the combination date.
A)True
B)False Answer: True
Q3) A subsidiary can be excluded from consolidation when control does not rest with the majority owner.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Consolidated Techniques and Procedures
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Q1) The consolidated cash flow statement is prepared from the consolidated income statement and consolidated balance sheet.
A)True
B)False
Q2) Which of the following will be debited to the Investment account when the equity method is used?
A)Investee net losses
B)Investee net profits
C)Investee declaration of dividends
D)Depreciation of excess purchase cost attributable to investee equipment
Q3) The depreciation on buildings is presented under investing activities on the consolidated cash flow statement.
A)True
B)False
Q4) What amount of total liabilities will be reported?
A)$206,000
B)$278,400
C)$319,600
D)$348,000
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Chapter 5: Intercompany Profit Transactions - Inventories
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Sample Questions
Q1) The 2014 consolidated income statement showed cost of goods sold of
A)$500,000.
B)$516,000.
C)$532,000.
D)$660,000.
Q2) Assume there are routine inventory sales between parent companies and subsidiaries.When preparing the consolidated financial statements,which of the following line items is indifferent to the sales being either upstream or downstream?
A)Consolidated retained earnings
B)Consolidated gross profit
C)Noncontrolling interest share
D)Controlling interest share of consolidated net income
Q3) Parent sales to its subsidiary increase parent sales,COGS and gross profit.
A)True
B)False
Q4) Sales by a subsidiary to its parent affects the operating income of the parent when the merchandise is resold.
A)True
B)False
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Chapter 6: Intercompany Profit Transactions - Plant Assets
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Q1) Park Incorporated purchased a 70% interest in Silk Company in 2012 at book value.On January 1,2014,equipment having a historical cost of $100,000 and a net book value of $70,000 is sold in an intercompany transfer for $90,000.The equipment has a remaining useful life of five years and no salvage value.Straight-line depreciation is used by both companies.Silk reports net income of $180,000 in 2014 and $200,000 in 2015.
Required:
1.Assume Park sold the equipment to Silk.
A.Prepare the consolidating worksheet entries for the equipment for 2014 and 2015.
B.Calculate the noncontrolling interest share in Silk's income for 2014 and 2015.
2.Assume that Silk sold the equipment to Park.
A.Prepare the consolidating worksheet entries for the equipment for 2014 and 2015.
B.Calculate the noncontrolling interest share in Silk's income for 2014 and 2015.
Q2) Unrealized inventory profits self-correct over any three accounting periods. A)True B)False
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Chapter 7: Intercompany Profit Transactions - Bonds
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Q1) Spott is a 75%-owned subsidiary of Penthal.On January 1,2013,Spott issued $900,000 of $1,000 face amount 8% bonds at par.The bonds have interest payments on January 1 and July 1 of each year and mature on January 1,2017.On July 2,2014,Penthal purchased all 900 bonds on the open market for $1,020 per bond.Both companies use straight-line amortization.
Required: With respect to the bonds,use General Journal format to:
1.Record the 2014 journal entries from July 1 to December 31 on Spott's books.
2.Record the 2014 journal entries from July 1 to December 31 on Penthal's books.
3.Record the elimination entries for the consolidation working papers for the year ending December 31,2014.
Q2) Using the original information,the amount of consolidated Interest Expense for 2014 was
A)$ 135,000.
B)$ 180,000.
C)$ 270,000.
D)$ 360,000.
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Chapter 8: Consolidations - Changes in Ownership
Interests
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Q1) When a parent/investor sells an ownership interest,a gain or loss is recorded where the interest sold leads to deconsolidation of a former subsidiary.
A)True
B)False
Q2) Preacquisition income for 2013 is
A)$50,000.
B)$35,000.
C)$44,000.
D)$36,000.
Q3) If SOS sold the additional shares to the general public,Great's Investment in SOS account after the sale would be ________.(Use four decimal places.)
A)$945,000
B)$1,157,100
C)$1,225,000
D)$1,245,000
Q4) The acquisition of treasury stock by a subsidiary increases subsidiary equity and share outstanding.
A)True
B)False
10
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Chapter 9: Indirect and Mutual Holdings
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Q1) Ackroyd's noncontrolling interest share for 2014 is
A)$7,609.
B)$8,044.
C)$15,652.
D)$23,696.
Q2) The treasury stock approach to account for parent stock held by subsidiary accounts for the stock as treasury stock for the consolidated entity.
A)True
B)False
Q3) Paglia Corporation owns 80% of Aburn Corporation and has separate net income of $200,000 for 2013.Aburn Corporation has separate net income of $100,000 and owns 70% of the outstanding stock of Badley Corporation.Badley Corporation has separate net income of $80,000.(Separate net incomes exclude investment income.)The cost of each investment was equal to book value and fair value.The controlling interest share of consolidated net income for 2013 is
A)$324,800.
B)$328,800.
C)$344,800.
D)$348,800.
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Page 11
Chapter 10: Subsidiary Preferred Stock, consolidated
Earnings Per Share, and Consolidated Income Taxation
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Sample Questions
Q1) In computing consolidated diluted EPS,the replacement calculation replaces the parent's equity in subsidiary earnings with the
A)parent's share of basic EPS of the subsidiary.
B)subsidiary's share of basic EPS of the parent.
C)parent's share of diluted EPS of the subsidiary.
D)subsidiary's share of diluted EPS of the parent.
Q2) The calculation of parent EPS and consolidated basic EPS are identical.
A)True B)False
Q3) What is the goodwill on the consolidated balance sheet for Pamplin and Subsidiaries on December 31,2014 based on Pamplin's purchase of Sage's common stock?
A)$140,000
B)$240,000
C)$290,000
D)$306,667
Q4) The GAAP requires that corporations report both basic and diluted earnings per share.
A)True
B)False
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Chapter 11: Consolidation Theories, push-Down Accounting, and Corporate Joint Ventures
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Sample Questions
Q1) Goodwill was reported in the December 31,2014 consolidated balance sheet at A)$170,000.
B)$180,000.
C)$200,000.
D)$210,000.
Q2) With regard to a variable interest entity (VIE),Ann Company may meet the following two conditions: Condition I
Ann Company has the power to direct VIE activities that significantly impact VIE's economic performance.
Condition II
Ann Company has an obligation to absorb losses and/or a right to receive significant benefits from the VIE.
Ann Company must consolidate a VIE if
A)Condition I is met only.
B)Condition II is met only.
C)either Condition I or Condition II is met.
D)both Condition I and Condition II are met.
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Chapter 12: Derivatives and Foreign Currency: Concepts and Common Transactions
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Q1) Forward contracts are negotiated contracts between three or more parties for the delivery or purchase of a commodity or foreign currency at a preagreed delivery date.
A)True
B)False
Q2) Futures contracts are very standardized and more easy to trade in the markets than forward contracts.
A)True
B)False
Q3) If the sale of the merchandise was denominated in Swiss francs,the November 30 entry to record the receipt of payment from Watchem included a A)credit to Accounts Receivable for $104,040.
B)credit to Exchange Gain for $3,060.
C)debit to Cash for $107,100.
D)debit to Exchange Loss for $3,060.
Q4) Floating exchange rates reflect fluctuating market prices for a currency based on supply and demand in the world currency markets.
A)True
B)False
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Chapter 13: Accounting for Derivatives and Hedging Activities
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Q1) Assuming a present value factor of 1 for simplicity,what is the fair value of this forward contract on January 31?
A)$-0-
B)$ 60 asset
C)$160 liability
D)$200 liability
Q2) What is the fair value of the forward contract at March 1?
A)$-0-
B)$1,654.97 asset
C)$1,654.97 liability
D)$1,680 asset
Q3) Hedge accounting is designed to record changes in the value of the hedged item and in the value of the hedging instrument in the same accounting period.
A)True
B)False
Q4) The net gain or loss in earnings during the period for a fair-value hedge must be reported in the financial statement footnotes.
A)True
B)False
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Chapter 14: Foreign Currency Financial Statements
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Q1) Assume the functional currency of a foreign entity is the U.S.dollar,but the books are kept in euros.The objective of remeasurement of a foreign entity's accounts is to
A)produce the same results as if the foreign entity's books were maintained in the currency of the largest customer.
B)produce the same results as if the foreign entity's books were maintained solely in the local currency.
C)produce the same results as if the foreign entity's books were maintained solely in the U.S.dollar.
D)produce the results reflective of the foreign entity's economics in the local currency.
Q2) Functional currency is the currency of the primary economic environment in which it operates.
A)True
B)False
Q3) A foreign subsidiary's foreign currency statements must conform with the U.S.GAAP before translated into U.S.dollars.
A)True
B)False
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Page 16
Chapter 15: Segment and Interim Financial Reporting
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Q1) GAAP requires disclosures for each reportable operating segment for each of the following,except for A)Revenues.
B)Depreciation expense.
C)R&D expenditures.
D)Extraordinary items.
Q2) The gross profit method for estimating inventory and cost of goods sold can be used for interim financial reports if the periodic inventory method is not used and it is too costly to perform an inventory count.
A)True
B)False
Q3) Similar operating segments may be combined if the segments have similar economic characteristics.Which one of the following is a similar economic characteristic under GAAP?
A)The segments' management teams
B)The tax reporting law sections
C)The distribution method for products or services
D)The expected rates of return and risk for the segments' productive assets
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17
Chapter 16: Partnerships - Formation,operations,and
Changes in Ownership Interests
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Q1) The death of a partner results in a dissociation and requires a settlement with the estate of the deceased partner.
A)True
B)False
Q2) The profit and loss sharing agreement for the Jill,Kelly,and Lila partnership provides that each partner receives a bonus of 5% on the original amount of partnership net income if net income is above $25,000.Jill and Kelly receive a salary allowance of $7,500 and $10,500,respectively.Lila has an average capital balance of $260,000,and receives a 10% interest allocation on the amount by which her average capital account balance exceeds $200,000.Residual profits and losses are allocated to Jill,Kelly,and Lila in their respective ratios of 7:5:8.
Required:
Prepare a schedule to allocate $88,000 of partnership net income to the partners.
Q3) Partnerships
A)are required to prepare annual reports.
B)are required to file income tax returns but do not pay Federal income taxes.
C)are required to file income tax returns and pay Federal income taxes.
D)are not required to file income tax returns or pay Federal income taxes.
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Chapter 17: Partnership Liquidation
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Q1) A cash distribution plan involves ranking the partners in terms of their vulnerability to possible losses.
A)True
B)False
Q2) The liquidation of a partnership is covered under Section 807 of the Uniform Partnership Act of 1997.
A)True
B)False
Q3) Creditors of the partnership may seek the personal assets of the partners to satisfy amounts owed.When this happens
A)creditors may only file against partnership assets.
B)creditors must file against all partners and recover their claims based on the individual partner's profit and loss distribution percentage.
C)creditors must file against all partners and recover their claims based on the individual partner's percentage ownership.
D)creditors may file against an individual partner to recover their claims,or against any combination of partners.
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Chapter 18: Corporate Liquidations and Reorganizations
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Q1) An entity which qualified for fresh-start accounting is not required to disclose which of the following items in their initial financial statements?
A)Adjustments from historical cost of assets and liabilities
B)Amount of debt of the prior entity forgiven
C)Amount of ending retained earnings/deficit of the prior entity
D)Changes to the management team from the prior entity
Q2) Moddle Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.The trustee has determined that the unsecured claims will receive $.20 on the dollar.National Corporation holds a $500,000 mortgage note receivable from Moddle that is secured by equipment with a $550,000 book value and a $430,000 fair value. Required:
How much of the mortgage receivable will National recover?
Q3) In a liquidation under Chapter 7,the trustee
A)may not be appointed,but may only be elected.
B)may not be elected,but may only be appointed.
C)is responsible for converting assets to cash and distributing payments to claimants.
D)is responsible for appointing a creditors' committee.
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Page 20
Chapter 19: An Introduction to Accounting for State and Local Governmental Units
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Q1) What funds are reported in Government-wide financial statements?
A)Governmental only
B)Proprietary only
C)Governmental and proprietary
D)Governmental,proprietary and fiduciary
Q2) Which fund would most likely report depreciation expense?
A)A special revenue fund
B)An enterprise fund
C)A capital projects fund
D)A debt service fund
Q3) Debt service fund accounts for resources to be used to pay principal and interest for general short-term debt.
A)True
B)False
Q4) A comprehensive annual financial report has the following three major sections:
A)introductory,financial,and management's discussion and analysis.
B)introductory,financial,and statistical.
C)transmittal,financial,and statistical.
D)transmittal,financial,and management's discussion and analysis.
21
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Chapter 20: Accounting for State and Local Governmental Units
- Governmental Funds
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Questions
Q1) Permanent funds are normally for nonexpendable resources set aside for support of a government's programs or citizenry.
A)True
B)False
Q2) Taxes which were billed,but are not paid by the due date,require which of the following entries at the fiscal close?
A)Debit Taxes Receivable - Delinquent
B)Debit Allowance for Uncollectible Taxes - Delinquent
C)Credit Taxes Receivable - Delinquent
D)Credit Allowance for Uncollectible Taxes - Current
Q3) Government enter the annual budget in the journal by recording a debit to the appropriations account and a credit to estimated revenues.
A)True
B)False
Q4) When the interest income of $50,000 is received,what account should be credited?
A)Other Financing Sources
B)Other Financing Uses
C)Revenue collected in advance
D)Revenue
22
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Chapter 21: Accounting for State and Local Governmental Units - Proprietary and Fiduciary Funds
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Q1) At December 31,2014,an Enterprise Fund has the following adjusted accounts outstanding: \(\begin{array}{ll}
\text { Insurance Expense } & \$ 2,000 \\
\text { Depreciation Expense } & 3,000 \\
\text { Supplies Expense } & 10,000 \\
\text { Salaries Expense } & 100,000 \\
\text { Service Revenues } & 123,000 \end{array}\) When preparing the closing entry for the temporary accounts at December 31,2014,the Enterprise Fund's accountant will
A)credit Retained Earnings $8,000.
B)credit Net Cash,$8,000.
C)credit Net Position,Unrestricted $8,000.
D)credit Invested Capital Assets,Net of Related Debt,$8,000.
Q2) On the Statement of Net Position,in place of stockholders' equity,proprietary funds report
A)Retained Earnings only.
B)Restricted Cash only.
C)Unrestricted Cash only.
D)Net Position.
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Chapter 22: Accounting for Not-For-Profit Organizations
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Q1) Voluntary health and welfare organizations classify fund-raising costs as A)costs of services sold.
B)program services.
C)auxiliary expenses.
D)supporting services.
Q2) A donor gives a Voluntary Health and Welfare Organization (VHWO)$1,000 cash that is restricted for a research project.What account does the VHWO credit when the VHWO receives the money?
A)Nonoperating Revenue
B)Permanently Restricted Revenue
C)Unrestricted Support
D)Temporarily Restricted Support
Q3) Not-for-profits account for revenues and expenses using the modified accrual basis of accounting.
A)True
B)False
Q4) Nongovernmental not-for-profit entities follow FASB standards.
A)True
B)False
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Chapter 23: Estates and Trusts
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Q1) In accounting for interest income on bond investments included in the estate,bond premiums and discounts must be amoritized.
A)True
B)False
Q2) In reference to the potential taxation of an estate,which of the following statements is correct?
A)An estate may be subject to taxation at both the state and federal level.
B)The taxable amount of an estate is based on the book values of all estate assets at the date of death.
C)The estate value is not reduced by such expenses as funeral expenses,bequests to qualified charities,or state-level taxes.
D)Taxable estate assets do not include proceeds from life insurance policies.
Q3) Under the Uniform Probate Code,the term "personal representative" refers to which of the following?
A)An executor,but not an administrator
B)An administrator,but not an executor
C)Executor and administrator
D)Fiduciary
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