Course Introduction
Financial Reporting Review
Questions
Financial Reporting is a fundamental course that explores the principles, standards, and practices involved in preparing and presenting financial statements for external users. Students will learn about the conceptual framework underlying financial reporting, the regulatory environment, and the requirements of accounting standards such as International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP). The course covers topics including the preparation and analysis of balance sheets, income statements, statements of cash flows, and statements of changes in equity. Emphasis is placed on understanding how financial information communicates an organizations financial health, supports decision-making, and meets regulatory and stakeholder expectations.
Recommended Textbook
Advanced Accounting 12th Edition by Paul M. Fischer
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Page 2
Chapter 1: Business Combinations: New Rules for a
Long-Standing Business Practice
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Q1) Jones company acquired Jackson Company for $2,000,000 cash.At that time, the fair value of recorded assets and liabilities was $1,500,000 and $250,000, respectively.Jackson also had in-process research and development projects valued at $150,000 and its pension plan's projected benefit obligation exceeded the plan assets by $50,000.What was the amount of the goodwill related to the acquisition?
A)$750,000
B)$50,000
C)$250,000
D)$650,000
Answer: D
Q2) Which of the following costs of a business combination can be deducted from the value assigned to paid-in capital in excess of par?
A)Direct and indirect acquisition costs.
B)Direct acquisition costs.
C)Direct acquisition costs and stock issue costs if stock is issued as consideration.
D)Stock issue costs if stock is issued as consideration.
Answer: D
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Chapter 2: Consolidated Statements: Date of Acquisition
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Q1) On April 1, 2016, Paape Company paid $950,000 for all the issued and outstanding stock of Simon Corporation.The recorded assets and liabilities of the Simon Corporation on April 1, 2016, follow: \[\begin{array} { l r }
\text { Cash } & \$ 80,000 \\
\text { Inventory } & 240,000 \\
\text { Property and equipment (net of accumulated depreciation of } \$ 320,000 ) & 480,000 \\
\text { Liabilities } & ( 180,000 ) \end{array}\] On April 1, 2016, it was determined that the inventory of Simon had a fair value of $190,000, and the property and equipment (net) had a fair value of $560,000.The entry to distribute the excess of fair value over book value will include:
A)A debit to inventory of $50,000
B)A credit to the investment in Simon Corporation of $620,000
C)A debit to goodwill of $330,000
D)A credit to the investment in Simon Corporation of $330,000
Answer: C
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Chapter 3: Consolidated Statements: Subsequent to Acquisition
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Q1) On January 1, 2016, Rabb Corp.purchased 80% of Sunny Corp.'s $10 par common stock for $975,000.On this date, the carrying amount of Sunny's net assets was $1,000,000.The fair values of Sunny's identifiable assets and liabilities were the same as their carrying amounts except for plant assets (net), which were $100,000 in excess of the carrying amount.
In the January 1, 2016, consolidated balance sheet, goodwill should be reported at ____.
A)$0
B)$75,750
C)$95,000
D)$118,750
Answer: D
Q2) Under IASB for small and medium entities, goodwill:
A)is subject to impairment procedures.
B)is never adjusted.
C)is amortized over ten years.
D)is not recorded in an acquisition.
Answer: C
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5
Chapter 4: Intercompany Transactions: Merchandise, Plant
Assets, and Notes
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Q1) Which of the following should appear in consolidated financial statements?
A)All intercompany transactions properly recorded on each affiliate's books.
B)Transactions between the consolidated company and outside parties.
C)Transactions not accounted for by the simple equity method.
D)Lease transactions between a parent and subsidiary.
Q2) Phelps Co.uses the sophisticated equity method to account for the 80% investment in its subsidiary Shore Corp.At the time of the acquisition, the fair values of the net asset required approximated their book values.Based upon the following information, what amount does Phelps Co.record as subsidiary income \(\begin{array}{lr}
\text { Phelps internally generated income: } & \$ 250,000 \\
\text { Shore internally generated income: } & \$ 50,000 \\
\text { Intercompany profit on Shore beginning inventory: } & \$ 10,000 \\
\text { Intercompany profit on Shore ending inventory: } & \$ 15,000 \end{array}\)
A)$50,000
B)$44,000
C)$40,000
D)$36,000
Page 6
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Chapter 5: Intercompany Transactions: Bonds and Leases
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Q1) Company S is a 100%-owned subsidiary of Company P.On January 1, 2019, Company S has $200,000 of 8% face rate bonds outstanding, which were issued at face value.The bonds had 5 years to maturity on January 1, 2019.Premiums or discounts would be amortized on a straight-line basis.On that date, Company P purchased the bonds for $198,000.The amount on the consolidated balance sheet relative to the debt is:
A)bonds payable $200,000.
B)bonds payable $200,000, discount $2,000.
C)bonds payable $200,000, discount $1,600.
D)The bonds do not appear on the consolidated balance sheet.
Q2) The effect of an operating lease on the income distribution schedule:
A)is non-existent.
B)affects only the lessee's income.
C)affects only the lessor's income.
D)affects the amount of income or distribution of income between the non-controlling and controlling interests.
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Page 7
Chapter 6: Cash Flow, Eps, and Taxation
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Q1) Company P purchased an 80% interest in Company S on January 1, 2016, for $800,000.On the purchase date, Company S stockholders' equity was $800,000.Any excess of fair value over book value was attributed to a patent with a 10-year remaining life.In 2016, Company P reported internally generated net income before taxes of $150,000.Company S reported a net income before taxes of $70,000.The firms file a consolidated tax return at a 30% tax rate.The nondeductible portion of excess amortization is
A)$20,000
B)$15,000
C)$4,000
D)$0 (The amortization is fully deductible)
Q2) In a noncash purchase of a controlling interest in a firm, disclosure is required on the consolidated statement of cash flows as a(n)
A)financing activity only.
B)financing activity and in the schedule of noncash financing and investing activity.
C)investing activity only.
D)investing activity and in the schedule of noncash financing and investing activity.
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Page 8
Chapter 7: Special Issues in Accounting for an Investment
in a Subsidiary
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Q1) Pine Company purchased a 60% interest in the Scent Company on January 1, 2016 for $360,000.On that date, the stockholders' equity of Scent Company was $450,000.Any excess cost on 1/1/16 was attributable to goodwill.Pine purchased another 20% interest on January 1, 2019 for $200,000.On January 1, 2019, Scent Company's stockholders' equity was $700,000, the entire increase due to retained earnings.The excess of cost over book on the new block of stock is ____.
A)$60,000
B)$50,000
C)$48,000
D)$20,000
Q2) When selling an investment in a subsidiary, in order to record the appropriate gain or loss:
A)the investment must be adjusted to show the balance under the sophisticated equity method.
B)the investment must be adjusted to show the balance under the equity method.
C)a final consolidation must be prepared.
D)the unamortized balances of the excess of the purchase price over the book value of the investment must be written off.
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Chapter 8: Subsidiary Equity Transactions, Indirect
Subsidiary Ownership, and Subsidiary Ownership of Parent Shares
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Q1) Apple Inc.owns a 90% interest in Banana Company.Banana Company, in turn, owns a 80% interest in Carrot Company.During 2019, Carrot Company sold $50,000 of merchandise to Apple Inc.at a gross profit of 20%.Of this merchandise, $10,000 was still unsold by Apple Inc.at year end.The adjustment to the controlling interest in consolidated net income for 2019 is ____.
A)$560
B)$1,440
C)$1,600
D)$1,800
Q2) Company P had 300,000 shares of common stock outstanding.It owned 80% of the outstanding common stock of S.S owned 20,000 shares of P common stock.In the consolidated balance sheet, Company P's outstanding common stock may be shown as A)285,000 shares.
B)300,000 shares.
C)300,000 shares, less 20,000 shares of treasury stock.
D)300,000 shares, footnoted to indicate that S holds 20,000 shares.
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Chapter 9: The International Accounting Environment
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Q1) Forward Contracts:
Calculate the gain or loss to the holder and to the writer of the forward contract who agrees to buy foreign currencies at a specific price.Assume that on May 1, the writer of the forward contract agrees to sell 3,000,000 foreign currencies at a specific price of $0.22 per foreign currency (FC) with delivery in 30 days (May 31).Assume the spot rate at the end of the forward period is $0.20.
What is the entry to the holder on May 1.
Explain how the value of the forward contract changes over time.
Q2) A U.S.company purchases medical lab equipment from a Japanese company.The Japanese company requires payment in Japanese yen.In this transaction, the yen would be referred to as the ___________ currency.
A)measurement
B)denominated
C)purchasing
D)selling
Q3) Explain the factors which have led to the differences in accounting standards among nations.
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Chapter 10: Foreign Currency Transactions
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Q1) Larson, Inc.sold merchandise for 600,000 FC to a foreign vendor on November 30, 2020.Payment in foreign currency is due January 31, 2021.On the same day, Larson signed an agreement with a foreign exchange broker to sell 600,000 FC on January 31, 2021.The discount rate is 8% and exchange rates to purchase 1 FC are as follows: ?
\[\begin{array} { l r r r } & \text { Nov. } 30,2020 & \text { Dec. } 31,2020 & \text { Jan. } 31,2021 \\
\text { Spot } & \$ 1.49 & \$ 1.46 & \$ 1.43 \\
30 \text { day } & \$ 1.48 & \$ 1.43 & \$ 1.44 \\
60 \text { day } & \$ 1.47 & \$ 1.40 & \$ 1.42
\end{array}\] What is the net amount of the gains or losses recognized in the financial statements for the year ended December 31, 2020?
A)$5,840 gain
B)$6,000 loss
C)$18,000 loss
D)$12,000 gain
Q2) Discuss the differences in using an option to hedge a foreign currency risk rather than a forward contract.
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Chapter 11: Translation of Foreign Financial Statements
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Q1) If the functional currency is determined to not be the foreign entity's local currency, translation is done using
A)the current rate method
B)the functional method
C)the re-measurere-measurement method
D)the derivative method
Q2) In most cases, which of the following is not a component of translated retained earnings?
A)Translated retained earnings at the end of the prior period
B)Income from the period translated at the historical rate
C)The value of dividends translated at the exchange rate on the date of declaration
D)All are components of translated retained earnings
Q3) Assuming that a foreign entity is deemed to be operating in an environment dominated by the local currency, the entity's assets are translated using
A)the current rate.
B)a simple average rate.
C)a weighted average rate.
D)a historical rate.
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13
Chapter 12: Interim Reporting and Disclosures About
Segments of an Enterprise
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Q1) Abel Corporation sold equipment in the first quarter of 2016 at a $150,000 loss.How much of the loss should appear in the 2016 second- and third-quarter income?
A)$37,500 and $37,500
B)$50,000 and $50,000
C)$0 and $0
D)$100,000 and $0
Q2) Which of the following is not required to be disclosed for a reportable segment?
A)The measure of profit or loss that is reviewed by the chief operating decision maker.
B)Segment assets.
C)Segment liabilities.
D)Types of products and services from which the segment derives revenue.
Q3) Non-ordinary items resulting in income or loss
A)include unusual but not infrequent gains.
B)are treated the same as ordinary items when calculating the effective tax rate.
C)are always treated as a total group when calculating the effective rate for the quarter.
D)are always excluded from interim reporting.
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Chapter 13: Partnerships: Characteristics, Formation, and
Accounting for Activities
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Q1) As is the case with all entities, the investment of capital in a partnership should initially be measured at what value:
A)Book
B)Fair market
C)Labor
D)Asset
Q2) Characteristics of a partnership that emphasize that the entity is viewed as the individual owners include the following:
A)Salaries to partners are viewed as distribution of income rather than a component of income.
B)Limited liability of general partners extends beyond the entity to the individual partners.
C)Income of the partnership is not taxed at the partnership level but, rather, is included as part of the partners' individual taxable income.
D)A & C
E)All of above
Q3) Record the entry for the partnership of E & R assuming a net loss of $15,000.The agreement calls for profit and loss to be distributed equally.
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Chapter 14: Partnerships: Ownership Changes and Liquidations
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Q1) In liquidation of a partnership profit and loss become part of:
A)Partners Drawing
B)Cash
C)Partners' capital
D)Partners personal wealth not related to partnership
Q2) If objective evidence supports the write-down of existing assets, the previous partners' capital balances would be reduced accordingly in proportion to
A)Capital investment
B)Profit and loss ratio
C)Amount of Drawing
D)Amount of Expense
Q3) Although the admission of new partner does not result in the dissolution and winding up of the previous partnership, the goodwill method views the admission of a new partner as an opportunity to: revalue net assets as though a new entity had been create
A)Increase the Goodwill account
B)Increase the cash account
C)Decrease Expense of the new partnership
D)revalue net assets
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Chapter 15: Government and Not for Profit Accounting
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Q1) Fiduciary funds account for resources for which the government unit:
A)Reports under specific guidelines
B)Reports as strictly useful cash
C)Acts as a trustee
D)Acts as a holding account
Q2) Record the following journal entries: ?
Vouchers were approved for nonencumbered items on December 31.
Salaries $50,000
Other expenses $100,000
Vouchers totaling $500,000 were paid
Transfer of $20,000 is made to the debt service fund ?
Q3) GASB standards for recording pension expenses require a calculation of the difference between the pension plan's total liabilities and the pensions:
A)Permanent Life
B)Accrued liabilities
C)Plans Assets
D)Plans estimated useful Life
Q4) Identify the three fund types used in government accounting and their relevance:
Page 17
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Chapter 16: Governmental Accounting: Other
Governmental Funds, Proprietary Funds, and Fiduciary Funds
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Q1) Utilizing serial bonds to raise long term resources is preferred in debt service funds because:
A)the face value becomes due at one time at a more distant maturity date.
B)serial bonds do not require a substantial accumulation of money in a sinking fund.
C)it assists in the budgeting process.
D)the primary function is to account for fixed asset acquisitions.
Q2) Which of the following is not a typical year-end statement for an Enterprise Fund?
A)Balance Sheet
B)Statement of Revenue, Expenses and Changes in Net Assets
C)Statement of Cash Flows
D)All of these financial statements would be used at year end by an Enterprise Fund.
Q3) When the General Fund sends fund to another fund, for which it does not expect repayment, it is considered an Expenditure.
A)True
B)False
Q4) What reporting is required for the accounting for employee Pension Trust Funds.
Q5) What is escheat property and how do we account for it?
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Chapter 17: Financial Reporting Issues
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Q1) Converting the governmental fund balance sheet to a government-wide statement of net assets requires which of the following activities? ? ?
1) Add general fixed assets, net of accumulated depreciation
2) Add general long-term debt, using the effective interest method
3) Eliminate the assets and liabilities of most internal service funds (those whose primary customer is the general government)
4) Eliminate the fund balance and classify the net assets into invested in capital assets, restricted net assets, and unrestricted net assets
A)1, 2, 3, 4
B)1, 3
C)1, 2, 4
D)3, 4
Q2) Required supplementary information includes pension-related information, but not a budgetary comparison or schedule.
A)True
B)False
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Chapter 18: Accounting for Private Not-For-Profit Organizations
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Q1) Investment revenue includes realized and unrealized gains and losses on investments, but not interest or dividends.
A)True
B)False
Q2) Which of the following is not a required characteristic of a private not-for-profit organization per the definition given by the AICPA?
A)no owners or shareholders
B)an operating purpose other than making a profit
C)an organization dedicated to service of the public good
D)Significant contributions from providers who do not expect reciprocal goods or services in return
Q3) Public support for a voluntary health and welfare organization includes:
A)news articles about the organization.
B)banners and promotional materials.
C)legacies and bequests.
D)celebrity endorsements.
Q4) A not-for-profit organization does not issue an income statement.
A)True
B)False
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Chapter 19: Accounting for Not-For-Profit Colleges and Universities and Health Care Organizations
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Q1) Unrestricted contributions are recognized at fair value with a credit to financial securities.
A)True
B)False
Q2) What is the basis of accounting used in accounting for not-for-profit universities?
A)fund accounting
B)accrual basis
C)modified accrual basis
D)cash basis
Q3) Which of the following is a category of health care entity?
A)Proprietary entity.
B)Voluntary not-for-profit entity.
C)Public entity.
D)All of the above.
Q4) Are not-for-profit universities required to use fund accounting?
Q5) The account, Cash--Limited in Use Under Malpractice Funding Arrangement, would be found in the Endowment Funds.
A)True
B)False
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Chapter 20: Estates and Trusts: Their Nature and the
Accountants Role
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Q1) Which of the following items is not included in the estate principal subsequent to the date of death?
A)Assets discovered after the date of death
B)Gains on the sale of principal assets
C)Losses on the sale of principal
D)All affect the estate principal.
Q2) Property that is titled as "joint tenants" allows for:
A)the property to pass outside of the probate process to a surviving joint owner.
B)tenants to remain in a leased property if the lessor dies.
C)the decedent's interest in the property to avoid inclusion in his or her estate for estate tax purposes.
D)a distribution to the joint survivor that is recognized as taxable income.
Q3) The party ultimately receiving the principal of an estate may be referred to as the A)income beneficiary.
B)remainderman.
C)devisee.
D)b and c
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Page 22
Chapter 21: Debt Restructuring, Corporate Reorganizations, and Liquidations
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Q1) Below is a list of unsecured items that may arise during a Chapter 7 liquidation.
a.Wages up to $4,000 earned within 90 days before the filing.
b.Tax claims of a government unit.
c.Debts incurred after commencement of involuntary bankruptcy but before the order for relief.
d.Claims of general creditors not granted priority.
e.Deposits up to $1,800 each for goods or services never received from the debtor.f.Expenses to administer the estate.g.Unpaid contributions to employee benefit plans arising from service performed up to 180 days before filing, up to $4,000 per employee covered.
Q2) Describe the duties of the trustee in a Chapter 7 liquidation.
Q3) Describe the options that are available to a corporation that is unable to service its debts on a timely basis but that does NOT require court action.
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Chapter 22: Derivatives and Related Accounting Issues
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Q1) Interest rate swaps
A)are a type of Futures Contract.
B)are traded on the over-the-counter market.
C)required an initial cash flow in the form of a margin.
D)are customized to meet the needs of the specific parties.
Q2) On August 9, Jacobs Company buys 25 contracts on Nymex to receive December delivery of Brent Crude Oil.Each contract is in units of 1,000 bbls at a futures price of $24.85 per bbl.The initial margin on the contract is set at $25,000, with a maintenance margin of $19,000.The futures prices are as follows: ? ?
\[\begin{array} { r r r }
\text { Aug. } 9 & \text { Aug. } 10 & \text { Aug. } 11 \\
\$ 24.85 & \$ 24.63 & \$ 24.56 \end{array}\] Required:
?
a.Journalize the entries for Jacobs Company for the first three days of the contract.? ?
b.Why are forward prices discounted and future prices are not discounted?
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Page 24
Chapter 23: Equity Method for Unconsolidated Investments
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Q1) Per the FASB< to be considered an influential investment the investor must own at least 50% of the total ownership position.
A)True
B)False
Q2) Company P uses the sophisticated equity method of accounting for its 30% investment in Company S's common stock.During 20X9, Company S reported net earnings of $650,000 and paid dividends of $150,000.Assume that all the undistributed earnings of Company S will be distributed as dividends in future periods.The dividends received from Company S are eligible for the 80% dividends received deduction.Company P's 20X9, tax rate is 30%.In its December 31, 20X9, balance sheet, the increase in the deferred tax liability from these transactions would be ____.
A)$7,500
B)$9,000
C)$150,000
D)$30,000
Q3) The percentage of ownership in an investment is not a required disclosure for equity method investors.
A)True
B)False
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Chapter 24: Variable Interest Entities
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Q1) The consolidation process for VIE's includes the elimination of all inter-entity transactions as would be the case for control based on stock ownership
A)True
B)False
Q2) The primary bene ciary will likely record its share of VIE interest revenue on its books.
A)True
B)False
Q3) In a VIE, the majority of losses or income ow to the primary bene ciaries, not the residual interest shareholders shareholder.The distribution of income is not based on common stock ownership.Instead, it is based on contractual agreements that could include interest on loans, management fees or a de ned percentage of revenue or income.
A)True
B)False
Q4) The primary beneficiary does not consolidate its interest in a VIE into their consolidated financial statements.
A)True
B)False
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