Consolidated Financial Statements
Chapter Exam Questions
Course Introduction
This course provides a comprehensive understanding of the preparation and analysis of consolidated financial statements in accordance with relevant accounting standards. Students will explore the processes involved in accounting for business combinations, including acquisitions, subsidiaries, associates, and joint ventures. Key topics include the identification and treatment of non-controlling interests, goodwill calculation and impairment, intra-group transactions, and the effects of changes in ownership interests. The course also addresses practical challenges and ethical considerations encountered in consolidation, equipping students with the skills necessary to interpret consolidated reports for effective decision-making.
Recommended Textbook
Modern Advanced Accounting in Canada9th Edition by Darrell Herauf
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Page 2
Chapter 1: Conceptual and Case Analysis Frameworks for Financial Reporting
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Sample Questions
Q1) The formula for the current ratio is:
A) current assets - current liabilities
B) current assets/current liabilities
C) total debt/shareholders' equity
D) net income/shareholders' equity
Answer: B
Q2) One of the underlying assumptions of the Historical Cost Principle is that a stable unit of measure (currency) should be used for Financial Reporting. Is this always the case?
Answer: The Historical Cost Principle is not very useful when inflation rates are high. As a result of the eroding purchase power associated with periods of high inflation, many countries have had to experiment with price-level adjustments. These adjustments often include asset revaluations to reflect their current values.
Q3) The debt-to-equity ratio measures:
A) liquidity.
B) solvency.
C) profitability of assets.
D) profitability of owners' investment.
Answer: B
3
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Chapter 2: Investments in Equity Securities
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Q1) A significant influence investment is one that:
A) allows the investor to exercise significant influence over the strategic operating and financing policies of the Associate.
B) allows the investor to exercise significant influence over only the financing policies of the Associate.
C) allows the investor to exercise significant influence over only the operating policies of the Associate.
D) allows the investor to exercise significant influence over the strategic and operating policies of the Associate.
Answer: A
Q2) If the investor sells part of its stake in an associate, accounted for using the equity method, which of the following is used to calculate the gain or loss on the sale of these shares?
A) The average carrying amount of the investment
B) The FIFO method
C) The LIFO method
D) The specific identification method
Answer: A
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Chapter 3: Business Combinations
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Q1) IOU Inc. purchased all of the outstanding common shares of UNI Inc. for cash of $800,000. On the date of acquisition, UNI's assets included $2,000,000 of Inventory, and Land with a Book value of $120,000. UNI also had $1,400,000 in Liabilities on that date. UNI's book values were equal to their fair market values, with the exception of the company's Land, which was estimated to have a fair market value which was $50,000 higher than its book value. UNI also had patent rights with a fair market value on acquisition date of $20,000 that were not shown on its balance sheet because the rights had been developed internally. How much goodwill would be created by IOU's acquisition of UNI?
A) $30,000
B) $10,000
C) $70,000
D) $80,000
Answer: B
Q2) Which of the following would NOT be included in the acquisition cost?
A) Share issue costs.
B) Fair value of any shares issued.
C) Fair value of contingent consideration.
D) Fair value of assets transferred.
Answer: A
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Chapter 4: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Under the parent company method, which of the following statements pertaining to consolidated financial statements is TRUE?
A) The consolidated balance sheet is prepared by adding the carrying amounts of both the parent and its subsidiary.
B) The consolidated balance sheet is prepared by adding the carrying amounts of both the parent and its subsidiary as well as the parent's share of any acquisition differentials.
C) The consolidated balance sheet is prepared by adding the fair market values of both the Parent and its subsidiary as well as the parent's share of any acquisition differentials.
D) The consolidated balance sheet is prepared by adding together the fair market values of both the parent and its subsidiary.
Q2) Company A Inc. owns a controlling interest in Company B. which is located overseas. Company A and B are in entirely different lines of business. Company A wishes to file a request allowing it to not consolidate its financial statements with those of Company B. Assuming that Company A is based in Canada, is this allowed? Explain.
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6
Chapter 5: Consolidation Subsequent to Acquisition Date
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Q1) GNR Inc. owns 100% of NMX Inc. During the year, NMX Inc. earned a net income of $40,000 and paid dividends of $10,000. Assuming that GNR Inc. uses the Equity Method, what effect would the above information have on GNR's investment in NMX account?
A) An increase of $10,000.
B) An increase of $30,000.
C) An increase of $40,000.
D) No effect.
Q2) Consolidated retained earnings include:
A) consolidated net income less any dividends declared by either the parent or the subsidiary.
B) consolidated net income less any dividends declared by the parent only.
C) the parent's net income plus its share of the subsidiary's income less any dividends declared by either the parent or the subsidiary.
D) the parent's share of consolidated net income less any dividends declared by the parent.
Q3) Prepare a consolidated balance sheet for Par Inc. as at June 30, 2021.
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Chapter 6: Intercompany Inventory and Land Profits
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Q1) X Inc. owns 80% of Y Inc. During 2020, X Inc. sold inventory to Y for $10,000. Half of this inventory remained in Y's warehouse at year end. Y Inc. sold Inventory to X Inc. for $5,000. 40% of this inventory remained in X's warehouse at year end. Both companies are subject to a tax rate of 40%. The gross profit percentage on sales is 20% for both companies. Unless otherwise stated, assume X Inc. uses the cost method to account for its Investment in Y Inc.
Assume that Y Inc. reported an after-tax net income of $20,000 in 2020, what would be Y's adjusted net income for the year?
A) $202,400
B) $20,000
C) $19,840
D) $19,760
Q2) Intercompany profits on sales of inventory are only realized:
A) once the seller receives payment for the sale.
B) once the inventory has been sold to outsiders.
C) when the inventory has been received by the purchaser. D) when the inventory has been shipped to the purchaser.
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Page 8
Chapter 7: A Intercompany Profits in Depreciable Assets B
Intercompany
Bondholdings
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Q1) Duff Inc. owns 75% of Paddy Corp. and uses the Equity Method to account for its investment. Paddy purchased $120,000 face value of Duff's 12% par value bonds on January 1, 2020 for $100,000, when Duff's bond liability consisted of $240,000 par of 12% bonds maturing on January 1, 2030.
There was an unamortized bond discount of $20,000 attached to the bonds on that date. Interest payment dates are June 30 and December 31 each year. Straight line amortization is used.
Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company. During 2020, Paddy earned a net income of $80,000 and paid dividends of $20,000. What amount would be shown on Duff's 2020 Consolidated Statement of Financial Position under bonds payable?
A) $110,000
B) $111,000
C) $112,000
D) $220,000
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Page 9
Chapter 8: Consolidated Cash Flows and Changes in Ownership
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Q1) What is the correct method of treating an acquisition differential arising from a Preferred Share Issue?
A) It should be treated as an adjustment to goodwill.
B) It should be pro-rated across the subsidiary's identifiable assets and liabilities.
C) It should be expensed in the current year.
D) It should be adjusted to a contributed surplus or retained earnings account.
Q2) If the shareholders' equity allocated to the subsidiary's preference shares amounts to $240,000 and the parent company acquires 60% of the subsidiary's preference shares at a cost of $150,000, how much will the non-controlling interest in the preferred shares amount to after the purchase by the parent?
A) $90,000
B) $96,000
C) $120,000
D) $240,000
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Chapter 9: Other Consolidation Reporting Issues
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Q1) Globecorp International has six operating segments, the details of which are shown below. All figures shown are in thousands of dollars.
\(\begin{array}{|l|r|r|r|}
\hline \text { OperatingSegment } & \text { Revenues } & \text { Profits } & \text { Assets } \\
\hline \mathrm{A} 01 & \$ 6,000 & \$ 1,050 & \$ 12,000 \\
\hline \mathrm{B} 02 & \$ 4,800 & \$ 840 & \$ 10,500 \\
\hline \text { C03 } & \$ 3,600 & \$ 720 & \$ 7,500 \\\hline \text { D04 } & \$ 1,800 & \$
330 & \$ 4,500 \\
\hline \text { E05 } & \$ 2,550 & \$ 405 & \$ 4,200 \\
\hline \text { F06 } & \$ 900 & \$ 135 & \$ 1,800 \\
\hline \text { Total } & \$ 19,650 & \$ 3,480 & \$ 40,500\\ \hline
\end{array}\) Using ONLY the revenues test, determine which of the operating segments require separate disclosures.
Total revenues add up to $19,650. $19,650 \(\times\) 10% = $1,965
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Chapter 10: Foreign Currency Transactions
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Q1) On July 1, 2020, CANCO purchased inventory from its main U.S. supplier, RNB Enterprises, at a cost of US$12,000. CANCO's year end is on July 31. Payment of US$12,000 for the inventory is due on August 31, 2020. Some important dates regarding this transaction, as well as the exchange rates in effect at each of these dates are shown below:
\[\begin{array} { | l | l | }
\hline \text { Tarsaction date: July } 1,2020 : & \text { 1 U.S. Dollar } = \text { CDN } \$ 1.370 \\
\hline\text { Year end July } 31,2020 : & \text { 1 U.S. Dollar } = \text { CDN } \$ 1.345 \\
\hline \text { Setternent date: August } 31,2020 : & \text { 1 U.S. Dollar } = \text { CDN } \$ 1.325 \\
\hline
\end{array}\] What was the amount in Canadian dollars paid by CANCO to RNB on the settlement date?
A) CDN$15,900
B) CDN$16,440
C) CDN$16,140
D) CDN$12,000
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Page 12
Chapter 11: Translation and Consolidation of Foreign Operations
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Q1) A foreign subsidiary has earned income evenly over the year and it has paid its income taxes for the year in two instalments, half on June 30 and half on December 31. Assuming the foreign subsidiary's functional currency is the same as the parent's functional currency, what rate(s) should be used to translate the foreign subsidiary's income tax expense into Canadian dollars when preparing translated financial statements for the year ended December 31?
A) Half at the rate at June 30 and half at the rate at December 31.
B) All at the average rate for the year.
C) All at the closing rate for the year.
D) All at the opening rate for the year.
Q2) The exposure resulting from the translation of foreign-currency-denominated financial statements into Canadian dollars is referred to as:
A) translation (accounting) exposure.
B) transaction exposure.
C) economic exposure.
D) business risk exposure.
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Page 13
Chapter 12: Accounting for Not-For-Profit and Public Sector Organizations
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Q1) Where should be endowment contributions presented in the financial statements of a not-for-profit organization under the deferral method?
A) They are reflected in the notes to the financial statements.
B) They are used to effect a reduction to a related expense account.
C) They are reflected in the statement of changes in net assets.
D) They are shown in the statement of operations.
Q2) Which of the following statements is NOT correct?
A) A contribution receivable should be recognized as an asset when the amount can be reasonably estimated and the ultimate collection is reasonably assured.
B) A contribution receivable should be recognized as an asset when the amount can be reasonably estimated or the ultimate collection is reasonably assured.
C) Contribution revenue is a type of revenue where the contributor receives nothing directly in return for his or her contribution.
D) Government grants typically qualify as a contribution.
Q3) Describe what fund accounting is and why is it used for not-for-profit organizations.
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