Corporate Accounting
Midterm Exam
Course Introduction
Corporate Accounting is a specialized field within accounting that focuses on the financial activities and reporting requirements of corporations. This course covers essential topics such as the preparation and analysis of financial statements, accounting for share capital and debentures, corporate income tax, cash flow statements, and internal reconstruction. Emphasis is placed on understanding the regulatory framework governing corporate financial disclosure, compliance with accounting standards, the process of mergers and acquisitions, and the implications of various financial decisions for stakeholders. By blending theoretical concepts with practical applications, students gain the skills necessary to manage and report the financial affairs of corporations in accordance with legal and professional standards.
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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Q1) On January 4, 2012, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values.
During 2012, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2012 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot.
At what amount will Inkblot be reflected in Trycker's December 31, 2012 balance sheet?
A) $2,400,000.
B) $2,280,000.
C) $2,480,000.
D) $2,800,000.
E) $7,000,000.
Answer: D
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Chapter 2: Consolidation of Financial Information
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Q1) How are bargain purchases accounted for in an acquisition business transaction?
Answer: A bargain purchase results when the collective fair values of the net identified assets acquired and liabilities assumed exceed the fair value of consideration transferred. The assets and liabilities acquired are recorded at their fair values and the bargain purchase is recorded as a Gain on Bargain Purchase.
Q2) How would you account for in-process research and development acquired in a business combination accounted for as an acquisition?
Answer: In-Process Research and Development is capitalized as an asset of the combination and reported as intangible assets with indefinite lives subject to impairment reviews.
Q3) According to GAAP, the pooling of interest method for business combinations
A) Is preferred to the purchase method.
B) Is allowed for all new acquisitions.
C) Is no longer allowed for business combinations after June 30, 2001.
D) Is no longer allowed for business combinations after December 31, 2001.
E) Is only allowed for large corporate mergers like Exxon and Mobil.
Answer: C
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Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment?
A) the amount of consolidated net income.
B) total assets on the consolidated balance sheet.
C) total liabilities on the consolidated balance sheet.
D) the balance in the investment account on the parent's books.
E) the amount of consolidated cost of goods sold.
Answer: D
Q2) On January 1, 2012, Jumper Co. acquired all of the common stock of Cable Corp. for $540,000. Annual amortization associated with the purchase amounted to $1,800. During 2012, Cable earned net income of $54,000 and paid dividends of $24,000. Cable's net income and dividends for 2013 were $86,000 and $24,000, respectively.
Required:
Assuming that Jumper decided to use the partial equity method, prepare a schedule to show the balance in the investment account at the end of 2013.
Answer: 11ea8e0c_b176_40c7_b636_2310ae0bbed2_TB2311_00_TB2311_00
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000.
What is the effect of including Kailey in consolidated net income for 2014?
A) $31,000.
B) $33,000.
C) $55,000.
D) $60,000.
E) $39,000.
Q2) When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?
A) Income from subsidiary is not recognized until there is an entire year of consolidated operations.
B) Income from subsidiary is recognized from date of acquisition to year-end.
C) Excess cost over acquisition value is recognized at the beginning of the fiscal year.
D) No goodwill can be recognized.
E) Income from subsidiary is recognized for the entire year.
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Chapter 5: Consolidated Financial Statements Intra-Entity
Asset Transactions
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Q1) Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2013, Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to Hambly for $145,000. Stroban's reported net income for 2013 was $119,000.
Required:
What was the non-controlling interest's share of Stroban Co.'s net income?
Q2) On January 1, 2013, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000, and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-line depreciation. On their separate 2013 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2013 would have been
A) $144,000.
B) $148,375.
C) $109,000.
D) $134,000.
E) $139,625.
Q3) When is the gain on an intra-entity transfer of land realized?
Q4) How is the gain on an intra-entity transfer of a depreciable asset realized?
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Chapter 6: Variable Interest Entities, Intra-Entity Debt,
Consolidated Cash Flows, and Other Issues
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Q1) Parent Corporation had just purchased some of its subsidiary's outstanding bonds on the open market. What items related to these bonds will have to be accounted for in the consolidation process?
Q2) Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on January 1, 2012, with a book value of $265,000. The parent acquired the bonds on that date for $288,000. Subsequently, Vontkins reported interest income of $25,000 in 2012 while Quasimota reported interest expense of $29,000. Consolidated financial statements were prepared for 2013. What adjustment would have been required for the retained earnings balance as of January 1, 2013?
A) reduction of $27,000.
B) reduction of $4,000.
C) reduction of $19,000.
D) reduction of $30,000.
E) reduction of $20,000.
Q3) What documents or other sources of information would be used to prepare a consolidated statement of cash flows?
Q4) How does the existence of a non-controlling interest affect the preparation of a consolidated statement of cash flows?
Page 8
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Q1) On January 1, 2013, a subsidiary bought 10% of the outstanding shares of its parent company. Although the total book value and fair value of the parent's net assets were $5.5 million, the consideration transferred for these shares was $590,000. During 2013, the parent reported operating income (no investment income was included) of $714,000 while paying dividends of $196,000. How were these shares reported at December 31, 2013?
A) The investment was recorded for $641,800 at the end of 2013 and then eliminated for consolidation purposes.
B) Consolidated stockholders' equity was reduced by $641,800.
C) The investment was recorded for $590,000 at the end of 2013 and then eliminated for consolidation purposes.
D) Consolidated stockholders' equity was reduced by $639,800.
E) Consolidated stockholders' equity was reduced by $590,000.
Q2) What ownership pattern is referred to as mutual ownership? Describe briefly or illustrate with a diagram.
Q3) Explain how the treasury stock approach treats shares of the parent's common stock that are owned by the subsidiary and the rationale behind the approach.
Q4) What are the benefits or advantages of filing a consolidated income tax return?
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Chapter 8: Segment and Interim Reporting
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Q1) Generally accepted accounting principles require a U.S. corporation to disclose the following disaggregated information for each operating segment, except:
A) Revenues from external customers.
B) Discontinued operations.
C) Cost of goods sold.
D) Depreciation expense.
E) Intersegment revenues.
Q2) What is the purpose of the U.S. GAAP seventy-five percent requirement for industry segment disclosure?
Q3) What is the major objective of segment reporting?
Q4) Which of the following is not one of the criteria management should consider in determining whether business activities and environments of an operating segment are similar?
A) The geographical location of the operations.
B) The nature of the production process.
C) The distribution methods.
D) The nature of the regulatory environment, if applicable.
E) The type or class of customer.
Q5) What is meant by the term: disaggregated financial information?
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.
Q2) Winston Corp., a U.S. company, had the following foreign currency transactions during 2013:
(1)) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $54,000.
(2)) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014.
What amount should be included as a foreign exchange gain or loss from the two transactions for 2014?
A) $1,000 loss.
B) $1,000 gain.
C) $2,000 loss.
D) $4,000 gain.
E) $4,000 loss.
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) A net liability balance sheet exposure exists and the foreign currency appreciates. 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.
Q2) A highly inflationary economy is defined as
A) Cumulative 5-year inflation in excess of 100%.
B) Cumulative 3-year inflation in excess of 100%.
C) Cumulative 5-year inflation in excess of 90%.
D) Cumulative 3-year inflation in excess of 90%.
E) Any country designated as a company operating in a third-world economy.
Q3) Under the current rate method, how would cost of goods sold be translated?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q4) Contrast the purpose of remeasurement with the purpose of translation.
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) What are recognition differences in international reporting and what would be an example of a difference?
Q2) 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.
Q3) What were the major objectives of the Treaty of Rome?
Q4) What problems are caused by diverse accounting practices?
Q5) What are measurement differences in international reporting and what would be an example of a difference?
Q6) What are the two major types of legal systems used around the world?
Q7) What is meant by harmonization of accounting standards?
Q8) What is the IOSCO?
Q9) What are the four different ways IFRS can be used by a country? Page 13
Q10) What are the six key FASB initiatives to further convergence?
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) Why was the Public Utility Holding Company Act of 1935 created?
Q2) What is Form 10-K?
A) a quarterly report filed with the SEC.
B) an annual report filed with the SEC.
C) a semiannual report filed with the SEC.
D) a form filed with the SEC before the company issues stock for the first time.
E) a form filed with the SEC before issuing stocks to acquire another company.
Q3) What is shelf registration?
A) a procedure that allows the sale of securities to a small group of knowledgeable investors without any general solicitation.
B) a procedure that allows a company to register securities and then sell them over a period of two years without reregistering.
C) a method of filing Form 10-K with the SEC.
D) the registration of mutual funds that engage in investing and trading securities.
E) the registration of securities issued in connection with business combination transactions.
Q4) Name five securities offerings exempt from registration with the SEC.
Q5) What is included in Part I of a securities registration statement?
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) What is normally required before a reorganization plan can be implemented?
A) The plan must be presented by the company and confirmed by the court.
B) The plan must be approved by each class of creditors and each class of stockholders, and confirmed by the court.
C) The plan must be presented by the company, approved by two-thirds of each class of stockholders, and confirmed by the court.
D) The plan must be presented by the company, approved by three-fourths of each class of stockholders, and confirmed by the court.
E) The plan must be approved by two-thirds of each class of creditors, approved by two-thirds of each class of stockholders, and confirmed by the court.
Q2) What is the role of the trustee in the liquidation of a company?
Q3) The statement of financial affairs should be prepared
A) under the going concern assumption.
B) under the concept of conservatism.
C) under the assumption that liquidation will occur.
D) under the continuity concept.
E) only for a company in Chapter 7 bankruptcy.
Q4) What is meant by a "fully secured liability"?
Page 16
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Chapter 14: Partnerships: Formation and Operation
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Q1) Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively.
Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital balance of Dana?
A) $20,000.
B) $60,000.
C) $110,000.
D) $120,000.
E) $230,000.
Q2) The advantages of the partnership form of business organization, compared to corporations, include
A) single taxation.
B) ease of raising capital.
C) mutual agency.
D) limited liability.
E) difficulty of formation.
Q3) Why are the terms of the Articles of Partnership important to partners?
Q4) By what methods can a person gain admittance to a partnership?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All liabilities have been paid. The partners' capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, how much cash will Waters receive in the final settlement?
A) $5,000.
B) $9,000.
C) $18,000.
D) $28,000.
E) $55,000.
Q2) 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 these. The partner has no legal responsibility to cover the capital deficit balance.
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Chapter 16: Accounting for State and Local Governments
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Q1) A $5,000,000 bond is issued by Northern City to build a new hospital.
Required:
Prepare the journal entry and identify the fund in which it is recorded to reflect the bond issue.
Q2) When a city received a private donation of $1,000,000 stipulating that the principal donation would be preserved but allowing the interest income to be spent on building a city park with access for disabled children, which fund should the money be recorded in?
A) the General Fund.
B) an Expendable Trust Fund.
C) a Permanent Fund.
D) an Agency Fund.
E) a Special Revenue Fund.
Q3) On August 21, 2013, Fred City transferred $100,000 to the School System to cover repairs to a school building.
Required:
Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund Financial Statements.
Q4) What are the four fiduciary fund types?
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Chapter 17: Accounting for State and Local Governments
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Q1) According to the GASB (Governmental Accounting Standards Board), which one of the following is not a criterion for determining whether a government is legally separate?
A) The government can determine its own budget.
B) The government can issue debt.
C) The government has corporate powers including the right to sue and be sued.
D) The government has the power to levy taxes.
E) The government can issue preferred stock.
Q2) The Town of Wakefield opened a solid waste landfill in 2012 that was at 20% capacity on December 31, 2012 and at 50% capacity on December 31, 2013. The city initially anticipated closure costs of $2.3 million but in 2013 revised the estimate of the closure costs to be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed.
What is the journal entry that should be recorded on December 31, 2013 for Government-wide Financial Statements?
Q3) What information is required in the financial section of a state or local government's CAFR?
Q4) What is meant by the term fiscally independent?
Q5) What is meant by the term legally independent?
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Chapter 18: Accounting and Reporting for Private
Not-For-Profit Organizations
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Q1) Which of the following is not a question individuals ask of not-for-profit organizations in considering whether to make a contribution?
A) Will donated funds be used effectively by the organization to accomplish its purpose?
B) Will the donated funds be wasted?
C) How much should this organization receive?
D) Is this organization profitable?
E) Is contributing to this charity a wise allocation of resources?
Q2) Wakefield Home is a private not-for-profit healthcare organization offering services for a fee. In the first quarter of 2013, Wakefield Home rendered services of $300,000 to patients. Of this amount 75% will be paid by patients, and $25,000 will be adjusted based on estimated insurance agreements. The remaining amount is to be paid by third party insurance providers.
The Home incurred the following liabilities: $110,000 salaries, $30,000 medical equipment, $10,000 utilities expense. Prepare the journal entries for these transactions.
Q3) For a voluntary health and welfare organization, what are supporting services expenses?
Q4) What are the objectives of accounting for a not-for-profit organization?
Page 21
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Chapter 19: Accounting for Estates and Trusts
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Q1) The provisions of a will currently undergoing probate are: "One thousand shares of Wal-Mart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,400 shares of Wal-Mart stock and $25,000 cash in the savings account. What is the remaining principal to be divided equally between the son and the daughter?
A) $10,000 cash
B) $15,000 cash
C) 400 shares of Wal-Mart stock and $10,000 cash
D) 400 shares of Wal-Mart stock and $15,000 cash
E) 1,000 shares of Wal-Mart stock and $5,000 cash
Q2) What is meant by estate accounting?
Q3) In settling an estate, what is the meaning of the term devise?
Q4) What is the difference between an executor and an administrator?
Q5) What are the three goals of probate laws?
Q6) What are the four levels of claims in the order of priority of the Uniform Probate Code?
Q7) What is the purpose of the Uniform Probate Code?
Q8) In settling an estate, what is the meaning of the term legacy?
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