Advanced Financial Accounting
Final Test Solutions
Course Introduction
Advanced Financial Accounting delves into the complex principles and practices behind financial reporting for business entities with intricate organizational structures, such as partnerships, consolidated corporations, and international operations. The course explores advanced topics including mergers and acquisitions, foreign currency transactions, translation of foreign financial statements, segment and interim reporting, and accounting for governmental and nonprofit organizations. Through in-depth case studies and real-world examples, students gain a comprehensive understanding of contemporary accounting standards and ethical considerations essential for preparing and analyzing sophisticated financial statements in a globalized business environment.
Recommended Textbook Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle
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12 Chapters
1192 Verified Questions
1192 Flashcards
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2011, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered over the next several months. How should Club account for the decline in value?
A) Club should switch to the fair-value method.
B) No accounting because the decline in fair value is temporary.
C) Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement.
D) Club should not record its share of Chip's 2011 earnings until the decline in the fair value of the stock has been recovered.
E) Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.
Answer: B
Q2) When should an investor not use the equity method for an investment of 21% in another corporation?
Answer: When the investor does not have significant influence with regard to the investee.
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Page 3
Chapter 2: Consolidation of Financial Information
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Sample Questions
Q1) For each of the following situations, select the best letter Answer to reflect the effect of the numbered item on the acquirer's accounting entry at the date of combination when separate incorporation will be maintained. Items (4) and (6) require two selections.
(A) Increase Investment account.
(B) Decrease Investment account.
(C) Increase Liabilities.
(D) Increase Common stock.
(E) Decrease common stock.
(F) Increase Additional paid-in capital.
(G) Decrease Additional paid-in capital.
(H) Increase Retained earnings
(I) Decrease Retained earnings
_____1. Direct costs.
_____2. Indirect costs.
_____3. Stock issue costs.
_____4. Contingent consideration.
_____5. Bargain purchase.
_____6. In-process research and development acquired. Answer: (1) I; (2) I; (3) G; (4) A, C; (5) H; (6) A, I
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Page 4
Chapter 3: Consolidationssubsequent to the Date of Acquisition
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Sample Questions
Q1) Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2010. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2010 and $68,000 in 2011, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2010 and $36,000 in 2011, and paid dividends of $10,000 in dividends each year.
Assume that Fesler's reported net income includes Equity in Subsidiary Income. If the parent's net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2011?
Answer: 11ea8df8_a840_3f67_b636_a779fa841071_TB4172_00
Q2) Under the initial value method, when accounting for an investment in a subsidiary,
A) Dividends received by the subsidiary decrease the investment account.
B) The investment account is adjusted to fair value at year-end.
C) Income reported by the subsidiary increases the investment account.
D) The investment account remains at initial value.
E) Dividends received are ignored.
Answer: D
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Sample Questions
Q1) Parsons Company acquired 90% of Roxy Company several years ago and recorded goodwill of $200,000 at that date. During 2013 an analysis of the fair value of Roxy's assets determined an impairment of goodwill in the amount of $50,000.
At what amount would consolidated goodwill be reported for 2013?
A) $150,000
B) $200,000.
C) $50,000.
D) $0.
E) $135,000.
Q2) How is a non-controlling interest in the net income of an entity reported in the income statement?
Q3) One company buys a controlling interest in another company on April 1. How should the preacquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?
Q4) Where may a non-controlling interest be presented in a consolidated balance sheet?
Q5) What is preacquisition income?
Q6) Where should a non-controlling interest appear on a consolidated balance sheet?
Page 6
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Chapter 5: Consolidated Financial Statementsintra-Entity
Asset Transactions
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Sample Questions
Q1) Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2009, Dalton acquired a building with a ten-year life for $420,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2011, Dalton sold this building to Shrugs for $392,000. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2011, how does this transfer affect the calculation of Dalton's share of consolidated net income?
A) Consolidated net income must be reduced by $44,800.
B) Consolidated net income must be reduced by $50,400.
C) Consolidated net income must be reduced by $49,000.
D) Consolidated net income must be reduced by $56,000.
E) Consolidated net income must be reduced by $34,300.
Q2) What is the impact on the non-controlling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?
Q3) During 2011, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned the entire inventory purchased at the end of 2011. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2011?
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Chapter 6: Variable Interest Entities, Intra-Entity Debt,
Consolidated Cash Flows, and Other Issues
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Sample Questions
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.
Using the indirect method, where does the decrease in accounts receivable appear in a consolidated statement of cash flows?
A) $8,000 increase to net income as an operating activity.
B) $8,000 decrease to net income as an operating activity.
C) $6,400 increase to net income as an operating activity.
D) $6,400 decrease to net income as an operating activity.
E) $8,000 increase as an investing activity.
Q2) What documents or other sources of information would be used to prepare a consolidated statement of cash flows?
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Chapter 7: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Sample Questions
Q1) All of the following data may be needed to determine the fair value of a forward contract at any point in time except
A) The forward rate when the forward contract was entered into.
B) The current forward rate for a contract that matures on the same date as the forward contract entered into.
C) The future spot rate.
D) A discount rate.
E) The company's incremental borrowing rate.
Q2) A U.S. company sells merchandise to a foreign company denominated in U.S. dollars. Which of the following statements is true?
A) If the foreign currency appreciates, a foreign exchange gain will result.
B) If the foreign currency depreciates, a foreign exchange gain will result.
C) No foreign exchange gain or loss will result.
D) If the foreign currency appreciates, a foreign exchange loss will result.
E) If the foreign currency depreciates, a foreign exchange loss will result.
Q3) What is the purpose of a hedge of foreign exchange risk?
Q4) How does a foreign currency forward contract differ from a foreign currency option?
Q5) What is meant by the spot rate?
Page 9
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Chapter 8: Translation of Foreign Currency Financial Statements
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Sample Questions
Q1) Which accounts are remeasured using current exchange rates?
A) all revenues and expenses.
B) all assets and liabilities.
C) cash, receivables, and most liabilities.
D) all current assets and liabilities.
E) all noncurrent assets and liabilities.
Q2) Under the temporal method, how would cost of goods sold be remeasured?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q3) Where is the disposition of a translation loss reported in the parent company's financial statements?
A) Net loss in the income statement.
B) Cumulative translation adjustment as a deferred asset.
C) Cumulative translation adjustment as a deferred liability.
D) Accumulated other comprehensive income.
E) Retained earnings.
Q4) Contrast the purpose of remeasurement with the purpose of translation.
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Chapter 9: Partnerships: Formation and Operation
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Sample Questions
Q1) Why are the terms of the Articles of Partnership important to partners?
Q2) The disadvantages of the partnership form of business organization, compared to corporations, include
A) the legal requirements for formation.
B) unlimited liability for the partners.
C) the requirement for the partnership to pay income taxes.
D) the extent of governmental regulation.
E) the complexity of operations.
Q3) Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest, with payments directly to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000, respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the bonus method to account for the admission of Upton to the partnership.
Required:
Prepare the journal entry to record the admission of Upton to the partnership.
Q4) What events cause the dissolution of a partnership?
Q5) Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?
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Chapter 10: Partnerships: Termination and Liquidation
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Sample Questions
Q1) A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All liabilities have been paid. The partners' capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, how much cash will Waters receive in the final settlement?
A) $5,000.
B) $9,000.
C) $18,000.
D) $28,000.
E) $55,000.
Q2) When a partnership is insolvent and a partner has a deficit capital balance, that partner is legally required to:
A) declare personal bankruptcy.
B) initiate legal proceedings against the partnership.
C) contribute cash to the partnership.
D) deliver a note payable to the partnership with specific payment terms.
E) None of the above. The partner has no legal responsibility to cover the capital deficit balance.
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12
Chapter 11: Accounting for State and Local Governments
Part 1
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Sample Questions
Q1) Under modified accrual accounting, revenues should be recognized when they are A) collected.
B) realizable.
C) reasonably estimable.
D) measurable and available.
E) earned.
Q2) For a government, what kinds of operations are accounted for using a proprietary fund? Give three examples.
Q3) Prepare the journal entry and identify the fund to record the purchase order of two trucks owned by Simple City for $100,000. Identify the fund in which the entry is recorded.
Q4) On August 21, 2011, Fred City transferred $100,000 to the School System to cover repairs to a school building.
Required:
Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund Financial Statements.
Q5) What is a special revenue fund used to account for?
Q6) What are the two proprietary fund types?
Q7) What is the purpose of government-wide financial statements?
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Chapter 12: Accounting for State and Local Governments
Part 2
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Sample Questions
Q1) Which statement is false regarding the Statement of Revenues, Expenditures, and Changes in Fund Balance when it is included with government-wide financial statements?
A) The Statement of Revenues, Expenditures, and Changes in Fund Balance uses the modified accrual method for timing purposes.
B) The Statement of Revenues, Expenditures, and Changes in Fund Balance presents revenues as either program revenues or general revenues.
C) A presentation reconciles the change in governmental fund balance to the change in net assets for governmental activities.
D) Other financing sources are presented on the Statement of Revenues, Expenditures, and Changes in Fund Balance.
E) All non-major funds are combined and reported together.
Q2) What information is required in the financial section of a state or local government's CAFR?
Q3) What three criteria must be met to identify a governmental unit as a primary government?
Q4) What is meant by the term legally independent?
Q5) What are the three broad sections of a state or local government's CAFR?
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