Advanced Accounting Theory
Midterm Exam
Course Introduction
Advanced Accounting Theory delves into the conceptual foundations underlying accounting standards and practices, exploring the frameworks, assumptions, and principles that inform the preparation and interpretation of financial statements. The course examines major theoretical approaches, including positive and normative accounting theories, as well as contemporary issues such as earnings management, corporate governance, and the impact of regulation and international standards. Students will critically analyze the role of accounting in economic decision-making, ethical considerations in reporting, and the evolving landscape of financial disclosure. Emphasis is placed on research methods, empirical studies, and the application of theory to complex, real-world accounting scenarios.
Recommended Textbook
Advanced Financial Accounting 6th Edition by Thomas H. Beechy
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Chapter 1: Setting the Stage
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Q1) How does a company usually take a "big bath" in a loss year?
A)Reduces its long-term liabilities
B)Expenses as many of its costs as possible
C)Recognizes revenue as soon as possible
D)Writes-down its assets
Answer: D
Q2) Which of the following financial statements would likely be the most effective in conveying information to users that will help them to predict the long-term future cash flows of the company?
A)A classified balance sheet prepared under the accrual basis of accounting
B)A proforma cash flow statement showing expected cash flows for the next year
C)A multi-step income statement prepared under the accrual basis of accounting
D)A cash flow statement showing actual cash flows for the past two year
Answer: C
Q3) What effect does income smoothing have on risk analysis?
A)Reduces the business risk of a company
B)Increases the financial risk of a company
C)Reduces the audit risk of a company
D)Has no effect on risk analysis
Answer: A
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Townsend Ltd.has the following shareholders:
Palermo Co.- 60%
Nix Ltd.- 30%
Riley Ltd.- 10%
Nix has two seats on Townsend's five-person board of directors.Which of the following statements is true?
A)Nix has significant influence over Townsend.
B)Nix has control over Townsend.
C)Townsend is a special purpose entity to Nix.
D)Nix should treat Townsend as a passive investment.
Answer: A
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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Chapter 3: Business Combinations
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Q1) Which of the following statements about a bargain purchase is true?
A)It is reported on the financial statements as an "excess of fair value over cost of assets acquired".
B)It is reported as a deferred credit on the financial statements called negative goodwill.
C)Assets and liabilities of the acquired company are reported at net book value.
D)Assets and liabilities of the acquired company are reported at their fair value.
Answer: D
Q2) Ha Ltd.and Hee Ltd.exchanged shares in a business combination.After the share exchange,each company held the same number of voting shares.Which of the following statements is true?
A)The company with the highest net assets is considered the acquirer.
B)The companies must ask the courts to decide which company is the acquirer.
C)A number of factors must be considered to determine which company is the acquirer.
D)There is no acquirer as this is not a proper business combination.
Answer: C
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Chapter 4: Wholly-Owned Subsidiaries: Reporting
Subsequent to Acquisition
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Q1) DC Company purchased 100% of the outstanding common shares of FA Company on December 31,20X3 for $170,000.At that date,FA had $100,000 of outstanding common stock and retained earnings of $30,000.It was agreed that the net assets were fairly valued except that the fair value of the capital assets exceeded their net book value by $20,000 and the carrying value of the inventory exceeded its fair value by $10,000.The capital assets had a remaining useful life of eight years as of the acquisition date and have no salvage value.Inventory turns over four times a year.What adjustment should be made to the consolidated financial statements for the year ended December 31,20X6 for the fair value increment related to the capital assets?
A)The retained earnings at January 1,20X6 will be increased by $20,000.
B)Amortization expense on the capital assets for 20X6 will be increased by $2,500.
C)Amortization expense on the capital assets for 20X6 will be increased by $7,500.
D)Retained earnings at the end of 20X6 will be increased by $12,500.
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Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Which of the following statements about IFRS 3,Business Combinations is true?
A)IFRS 3 allows organizations to use either the parent-company method or the entity method.
B)IFRS 3 allows organizations to use either the parent-company extension method or the entity method.
C)IFRS 3 allows organizations to use either the parent-company method or the parent-company extension method.
D)IFRS 3 allows organizations to use either the parent-company method,the parent-company extension method,or the entity method.
Q2) Olthius Ltd.purchased 60% of Fredo Ltd.for $1,500,000.At the date of acquisition,the carrying value of Fredo's net identifiable assets was $1,800,000 and the fair value was $2,200,000.What is the amount of the goodwill under the entity method?
A)$(300,000)
B)$120,000
C)$300,000
D)$400,000
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Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Dixon Ltd.owns 60% of the common shares of Kelly Co.Kelly sold a machine with a book value of $350,000 to Dixon for $410,000.When Dixon prepares its consolidated financial statements,it makes an adjustment to reduce the amortization.What is the effect of this adjustment?
A)The total decrease in amortization will flow through to ending retained earnings.
B)The total decrease in amortization will flow through to the ending non-controlling interest.
C)60% of the decrease in amortization will flow through to ending retained earnings and 40% will flow through to the ending non-controlling interest.
D)40% of the decrease in amortization will flow through to ending retained earnings and 60% will flow through to the ending non-controlling interest.
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
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Chapter 7: Segmented and Interim Reporting
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Q1) In Canada and the United States,at a minimum,how often are interim financial statements required to be issued?
A)Monthly
B)Bi-monthly
C)Quarterly
D)Semi-annually
Q2) What is the main objective in disclosing segmented information?
A)It provides a broader view of the entire economic entity controlled by the parent.
B)It provides information to assess the risk of different operating units.
C)It increases the income of different operating segments.
D)It reduces the cost of financial reporting.
Q3) Which of the following is not included among requirements for interim financial reports for public companies?
A)Statement of comprehensive income
B)Statement of financial position
C)Statement of cash flows
D)Summary of significant accounting policies
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Chapter 8: Foreign Currency Transactions and Hedges
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Q1) What exchange rate is usually used to report non-monetary assets on the statement of financial position?
A)Historical rate
B)Spot rate
C)Closing rate
D)Fair value
Q2) On December 1,20X5,Gillard Ltd.sold goods to International Traders Ltd. ,a company located in Switzerland for 500,000 Swiss francs (CHF).At the date of sale,the spot rate was CHF1 = $1.0329.On the same date,Gillard acquired a 90-day forward contract at a rate of CHF1 = $1.0315.On March 1,20X6,Gillard receives full payment from International Traders and delivered the Swiss francs in execution of the forward contract.The spot rate at March 1,20X6 was CHF1 = $1.0287.What amount should Gillard record for the sale?
A)$500,000.
B)$514,300
C)$515,750
D)$516,450
Q3) Compare and contrast accounting for foreign currency transactions and hedges under IFRS and ASPE.
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Chapter 9: Reporting Foreign Operations
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Q1) Under the temporal method,which of the following items would be translated using the historical rate?
A)Inventory
B)Accounts receivable
C)Accounts payable
D)Long-term debentures
Q2) Under the current-rate method,which of the following items would be translated using the historical rate?
A)Land
B)Inventory
C)Long-term debentures
D)Share capital
Q3) Under the current-rate method,what is the accounting treatment for exchange gains and losses arising from previous years?
A)Reported as equity
B)Reported in other comprehensive income
C)Reported in consolidated net income
D)Included in opening consolidated retained earnings
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Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) Mr.Generous donated $100,000 to Excel Private School and specified that the principal amount not be spent but be maintained permanently.Interest on the invested funds can be used to award scholarships to those who excel in drama.How should the $100,000 contribution be presented on Excel Private School's financial statements?
A)As a direct increase in net assets of the endowment fund
B)As revenue of the operating fund
C)As revenue of the endowment fund
D)As deferred revenue of the operating fund
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) What type of not-for-profit (NFP)organization may be allowed to use the restricted fund method?
A)Any NFP organization
B)Any NFP that has a general fund for unrestricted contributions
C)Any NFP that has at least one internally restricted fund
D)Any NFP that has at least one externally restricted fund
Page 12
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Chapter 11: Public Sector Financial Reporting
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Q1) Clearly distinguish between a government business organization and a non-business government organization.
Q2) Which of the following is a non-financial asset?
A)Available-for-sale investment
B)Investment in a government enterprise
C)Crown land
D)Tangible capital asset
Q3) A provincial government provides a grant to one of its cities to support a winter festival.The provincial government can recognize this transfer when it has been fully authorized.When is the transfer considered fully authorized?
A)When the appropriate government minister has provided written approval for the transfer
B)When the grant has been received by the city
C)When the grant has been used by the city for the required purpose
D)When the transfer has been approved by the legislature
Q4) Describe the major differences that exist in the purpose of accounting and reporting and in the types of reports of a large city when compared to a large public company.
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Chapter 12: Income Tax Allocation
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Q1) O'Ball Ltd.wants to acquire Kiro Ltd.to take advantage of its tax losses and credit carry forwards.In what way can O'Ball accomplish this?
A)O'Ball can purchase Kiro's net assets.
B)O'Ball can do a share exchange with Kiro.
C)O'Ball can either purchase Kiro's net assets or purchase Kiro's shares.
D)O'Ball can either purchase Kiro's net assets or do a share exchange with Kiro.
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Chapter 13: Income Tax Allocation Subsequent to Acquisition
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Q1) Morin Co.acquired all the shares of Lightfoot Ltd.Lightfoot has a number of amortizable capital assets and has properly recorded the related deferred income taxes on its books.What deferred income tax adjustment must Morin make for its consolidated financial statements?
A)Adjustment for any changes in temporary differences due to the difference between carrying values and tax bases of Lightfoot's depreciable capital assets
B)Adjustment for any changes in temporary differences due to the amortization of fair value increments
C)Adjustment for any changes in temporary differences due to the amortization of goodwill
D)No adjustment is necessary.
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Chapter 14: Good will Impairment Test
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Q1) For private enterprises that have acquired goodwill in a business combination,which of the following is considered a change of circumstances for purposes of testing for goodwill impairment?
A)A large unfavourable income tax reassessment
B)Sale of a capital asset for a small loss
C)A major competitor has ceased operations
D)Retirement of the subsidiary's operations manager
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) 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
Q4) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE).
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Chapter 15: Step Purchases
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Q1) Frey Ltd.acquired 70% of Sabo Ltd.on January 1,20X4.On January 1,20X8,Frey acquired another 10% of Sabo's common shares for $250,000.
With respect to this addition purchase,which of the following is true?
A)On the consolidated statement of financial position,the goodwill balance will increase.
B)On the consolidated statement of financial position,the common shares balance will increase.
C)Frey must use the equity method to report the additional investment.
D)Frey should ignore any changes in the fair values of Sabo's net assets between January 1,20X4 and January 1,20X8.
Q2) Frey Ltd.acquired 70% of Sabo Ltd.in 20X4.On January 1,20X8,Frey acquired another 10% of Sabo's common shares for $250,000.Under the entity method,the balance of the non-controlling interest at December 31,20X7 was $660,000.What adjustment should be made to 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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Chapter 16: Decreases in Ownership Interest
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Q1) Frey Ltd.acquired 70% of Sabo Ltd.several years ago.On January 1,20X8,Frey reduced its holding in Sabo by 10%.The shares were sold for $160,000.At December 31,20X7,under the entity method,the balance of Frey's share of Sabo's net assets was $84,000.What adjustment should be made to the consolidated shareholders' equity to reflect Frey's reduction in interest in Sabo to 60%?
A)$76,000
B)$84,000
C)$148,000
D)$160,000
Q2) When a subsidiary issues shares,________.
A)no gain or loss is recognized
B)a gain or loss is always recognized
C)this reduces minority interest
D)this may increase minority interest
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Chapter 17: 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) A parent company owns a subsidiary's preferred and common shares.How should the acquisition of the preferred shares be treated?
A)In the same manner as common shares
B)As a retirement of shares
C)As an expense
D)As a deduction from retained earnings
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Chapter 18: Intercompany Bond Holdings
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Q1) Soft Limited owns 70% of the shares of Hard Co.On January 1,20X5,Hard Co.issued
$1,000,000 bonds payable at 6%,due in December 31,20X10.The bonds were issued for $907,542,representing a yield of 8%.The interest is paid annually on December 31.On January 1,20X6,Soft purchased $300,000 face value of the Hard bonds for $287,700 when the bonds were yielding 7%.
Required:
Both companies use the effective interest rate to amortize the bonds.Prepare the journal eliminating journal entries relating to the bonds as they would appear on the consolidated worksheet.The agency method is used.Calculate the consolidated bonds payable account at December 31,20X6,assuming there are no other bonds outstanding.
Q2) A subsidiary has purchased some bonds from its parent company.Under the par-value method,the non-controlling interest is allocated its share of the difference between ________.
A)the bond's market value and face value
B)the bond's face value and carrying value
C)the bond's market value and carrying value
D)the bond's par value and carrying value
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Chapter 19: Fund Accounting
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Q1) Sparrow Pension Plan is a not-for-profit organization that administers the pension fund held for the employees of Sparrow Tech Ltd.What type of fund is the pension fund?
A)Reserve fund
B)Self-sustaining fund
C)Fiduciary fund
D)Endowment fund
Q2) Which statements are affected by inter-fund loans?
A)Statement of operations and consolidated statements
B)Statement of financial position of the individual funds and consolidated statements
C)Statement of operations and statement of financial position of the individual funds
D)Statement of financial position of the individual funds and statement of changes in net assets
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