Corporate Accounting Exam
Questions
Course Introduction
Corporate Accounting is a foundational course that explores the principles, standards, and practices involved in accounting for corporations. It covers key topics such as the preparation and analysis of financial statements, accounting for share capital, debentures, and dividends, as well as the treatment of reserves, bonus shares, and rights issues. Students will also learn about the regulatory environment governing corporate financial reporting, amalgamation, absorption, and reconstruction of companies. By the end of the course, learners will have developed the skills necessary to interpret corporate financial information and understand its implications for various stakeholders.
Recommended Textbook
Advanced Accounting 12th Edition by Hoyle
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) Jarmon Company owns twenty-three percent of the voting common stock of Kaleski Corp. Jarmon does not have the ability to exercise significant influence over the operations of Kaleski. What method should Jarmon use to account for its investment in Kaleski?
Answer: The fair-value method should be used. Generally, ownership of more than twenty percent of the voting common stock would be presumed to carry significant influence and would require use of the equity method. The equity method is not appropriate in this case because of the lack of the ability to exercise significant influence.
Q2) Which of the following results in a decrease in the investment account when applying the equity method?
A) Dividends paid by the investor.
B) Net income of the investee.
C) Net income of the investor.
D) Unrealized gain on intra-entity inventory transfers for the current year.
E) Purchase of additional common stock by the investor during the current year. Answer: D
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Page 3
Chapter 2: Consolidation of Financial Information
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Q1) Which one of the following is a characteristic of a business combination accounted for as an acquisition?
A) The combination must involve the exchange of equity securities only.
B) The transaction establishes an acquisition fair value basis for the company being acquired.
C) The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company.
D) The transaction may be considered to be the uniting of the ownership interests of the companies involved.
E) The acquired subsidiary must be smaller in size than the acquiring parent.
Answer: B
Q2) Elon Corp. obtained all of the common stock of Finley Co., paying slightly less than the fair value of Finley's net assets acquired. How should the difference between the consideration transferred and the fair value of the net assets be treated if the transaction is accounted for as an acquisition?
Answer: The difference between the consideration transferred and the fair value of the net assets acquired is recognized as a gain on bargain purchase.
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Page 4
Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. Assuming Gataux generates cash flow from operations of $27,200 in 2012, how will Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of its contingent obligation?
A) Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and Credit Cash $12,000.
B) Debit Contingent performance obligation $3,461, debit Loss from revaluation of contingent performance obligation $8,539, and Credit Cash $12,000.
C) Debit Goodwill and Credit Cash $12,000.
D) Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and Credit Cash $12,000.
E) No entry.
Answer: B
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What is the amount of excess land allocation attributed to the controlling interest at the acquisition date?
A) $0.
B) $30,000.
C) $22,500.
D) $25,000.
E) $17,500.
Q2) Kordel Inc. acquired 75% of the outstanding common stock of Raxston Corp. Raxston currently owes Kordel $500,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated?
A) $375,000
B) $125,000
C) $300,000
D) $500,000
E) $0
Q3) Where should a non-controlling interest appear on a consolidated balance sheet?
Page 6
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Chapter 5: Consolidated Financial Statements Intra-Entity
Asset Transactions
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Q1) During 2012, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the combination, when is the $14,000 gain realized?
A) When the goods are sold to a third party by Lord.
B) When Lord pays Von for the goods.
C) When Von sold the goods to Lord.
D) When the goods are used by Lord.
E) No gain can be recognized since the transaction was between related parties.
Q2) Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher.
In the consolidation worksheet for 2012, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Fisher Company.
E) Sales.
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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) If a subsidiary reacquires its outstanding shares from outside ownership for more than book value, which of the following statements is true?
A) Additional paid-in capital on the parent company's books will decrease.
B) Investment in subsidiary will increase.
C) Treasury stock on the parent's books will increase.
D) Treasury stock on the parent's books will decrease.
E) No adjustment is necessary.
Q2) Parker owned all of Odom Inc. Although the Investment in Odom Inc. account had a balance of $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share. On January 1, 2013, Odom issued 3,000 new shares to the public for $70 per share. How does this transaction affect the Investment in Odom Inc. account?
A) It should be decreased by $141,120.
B) It should be increased by $176,400.
C) It should be increased by $48,000.
D) It should be decreased by $128,400.
E) It is not affected since the shares were sold to outside parties.
Q3) Parent Corporation acquired some of its subsidiary's outstanding bonds. Why might Parent purchase the bonds, rather than the subsidiary buying its own bonds?
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Q1) Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle.
What is this pattern of ownership called?
A) pyramid ownership.
B) a connecting affiliation.
C) mutual ownership.
D) an indirect affiliation.
E) an affiliated group.
Q2) X Co. owned 80% of Y Corp., and Y Corp. owned 15% of X Co. Under the treasury stock approach, how would the dividends paid by X Co. to Y Corp. be handled on a consolidation worksheet?
Q3) T Corp. owns several subsidiaries that are eligible for inclusion on a consolidated income tax return, but T Corp. decided that each company in the group will file a separate return. Under what conditions would there be minimal advantage in filing a consolidated income tax return?
Q4) How is the amortization of goodwill treated for income tax purposes? How does the amortization of goodwill affect deferred income taxes?
Q5) What are the essential criteria for including a subsidiary within an affiliated group?
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Chapter 8: Segment and Interim Reporting
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Sample Questions
Q1) Provo, Inc. has an estimated annual tax rate of 35 percent in the first quarter of 2013. Pretax income for the first quarter was $300,000. At the end of the second quarter of 2013, Provo expects the annual tax rate to be 32 percent because of anticipated tax credits. Pretax income for the second quarter was $350,000. Assume no items in either quarter requiring the net-of-tax presentation.
How much income tax expense is recognized in the first quarter of 2013?
A) $0.
B) $26,250.
C) $96,000.
D) $105,000.
E) $112,000.
Q2) 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.
Q3) How does a company measure income tax expense to be reported in an interim period?
Q4) What is the major objective of segment reporting?
Page 10
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) A U.S. company buys merchandise from 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) Any gain or loss will be included in comprehensive income.
Q2) Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2012, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2013, the U.S. dollar equivalent was $144,000. In Mills' 2013 consolidated income statement, how much should have been reported as a foreign exchange gain?
A) $0.
B) $36,000.
C) $48,000.
D) $10,000.
E) $12,000.
Q3) How is the fair value of a Forward Contract determined by U.S. GAAP?
Q4) What factors create a foreign exchange gain?
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be the functional currency for this subsidiary?
Q2) How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?
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) A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?
A) There is no translation adjustment.
B) There is a transaction loss.
C) There is a transaction gain.
D) There is a negative translation adjustment.
E) There is a positive translation adjustment.
Page 12
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) What accounting topics were covered under the FASB short-term convergence project?
Q2) A company incurs research and development costs of $200,000 in 2013 of which $50,000 of these costs relate to development activities because certain criteria have been met which suggest that an intangible asset has been created. As a result of research and development costs, what is the difference in income between reporting using U.S. GAAP and IFRS in 2013?
A) U.S. GAAP income is $50,000 higher.
B) U.S. GAAP income is $50,000 lower.
C) IFRS income is $50,000 lower.
D) IFRS income is $150,000 lower.
E) IFRS income is $150,000 higher.
Q3) Which of the following is not a factor influencing a country's financial reporting practices?
A) Providers of financing.
B) Inflation.
C) Legal system.
D) Gross National Product.
E) Political and economic ties.
Page 13
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) What are some of the reasons for the corporate scandals of 2001 and 2002?
Q2) What is blue sky legislation?
Q3) Filings with the SEC are divided generally into two broad categories:
A) Registration statements and perpetual filings.
B) Reconciliation statements and periodic filings.
C) Registration statements and periodic filings.
D) Registration filings and reconciliation statements.
E) Reconciliation filings and perpetual filings.
Q4) Audited financial statements in an annual report of an issuer that is subject to SEC regulation must include:
A) three balance sheets, three income statements, and three statements of cash flows.
B) three balance sheets, two income statements, and two statements of cash flows.
C) one balance sheet, one income statement, and one statement of cash flows.
D) two balance sheets, three income statements, and three statements of cash flows.
E) two balance sheets, two income statements, and two statements of cash flows.
Q5) What Federal agency has Congressional responsibility to create auditing and accounting standards?
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) During a reorganization, how should interest expense be reported on the financial statements?
A) on the income statement, but not classified as a reorganization item.
B) on the income statement as a separate reorganization item.
C) on the balance sheet as a prepaid expense.
D) as a debit directly to retained earnings.
E) on the balance sheet as an intangible asset.
Q2) Berry Company is going through Chapter 11 bankruptcy reorganization. Prepare the income statement for the calendar year 2013 using the following information. The effective tax rate is 20%.
Q3) On a statement of financial affairs, a company's liabilities should be valued at
A) the present value of future cash flows.
B) net realizable value.
C) the amount required for settlement.
D) replacement cost.
E) the amount expected to be paid if the company could honor its debts.
Q4) What are some of the common elements that can be included in a reorganization proposal?
Page 15
Q5) What is meant by a "partially secured liability"?
Q6) What is the purpose of Chapter 7 of the Bankruptcy Reform Act?
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Page 16
Chapter 14: Partnerships: Formation and Operation
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Q1) What is the dissolution of a partnership?
Q2) Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013.
What was Nolan's capital balance at the end of 2013?
A) $139,420.
B) $246,000.
C) $276,540.
D) $279,440.
E) $304,040.
Q3) For what events or conditions should the Articles of Partnership make provision?
Q4) How is accounting for a partnership different from accounting for a corporation?
Q5) By what methods can a person gain admittance to a partnership?
Q6) 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?
Page 17
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) What financial schedule would be prepared for a partnership that has begun liquidation but has not yet completed the process? What is the purpose of this schedule?
Q2) Jones, Marge, and Tate LLP decided to dissolve and liquidate the partnership on September 30, 2013. After realization of a portion of the noncash assets, the capital account balances were Jones $50,000; Marge $40,000; and Tate $15,000. Cash of $35,000 and other assets with a carrying amount of $100,000 were on hand. Creditors' claims totaled $30,000. Jones, Marge, and Tate shared net income and losses in a 2:1:1 ratio, respectively.
Prepare a working paper to compute the amount of cash that may be paid to creditors and to partners at this time, assuming that no partner is solvent.
Q3) 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.
Q4) What should occur when a solvent partner has a deficit balance?
Q5) For a partnership, how should liquidation gains and losses be accounted for?
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Chapter 16: Accounting for State and Local Governments
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Q1) A city operates a central data processing facility. The expenses of this facility would be accounted for using
A) the General Fund.
B) an Enterprise Fund.
C) a Capital Projects Fund.
D) an Agency Fund.
E) an Internal Service Fund.
Q2) Which of the following statements is true about Fund Balance classifications for the governmental funds?
A) A restricted fund balance is for monies the governing board has appropriated.
B) An assigned fund balance has been designated for a specific purpose and is restricted to use for only that purpose.
C) An unassigned fund balance has no restriction for use of the money and is only applicable to the General Fund.
D) A committed fund balance has been designated by an outside party for a particular use.
E) A non-spendable fund balance is designated only for Permanent Fund balances.
Q3) What are the five types of governmental funds?
Q4) When should property taxes be recognized under modified accrual accounting?
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Chapter 17: Accounting for State and Local Governments
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Q1) Which of the following is a section of the general purpose external financial statements of a state or local government?
(1) Management's discussion and analysis (MD&A).
(2) Required supplementary information (other than MD&A).
(3) Basic financial statements and notes to financial statements.
A) 1 and 2.
B) 2 and 3.
C) 1 and 3.
D) 3 only.
E) 1, 2, and 3.
Q2) The city operates a public pool where each person is assessed a $2 entrance fee. Which fund is most appropriate to record these revenues?
A) General Fund.
B) Enterprise Fund.
C) Special Revenue Fund.
D) Internal Service Fund.
E) Capital Projects Fund.
Q3) What three criteria must be met to identify a governmental unit as a primary government?
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Page 20
Chapter 18: Accounting and Reporting for Private
Not-For-Profit Organizations
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Q1) How does a recipient not-for-profit organization record the receipt of a gift that will be transferred without restriction to another charitable organization? What if the donor retains the right to revoke or redirect the gift?
Q2) When are unconditional promises to give recognized as revenues?
A) In the period the promise is received.
B) In the period the promise is collected.
C) In the period in which the conditions on which they depend are substantially met.
D) In the period in which the conditions on which they depend have begun to be met.
E) Unconditional promises from potential donors are not revenues.
Q3) For the month of December 2013, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. The hospital estimated that contractual adjustments would reduce the amount collected from third-party payors to $1,710,000.
Required:
Prepare the necessary journal entry to record the contractual adjustments.
Q4) What are the objectives of accounting for a not-for-profit organization?
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Page 21
Chapter 19: Accounting for Estates and Trusts
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Q1) Which of the following is not subtracted to arrive at the taxable value of an estate?
A) Liabilities.
B) Charitable bequests.
C) Funeral expenses.
D) Estate administration expenses.
E) Deduction for property conveyed to children of decedent.
Q2) After expenses of administering an estate, which claims would be next in a typical order of priority to establish which creditors will get paid?
(1) funeral expenses
(2) medical expenses of the last illness
(3) debts and taxes given preference under laws
(4) all other claims.
A) 1 and 2.
B) 2 and 3.
C) 3 and 4.
D) 1 and 4.
E) 2 and 4.
Q3) What is meant by "an individual dies intestate"?
Q4) In settling an estate, what is the meaning of the term devise?
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