Advanced Accounting
Pre-Test Questions
Course Introduction
Advanced Accounting delves into complex financial reporting topics beyond the scope of introductory accounting courses. This course covers advanced principles and practices such as consolidated financial statements, intercompany transactions, foreign currency transactions, accounting for partnerships, mergers and acquisitions, and segment and interim reporting. Students will learn to analyze and interpret financial statements for business combinations and multinational operations, navigate the unique standards applicable to governmental and nonprofit entities, and apply advanced problem-solving skills to real-world accounting scenarios. The course is designed to prepare students for professional accounting qualifications and higher-level responsibilities in the field.
Recommended Textbook
Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2011, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2011, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2010, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2010. Additional sales were made to Steven in 2011 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2011 purchases had not been sold to outsiders by the end of 2011.
What was the balance in the Investment in Nicole Corp. account at December 31, 2011?
Answer: [$503,000 + $36,660 - ($40,000 x .4)] = $523,660
Q2) What is the justification for the timing of recognition of income under the equity method?
Answer: According to the equity method, the investor should recognize its share of the investee's income in the same period in which it is earned by the investee. The equity method applies accrual accounting when the investor could exercise significant influence over the investee.
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Page 3
Chapter 2: Consolidation of Financial Information
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Sample Questions
Q1) Bale Co. acquired Silo Inc. on December 31, 20X1, in an acquisition business combination transaction. Bale's net income for the year was $1,400,000, while Silo had net income of $400,000 earned evenly during the year. Bale paid $100,000 in direct combination costs, $50,000 in indirect costs, and $30,000 in stock issue costs to effect the combination.
Required:
What is consolidated net income for 20X1?
Answer: 11ea8df8_a850_ba88_b636_9f4b47aa48c7_TB4172_00
Note: Silo's net income does not affect consolidated net income until after the date of acquisition. The combination costs belong to Bale only.
Q2) Which of the following is a not a reason for a business combination to take place?
A) Cost savings through elimination of duplicate facilities.
B) Quick entry for new and existing products into domestic and foreign markets.
C) Diversification of business risk.
D) Vertical integration.
E) Increase in stock price of the acquired company.
Answer: E
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Page 4
Chapter 3: Consolidationssubsequent to the Date of Acquisition
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Q1) Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2010 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2011 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. What will Beatty record as its Investment in Gataux on January 1, 2010?
A) $500,000.
B) $503,461.
C) $512,000.
D) $515,461.
E) $526,500.
Answer: B
Q2) For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?
Answer: The initial value method is the easiest to use.
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Page 5
Chapter 4: Consolidated Financial Statements and Outside Ownership
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Sample Questions
Q1) Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What amount of goodwill should be attributed to Perch at the date of acquisition?
A) $150,000.
B) $250,000.
C) $0.
D) $120,000.
E) $170,000.
Q2) What is preacquisition income?
Q3) On January 1, 2010, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no active trading market for Acron's stock. The fair value of Acron's net assets was $600,000 and Glenville accounts for its interest using the acquisition method. Determine the amount of goodwill to be recognized in this acquisition.
Q4) How is a non-controlling interest in the net income of an entity reported in the income statement?
Q5) Where should a non-controlling interest appear on a consolidated balance sheet?
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Chapter 5: Consolidated Financial Statementsintra-Entity
Asset Transactions
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Sample Questions
Q1) Throughout 2011, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer be earned?
Q2) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2010, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2010, 2011, and 2012, respectively. Parker sold the land purchased from Stark in 2010 for $92,000 in 2012. Compute income from Stark reported on Parker's books for 2011.
A) $185,000.
B) $157,500.
C) $166,500.
D) $162,000.
E) $180,000.
Q3) Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards' inventory in 2011. The transfer price was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?
Q4) How is the gain on an intra-entity transfer of a depreciable asset realized?
Q5) When is the gain on an intra-entity transfer of land realized?
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Chapter 6: Variable Interest Entities, Intra-Entity Debt,
Consolidated Cash Flows, and Other Issues
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Q1) The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company.
(1)) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000.
(2)) Non-controlling interest in Stage's net income was $30,000.
(3)) Graham paid dividends of $15,000.
(4)) Stage paid dividends of $10,000.
(5)) Excess acquisition-date fair value over book value was expensed by $6,000.
(6)) Consolidated accounts receivable decreased by $8,000.
(7)) Consolidated accounts payable decreased by $7,000.
How is the amount of excess acquisition-date fair value over book value recognized in a consolidated statement of cash flows assuming the indirect method is used?
A) It is ignored.
B) $6,000 subtracted from net income.
C) $4,800 subtracted from net income.
D) $6,000 added to net income.
E) $4,800 added to net income.
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8
Chapter 7: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Sample Questions
Q1) What is meant by the spot rate?
Q2) What is the major assumption underlying the one-transaction perspective?
Q3) Which statement is true regarding a foreign currency option?
A) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future.
B) A foreign currency option gives the holder the obligation only sell foreign currency in the future.
C) A foreign currency option gives the holder the obligation to only buy foreign currency in the future.
D) A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future.
E) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate on the future date.
Q4) What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?
Q5) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?
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Chapter 8: Translation of Foreign Currency Financial Statements
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Q1) Under the current rate method, inventory at market would be translated at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q2) Where is the disposition of a remeasurement gain or loss reported in the parent company's financial statements?
A) Net income/loss in the income statement.
B) Cumulative translation adjustment as a deferred asset.
C) Cumulative translation adjustment as a deferred liability.
D) Other comprehensive income.
E) Retained earnings.
Q3) Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2011, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?
Q4) Contrast the purpose of remeasurement with the purpose of translation.
Page 10
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Chapter 9: Partnerships: Formation and Operation
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Q1) On January 1, 2011, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Noris, the partnership contract included the following provisions: Salary of $40,000 a year to Noris.
Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%
During the fiscal year ended December 31, 2011, the partnership had income of $90,000 prior to recognition of salary to Noris. Record the journal entry to record the remainder of net income to the capital accounts.
Q2) The advantages of the partnership form of business organization, compared to corporations, include
A) single taxation.
B) ease of raising capital.
C) mutual agency.
D) limited liability.
E) difficulty of formation.
Q3) For what events or conditions should the Articles of Partnership make provision?
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Chapter 10: Partnerships: Termination and Liquidation
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Q1) The Albert, Boynton, and Creamer partnership was in the process of liquidating its assets and going out of business. Albert, Boynton, and Creamer had capital account balances of $80,000, $120,000, and $200,000, respectively, and shared profits and losses in the ratio of 1:3:2. Equipment that had cost $90,000 and had a book value of $60,000 was sold for $24,000 cash.
Required:
Prepare the appropriate journal entry to record the sale of the equipment, distributing any gain or loss directly to the partners.
Q2) What accounting transactions are not recorded by an accountant during partnership liquidation?
A) The conversion of partnership assets into cash.
B) The allocation of gains and losses from sales of assets.
C) The payment of liabilities and expenses.
D) The initiation of legal action by creditors of the partnership.
E) Write-off of remaining unpaid debts.
Q3) What financial schedule would be prepared for a partnership that has begun liquidation but has not yet completed the process? What is the purpose of this schedule?
Q4) What is the purpose of a predistribution plan?
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Page 12
Chapter 11: Accounting for State and Local Governments
Part 1
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Sample Questions
Q1) Special Revenue funds are
A) Funds used to account for the activities of a government that are carried out primarily to provide services to citizens.
B) Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations.
C) Funds used to account for monies held by the government in a trustee capacity.
D) Funds used to account for all financial resources except those required to be accounted for in another fund.
E) Funds used to account for revenues that have been legally restricted as to expenditure.
Q2) Revenue from property taxes should be recorded in the General Fund
A) when received.
B) when there is an enforceable legal claim.
C) when they are available for recognition.
D) in the period for which they are required or permitted to be used.
E) in the period in which the tax bills are mailed.
Q3) Under modified accrual accounting, when are expenditures recorded?
Q4) What is the purpose of government-wide financial statements?
Page 13
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Chapter 12: Accounting for State and Local Governments
Part 2
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Q1) What three criteria must be met to identify a governmental unit as a primary government?
Q2) What is meant by the term fiscally independent?
Q3) Marie Todd works for the City of Rochester and volunteered to work the New Years Eve holiday in December, 2010. In exchange for working the holiday, the city will grant her 2 vacation days compensated at $500 per day. Marie decided to take these vacation days during January, 2011.
For Government-wide financial statements, what are the journal entries to record these events in 2010 and in 2011?
Q4) How is the Statement of Cash Flows for Proprietary Funds similar and dissimilar to a Statement of Cash Flows for a for-profit business?
Q5) What are the three broad sections of a state or local government's CAFR?
A) Introductory, financial, and statistical.
B) Financial statements, notes to the financial statements, and component units.
C) Introductory, statistical, and component units.
D) Component units, financial, and statistical.
E) Financial statements, notes to the financial statements, and statistical.
Page 14
Q6) What are the three broad sections of a state or local government's CAFR?
Q7) What is meant by the term legally independent?
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