Financial Reporting
Practice Exam
Course Introduction
Financial Reporting is a core course that explores the principles, standards, and frameworks governing the preparation and presentation of financial statements. Students learn to analyze and interpret statements such as the balance sheet, income statement, statement of cash flows, and statement of changes in equity, with an emphasis on accuracy, transparency, and ethical considerations. The course covers international and local accounting standards, such as IFRS and GAAP, enhancing students ability to prepare financial reports for various stakeholders and make informed business decisions based on financial data.
Recommended Textbook
Advanced Accounting 11th Edition by Floyd
A. Beams
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Page 2
Chapter 1: Business Combinations
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Q1) Which of the following is not a reason for a company to expand through a combination, rather than by building new facilities?
A) A combination might provide cost advantages.
B) A combination might provide fewer operating delays.
C) A combination might provide easier access to intangible assets.
D) A combination might provide an opportunity to invest in a company without having to take responsibility for its financial results.
Answer: D
Q2) Pitch Co.paid $50,000 in fees to its accountants and lawyers in acquiring Slope Company.Pitch will treat the $50,000 as
A) an expense for the current year.
B) a prior period adjustment to retained earnings.
C) additional cost to investment of Slope on the consolidated balance sheet.
D) a reduction in additional paid-in capital.
Answer: A
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3
Chapter 2: Stock Investments Investor Accounting and Reporting
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Q1) Pinkerton Inc.owns 10% of Sable Company.In the most recent year, Sable had net earnings of $40,000 and paid dividends of $6,000.Pinkerton's accountant mistakenly assumed Pinkerton had considerable influence over Sable and used the equity method instead of the cost method.What is the impact on the investment account and net earnings, respectively?
A) By using the equity method, the accountant has understated the investment account and overstated the net earnings.
B) By using the equity method, the accountant has overstated the investment account and understated the net earnings.
C) By using the equity method, the accountant has understated the investment account and understated the net earnings.
D) By using the equity method, the accountant has overstated the investment account and overstated the net earnings.
Answer: D
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4
Chapter 3: An Introduction to Consolidated Financial Statements
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Q1) A newly acquired subsidiary had pre-existing goodwill on its books.The parent company's consolidated balance sheet will
A) not show any value for the subsidiary's pre-existing goodwill.
B) treat the goodwill similarly to other intangible assets of the acquired company.
C) not show any value for the pre-existing goodwill unless all other assets of the subsidiary are stated at their full fair value.
D) always show the pre-existing goodwill of the subsidiary at its book value.
Answer: A
Q2) Pental Corporation bought 90% of Sedacor Company's common stock at its book value of $400,000 on January 1, 2011.During 2011, Sedacor reported net income of $130,000 and paid dividends of $40,000.At what amount should Pental's Investment in Sedacor account be reported on December 31, 2011?
A) $400,000
B) $481,000
C) $490,000
D) $530,000
Answer: B
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Page 5
Chapter 4: Consolidated Techniques and Procedures
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Q1) When preparing the consolidation workpaper for a company and its controlled subsidiary, which of the following would be used for the entities being consolidated?
A) Post-closing trial balances
B) Adjusted trial balances
C) Unadjusted trial balances
D) The adjusted trial balance for the parent and the unadjusted trial balance for all controlled subsidiaries
Q2) Which one of the following will increase consolidated retained earnings?
A) An increase in the value of goodwill associated with a subsidiary subsequent to the parent's date of acquisition
B) The amortization of a $10,000 excess in the fair value of a note payable over its recorded book value
C) The depreciation of a $10,000 excess in the fair value of equipment over its recorded book value
D) The sale of inventory by a subsidiary that had a $10,000 excess in fair value over recorded book value on the parent's date of acquisition
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Chapter 5: Intercompany Profit Transactions - Inventories
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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 2012 were $60,000.Unrealized profits in Sachet's December 31, 2011 inventory and December 31, 2012 inventory were $6,000 and $4,500, respectively.Sachet reported net income of $120,000 for 2012.
Required: In General Journal format, prepare consolidation working paper entries at December 31, 2012 to eliminate the effects of the intercompany inventory sales.
Q2) For 2011, consolidated net income will be what amount if the intercompany sale was downstream?
A) $180,000
B) $253,000
C) $256,000
D) $259,000
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Chapter 6: Intercompany Profit Transactions - Plant Assets
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Q1) Parrot Company owns all the outstanding voting stock of Southern Manufacturing.On January 1, 2012, Parrot sold machinery to Southern at its book value of $24,000.Parrot had the machinery three years before selling it and used an eight-year straight-line depreciation method, with zero salvage value.Southern will use the straight-line depreciation method, and assumes the machine has five years remaining and no salvage value.In the 2012 consolidating working papers, the depreciation expense A) required no adjustment. B) decreased by $4,800. C) increased by $4,800 D) increased by $8,000.
Q2) Pogo Corporation acquired a 75% interest in Sperry Corporation on January 1, 2009 at a cost equal to book value and fair value.In the same year Sperry sold land costing $25,000 to Pogo for $50,000.On July 1, 2012, Pogo sold the land to an unrelated party for $85,000.What was the gain on the sale of the land on the consolidated income statement for 2012?
A) $25,000
B) $35,000
C) $45,000
D) $60,000
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Page 8
Chapter 7: Intercompany Profit Transactions - Bonds
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Q1) Bonds issued by a company remain on their books as a liability, but are considered constructively retired when
A) the company borrows money from unaffiliated entities to re-purchase its own bonds at a gain.
B) The company borrows money from an affiliate to re-purchase its own bonds at a gain.
C) The company's parent or subsidiary purchases the bonds from outside entities.
D) The company borrows money from an affiliate to repurchase its own bonds at a gain or at a loss.
Q2) Using the original information, the elimination entries on the consolidation working papers prepared on December 31, 2012 included at least
A) debit to Bond Interest Expense for $360,000.
B) credit to Bond Interest Expense for $180,000 and a debit to Bond Interest Payable for $90,000.
C) credit to Bond Interest Receivable for $180,000.
D) debit to Bond Interest Revenue for $360,000.
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Chapter 8: Consolidations - Changes in Ownership
Interests
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Q1) At December 31, 2012 year-end, Lapwing Corporation's investment in Ground Inc.was $200,000 consisting of 80% of Ground's $250,000 stockholders' equity on that date.On April 1, 2013, Lapwing sold 20% interest (one-fourth of its holdings)in Ground for $65,000.During 2013, Ground had net income of $75,000(earned uniformly)and on July 1, 2013, Ground paid dividends of $40,000.Lapwing uses the equity method to account for the investment.
Required:
1.What is the gain or loss on sale of the 20% interest?
2.Record the journal entries for Lapwing for the year ending December 31, 2013.Use the actual-sale-date assumption.
Q2) What is Goldberg's percentage ownership in Savannah after Savannah issues its stock to Goldberg?
A) 76.32%
B) 80.43%
C) 82.57%
D) 83.43%
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10
Chapter 9: Indirect and Mutual Holdings
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Q1) Pallet Corporation owns 80% of Adelt Corporation and Adelt owns 60% of Bajo Inc.Which of the following is correct?
A) Bajo should not be consolidated because noncontrolling interests hold 52%.
B) Bajo should be consolidated because the 60% of Bajo stock is held in the affiliate structure.
C) Pallet has 8% indirect ownership of Bajo.
D) Pallet has 80% indirect ownership of Bajo.
Q2) Bailey's noncontrolling interest share for 2011 is
A) $7,609.
B) $8,044.
C) $15,652.
D) $23,696.
Q3) Controlling interest share of consolidated net income for the current year is
A) $504,800.
B) $516,800.
C) $545,200.
D) $557,200.
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Chapter 10: Subsidiary Preferred Stock, Consolidated
Earnings Per Share, and Consolidated Income Taxation
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Q1) How much should the Parminter's Investment in Sanchez-Common Stock, change during 2011?
A) $5,000
B) $20,000
C) $25,000
D) $30,000
Q2) Palomba Corporation allocates consolidated income taxes to its 90%-owned subsidiary using the percentage allocation method.Under this method, consolidated income tax expense will be allocated to a subsidiary
A) on the basis of the agreement between the parent and subsidiary.
B) on the basis of the subsidiary's pretax income as a percentage of consolidated pretax income.
C) on the basis of the income taxes remitted to the IRS.
D) 90% to the subsidiary.
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12
Chapter
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Q1) Under parent company theory, noncontrolling interest is classified on the consolidated balance sheet as ________.Under entity theory, noncontrolling interest is classified on the consolidated balance sheet as ________.
A) stockholders' equity; stockholders' equity
B) stockholders' equity; liability
C) liability; a liability
D) liability; stockholders' equity
Q2) Pascoe's income from Sarabet under the equity method for 2011 was A) $72,000.
B) $87,500.
C) $90,000.
D) $100,000.
Q3) Under the entity theory, a consolidated balance sheet prepared immediately after the business combination will show noncontrolling interest of A) $5,000.
B) $7,500.
C) $9,000.
D) $10,000.
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Chapter 12: Derivatives and Foreign Currency: Concepts and Common Transactions
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Q1) Which of the following is a true statement regarding the recording of a transaction which involves foreign currency?
A) A transaction is always settled in the currency in which it is denominated.
B) A transaction is always measured in the currency in which it is denominated.
C) A transaction is always settled in the currency in which it is measured.
D) A transaction is always recorded in the currency in which it is denominated.
Q2) Crabby Industries, a U.S.corporation, purchased inventory from a company in Sweden on November 18, 2011 when the Swedish krona was trading at 1 krona = $0.161.The transaction was for 600,000 krona, and was to be paid in krona in 90 days.Crabby closed their books at December 31 for financial reporting purposes when the krona was trading at $0.167.On February 16, 2012, Crabby paid the invoice when the krona was trading at $0.156.
Required:
Show the journal entries recorded by Crabby on November 18, 2011, December 31, 2011, and February 16, 2012.
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Page 14
Chapter 13: Accounting for Derivatives and Hedging
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Q1) What is the fair value of the forward contract at February 29?
A) $-0-
B) $1,654.97 asset
C) $1,654.97 liability
D) $1,680 asset
Q2) If a financial instrument is classified as a cash flow hedge, then
A) its gains or losses are reported in the income statement if a fiscal year-end occurs before the settlement date.
B) it is classified as a held-to-maturity asset.
C) it does not require a notional amount.
D) its gains or losses are reported in the balance sheet if a fiscal year-end occurs before the settlement date.
Q3) What is the fair value of the forward contract at December 31, 2011?
A) $400.00 liability
B) $400.00 asset
C) $396.04 liability
D) $396.04 asset
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Page 15
Chapter 14: Foreign Currency Financial Statements
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Q1) Which of the following foreign subsidiary accounts will have the same value on consolidated financial statements, regardless of whether the statements are remeasured or translated?
A) Trademark
B) Deferred Income
C) Accounts Receivable
D) Goodwill
Q2) A foreign entity is a subsidiary of a U.S.parent company and has always used the current rate method to translate its foreign financial statements on behalf of its parent company.Which one of the following statements is false?
A) The U.S. dollar is the functional currency of this company.
B) Changes in exchange rates between the subsidiary's country and the parent's country are not expected to affect the foreign entity's cash flows.
C) Translation adjustments are shown in stockholders' equity as increases or decreases in other comprehensive income.
D) Translation adjustments are not shown on the income statement.
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16
Chapter 15: Segment and Interim Financial Reporting
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Q1) Dott Corporation experienced a $100,000 extraordinary loss in the second quarter of 2011 in their East Coast operating segment.The loss should be recognized
A) only at the consolidated report level at the end of the year.
B) entirely in the second quarter of 2011 in the East Coast operating segment.
C) in equal amounts allocated to the remaining three quarters of 2011 at the corporate level.
D) in equal amounts allocated to the remaining three quarters of 2011 of the East Coast segment.
Q2) Similar operating segments may be combined if the segments have similar economic characteristics.Which one of the following is a similar economic characteristic under GAAP?
A) The segments' management teams
B) The tax reporting law sections
C) The distribution method for products or services
D) The expected rates of return and risk for the segments' productive assets
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17
Chapter 16: Partnerships - Formation, Operations, and Changes in Ownership Interests
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Q1) Required:
1.Prepare a schedule to allocate income to the partners assuming that partnership net income for 2011 is $330,000.
2.Prepare a journal entry to distribute the partnership's income to the partners (assume that an Income Summary account is used by the partnership).
Q2) What will the profit and loss sharing ratios be after Oran's investment?
A) 1:2:4:2
B) 2:3:5:2
C) 3:4:6:2
D) 4:6:10:5
Q3) Required:
1.Prepare a schedule to allocate income or loss to the partners assuming that the partnership incurs a net loss of $36,000 for 2011.
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).
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18
Chapter 17: Partnership Liquidation
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Q1) In partnership liquidations, what are safe payments?
A) The amounts of distributions that can be made to the partners, after all creditors have been paid in full.
B) The amounts of distributions that can be made to the partners with assurance that such amounts will not have to be returned to the partnership.
C) The amounts of distributions that can be made to the partners, after all non-cash assets have been adjusted to fair market value.
D) The amounts of distributions that can be made to the partners during the liquidation based on the partner's contributed capital return.
Q2) Which partner is considered the most vulnerable as a result of a computation of vulnerability rankings?
A) The partner who has the lowest loss absorption potential
B) The partner who has the highest loss absorption potential
C) The partner with the highest capital account balance
D) The partner with the lowest capital account balance
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19
Chapter 18: Corporate Liquidations and Reorganizations
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Q1) Which of the following statements is correct concerning companies emerging from reorganization under Chapter 11 when they do not qualify for fresh start accounting? The forgiveness of debt is reported as
A) an operating gain.
B) a non-operating gain.
C) an extraordinary item.
D) an increase in contributed capital.
Q2) Oceana Corporation is being liquidated under Chapter 7 of the Bankruptcy Act.The trustee has determined that the unsecured claims will receive $.35 on the dollar.Loans-R-Us holds a $1,000,000 mortgage note receivable from Oceana that is secured by building and equipment with a $1,200,000 book value and a $900,000 fair value.
Required: How much of the mortgage receivable will Loans-R-Us recover?
Q3) Creditor committees are elected
A) in all bankruptcy cases.
B) in Chapter 7 cases.
C) only in bankruptcy cases arising from involuntary petitions.
D) in Chapter 11 cases.
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Page 20
Chapter 19: An Introduction to Accounting for State and Local Governmental Units
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Q1) For each of the following transactions that could be introduced to fund the maintenance of the city park, state the type of fund(s)that would be affected.Assume that a capital project fund will be used to handle any long-term improvements or additions to the park.
1.Resources used to make 60 monthly installments on outstanding long-term debt.
2.Implemented a tax on alcohol purchases specifically designated for the park upkeep.
3.A local sports organization that uses the park raises funds and donates the money, stating that the principal may not be spent, but designating earnings to the park upkeep.
4.City council approves the funds from existing resources for the upkeep required in the upcoming year.
5.Resources used only to pay principal and interest of debt outstanding to finance park maintenance.
Q2) The accounting equation for an agency fund is
A) Current assets - Current liabilities = Fund Balance.
B) Assets - Liabilities = Equity.
C) Assets = Equity + Liabilities.
D) Assets = Liabilities.
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Page 21
Chapter 20: Accounting for State and Local Governmental Units
- Governmental Funds
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Q1) At any point in time, a government will be able to spend an amount equal to A) appropriations minus expenditures.
B) appropriations minus expenditures minus encumbrances.
C) appropriations minus encumbrances.
D) expenditures minus encumbrances.
Q2) A Capital Projects Fund awards the construction of a building to a construction contractor at a contract cost of $1,000,000.What entry is prepared by the Capital Projects Fund?
A) Debit Expenditures $1,000,000, Credit Liability $1,000,000
B) Debit Building $1,000,000, Credit Expenditures $1,000,000
C) Debit Other Financing Uses $1,000,000, Credit Expenditures $1,000,000
D) Debit Encumbrances $1,000,000, Credit Reserve for Encumbrances $1,000,000
Q3) When a capital lease is used to lease fixed assets for the general government, the governmental fund acquiring the fixed assets debits ________ at the ________.
A) expenditures; future value of the minimum lease payments
B) fixed assets; future value of the minimum lease payments
C) expenditures, present value of the minimum lease payments
D) fixed assets; present value of the minimum lease payments
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Chapter 21: Accounting for State and Local Governmental Units
- Proprietary and Fiduciary Funds
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Q1) Willborough County had the following transactions in 2012.
1.A central motor pool was established with a $200,000 nonreciprocal transfer from the General Fund.
2.The water and sewer authority, which provides services to residents for a fee, issued a bond offering at $750,000 par.Bonds proceeds are restricted to renovating the treatment facility.
3.Willborough received a grant from the state to be used for renovation of the courthouse amounting to $800,000.The General Fund will temporarily provide $100,000 cash, because the grant is set up on a reimbursement basis and will not be distributed until proper expenditures are documented.
4.Willborough's central motor pool bills out automobile usage to various government agencies amounting to $42,000.
5.The General Fund transfers $67,000 out of the operating budget to fund the county employees' pension plan.
Required:
Prepare the necessary journal entries for each of the above transactions for all funds affected.Be sure to identify the fund type for each entry.
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Page 23
Chapter 22: Accounting for Not-For-Profit Organizations
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Q1) 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.
Q2) For nonprofit, nongovernmental organizations, unconditional promises to give that include promises of payments due in future periods (next year or later)are reported as A) unrestricted revenues.
B) unrestricted support.
C) deferred revenues until payment is received.
D) restricted revenues.
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Chapter 23: Estates and Trusts
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Q1) Avery died testate early in 2011.The following transactions occurred relating to Avery's estate.
1.Avery's estate included bonds with a fair (market)value of $120,000.On the date of Avery's death, there was $2,000 of accrued but unpaid interest.Two months after Avery's death, a check arrived in the amount of $3,000, representing the normal semiannual interest payment.
2.Avery's will stated a specific transfer to the Bird Sanctuary in the amount of $10,000.Avery's estate should be adequate to cover all obligations and devises, and the amount is paid.
3.Funeral expenses amounted to $12,500.
4.A bank statement is received from the First National Bank indicating a cash balance of $8,600.This bank account was not known or included on the estate inventory.
5.Probate fees are paid to the court amounting to $900.
Required:
Prepare the journal entries for the listed transactions.Disregard the impact of estate and income taxes.
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