Financial Reporting and Analysis
Final Test Solutions
Course Introduction
Financial Reporting and Analysis is a course designed to provide students with a comprehensive understanding of how organizations communicate financial information to internal and external stakeholders. The course delves into the principles and standards underlying financial statements, including the income statement, balance sheet, and cash flow statement. Students learn how to interpret, analyze, and evaluate financial data, enhancing decision-making skills for both management and investors. Emphasis is placed on understanding Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), ratio analysis, and the impact of accounting choices on financial statements. Through practical case studies and real-world examples, students develop the ability to critically assess the financial health and performance of organizations.
Recommended Textbook
Advanced Accounting Global 12th Edition by Floyd A. Beams
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894 Verified Questions
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Page 2
Chapter 1: Business Combinations
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Sample Questions
Q1) Pepper Company paid $2,500,000 for the net assets of Salt Corporation and Salt was then dissolved. Salt had no liabilities. The fair values of Salt's assets were $3,750,000. Salt's only non-current assets were land and buildings with book values of $100,000 and $520,000, respectively, and fair values of $180,000 and $730,000, respectively. At what value will the buildings be recorded by Pepper?
A) $730,000
B) $520,000
C) $210,000
D) $0
Answer: A
Q2) According to FASB Statement 141R, which one of the following items may not be accounted for as an intangible asset apart from goodwill?
A) A production backlog
B) A valuable employee workforce
C) Noncontractual customer relationships
D) Employment contracts
Answer: B
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3
Chapter 2: Stock Investments - Investor Accounting and Reporting
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Q1) Which one of the following items, originally recorded in the Investment in Falcon Co. account under the equity method, would not be systematically used to reduce investment income on a periodic basis?
A) Amortization expense of goodwill
B) Depreciation expense on the excess fair value attributed to machinery
C) Amortization expense on the excess fair value attributed to lease agreements
D) Depreciation expense on the excess fair value attributed to building
Answer: A
Q2) Panda Corporation purchased 100,000 previously unissued shares of Skunk Company's $10 par value common stock directly from Skunk for $2,200,000. Skunk's stockholders' equity immediately before the investment by Panda consisted of $3,000,000 of common stock and $4,800,000 in retained earnings. What is Panda's book value of equity in the net assets of Skunk?
A) $2,200,000
B) $2,500,000
C) $3,000,000
D) $3,333,000
Answer: B
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Chapter 3: An Introduction to Consolidated Financial Statements
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Sample Questions
Q1) The unamortized excess account is
A) a contra-equity account.
B) used in allocating the amounts paid for recorded balance sheet accounts that are above or below their fair values.
C) used in allocating the amounts paid for each asset and liability that are above or below their book values, especially when numerous assets or liabilities are involved.
D) the excess purchase cost that is attributable to goodwill.
Answer: C
Q2) Percy Inc. acquired 80% of the outstanding stock of Sillson Company in a business combination. The book values of Sillson's net assets are equal to the fair values except for the building, whose net book value and fair value are $500,000 and $800,000, respectively. At what amount is the building reported on the consolidated balance sheet?
A) $400,000
B) $500,000
C) $640,000
D) $800,000
Answer: D
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Chapter 4: Consolidated Techniques and Procedures
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Q1) When performing a consolidation, if the balance sheet does not balance,
A) that indicates that the Investment in Subsidiary account on the parent's books should not be adjusted to -0-, because there is excess value represented in the investment.
B) it is frequently because of the noncontrolling interest, as these amounts do not appear on the separate companies' general ledgers.
C) the debit and credit totals of the adjusting/eliminating columns of the consolidation working paper should be checked to confirm that they balance, and if so, then there is no need to check the individual line items.
D) the amount that it is "off" will always equal the noncontrolling interest in the current year net income of the subsidiary.
Q2) In contrast with single entity organizations, consolidated financial statements include which of the following in the calculation of cash flows from operating activities under the indirect method?
A) Cash paid to employees
B) Noncontrolling interest dividends paid
C) Noncontrolling interest share
D) Proceeds from the sale of land
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Chapter 5: Intercompany Profit Transactions Inventories
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Sample Questions
Q1) Plateau Incorporated bought 60% of the common stock of Sachet Company several years ago. At the time of purchase, the fair value and book value of Sachet's net assets were equal. The cost of the 60% investment was equal to 60% of the book value of Sachet's net assets. Plateau sells merchandise to Sachet at 125% above Plateau's cost. Intercompany sales from Plateau to Sachet for 2014 were $60,000. Unrealized profits in Sachet's December 31, 2013 inventory and December 31, 2014 inventory were $6,000 and $4,500, respectively. Sachet reported net income of $120,000 for 2014.
Required: In General Journal format, prepare consolidation working paper entries at December 31, 2014 to eliminate the effects of the intercompany inventory sales.
Q2) If the intercompany sale mentioned above was an upstream sale, what will be the reported amount of total consolidated sales revenue for 2015?
A) $1,025,000
B) $1,900,000
C) $1,950,000
D) $2,000,000
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Chapter 6: Intercompany Profit Transactions Plant Assets
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Sample Questions
Q1) Parrot Corporation acquired a 70% interest in Swifti Corp. on January 1, 2013, when Swifti's book values and fair values were equivalent. On January 1, 2014, Swifti sold a building with a book value of $60,000 to Parrot for $80,000. The building had a remaining life of five years, no salvage value, and was depreciated by the straight-line method. Swifti reported net income of $200,000 for 2014. What was the noncontrolling interest share for 2014?
A) $54,000
B) $55,200
C) $60,000
D) $128,800
Q2) On January 1, 2014 Saffron Co. recorded a $40,000 profit on the upstream sale of some equipment that had a remaining four-year life under the straight-line depreciation method. The equipment has no salvage value. Saffron had separate income of $100,000 in 2014. The parent company, Pommel Incorporated, owns 90% of Saffron. Pommel would report investment income from Saffron in 2014 of
A) $54,000.
B) $63,000.
C) $90,000.
D) $126,000.
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Page 8
Chapter 7: Intercompany Profit Transactions Bonds
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Sample Questions
Q1) Using the original information, the balances for the Bonds Payable and Bond Interest Payable accounts, respectively, on the consolidated balance sheet for December 31, 2015 were
A) $3,000,000 and $ 90,000.
B) $3,000,000 and $180,000.
C) $6,000,000 and $ 90,000.
D) $6,000,000 and $180,000.
Q2) Pachelor Corporation owns 70% of the outstanding stock of Stabb Company. On January 1, 2013, Stabb issued $1,000,000 in 7% bonds that matured on January 1, 2018. At the time of issuance, the bonds were sold at a discount of $125,000. At January 2, 2015, Pachelor purchased the bonds for $1,400,000, and constructively retired the debt. Interest is paid annually on January 1. Straight-line amortization is used by both companies.
Required:
1. Calculate the gain or loss that the consolidated entity incurred to retire the debt.
2. Prepare eliminating/adjusting entries for the consolidating work papers for the year ended December 31, 2015.
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Chapter 8: Consolidations - Changes in Ownership
Interests
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Sample Questions
Q1) A subsidiary split its stock 2 for 1. Which of the following statements is false?
A) A stock split does not affect the amount of net assets of the subsidiary.
B) A stock split does not affect parent and noncontrolling interest ownership percentages.
C) A stock split does not affect consolidation procedures.
D) A 2 for 1 stock split decreases the number of shares outstanding.
Q2) Assume that Penguin sold the additional 3,000 shares to outside interests for $150,000 on January 2, 2014. Giant's percentage ownership immediately after the sale of additional stock would be
A) 66-2/3%.
B) 75%.
C) 80%.
D) 83-1/3%.
Q3) If SOS sold the additional shares directly to Great, Great's Investment in SOS account after the sale would be
A) $1,350,000.
B) $1,395,000.
C) $1,425,000.
D) $1,500,000.
Page 10
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Chapter 9: Indirect and Mutual Holdings
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Sample Questions
Q1) The amount of income for the current year assigned to the noncontrolling shareholders of Abussi Corporation is A) $48,000. B) $53,200.
C) $74,000.
D) $79,200.
Q2) Page Corporation acquired a 60% interest in Ace Corporation at a price $40,000 in excess of book value and fair value on January 1, 2013. On the same date, Ace acquired a 70% interest in Bader Corporation at a price $30,000 in excess of book value and fair value. The excess purchase cost paid by Page and Ace was attributed to goodwill. Separate net incomes (excluding investment income) for the three affiliates for 2013 are as follows: Page, $500,000, Ace, $300,000, and Bader, $400,000. Page's controlling interest share of consolidated net income for 2013 is A) $808,000. B) $848,000. C) $920,000. D) $960,000.
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Page 11
Chapter 10: Subsidiary Preferred Stock, Consolidated
Earnings Per Share, and Consolidated Income Taxation
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Sample Questions
Q1) If a parent company has controlling interest in a subsidiary which has no potentially dilutive securities outstanding, then in the calculation of consolidated diluted EPS, it will be necessary to
A) only make an adjustment of subsidiary's basic earnings.
B) replace the parent's equity in subsidiary earnings with the parent's equity in subsidiary's diluted EPS.
C) make a replacement calculation in the parent's basic earnings for the EPS.
D) only use the parent's common shares and shares represented by the parent's potentially dilutive securities.
Q2) What is the goodwill on the consolidated balance sheet for Pamplin and Subsidiaries on December 31, 2014 based on Pamplin's purchase of Sage's common stock?
A) $140,000
B) $240,000
C) $290,000
D) $306,667
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Chapter 11: Consolidation Theories, Push-Down Accounting, and Corporate Joint Ventures
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Sample Questions
Q1) A parent company acquired 100% of the outstanding common stock of another corporation. The parent is going to use push-down accounting. The fair market value of each of the acquired corporation's assets is lower than its respective book value. The fair market value of each of the acquired corporation's liabilities is higher than its respective book value. The acquired corporation has a deficit in the Retained Earnings account. Which one of the following statements is correct?
A) The push-down capital account will have a credit balance after this transaction is posted.
B) The push-down capital account will have a debit balance after this transaction is posted.
C) The push-down capital account will have either a debit or a credit balance depending upon whether the asset adjustments exceed the liability adjustments, or vice versa.
D) Subsidiary Retained Earnings will have a deficit balance after this transaction is posted.
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Chapter 12: Derivatives and Foreign Currency: Concepts and Common Transactions
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Sample Questions
Q1) On December 5, 2014, Unca Corporation, a U.S. firm, bought inventory items from Skagerrak Corporation of Norway for 1,000,000 Norwegian kroner when the spot rate for kroner was $0.166. The purchase was denominated in kroner. At Unca's fiscal year end, December 31, 2014, the spot rate was $0.171. On January 4, 2015, Unca purchased 1,000,000 kroner for $167,500 and paid the invoice. How much gain or (loss) did Unca report in its 2014 and 2015 income statements, respectively?
A) $(5,000) and $1,500
B) $0 and ($1,500)
C) ($5,000) and $3,500
D) $0 and ($3,500)
Q2) On April 1, 2014, Button Industries enters into an agreement with Bows Incorporated to lock in the price of cotton. Button agrees to purchase (and Bows agrees to sell) 100,000 pounds of cotton at $1.19 per pound, six months from the date of agreement. On October 1, 2014, the price of cotton is $1.17 per pound. The contract allows for net settlement. Required:
Determine the net settlement on the forward contract.
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Page 14
Chapter 13: Accounting for Derivatives and Hedging
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Sample Questions
Q1) On January 1, 2014, Bambi borrowed $500,000 from Lonni. The five-year term note carries a variable rate interest, based on LIBOR, and interest is payable at December 31 of each year, compounded annually. The first year's rate of interest is 6% and Bambi would like to assure that their rate does not increase. Bambi enters into a pay-fixed, receive-variable interest rate swap agreement with Third National Bank, under which Bambi will pay 6%, fixed. At December 31, 2014, it is determined that Bambi's interest rate to Lonni for the next year will be 5%. Treat as a cash flow hedge. Required: Determine the estimated fair value of the hedge at December 31, 2014, and prepare the related journal entry required to document this hedge and the related interest payment at December 31, 2014. Assume the interest rate curve is flat.
Q2) What is the fair value of the forward contract at March 1?
A) $-0-
B) $1,654.97 asset
C) $1,654.97 liability
D) $1,680 asset
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Page 15
Chapter 14: Foreign Currency Financial Statements
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Sample Questions
Q1) When translating foreign subsidiary income statements using the current rate method, why are some accounts translated at an average rate?
A) This approach improves matching.
B) This approach accentuates the conservatism principle.
C) This approach smoothes out highly volatile exchange rate fluctuations.
D) This approach approximates the effect of transactions which occur continuously during the period.
Q2) Assume the functional currency of a foreign entity is the U.S. dollar, but the books are kept in euros. The objective of remeasurement of a foreign entity's accounts is to
A) produce the same results as if the foreign entity's books were maintained in the currency of the largest customer.
B) produce the same results as if the foreign entity's books were maintained solely in the local currency.
C) produce the same results as if the foreign entity's books were maintained solely in the U.S. dollar.
D) produce the results reflective of the foreign entity's economics in the local currency.
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Chapter 15: Segment and Interim Financial Reporting
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Q1) What is the purpose of interim reporting?
A) Provide shareholders with more timely information
B) Provide shareholders with more accurate information
C) Provide shareholders with more extensive detail about specific accounts and transactions
D) Provide shareholders with more current audited information
Q2) How does GAAP view interim accounting periods?
A) As discrete units for which net income may be separately determined
B) As integral units of the entire year for which each interim period is an essential part of an annual period
C) As integral units of the entire year with each interim period as an independent accounting period
D) As discrete units of the entire year using the same principles that are applied to the annual period
Q3) What is the threshold for reporting a major customer?
A) 5 percent of revenues
B) 5 percent of profits
C) 10 percent of revenues
D) 10 percent of profits
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Page 17
Chapter 16: Partnerships - Formation, Operations, and Changes in Ownership Interests
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Q1) Required:
1. Prepare a schedule to allocate income or loss to the partners assuming that the partnership incurs a net loss of $26,200 for 2014.
2. Prepare a journal entry to distribute the partnership's loss to the partners (assume that an Income Summary account is used by the partnership).
Q2) The XYZ partnership provides a 10% bonus to Partner Y that is based upon partnership income, after deduction of the bonus. If the partnership's income is $140,000, how much is Partner Y's bonus allocation?
A) $12,727
B) $13,860
C) $14,000
D) $15,400
Q3) In a limited partnership, a general partner
A) is excluded from management of the business.
B) is not entitled to a bonus at the end of the year.
C) has limited liability for partnership debt.
D) has unlimited liability for partnership debt.
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Page 18
Chapter 17: Partnership Liquidation
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Q1) In a schedule of assumed loss absorptions
A) the partner with lowest loss absorption is eliminated last.
B) it is necessary to have a cash distribution plan first.
C) the least vulnerable partner is eliminated first.
D) the most vulnerable partner is eliminated first.
Q2) A cash distribution plan for the Sammi, Tammy, and Udd partnership was as follows:
Q3) If all partners are included in the first installment of an installment liquidation, then in future installments
A) cash will be distributed according to the residual profit and loss sharing ratios.
B) cash should not be distributed until all non-cash assets are converted into cash.
C) vulnerability rankings for each partner should be prepared.
D) a cash distribution plan must be prepared so that partners will know when they will be included in cash distributions.
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Chapter 18: Corporate Liquidations and Reorganizations
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Q1) A petition commencing a case against a corporate debtor
A) can be filed only under Chapter 7 of the bankruptcy act.
B) can be filed only under Chapter 11 of the bankruptcy act.
C) can be filed under either Chapter 7 or Chapter 11 of the bankruptcy act.
D) will be determined by the trustee whether it shall be Chapter 7 or Chapter 11 of the bankruptcy act.
Q2) A single creditor
A) can never file a petition for bankruptcy.
B) with a $14,425 or more secured claim may file a petition for bankruptcy.
C) with a $14,425 or more unsecured claim may file a petition for bankruptcy, if there are fewer than 12 unsecured creditors.
D) with a $14,425 or more unsecured claim may file a petition for bankruptcy if there are more than 12 unsecured creditors.
Q3) A company emerging from bankruptcy will have a reorganization value that
A) approximates the book value of the entity's assets prior to bankruptcy.
B) approximates the book value of the entity prior to bankruptcy.
C) approximates the fair market value of the entity without considering liabilities.
D) approximates the fair market value of the entity's liabilities.
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Chapter 19: An Introduction to Accounting for State and Local Governmental Units
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Q1) The following are transactions for the city of Franklin.
a. Borrowed $20,000 by issuing a two-year note.
b. Purchased equipment for $6,000 cash.
c. Licenses for $700 were billed on account.
d. Accrued employee salary costs of $7,000.
e. Depreciation expense on equipment for year, $1,000.
Required:
Analyze the above transactions by using the accounting equation for a proprietary fund.
Q2) The following are transactions for the city of Salem.
a. Incurred salaries of $44,000 to be paid next month.
b. Tax bills totaling $500,000 mailed to city residents.
c. Paid salaries above.
d. Computer equipment received in the amount of $11,000, to be paid in 30 days.
Required:
Analyze the above transactions by using the accounting equation for a proprietary fund.
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Chapter 20: Accounting for State and Local Governmental Units
- Governmental Funds
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Q1) The General Fund transfers $50,000 cash to the Debt Service Fund to meet annual interest payments. What entry did the Debt Service Fund prepare?
A) Debit Cash $50,000, Credit Revenue $50,000
B) Debit Cash $50,000, Credit Other Financing Sources-Transfer from General Fund $50,000
C) Debit Encumbrance $50,000, Credit Due to General Fund $50,000
D) Debit Appropriation $50,000, Credit Reserve for Encumbrance $50,000
Q2) When the donation of bonds is received, what account should be debited?
A) Encumbrance
B) Other Financing Sources
C) Other Financing Uses
D) Investment
Q3) Which of the following funds has similar accounting and reporting to the special revenue fund?
A) The proprietary fund
B) The trust fund
C) The general fund
D) The agency fund
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Chapter 21: Accounting for State and Local Governmental Units
- Proprietary and Fiduciary Funds
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Q1) The trust fund for a school library is required to prepare financial statements that include
A) Balance Sheet and Income Statement.
B) Statement of Revenues, Expenses and Changes in Fiduciary Net Assets.
C) Statement of Fund Balance and Statement of Changes in Fund Balance.
D) Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position.
Q2) Prepare journal entries in the motor pool department of Hill County to record each of the following transactions.
1. The General Fund contributed $50,000 cash to the motor pool department. The motor pool department purchased four vehicles on July 1, 2014 by paying $50,000 down and borrowing $70,000 on a 5%, 3-year note.
2. Billed General Fund departments $430,000 for services provided to those departments. Billings to the Enterprise Fund totaled $210,000. All billings were collected by year-end(June 30, 2015) except for $80,000 charged to the General Fund.
3. Accrued year-end adjustments at June 30, 2015 for interest expense and depreciation. The useful life of the equipment is 5 years with no salvage value.
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Page 23
Chapter 22: Accounting for Not-For-Profit Organizations
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Q1) In a nongovernmental, nonprofit hospital, contractual adjustments are
A) the discounted rate given to hospital employees.
B) discounts arranged with third-party payors.
C) recorded as a deduction from revenue or as an expense.
D) additional amounts paid by select group participants.
Q2) On January 1, 2011, a Voluntary Health and Welfare Organization (VHWO) receives an unconditional promise to give $6,000. The money is not collectible until 2012. The VHWO estimates that 10% of pledges are uncollectible. On January 1, 2011, the VHWO will credit
A) Unrestricted Support - Contribution, $6,000.
B) Allowance for Uncollectible Contributions $600, and Unrestricted SupportContribution, $5,400.
C) Allowance for Uncollectible Contributions $600, Temporarily Restricted SupportContribution, $5,400.
D) Allowance for Uncollectible Contributions $600, Contribution Revenue $5,400.
Q3) Voluntary health and welfare organizations classify fund-raising costs as
A) costs of services sold. B) program services.
C) auxiliary expenses.
D) supporting services.
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Page 24
Chapter 23: Estates and Trusts
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Q1) In reference to estate principal and income, which of the following statements is correct?
A) A primary reason for dividing estate principal and estate income is that the beneficiaries are often different.
B) In accounting for the decedent's estate, the receipts earned but not yet received at the date of death are considered estate income.
C) After death, earnings from income-producing property owned at the time of death are considered estate principal.
D) Expenses incurred after death to administer the estate are first charged against income earned after death.
Q2) Philiam Benedict dies on October 1, 2014, leaving his entire estate to his sole surviving niece, Muriel Finster. After all devise distributions and payments for estate expenses and liabilities, the fair value of Philiam's estate is $6,350,000.
Required:
Calculate the federal estate tax on Philiam's estate, assuming that federal estate taxes are paid at the 45% rate.
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