Forensic Accounting
Chapter Exam Questions
Course Introduction
Forensic Accounting is a specialized field that combines accounting, auditing, and investigative skills to analyze financial information for use in legal proceedings. This course introduces students to the principles and practices of forensic accounting, including fraud detection, financial statement analysis, litigation support, and the examination of financial evidence. Students will explore methods for identifying, preventing, and responding to financial crimes such as embezzlement, money laundering, and corruption. Emphasis is placed on real-world case studies, legal frameworks, ethical considerations, and the role of forensic accountants as expert witnesses in court.
Recommended Textbook
Advanced Accounting 11th Edition by Joe
Ben Hoyle
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Q1) Pursley, Inc. acquires 10% of Ritz Corporation on January 3, 2010, for $80,000 when the book value of Ritz was $800,000. During 2010 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 1, 2011, Pursley purchased an additional 20% of Ritz for $325,000, giving Pursley the ability to significantly influence the operating policies of Ritz. Any excess of cost over book value is attributable to goodwill with an indefinite life. What journal entry(ies) is(are) required on January 1, 2011?
Answer: 11ea8f9b_5aff_d5be_b161_ad2ef17fc120_TB4176_00
Q2) Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying $500,000. Of this amount, $50,000 is associated with goodwill.
Required:
Prepare the journal entry to record Aqua's investment.
Answer: 11ea8f9b_5aff_1263_b161_851747c64e80_TB4176_00
Q3) When should an investor not use the equity method for an investment of 21% in another corporation?
Answer: When the investor does not have significant influence with regard to the investee.
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Page 3
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) Peterman Co. owns 55% of Samson Co. Under what circumstances would Peterman not be required to prepare consolidated financial statements?
Answer: Peterman would not be required to prepare consolidated financial statements if control of Samson is temporary or if, despite majority ownership, Peterman does not have control over Samson. A lack of control might exist if Samson is in a country that imposes restrictions on Peterman's actions.
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) Kaye Company acquired 100% of Fiore Company on January 1, 2011. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2011 and paid dividends of $100. Assume the equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?
A) $400 increase.
B) $300 increase.
C) $380 increase.
D) $280 increase.
E) $480 increase.
Answer: C
Q2) 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
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in an acquisition business combination that resulted in the recognition of goodwill. Nomes owned a piece of land that cost $250,000 but was worth $600,000 at the date of acquisition. What value would be attributed to this land in a consolidated balance sheet at the date of acquisition?
A) $250,000.
B) $150,000.
C) $600,000.
D) $360,000.
E) $460,000.
Q2) When a parent uses the initial value method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is true before making adjustments on the consolidated worksheet?
A) Parent company net income equals consolidated net income.
B) Parent company retained earnings equals consolidated retained earnings.
C) Parent company total assets equals consolidated total assets.
D) Parent company dividends equal consolidated dividends.
E) Goodwill needs to be recognized on the parent's books.
Q3) What is preacquisition income?
Page 6
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Chapter 5: Consolidated Financial StatementsIntercompany Asset Transactions
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Q1) During 2011, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned the entire inventory purchased at the end of 2011. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2011?
Q2) On January 1, 2011, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method. Musial earned $308,000 in net income in 2011 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment.
Assuming that Musial owned only 90% of Matin, what is consolidated net income for 2011?
Q3) Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2011, 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 2011 was $119,000.
Required:
What was the non-controlling interest's share of Stroban Co.'s net income?
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Page 7
Chapter 6: Intercompany Debt, Consolidated Statement of Cash Flows,
and Other
Issues
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Q1) How do intra-entity sales of inventory affect the preparation of a consolidated statement of cash flows?
A) They must be added in calculating cash flows from investing activities.
B) They must be deducted in calculating cash flows from investing activities.
C) They must be added in calculating cash flows from operating activities.
D) Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows, no special elimination is required.
E) They must be deducted in calculating cash flows from operating activities.
Q2) If a subsidiary issues a stock dividend, which of the following statements is true?
A) Investment in subsidiary on the parent's books will increase.
B) Investment in subsidiary on the parent's books will decrease.
C) Additional paid-in capital on the parent's books will increase.
D) Additional paid-in capital on the parent's books will decrease.
E) No adjustment is necessary.
Q3) Parent Corporation recently acquired some of its subsidiary's outstanding bonds, at an amount which required the recognition of a loss. In what ways could the loss be allocated? Which allocation would you recommend? Why?
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Page 8
Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Q1) Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. When Buckette prepared consolidated financial statements, it should include
A) Shuvelle but not Tayle.
B) Tayle but not Shuvelle.
C) either Shuvelle or Tayle.
D) Shuvelle and Tayle.
E) neither Shuvelle nor Tayle.
Q2) Kurton Inc. owned 90% of Luvyn Corp.'s voting common stock. The consideration paid exceeded book value by $110,000. Of this amount, one half is attributable to a patent and is to be amortized over 5 years. Luvyn held 20% of Kurton's voting common stock which cost $28,000 more than fair value.
During the current year, Kurton reported operating income of $224,000 and dividend income from Luvyn of $37,800. At the same time, Luvyn reported operating income of $70,000 and dividend income from Kurton of $19,600.
Required:
Prepare a schedule to show Kurton's share of controlling interest in Luvyn's net income.
Q3) Under what conditions must a deferred income tax asset be recorded?
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Chapter 8: Segment and Interim Reporting
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Q1) Which of the following statements is true regarding the reporting of revenues in an interim report?
A) Revenues should be recognized on the income tax basis for interim reporting.
B) Revenues should be recognized in interim periods in the same way as they are on an annual basis.
C) Projected losses on long-term contracts should be deferred to the annual report.
D) The percentage-of-completion method of reporting long-term construction projects is not an acceptable method for interim reporting.
E) Revenues should be recognized on the cash basis of accounting for interim reporting.
Q2) How should revenues be recognized in interim periods?
A) In the same way as they are recognized on an annual basis.
B) On the cash basis.
C) On an annualized basis.
D) On a seasonal basis.
E) There are no revenues recognized in interim periods.
Q3) Which items of information are required to be included in interim reports for each operating segment?
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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) Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2010, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2011, when the U.S. equivalent was $6,900. How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31, 2011? A) $1,100 loss.
B) $1,100 gain.
C) $6,900 loss.
D) $6,900 gain.
E) $8,000 gain.
Q3) What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?
Q4) How is the fair value of a Forward Contract determined by U.S. GAAP?
Q5) Where can you find exchange rates between the U.S. dollar and most foreign currencies?
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) Under the temporal method, inventory at market would be remeasured at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q2) Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be the functional currency for this subsidiary?
Q3) Which method of remeasuring a foreign subsidiary's financial statements is correct?
A) Historical rate method.
B) Working capital method.
C) Current rate method.
D) Translation.
E) Temporal method.
Q4) In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses?
Q5) Under what circumstances would the remeasurement of a foreign subsidiary's financial statements be required?
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) Which of the following is not a factor influencing a country's financial reporting practices?
A) Providers of financing.
B) Inflation.
C) Legal system.
D) Gross National Product.
E) Political and economic ties.
Q2) A company sells a building to a bank in 2011 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale. As a result of the sale and leaseback transaction in 2011, what is the difference between income using U.S. GAAP and IFRS in 2011?
A) U.S. GAAP income is $80,000 higher.
B) U.S. GAAP income is $100,000 higher.
C) IFRS income is $50,000 lower.
D) IFRS income is $100,000 lower.
E) IFRS income is $80,000 higher.
Q3) What problems are caused by diverse accounting practices?
Q4) What is meant by harmonization of accounting standards?
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) Which one of the following forms is used when companies have filed with the SEC for less than 36 months but are not large enough to file form S-3?
A) S-1.
B) S-4.
C) S-11.
D) S-8.
E) S-3.
Q2) Briefly describe Regulation S-K. What is its purpose?
Q3) What is a private placement of securities?
Q4) Which one of the following Federal laws was enacted in 1935?
A) Securities Act.
B) Securities Exchange Act.
C) Trust Indenture Act.
D) Investment Company Act.
E) Public Utility Holding Company Act.
Q5) Who has the responsibility for the evaluation of the quality of an investment?
Q6) What Federal agency has Congressional responsibility to create auditing and accounting standards?
Q7) What is blue sky legislation?
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) Sparkman Co. filed a bankruptcy petition and liquidated its noncash assets. Sparkman was paying forty cents on the dollar for unsecured claims. Bailey Co. held a mortgage of $150,000 on land that was sold for $110,000. The total amount of payment that Bailey should have received is calculated to be
A) $110,000.
B) $44,000.
C) $126,000.
D) $150,000.
E) $60,000.
Sale of land $110,000 + 40% of remaining $40,000 owed = $126,000
Q2) How is the presentation of an income statement during a reorganization different from a normal income statement?
Q3) To what does the term Chapter 7 bankruptcy refer?
Q4) Who must accept and confirm the Reorganization plan?
Q5) What is an order for relief?
Q6) What is meant by a "partially secured liability"?
Q7) To what does the term Chapter 11 bankruptcy refer?
Q8) What occurs in the accounting records for fresh start accounting when a bank agrees to accept less than the debtor's book value of a note payable? Page 15
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Page 16
Chapter 14: Partnerships: Formation and Operation
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Q1) Cleary, Wasser, and Nolan formed a partnership on January 1, 2010, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2010 and $180,000 in 2011. Each partner withdrew $1,000 for personal use every month during 2010 and 2011. What was Nolan's total share of net income for 2011?
A) $34,420.
B) $75,540.
C) $65,540.
D) $70,040.
E) $61,420.
Q2) Which of the following is not a characteristic of a partnership?
A) The partnership itself pays no income taxes.
B) It is easy to form a partnership.
C) Any partner can be held personally liable for all debts of the business.
D) A partnership requires written Articles of Partnership.
E) Each partner has the power to obligate the partnership for liabilities.
Q3) By what methods can a person gain admittance to a partnership?
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Page 17
Chapter 15: Partnerships: Termination and Liquidation
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Q1) ___A schedule should be produced periodically by the accountant to disclose losses and gains that have been incurred, remaining assets and liabilities, and current capital balances.
_____One or more partners may have a negative capital balance often as a result of losses incurred in disposing of assets.
____A provision for an equitable distribution of assets during liquidation.
______At the start of a liquidation, this document provides guidance for all payments made to the partners throughout the liquidation
A)The schedule of liquidation
B)Safe capital balances
C)Deficit capital balances
D)Predistribution plan
Q2) What is the purpose of a predistribution plan?
Q3) The partnership of Rayne, Marin, and Fulton was being liquidated by the partners. Rayne was insolvent and did not have enough assets to pay all his personal creditors.
Under what conditions might Rayne's personal creditors have claimed some of the partnership assets?
Q4) What should occur when a solvent partner has a deficit balance?
Q5) What is the role of the accountant during the liquidation process?
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Chapter 16: Accounting for State and Local Governments
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Q1) What assets would be included in the accounting records of a city's general fund?
Q2) What account is debited in the general fund when equipment is received by a governmental entity?
A) Expenditures.
B) Encumbrances.
C) Plant assets.
D) Accounts Payable.
E) Fund Balance-Reserve for Encumbrances.
Q3) On July 12, 2011, Fred City ordered a new computer at an anticipated cost of $114,400. The computer was received on July 16 with an actual cost of $116,220. Payment was subsequently made on August 15, 2011.
Required:
(A.) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the Fund Financial Statements.
(B.) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the Government-Wide Financial Statements.
Q4) What are the five types of governmental funds?
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19
Chapter 17: Accounting for State and Local Governments
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Q1) What three criteria must be met before a governmental unit can elect to not capitalize and therefore report a work of art or historical treasure as an asset?
Q2) What are the three broad sections of a state or local government's CAFR?
A) Introductory, financial, and statistical.
B) Financial statements, notes to the financial statements, and component units.
C) Introductory, statistical, and component units.
D) Component units, financial, and statistical.
E) Financial statements, notes to the financial statements, and statistical.
Q3) The employees of the City of Raymond earn vacation compensation that totals $1,500 per week. During 2011, $30,000 in vacation time was taken and the remainder is expected to be used during the latter part of next year. In the government-wide financial statements, assuming there was no beginning balance, what liability should be reported at the end of 2011?
A) $0.
B) $1,500.
C) $30,000.
D) $48,000.
E) $78,000.
Q4) What is meant by the term fiscally independent?
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Chapter 18: Accounting for Not-For-Profit Organizations
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Q1) When are unconditional promises to give recognized as revenues?
A) In the period the promise is received.
B) In the period the promise is collected.
C) In the period in which the conditions on which they depend are substantially met.
D) In the period in which the conditions on which they depend have begun to be met.
E) Unconditional promises from potential donors are not revenues.
Q2) How does a voluntary health and welfare organization account for donated goods and cash contributed for operating purposes? What types of revenues are recognized by voluntary health and welfare organizations?
Q3) What term is used by voluntary health and welfare organizations for contributions?
Q4) What is the main source of financial support for most voluntary health and welfare organizations?
Q5) For the month of December 2011, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. Prepare the necessary journal entry to record the revenue and receivables.
Q6) What are the objectives of accounting for a not-for-profit organization?
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Page 21
Chapter 19: Accounting for Estates and Trusts
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Q1) The provisions of a will currently undergoing probate are: "Two thousand shares of Dorn stock to my son; $30,000 in cash from my savings account to my brother; $50,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." Assume that, at the time of death, the estate included 1,200 shares of Dorn stock, $60,000 cash in the savings account, and $70,000 in cash from other sources. What would the son have received from the settlement of the estate?
A) 1,200 shares of Dorn stock and $35,000 cash.
B) 2,000 shares of Dorn stock and $10,000 cash.
C) 2,000 shares of Dorn stock and $25,000 cash.
D) 1,200 shares of Dorn stock and $10,000 cash.
E) 1,200 shares of Dorn stock and $25,000 cash.
Q2) How may real property be treated in identifying estate property subject to probate?
Q3) What is the purpose of the Uniform Probate Code?
Q4) What choices does an executor of an estate have in determining the values of assets included in the estate for tax purposes?
Q5) What is the difference between an executor and an administrator?
Q6) What is a remainderman of trust property?
Q7) In settling an estate, what is the meaning of the term legacy?
Page 22
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