Advanced Financial Accounting
Midterm Exam
Course Introduction
Advanced Financial Accounting delves into the complex standards and practices governing the preparation and analysis of financial statements for business entities with intricate structures and transactions. Topics include consolidations, mergers and acquisitions, foreign currency transactions, segment and interim reporting, partnerships, and governmental and not-for-profit accounting. The course emphasizes the application of current accounting standards, ethical considerations, and critical analysis of financial disclosures to ensure transparent and effective communication with stakeholders. Through case studies and real-world examples, students gain an in-depth understanding of advanced accounting issues faced by global organizations.
Recommended Textbook
Advanced Financial Accounting 7th Edition by
Thomas H. Beechy
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Chapter 1: Setting the Stage
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Q1) NFP organizations can choose among reporting approaches contained within the framework provided by the CICA Handbook. Which of the following is not a consideration in choosing the approach?
A)Nature of the NFP's operations
B)Sources of the NFP's funding
C)The NFP's reporting objectives
D)Whether or not the NFP uses the restricted fund method of accounting Answer: D
Q2) In Germany, what does a company that has no debt indicate?
A)It is a superior company with stable earnings.
B)It is a safer company to invest in than a company with debt.
C)It is highly supported by financial markets.
D)The banks do not have any faith in the company. Answer: D
Q3) Which nation does not require a cash flow statement in its financial reporting?
A)United States
B)United Kingdom
C)Australia
D)Japan
Answer: D
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) O'Reilly Ltd. incorporated O'Reilly R&D Co. to conduct research and development activities. O'Reilly R&D is a(n)________.
A)associated company
B)joint venture
C)structured entity
D)passive investment
Answer: C
Q2) Which of the following is not an indicator of significant influence?
A)The investor has representation on the investee's board of directors.
B)There are material transactions between the investor and the investee.
C)The investor and the investee share office space and use the same accounting firm.
D)The investor provides computing services to the investee.
Answer: C
Q3) In Canada, what entities must be included in consolidated financial statements?
A)Subsidiaries only
B)All subsidiaries, except for ones in unrelated industries
C)All domestic subsidiaries
D)All subsidiaries and structured entities
Answer: D
4
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Chapter 3: Business Combinations
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Q1) Which accounting method yields the same results as push-down accounting?
A)Equity method
B)Cost method
C)Consolidation
D)Revaluation
Answer: D
Q2) How is negative goodwill treated in accounting for a joint venture in the year of acquisition?
A)Included in the investor's equity in the earnings of the investee
B)Included in the carrying value of the investment
C)Allocated among the assets and liabilities
D)Shown as a line item on the SFP
Answer: A
Q3) What does push-down accounting refer to?
A)Writing down assets where value is impaired
B)Applying the lower of cost or market approach
C)Recording fair values on a subsidiary's books after a business combination
D)Recording all consolidation adjustments on the books of the subsidiary
Answer: C
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Page 5
Chapter 3: Appendix A: AIncome Tax Allocation
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Q1) Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the amount of the deferred tax liability on Castle's consolidated SFP?
A)$40,000
B)$60,000
C)$100,000
D)$280,000
Q2) O'Ball Ltd. wants to acquire Kiro Ltd. to take advantage of its tax losses and credit carryforwards. 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 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) Fair value increments on depreciable assets ________.
A)should be amortized in accordance with the subsidiary's depreciation policies
B)should be amortized in accordance with the parent company's depreciation policies
C)should always be recorded on the subsidiary's books
D)should be expensed immediately
Q2) 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.
Q3) What does "one-line consolidation" refer to?
A)Cost method
B)Equity method
C)Direct method of consolidation
D)Worksheet method of consolidation
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Q1) 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.
Q2) Which of the following statements is true with respect to adjusting the deferred tax account on consolidation?
A)Deferred taxes only need to be adjusted for unrealized profits in inventory at the end of the year.
B)Deferred taxes only need to be adjusted for unrealized profits in inventory at the beginning of the year.
C)Deferred taxes need to be adjusted for unrealized profits in inventory at both the beginning and the end of the year.
D)Deferred taxes do not need to be adjusted for unrealized profits.
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Q1) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE).
Q2) Proudfoot Ltd. acquired all the shares of Jacob Ltd. several years ago. In conducting its goodwill impairment test for the current year, Proudfoot has determined that there has been an impairment related to revalued assets. On Proudfoot's consolidated financial statements, where should this impairment be reported?
A)As part of profit or loss
B)As part of other comprehensive income
C)As an adjustment to retained earnings
D)As a separate amount under shareholders' equity
Q3) 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.
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9
Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) There are alternative ways to calculate consolidated retained earnings. One of the methods requires adjustments to be made to the parent company's separate-entity ending retained earnings balance as of the consolidation date. What adjustments must be made to determine ending consolidated retained earnings?
A)Add in the dividends from the subsidiary to the parent and the parent's share of the subsidiary's adjusted income.
B)Subtract the dividends from the subsidiary to the parent and the parent's share of the subsidiary's adjusted income.
C)Add in the dividends from the subsidiary to the parent and subtract the parent's share of the subsidiary's adjusted income.
D)Subtract the dividends from the subsidiary to the parent and add in the parent's share of the subsidiary's adjusted income.
Q2) Explain why a parent might want to own less than 100% of the shares of a subsidiary.
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10
Chapter 5: Appendix A: Step Purchases
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Q1) Dinh Co. acquired 60% of Ludo Ltd. five years ago. In the current year, Dinh purchased additional shares from the NCI to bring its holdings to 75%. How should the difference between the purchase consideration paid and the adjustment to the value of the NCI be treated?
A)It should be taken directly to equity, split equally between the shareholders of the parent and the NCI.
B)It should be taken directly to equity, split proportionately between the shareholders of the parent and the NCI.
C)It should be taken directly to equity, all attributed to the shareholders of the parent.
D)It should be taken directly to equity, all attributed to the NCI.
Q2) Under the parent-company extension method, the balance of the non-controlling interest at December 31, 20X7, was $600,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$50,000
B)$66,667
C)$200,000
D)$250,000
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Chapter 5: Appendix B: Decreases in Ownership Interest
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Q1) A parent company reduced its ownership in its subsidiary from 80% to 15%. How should this be reported on the parent's consolidated financial statements?
A)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at fair value
B)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at book value
C)As a write-down to the retained interest
D)As an adjustment to the shareholders' equity
Q2) When a subsidiary issues shares, ________.
A)no gain or loss is recognized
B)a gain or loss is always recognized
C)this reduces the NCI
D)this may increase the NCI
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Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Arnez Ltd. acquired 70% of the outstanding common shares of Bedard Ltd. At the acquisition date, Bedard's net identifiable assets had a carrying value of $825,000 and a fair market value of $1,000,000. Arnez paid $910,000 for the acquisition. Under the entity method, what amount should be reported for the non-controlling interest on the consolidated statement of financial position?
A)$210,000
B)$247,000
C)$300,000
D)$390,000
Q2) In 2008, Teal paid out dividends of $100,000. In preparing Mallard's consolidated financial statements, what elimination is required for the dividends?
A)Reduce dividends declared by $75,000; reduce dividend income by $75,000.
B)Reduce dividends declared by $100,000; reduce dividend income by $100,000.
C)Reduce dividends declared by $100,000; reduce dividend income by $75,000; reduce non-controlling interest by $25,000.
D)Reduce dividend declared by $100,000; reduce dividend income by $75,000; increase non-controlling interest by $25,000.
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Page 13
Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) 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.
Q2) 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
Q3) 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
Page 14
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Chapter 6: Appendix B: Intercompany Bond Holdings
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Q1) Gill Ltd. is the wholly owned subsidiary of Basaraba Ltd. Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. How should the gain be shown?
A)It will appear on Basaraba's separate-entity statement of comprehensive income only.
B)It will appear on both Basaraba's separate-entity and consolidated statements of comprehensive income.
C)It will appear on Basaraba's consolidated statement of comprehensive income only.
D)It will be added to the value of the bonds payable on Basaraba's statement of financial position.
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 its carrying value on the subsidiary's books
C)the bond's market value and its carrying value on the subsidiary's books
D)the bond's par value and carrying value
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Chapter 7: Segment and Interim Reporting
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Q1) HB Company is a private company with a significant amount of long-term debt. The company reports under IFRS. One of the conditions of the debt-financing indenture is that it must provide quarterly financial statements to the lender. HB pays tax at the rate of 20% on the first $200,000 of income and 40% on any income in excess of $200,000. During 20X5, the company earned $500,000 and paid tax at an average rate of 32%. Similar results were expected for 20X6. HB realized the following actual results for the year ended December 31, 20X6 (in thousands):
\[\begin{array} { c l }
\text { Quarter } & { \text { Income (loss) } } \\
1 & \$ 100 \\
2 & ( 150 ) \\
3 & 200 \\
4 & 400
\end{array}\] Required:
Calculate income tax expense (recovery)for each quarter in 20X6 and for the year in total under the:
a. discreet approach
b. integral approach
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Page 16
Chapter 8: Foreign Currency Transactions and Hedges
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Q1) Required:
1. Provide the journal entries for Bouchard (the seller)at each of the above dates, as required. The account was not hedged by Bouchard.
2. What is hedging and why might Bouchard have decided not to hedge this transaction? What risk is Bouchard incurring?
Q2) What is a currency swap an example of?
A)A futures contract
B)A call option
C)A derivative instrument
D)A forward contract
Q3) Assume that the transaction qualifies as a fair-value hedge. On March 1, at what amount should the forward contract be recorded?
A)$307,440
B)$312,400
C)$317,600
D)$319,800
Q4) Required:
Provide the journal entries for Bouchard (the seller)at each of the above dates, as required.
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Chapter 9: Reporting Foreign Operations
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Q1) Machinery, land, and buildings were purchased on June 30, 20X4
Bralta is the Brazilian subsidiary of Altapro Co., a Canadian company. Under the current-rate method, what is the balance of the total assets?
A)$2,108,625
B)$2,154,000
C)$2,161,688
D)$2,183,620
Q2) Which of the following statements about the temporal method is true?
A)The accounting exposure is always a net asset balance.
B)The accounting exposure is always a net liability balance.
C)The proportionate amounts of various assets and liabilities change after the statement of financial position is translated.
D)The temporal method and the current rate method both yield the same exchange gain or loss.
Q3) What does a funds-flow statement measure?
A)Exchange gains/losses arising from the income statement
B)Exchange gains/losses arising from monetary assets and liabilities
C)Exchange gains/losses arising from non-monetary assets and liabilities
D)Exchange gains/losses arising from financing instruments
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Page 18
Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) 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
Q2) For a not-for-profit organization, an expenditure is ________.
A)any payment for expenses or to settle a liability
B)a payment, a liability incurred, or a transfer of property to obtain goods or services
C)any cost associated with the consumption of goods or services
D)a capital acquisition only
Q3) 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
Q4) Describe the four fundamental ways in which not-for-profit organizations differ from business enterprises. What are the reporting objectives of NFPs?
Page 19
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Chapter 10: Appendix A: 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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Chapter 11: Public Sector Financial Reporting
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Q1) Under the modified equity method, government business enterprises must follow
A)the PSA Handbook
B)IFRS
C)ASPE
D)either the PSA Handbook or IFRS
Q2) What valuation must government organizations use to report derivatives?
A)Cost
B)Amortized cost
C)Fair value
D)Lower of cost or fair value
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
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