Consolidated Financial Statements
Pre-Test Questions
Course Introduction
This course explores the principles and practices involved in preparing and interpreting consolidated financial statements, focusing on the accounting methods used when a parent company controls one or more subsidiaries. Students will learn about the concepts of control, acquisition accounting, and the elimination of intercompany transactions, as well as the treatment of non-controlling interests, goodwill, and fair value adjustments. The course also addresses complex topics such as indirect ownership, step acquisitions, foreign subsidiaries, and the impact of changes in ownership interests. By the end of the course, students will be equipped with the skills to accurately prepare and analyze consolidated financial statements in compliance with international accounting standards.
Recommended Textbook
Advanced Financial Accounting 7th Edition by Thomas H. Beechy
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Page 2
Chapter 1: Setting the Stage
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Q1) One of the components that a nation must have to effectively apply international standards is quality auditing. Which of the following statements about auditing is true?
A)Audit quality is consistently high around the world due to the implementation of International Auditing Standards.
B)Most audits around the world are conducted by the Big Four, which ensures consistency.
C)Audit quality is consistent around the world as smaller countries import well-educated auditors to ensure expertise.
D)Audit quality is inconsistent around the world.
Answer: D
Q2) Why might a large private company choose to use full IFRS?
A)Its assets exceed $10,000,000.
B)It only uses debt financing.
C)It only uses equity financing.
D)It competes with public companies for financing.
Answer: D
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3
Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Jarrett Corporation uses the equity method to account for its 25% investment in Polo Corporation and receives $15,000 in dividends. How should Jarrett account for these dividends?
A)An increase in assets
B)A decrease in the investment
C)An increase in income
D)A decrease in income
Answer: B
Q2) 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
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Page 4
Chapter 3: Business Combinations
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Q1) Perez Co. acquired Roo Co. in a business combination. Perez issued new shares to Roo's shareholders in exchange for their outstanding shares. What type of share exchange is this?
A)Direct exchange
B)Indirect exchange
C)Hostile takeover
D)Reverse takeover
Answer: A
Q2) What type of business combination is accounted for in a manner that is essentially the same as the pooling-of-interests method?
A)Statutory amalgamation
B)Corporate restructuring
C)Reverse takeover
D)Hostile takeover
Answer: B
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5
Chapter 3: Appendix A: AIncome Tax Allocation
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Q1) Foster Ltd. acquired 100% of Benson Ltd. The carrying values of Benson's capital assets differed from their fair values and their fair values differed from their tax bases. Which of the following statements is true?
A)The difference between Benson's carrying values and its fair values created a deferred tax asset or liability that is part of the allocation of the acquisition cost.
B)The difference between Benson's fair values and its adjusted cost bases for tax purposes creates a deferred tax asset or liability that is part of the allocation of the acquisition cost.
C)The difference between Benson's carrying values and its adjusted cost bases for tax purposes created a deferred tax asset or liability that is part of the allocation of the acquisition cost.
D)No deferred tax asset or liability arises from the above situation.
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Chapter 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) Amber Ltd. acquired Luna Ltd. in a business combination. One of the main reasons for the acquisition is that Amber wanted access to Luna's extensive customer list. The list is not recorded on Luna's books and has an estimated value of $100,000 and an estimated life of seven years. On Amber's consolidated statement of financial position, what value should be shown for Luna's customer list?
A)$0, since it was not recorded on Luna's books
B)$100,000 less any impairment losses
C)$100,000 less any accumulated amortization (calculated over five years)and any impairment losses
D)$100,000 less any accumulated amortization (calculated over seven years)and any impairment losses
Q2) 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
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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) Under IFRS, 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
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) 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
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Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Sunny Co. purchased 80% of Reuben Ltd. for $1,200,000. At the date of acquisition, the carrying value of Reuben's net identifiable assets was $1,000,000, and the fair value was $1,300,000. What is the amount of the goodwill under the entity method?
A)$0
B)$200,000
C)$240,000
D)$300,000
Q2) Under IAS 27, where does the non-controlling interest (NCI)appear on the statement of financial position?
A)Under the liabilities section
B)Under the shareholders' equity section
C)Between the liabilities and shareholders' equity sections
D)NCI does not appear on the statement of financial position.
Q3) What is the balance of the consolidated inventory account at December 31, 20X6?
A)$160,000
B)$162,000
C)$165,000
D)$168,000
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Chapter 5: Appendix A: Step Purchases
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Q1) 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) Husch Ltd. acquired 35% of the common shares of Megia Ltd. on June 30, 20X1. Husch uses the equity method to record its investment. On June 30, 20X8, Husch acquired another 40% of Megia's common shares. At June 30, 20X8, how should the original 35% ownership be treated?
A)The original valuation of the 35% is added to the valuation of the 40%.
B)The original 35% investment is deemed to have been disposed of and reacquired at the fair value at June 30, 20X8, and added to the new acquisition.
C)The carrying value of the original 35% at June 30, 20X8, is added to the new acquisition.
D)The original 35% is irrelevant to the new acquisition and should be ignored.
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Chapter 5: Appendix B: Decreases in Ownership Interest
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Q1) Gumble Ltd. has owned 65% of the common shares of Lopez for several years. This year, Gumble reduced its interest in Lopez to 10%. Which of the following statements is true?
A)Gumble must change from reporting under consolidation to the equity method.
B)Gumble must change from reporting under consolidation to the cost method.
C)Gumble must change from reporting under the equity method to the cost method.
D)Gumble is not required to change its reporting method.
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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12
Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Ten years later, Belzer is still using the equipment. In preparing its consolidated financial statements, Belzer should credit the equipment account by $35,000. What account(s)should be debited in this journal entry?
A)Opening consolidated retained earnings by $35,000
B)Opening consolidated retained earnings by $24,500 and NCI by $10,500
C)Depreciation expense by $35,000
D)Accumulated depreciation by $35,000
Q2) When investments in associate or joint ventures are reported using the equity method, IFRS requires the application of ________.
A)proprietary theory
B)parent-company theory
C)parent-company extension theory
D)entity theory
Q3) What is the amount of Goldberg's fair value increments?
A)$54,000
B)$70,000
C)$85,000
D)$121,000
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Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) Restricted shares may have a cocktail provision. When might a coattail provision take effect?
A)When a company increases its dividends
B)When a buyer tries to acquire control of a company
C)When a company reacquires some of its shares
D)When a company issues preferred shares
Q2) 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
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 6: Appendix B: Intercompany Bond Holdings
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Q1) Basaraba Ltd. Owns 80% of the outstanding common shares of Gill 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. Under the agency approach to dealing with a gain on elimination of intercompany bond holdings, which of the following statements is true?
A)The gain would be assigned to Basaraba.
B)The gain would be assigned to Gill.
C)The gain is assigned partially to Basaraba and partially to Gill.
D)The gain is eliminated on consolidation.
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) 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
Q2) The Alfred Company has operations in several international regions. These regions reported the following information: \(\begin{array}{clll}
\text { Segment } & \text { Revenues } & \text { Profit } & \text { Assets } \\
\text { A } & \$ 3,500 & \$ 600 & \$ 9,000 \\
\text { B } & 4,000 & 300 & 6,000 \\
\text { C } & 1,100 & (200) & 2,400 \\
\text { D } & 2,800 & 300 & 10,400 \\
\text { E } & 1,400 & 100 & 2,000\\
&\$12,800&\$1,100&\$29,800
\end{array}\) Which of these segments are reportable? Fully document all supporting calculations.
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Page 16
Chapter 8: Foreign Currency Transactions and Hedges
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Q1) Which of the following statements is true?
A)The historical rate is the exchange rate at the beginning of the reporting period, and the closing rate is the exchange rate at the end of the reporting period.
B)The historical rate is the exchange rate at the date of the transaction, and the closing rate is the exchange rate at the end of the reporting period.
C)The spot rate is the exchange rate at the date of the transaction, and the closing rate is the exchange rate at the conclusion of a hedge instrument.
D)The historical rate is the exchange rate at the beginning of the reporting period, and the forward rate is the exchange rate at the end of the reporting period.
Q2) Which of the following statements about hedge accounting is true?
A)Hedge accounting is mandatory.
B)Hedge accounting is optional.
C)Hedge accounting is applicable only if a receivable is being hedged.
D)Hedge accounting is applicable only if a liability is being hedged.
Q3) Compare and contrast accounting for foreign currency transactions and hedge accounting under IFRS and ASPE.
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Page 17
Chapter 9: Reporting Foreign Operations
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Q1) LaSalle Ltd., a Canadian company, has a subsidiary in Brazil that produces a component used in LaSalle's manufacturing. All of the components that the subsidiary produces are sold to LaSalle. The subsidiary also purchases most of the raw materials used in its production from LaSalle. Both companies use the Canadian dollar as their functional currency. Which of the following statements is true?
A)The current rate method of translation should be used.
B)Nothing needs to be done with the subsidiary's financial statements prior to consolidation.
C)The subsidiary's financial statements need to be re-measured in the functional currency prior to consolidation.
D)The subsidiary is considered to be an extension of the parent company and consolidation is not required.
Q2) A Canadian company has three subsidiaries that operate autonomously in Asia. What is the most appropriate alternative for handling translation gains and losses?
A)Immediate recognition
B)Limited recognition
C)Deferred recognition
D)Immediate recognition for losses and deferred recognition for gains
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Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) The transportation fleet department for a provincial government uses an encumbrance system. On October 15, 20X1, the department manager issued a purchase order for $4,000 for snow tires. The tires were delivered on October 31, 20X1, with an invoice for $3,800. What should be recorded on October 15, 20X1?
A)An accounts payable for $3,800
B)An encumbrance for $3,800
C)An accounts payable $4,000
D)An encumbrance for $4,000
Q2) Under the deferral method, how should contributions received in the current year, but restricted for operating expenses for one or more future periods, be reported in the current year?
A)As deferred revenue on the balance sheet
B)As revenue in the statement of operations
C)As a direct increase to net assets
D)As a reduction of operating expenses on the statement of operations
Q3) Describe the four fundamental ways in which not-for-profit organizations differ from business enterprises. What are the reporting objectives of NFPs?
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Page 19
Chapter 10: Appendix A: Fund Accounting
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Q1) 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
Q2) 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
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Page 20
Chapter 11: Public Sector Financial Reporting
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Q1) What is the only item that will appear under the investing section of a government statement of cash flows?
A)Sale and purchase of financial assets
B)Sale and purchase of nonfinancial assets
C)Sale and purchase of tangible capital assets
D)Amortization of tangible capital assets
Q2) A government business enterprise's net income or loss is reported on the government's statement of operations. In addition, ________.
A)its assets and liabilities are added to the government's statement of financial position
B)the accounting principles are not adjusted to government accounting principles
C)the investment should be reported using the cost method
D)the investment account should not be adjusted for the net income or loss
Q3) Research surveys have suggested that there are several qualitative characteristics that are desirable in published financial reports of governmental units. Explain why comparability is so important to users and what this means for users.
Q4) Clearly distinguish between a government business organization and a non-business government organization.
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