Consolidated Financial Statements
Question Bank
Course Introduction
This course offers an in-depth exploration of the concepts, principles, and procedures related to the preparation and presentation of consolidated financial statements. Students will examine the accounting techniques necessary to combine the financial information of parent companies and their subsidiaries, addressing issues such as intercompany transactions, non-controlling interests, and the treatment of goodwill. Through a combination of theoretical frameworks and practical case studies, the course aims to equip students with the skills required to analyze and interpret consolidated reports in compliance with international accounting standards and regulatory requirements.
Recommended Textbook
Advanced Accounting 11th Edition by Joe Ben Hoyle
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2011, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2011, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2010, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2010. Additional sales were made to Steven in 2011 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2011 purchases had not been sold to outsiders by the end of 2011. What amount of unrealized intra-entity inventory profit should be deferred by Steven at December 31, 2010?
Answer: [($50,000 - $35,000) x .25 x .40] = $1,500
Q2) What argument could be made against the equity method?
Answer: An argument could be made against the recognition of income under the equity method. The investor is required to recognize its share of the investee's income even when it is unlikely that the investor will ever receive the entire amount in cash dividends.
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Chapter 2: Consolidation of Financial Information
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Sample Questions
Q1) Which of the following statements is true?
A) The pooling of interests for business combinations is an alternative to the acquisition method.
B) The purchase method for business combinations is an alternative to the acquisition method.
C) Neither the purchase method nor the pooling of interests method is allowed for new business combinations.
D) Any previous business combination originally accounted for under purchase or pooling of interests accounting method will now be accounted for under the acquisition method of accounting for business combinations.
E) Companies previously using the purchase or pooling of interests accounting method must report a change in accounting principle when consolidating those subsidiaries with new acquisition combinations.
Answer: C
Q2) What is the difference in consolidated results between a business combination whereby the acquired company is dissolved, and a business combination whereby separate incorporation is maintained?
Answer: There is no difference in consolidated results.
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4
Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Sample Questions
Q1) On January 1, 2010, Franel Co. acquired all of the common stock of Hurlem Corp. For 2010, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000. How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the partial equity method of internal recordkeeping?
A) $170,000.
B) $354,000.
C) $164,000.
D) $6,000.
E) $174,000.
Answer: D
Q2) What advantages might push-down accounting offer for internal reporting?
Answer: Push-down accounting requires the subsidiary to record acquisition fair value allocations and amortizations in its accounting records. One advantage that the method offers to internal reporting is that it simplifies the consolidation process. More important, it provides better information for internal evaluation.
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Page 5
Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) In a step acquisition, which of the following statements is false?
A) The acquisition method views a step acquisition essentially the same as a single step acquisition.
B) Income from subsidiary is computed by applying a partial year for a new purchase acquired during the year.
C) Income from subsidiary is computed for the entire year for a new purchase acquired during the year.
D) Obtaining control through a step acquisition is a significant remeasurement event.
E) Preacquisition earnings are not included in the consolidated income statement.
Q2) Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were approximately equal.
Required:
Using the acquisition method, what amount of goodwill should appear in a consolidated balance sheet prepared immediately after the combination?
Q3) What is preacquisition income?
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6
Chapter 5: Consolidated Financial StatementsIntercompany Asset Transactions
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Q1) Edgar Co. acquired 60% of Stendall Co. on January 1, 2011. During 2011, Edgar made several sales of inventory to Stendall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2011. Consolidated cost of goods sold for 2011 was $2,140,000 because of a consolidating adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory. How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Stendall to Edgar?
A) Consolidated cost of goods sold would have remained $2,140,000.
B) Consolidated cost of goods sold would have been more than $2,140,000 because of the controlling interest in the subsidiary.
C) Consolidated cost of goods sold would have been less than $2,140,000 because of the non-controlling interest in the subsidiary.
D) Consolidated cost of goods sold would have been more than $2,140,000 because of the non-controlling interest in the subsidiary.
E) The effect on consolidated cost of goods sold cannot be predicted from the information provided.
Q2) How is the gain on an intra-entity transfer of a depreciable asset realized?
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Chapter 6: Intercompany Debt, Consolidated Statement of
Cash Flows, and Other
Issues
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Q1) How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected in a consolidated statement of cash flows?
Q2) Goehring, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports $40,000 Non-controlling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $100,000 for the year. What are the effects of these transactions in the consolidated statement of cash flows for the year?
A) Increase in the financing section of $70,000, and decrease in the operating section of $30,000.
B) Increase in the operating section of $70,000, and decrease in the financing section of $30,000.
C) Increase in the operating section of $70,000.
D) Decrease in the financing section of $30,000.
E) No effects.
Q3) Parent Corporation acquired some of its subsidiary's bonds on the open bond market. The remaining life of the bonds was eight years, and Parent expected to hold the bonds for the full eight years. How would the acquisition of the bonds affect the consolidation process?
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Page 8
Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Sample Questions
Q1) On January 1, 2011, a subsidiary buys 8 percent of the outstanding voting stock of its parent corporation. The payment of $350,000 exceeded book value of the acquired shares by $50,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $675,000 (excluding investment income from the subsidiary), and paid $100,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2011?
A) Included in current assets.
B) Included in noncurrent assets.
C) Consolidated stockholders' equity is reduced by $350,000.
D) Consolidated stockholders' equity is reduced by $300,000.
E) There is no effect on the consolidated balance sheet, because the effects have been eliminated.
Q2) What method is used in consolidation to account for a subsidiary's ownership of shares of its parent corporation?
Q3) What term is used to describe a parent and subsidiaries that are eligible to file a consolidated income tax return?
Q4) What are the benefits or advantages of filing a consolidated income tax return?
Q5) Under what conditions must a deferred income tax asset be recorded?
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Chapter 8: Segment and Interim Reporting
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Sample Questions
Q1) Which of the segments are separately reportable?
A) DVDs only.
B) DVDs and MP3s.
C) DVDs and VCRs.
D) VCRs and MP3s.
E) DVDs, VCRs, and MP3s.
Q2) Describe the test to determine whether a sufficient number of operating segments are disclosed.
Q3) For companies that provide quarterly reports, how is the fourth quarter reported?
A) Every company that reports for the first three quarters must also publish a fourth-quarter report.
B) No fourth-quarter report is required.
C) No company may publish a fourth-quarter report.
D) The SEC requires selected quarterly financial data to be reported separately as a fourth-quarter report.
E) When fourth-quarter financial statements are provided, special accounting items should be disclosed in the annual financial statements.
Q4) What is the major objective of segment reporting?
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Sample Questions
Q1) The forward rate may be defined as
A) The price a foreign currency can be purchased or sold today.
B) The price today at which a foreign currency can be purchased or sold in the future.
C) The forecasted future value of a foreign currency.
D) The U.S. dollar value of a foreign currency.
E) The Euro value of a foreign currency.
Q2) Belsen purchased inventory on December 1, 2010. Payment of 200,000 stickles was to be made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot rate was §1 = .35714, and the 60-day forward rate was §1 = $.38462. On December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168. Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1?
A) $71,428.
B) $76,924.
C) $588.
D) $582.
E) $0, since there is no cost, there is no value for the contract at this date.
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Chapter 10: Translation of Foreign Currency Financial Statements
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Sample Questions
Q1) Under the current rate method, depreciation expense would be translated at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q2) Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2011, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?
Q3) Under the temporal method, property, plant & equipment would be remeasured at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q4) What is the justification for the remeasurement of foreign currency transactions?
Page 12
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) How did the early International Accounting Standards (IAS) obtain support from a sufficient number of board members?
Q2) What problems are caused by diverse accounting practices?
Q3) A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely accounting issues to resolve for the opening IFRS balance sheet?
A) Inventory valuation.
B) Capitalizing development costs.
C) Classifying deferred taxes as current or noncurrent.
D) Acquisition value for a subsidiary.
E) Liability for restructuring charges.
Q4) What accounting topics were covered under the FASB short-term convergence project?
Q5) What international organization currently promulgates IFRS?
A) IASB.
B) IASC.
C) IOSCO.
D) FASB.
E) EU.
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) Why is the SEC's Rule 14c-3 important to the accounting profession?
Q2) What are the responsibilities of the SEC's Division of Corporation Finance?
Q3) How has the Sarbanes-Oxley Act of 2002 changed the role of the audit committee?
Q4) Which one of the following requires the maintenance of accounting records and adequate internal accounting controls?
A) The Securities Act of 1933.
B) The Securities Exchange Act of 1934.
C) The Investment Company Act of 1940.
D) The Foreign Corrupt Practices Act of 1977.
E) The Sarbanes-Oxley Act of 2002.
Q5) What information is required in proxy statements?
Q6) Which of the following securities offerings is not exempt from registration prior to their sale?
A) offerings of more than $5 million.
B) securities issued by governments.
C) securities issued by banks.
D) securities issued by savings and loan associations.
E) offerings of no more than $1 million made to any number of investors within a 12-month period.
Q7) What is a wrap-around filing? Page 14
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Page 15
Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) What are the three categories of assets in a Statement of Financial Affairs?
Q2) What is the purpose of Chapter 7 of the Bankruptcy Reform Act?
Q3) What is an order for relief?
Q4) Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building).
Total payment on the bond is calculated to be what amount?
Q5) What is the difference between a liquidation and a reorganization?
Q6) What are the four categories of debts in a Statement of Financial Affairs?
Q7) Which of the following is not one of the more common reorganization plan elements?
A) plans for plant expansion.
B) plans for generating additional monetary resources.
C) plans to settle the debts of the company that existed when the order for relief was entered.
D) plans proposing changes in the company's operations.
E) plans for changes in the management of the company.
Q8) What is the meaning of the phrase debtor in possession? Page 16
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Chapter 14: Partnerships: Formation and Operation
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Q1) Norr and Caylor established a partnership on January 1, 2010. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses:
- 12% interest on the yearly beginning capital balance
- $10 per hour of work that can be billed to the partnership's clients
- the remainder divided in a 3:2 ratio
The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month.
For 2010, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2011, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2010 and 2011.
Determine the balance in both capital accounts at the end of 2010.
Q2) Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to?
Q3) What is the dissolution of a partnership?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) For a partnership, how should liquidation gains and losses be accounted for?
Q2) What should occur when a solvent partner has a deficit balance?
Q3) 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.
Q4) The partnership of Rayne, Marin, and Fulton was being liquidated by the partners. Rayne was insolvent and did not have enough assets to pay all his personal creditors. Under what conditions might Rayne's personal creditors have claimed some of the partnership assets?
Q5) Which item is not shown on the schedule of partnership liquidation?
A) Current cash balances.
B) Property owned by the partnership.
C) Liabilities still to be paid.
D) Personal assets of the partners.
E) Current capital balances of the partners.
Page 19
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Chapter 16: Accounting for State and Local Governments
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Q1) Under modified accrual accounting, when are expenditures recorded?
Q2) On January 1, 2011, Wakefield City purchased $40,000 office supplies. During the year $35,000 of these supplies were used.
Required:
Record the journal entries for these transactions using the consumption method. (Disregard the encumbrance entries.)
Q3) On July 12, 2011, Fred City ordered a new computer at an anticipated cost of $114,400. The computer was received on July 16 with an actual cost of $116,220. Payment was subsequently made on August 15, 2011.
Required:
(A.) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the Fund Financial Statements.
(B.) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the Government-Wide Financial Statements.
Q4) What assets would be included in the accounting records of a city's general fund?
Q5) What are the five types of governmental funds?
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Chapter 17: Accounting for State and Local Governments
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Q1) Which statement is false regarding the Balance Sheet for Fund Financial Statements?
A) The Balance Sheet for Fund Financial Statements measures only current financial resources of the governmental entity.
B) The Balance Sheet for Fund Financial Statements uses the modified accrual method for timing purposes.
C) Capital Assets are not reported on the Balance Sheet for Fund Financial Statements.
D) The Balance Sheet for Fund Financial Statements measures only long-term financial resources of the governmental entity.
E) Long-term debts are not reported on the Balance Sheet for Fund Financial Statements.
Q2) For fund financial statements, what account is credited when a piece of equipment is leased on a capital lease?
A) Equipment - Capital Lease.
B) Encumbrances - Long Term.
C) Encumbrances - Lease Obligations.
D) Capital Lease Obligation.
E) Other Financing Sources - Capital Lease.
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Chapter 18: Accounting for Not-For-Profit Organizations
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Q1) What are third party payors? Why are their interests important in accounting for health care entities?
Q2) Unconditional transfers of cash or other resources to an entity in a voluntary nonreciprocal transaction is the GAAP definition for A) miscellaneous revenues. B) contributions.
C) unconditional promises to give.
D) exchange transactions.
E) pledges.
Q3) For May 2011, Carlington Hospital's charges for patient services were $608,000, of which 80% was billed to third-party payors.
Required:
Prepare the journal entry to accrue patient charges for the month.
Q4) Reciprocal transfers where both parties give and receive something of value are A) contributed services. B) unconditional promises to give.
C) endowment transactions.
D) exchange transactions.
E) required contributions.
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Chapter 19: Accounting for Estates and Trusts
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Q1) A gift that is specified in a will as "I leave my collection of baseball cards to my son" is a
A) general legacy.
B) specific legacy.
C) demonstrative legacy.
D) residual legacy.
E) devise.
Q2) Which of the following is normally viewed as an adjustment to the principal of an estate?
A) Ordinary repair expenses.
B) Insurance expenses.
C) Utility expenses.
D) Major repairs to rental property.
E) Property taxes.
Q3) What are the three goals of probate laws?
Q4) What are the four levels of claims in the order of priority of the Uniform Probate Code?
Q5) In settling an estate, what is the meaning of the term devise?
Q6) What is a remainderman of trust property?
Q7) What is the difference between an executor and an administrator?
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