Advanced Financial Accounting Exam Preparation Guide
Course Introduction
Advanced Financial Accounting delves into complex accounting principles and procedures associated with business combinations, consolidated financial statements, foreign currency transactions, segment and interim reporting, and accounting for partnerships. The course emphasizes the application of Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) to specialized accounting topics, including mergers and acquisitions, variable interest entities, and multinational operations. Students learn to analyze and prepare advanced financial reports, evaluate the implications of accounting choices, and develop professional judgment for addressing ethical challenges in financial reporting.
Recommended Textbook
Intermediate Accounting 2nd Edition Volume II by Kin Lo George Fisher
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Page 2
Chapter 11: Current Liabilities and Contingencies
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Sample Questions
Q1) Which of the following characteristic is required for a liability under IFRS Framework?
A)Arises from a past event.
B)Arises from a non-financial transaction.
C)Arises from a future transaction.
D)Arises from a forecasted transaction.
Q2) Which is true about lines of credit?
A)The company generally must repay the credit line in full monthly.
B)The borrower can borrow up to an agreed upon limit.
C)Interest is charged on the full amount of the agreed upon limit.
D)Lines of credit are particularly useful for steady income businesses that have very little volatility in revenue.
Q3) Which of the following is a financial liability?
A)A magazine publisher's obligation to provide the magazine monthly for an agreed upon period.
B)Warranties.
C)Accounts payable.
D)Income taxes payable.
Q4) Explain the nature of current liabilities and how these are accounted for in the financial statements.
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Chapter 12: Non-Current Financial Liabilities
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Sample Questions
Q1) Bailey's Gold Mines Inc.(BGMI)purchases a piece of land for the purpose of developing a gold mine.BGMI is legally required to remove all structures and convert the mine site to a wildlife sanctuary at the end of its estimated 10-year useful life.BGMI estimates that it will have to spend $11,000,000 to decommission the site and reclaim the land when operations cease.The present value of this $11,000,000 site restoration cost,assuming a discount rate of 5%,is $6,753,046.BGMI uses straight-line depreciation. Required: Prepare the journal entries to recognize this site restoration cost the company would record upon initial acquisition and subsequently.
Q2) Which statement is correct about offsetting?
A)Offsetting is required under IFRS when the entity is willing and legally able to offset.
B)Offsetting is required under IFRS when the company intends to settle on a net basis.
C)Offsetting is generally permitted under IFRS,unless it is specifically prohibited.
D)Offsetting is required under IFRS when there is a legally enforceable right of offset.
Q3) What does an "AAA" credit rating mean?
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4
Chapter 13: Equities
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Q1) List the five classes of transactions that explain the change in equity on the statement of changes in equity.
Q2) Golf Is for Nerds Inc.sells 20,000 no-par value common shares for $8.00 each on a subscription basis.Terms of the sale require the purchaser to pay $3.00 per share when the contract is signed and the balance in three months' time.
Required: Prepare the journal entries at (a)the date of signing the contract; (b)the date that the remaining payment is made; (c)the date the shares are transferred.
Q3) How should subscriptions receivable be reported on the balance sheet and why?
Q4) Which statement is correct concerning property dividends?
A)Issuing property dividends is a common method of distributing value to the shareholders.
B)A property dividend could be used to transfer assets from a subsidiary to a parent company.
C)Property dividends cannot be used by a parent company to distribute shares of an associate or subsidiary to its shareholders.
D)The historical value of the property is used for purposes of recording the value of the dividend.
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Page 5
Chapter 14: Complex Financial Instruments
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Q1) A company issues convertible bonds with face value of $7,000,000 and receives proceeds of $8,500,000.Each $1,000 bond can be converted,at the option of the holder,into 100 common shares.The underwriter estimated the market value of the bonds alone,excluding the conversion rights,to be approximately $7,300,000.
Required:
Record the journal entry for the issuance of these bonds based on IFRS.
Q2) Explain how bonds issued with warrants alleviate adverse selection problem.
Q3) Naples Corporation issued call options on 20,000 shares of VESPUS Inc.on October 21,2019.These options give the holder the right to buy VESPUS shares at $35 per share until May 17,2020.For issuing these options,Naples received $60,000.On December 31,2020 (Naples's fiscal year-end),the options traded on the Montreal Exchange for $3.50 per option.On May 17,2020,VESPUS's share price increased to $40 and the option holders exercised their options.Naples had no holdings of VESPUS shares.
Required:
For Naples Corporation,record the journal entries related to these call options.
Q4) List three common stock compensation plans and describe them.
Q5) Explain the conceptual meaning of the difference between the book value and market value methods of recording the conversion of bonds into common shares.
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Chapter 15: Earnings Per Share
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Q1) Explain the difference between basic and diluted EPS.
Q2) Which statement is correct about the "if-converted" method for EPS?
A)This method assumes the convertible security is converted into ordinary shares at the end of the fiscal period.
B)This method assumes the convertible security is converted into ordinary shares at the beginning of the fiscal period.
C)This method assumes the convertible security is converted into ordinary shares evenly over the fiscal period.
D)This method assumes the convertible security is converted into ordinary shares at the mid-point of the fiscal period.
Q3) Which of the following are financial instruments that give rise to POS?
A)Convertible bonds that can be exchanged for cumulative preferred shares.
B)Convertible preferred shares that can be exchanged for ordinary shares.
C)Land that can be exchanged for preferred shares.
D)Stock options and warrants that permit the holder to buy preferred shares from the company at a predetermined price.
Q4) Explain why the IASB requires the disclosure of basic and diluted EPS.
Q5) Contrast the terms "income effect" and "tax effect."
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Chapter 16: Accounting for Income Taxes
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Sample Questions
Q1) A large public company reported that its provision for income taxes was $500 million and that it has a deferred tax liability of 2 billion.A Member of Parliament calls you and says,I see hundreds of companies who have these huge deferred tax liabilities on their balance sheets.If the government could get even half of what's owed,it could cut the public deficit down to size in a hurry.
Required:
Write a memo to the Member of Parliament explaining the issues.
Q2) Explain the large and growing amount of deferred tax liabilities on corporations' balance sheets mentioned in the opening vignette of this chapter.
Q3) A company has a deferred tax liability of $120,000 at the beginning of the fiscal year relating to a taxable temporary difference of $300,000.The current year tax rate is 20%.
Required:
Provide the journal entry to reflect the tax rate change.
Q4) State whether or not discounting of deferred assets and liabilities is required or permitted and explain why or why not.
Q5) Describe what is meant by a timing difference.
Q6) Why does the tax system appear to treat profits and losses asymmetrically?
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Page 8
Chapter 17: Pensions and Other Employee Future Benefits
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Q1) Which of the following component refers to the benefits earned by employees in a defined benefit plan?
A)Interest cost on pension obligations.
B)Income from plan assets.
C)Amortization of past service cost.
D)Amortization of actuarial gains and losses.
Q2) Regarding the presentation and disclosure of pension plans,which statement is true?
A)Enterprises must disclose the components of pension gains.
B)If the pension expense,OCI,and the defined benefit asset or liability are not separately identified on the face of the financial statements,they must be disclosed in the notes.
C)When a company has more than one defined benefit plan,IFRS usually permits the company to offset pension asset and pension liability amounts.
D)Two plans that both have net liability positions cannot be added together.
Q3) What is the key distinction between amounts recorded through income as pension expense versus amounts recorded through OCI?
Q4) Summarize the three steps in the accounting for defined benefit pension plans.
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Page 9
Chapter 18: Accounting for Leases
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Q1) Why do lessors prefer financing lease treatment over operating lease treatment?
Q2) What entry is needed by the lessor for a finance lease?
A)Obligation for lease.
B)Interest expense.
C)Depreciation expense.
D)Lease receivable.
Q3) On January 1,2017,Granite Company entered a lease to rent office space.The lease requires $350,000 per year,at the beginning of each year,for 20 years.The lease is non-cancellable and non-renewable.The building's estimated useful life is 30 years,and its current fair value is estimated to be $6 million.The incremental borrowing rate is 5%. Required:
Classify this lease and record the journal entries for the first year of the lease.
Q4) Why do the supporting indicators for lease classification use "major part" and "substantially all" rather than "all" in reference to the amount of time and value contained in the lease?
Q5) Discuss what is meant by the risk-adjusted rate and which risk adjusted rates the lessee and the lessor should use?
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Page 10
Chapter 19: Statement of Cash Flows
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Sample Questions
Q1) What is not a "non-cash" transaction?
A)Exchange of land with another company.
B)Conversion of preferred shares.
C)Payment of cash dividends.
D)Payment of stock dividends.
Q2) Which statement about "cash and cash equivalents" is correct?
A)Exchanges of "cash and cash equivalents" for items that are not "cash and cash equivalents" result in cash flows for the cash flow statement.
B)Changes in the composition of "cash and cash equivalents" is considered a cash flow for purposes of the cash flow statement.
C)Changes in the composition of "cash and cash equivalents" is considered an operating activity on the cash flow statement.
D)Cash equivalents include investment in long-term bonds.
Q3) What are the two distinct components to investing activities?
Q4) What are the options for recording interest and dividends received and interest and dividends paid on the cash flow statement according to Accounting Standards for Private Enterprises (ASPE)?
Q5) Define cash and cash equivalents.
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Chapter 20: Accounting Changes
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Q1) For a company using the straight-line method of depreciation that changes the estimated useful life from 20 years to 15 years remaining as at the beginning of the year,the accountant should do the following:
A)Compute current year depreciation as (carrying amount - residual value)divided by 15 years.
B)Adjust prior year's depreciation.
C)Adjust the amount of accumulated depreciation as at the beginning of the year.
D)Compute current year depreciation as (carrying amount)X 15/20.
Q2) Chesapeake Inc.issued a 7-year bond on October 1,2018.The $735,000 par bond pays $51,450 of interest on October 1st each year,its year end. It is now February 2022.During the audit of the 2021 financial statements,it was discovered that the bond indenture allowed holders to convert the bonds to common shares.The terms of the conversion allow each $1,000 bond to be converted into 50 shares.Additional investigation concluded that the bond would have yielded 8%/annum had it not included the conversion option.
Required:
Record any adjusting journal entries required to correct Chesapeake's accounts.The books for 2021 have not yet been closed.
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