Governmental and Nonprofit Accounting Exam Review
Course Introduction
This course provides an in-depth study of accounting principles and practices as applied to governmental and nonprofit entities. Students will explore the unique aspects of fund accounting, budgeting, financial reporting, and regulatory requirements that distinguish governmental and nonprofit organizations from for-profit businesses. The curriculum covers relevant standards such as those issued by the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB), along with topics such as grant accounting, performance measurement, and ethical considerations. Emphasis is placed on the preparation, analysis, and interpretation of financial statements to provide accountability and transparency for stakeholders.
Recommended Textbook
Advanced Accounting 12th Edition by Hoyle
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) On January 1, 2013, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid dividends of $30,000 and reported a net loss of $70,000.
What is the balance in the investment account on December 31, 2013?
A) $1,900,000.
B) $1,960,000.
C) $2,000,000.
D) $2,016,000.
E) $2,028,000.
Answer: B
Q2) Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?
A) Amortizations of purchase price over book value on date of purchase.
B) Amortizations, since date of purchase, of purchase price over book value on date of purchase.
C) Extraordinary gain of the investor.
D) Unrealized gain on intra-entity inventory transfers for the prior year.
E) Sale of a portion of the investment at a loss.
Answer: D
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Page 3
Chapter 2: Consolidation of Financial Information
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Q1) 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
Q2) At the date of an acquisition which is not a bargain purchase, the acquisition method
A) consolidates the subsidiary's assets at fair value and the liabilities at book value.
B) consolidates all subsidiary assets and liabilities at book value.
C) consolidates all subsidiary assets and liabilities at fair value.
D) consolidates current assets and liabilities at book value, long-term assets and liabilities at fair value.
E) consolidates the subsidiary's assets at book value and the liabilities at fair value.
Answer: C
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Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in 2013, and paid dividends of $10,000 in dividends each year.
Assume that Fesler's reported net income includes Equity in Subsidiary Income. If the parent's net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2013?
Answer: 11ea8e0c_b176_dd0c_b636_adf08cd8908f_TB2311_00_TB2311_00
Q2) When consolidating a subsidiary under the equity method, which of the following statements is true?
A) Goodwill is never recognized.
B) Goodwill required is amortized over 20 years.
C) Goodwill may be recorded on the parent company's books.
D) The value of any goodwill should be tested annually for impairment in value.
E) Goodwill should be expensed in the year of acquisition.
Answer: D
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) On January 1, 2014, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no active trading market for Acron's stock. The fair value of Acron's net assets was $600,000 and Glenville accounts for its interest using the acquisition method. Determine the amount of goodwill to be recognized in this acquisition.
Q2) Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000. What is the amount of net income to the controlling interest for 2014?
A) $31,000.
B) $33,000.
C) $55,000.
D) $60,000.
E) $39,000.
Q3) How does a parent company account for the sale of a portion of an investment in a subsidiary?
Q4) Where should a non-controlling interest appear on a consolidated balance sheet?
Q5) Where may a non-controlling interest be presented in a consolidated balance sheet?
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Chapter 5: Consolidated Financial Statements Intra-Entity
Asset Transactions
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Sample Questions
Q1) Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2012, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2012 and 2013, respectively. Leo uses the equity method to account for its investment.
Compute income from Stiller on Leo's books for 2012.
A) $110,000.
B) $100,000.
C) $125,000.
D) $85,000.
E) $88,000.
Q2) Justings Co. owned 80% of Evana Corp. During 2013, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. In its accounting records, Justings should
A) not recognize a gain on the sale of the land since it was made to a related party.
B) recognize a gain of $17,600.
C) defer recognition of the gain until Evana sells the land to a third party.
D) recognize a gain of $8,000.
E) recognize a gain of $22,000.
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Chapter 6:
Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues
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Q1) Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock. Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Stoop's annual after-tax interest expense for the bonds was $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2013. What was the amount of Stoop's earnings that should be included in calculating consolidated diluted earnings per share?
A) $300,000.
B) $240,000.
C) $257,600.
D) $322,000.
E) $201,250.
Q2) When a company has preferred stock in its capital structure, what amount should be used to calculate non-controlling interest in the preferred stock of the subsidiary when the company is acquired as a subsidiary of another company?
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Page 8
Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Q1) X Co. owned 80% of Y Corp., and Y Corp. owned 15% of X Co. Under the treasury stock approach, how would the dividends paid by X Co. to Y Corp. be handled on a consolidation worksheet?
Q2) On January 1, 2013, a subsidiary buys 8 percent of the outstanding voting stock of its parent corporation. The payment of $350,000 exceeded book value of the acquired shares by $50,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $675,000 (excluding investment income from the subsidiary), and paid $100,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?
A) Included in current assets.
B) Included in noncurrent assets.
C) Consolidated stockholders' equity is reduced by $350,000.
D) Consolidated stockholders' equity is reduced by $300,000.
E) There is no effect on the consolidated balance sheet, because the effects have been eliminated.
Q3) What configuration of corporate ownership is described as a father-son-grandson relationship?
Q4) Under what conditions must a deferred income tax asset be recorded?
Page 9
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Chapter 8: Segment and Interim Reporting
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Q1) Which of the following statements is true according to U.S. GAAP regarding segment or enterprise-wide disclosure?
A) A reconciliation of segment assets to consolidated assets is required.
B) Segment information does not have to be in accordance with generally accepted accounting principles.
C) Disclosure of a major customer's identity is required.
D) Geographic area information must be disclosed in interim financial statements.
E) A company comprised of only one operating segment does not have to report geographic area information.
Q2) Gregor Inc. uses the LIFO cost-flow assumption to value inventory. Inventory for Gregor on January 1, 2013 was 100 units at a LIFO cost of $25 per unit. During the first quarter of 2013, 200 units were purchased costing an average of $40 per unit, and sales of 265 units at a retail price of $50 per unit were made. Assuming Gregor expects to replace the units of beginning inventory sold before the year-end at a cost of $41, what is the amount of cost of goods sold for the quarter ended March 31, 2013?
Q3) What is meant by the term: disaggregated financial information?
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) A spot rate may be defined as
A) The price a foreign currency can be purchased or sold today.
B) The price today at which a foreign currency can be purchased or sold in the future.
C) The forecasted future value of a foreign currency.
D) The U.S. dollar value of a foreign currency.
E) The Euro value of a foreign currency.
Q2) When a U.S. company purchases parts from a foreign company, which of the following will result in zero foreign exchange gain or loss?
A) The transaction is denominated in U.S. dollars.
B) The option strike price to sell foreign currency is less than the spot rate of the currency.
C) The option strike price to buy foreign currency is less than the spot rate of the currency.
D) The foreign currency appreciated in value relative to the U.S. dollar.
E) The foreign currency depreciated in value relative to the U.S. dollar.
Q3) What is meant by the spot rate?
Q4) What is the purpose of a hedge of foreign exchange risk?
Q5) What is the major assumption underlying the one-transaction perspective?
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?
Q2) Under the temporal method, property, plant & equipment would be remeasured at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q3) Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. What must Dilty do to ready the subsidiary's financial statements for consolidation?
A) first translate them, then remeasure them.
B) first remeasure them, then translate them.
C) state all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the balance sheet date.
D) translate them.
E) remeasure them.
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) Convergence of accounting standards would not occur by:
A) FASB adopting an existing IASB standard.
B) IASB adopting an existing FASB standard.
C) IASB issuing a new standard.
D) IASB and FASB jointly developing a new standard.
E) IASB and FASB each issuing a similar but not identical standard.
Q2) What is the IOSCO?
Q3) What are recognition differences in international reporting and what would be an example of a difference?
Q4) A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely accounting issues to resolve for the opening IFRS balance sheet?
A) Inventory valuation.
B) Capitalizing development costs.
C) Classifying deferred taxes as current or noncurrent.
D) Acquisition value for a subsidiary.
E) Liability for restructuring charges.
Q5) Why does each country have its own unique set of financial reporting practices?
Q6) What are the four different ways IFRS can be used by a country?
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) What information is required in proxy statements?
Q2) Which one of the following regulates the subsequent trading of securities through brokers and exchanges?
A) The Securities Act of 1933.
B) The Securities Exchange Act of 1934.
C) The Investment Company Act of 1940.
D) The Investment Advisers Act of 1940.
E) The Sarbanes-Oxley Act of 2002.
Q3) What was the purpose of the Securities Act of 1933?
Q4) When must Form 8-K be filed with the SEC?
Q5) Which one of the following registration statement forms is used by large issuers that already have at least $75 million voting stock held by non-affiliates?
A) S-11.
B) S-3.
C) S-8.
D) S-4.
E) S-1.
Q6) Why was the Public Utility Holding Company Act of 1935 created?
Page 14
Q7) Briefly describe Regulation S-K. What is its purpose?
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) What information is conveyed by the Statement of Realization and Liquidation?
A) Account balances reported by the company at the date of the filing of the bankruptcy petition.
B) Cash receipts generated by the sale of the debtor's property.
C) Write up of assets.
D) Recognition of recorded liabilities.
E) Assets and liabilities but not stockholders' equity.
Q2) What is meant by a "fully secured liability"?
Q3) What is meant by a "partially secured liability"?
Q4) What is the purpose of Chapter 7 of the Bankruptcy Reform Act?
Q5) Which one of the following unsecured liabilities has the highest priority when an insolvent company is about to be liquidated?
A) federal income taxes payable.
B) claims for expenses of administering the bankruptcy.
C) loans made to the company by its stockholders.
D) employees' claims for salaries.
E) bank loans.
Q6) What term is used for a bankruptcy forced upon a debtor by its creditors?
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Q7) What is the difference between a liquidation and a reorganization?
Q8) To what does the term Chapter 7 bankruptcy refer?
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Chapter 14: Partnerships: Formation and Operation
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Q1) Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses:
- 12% interest on the yearly beginning capital balance
- $10 per hour of work that can be billed to the partnership's clients
- the remainder divided in a 3:2 ratio
The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month.
For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2012 and 2013.
Determine the amount of net income allocated to each partner for 2013. (Round all calculations to the nearest whole dollar).
Q2) By what methods can a person gain admittance to a partnership?
Q3) How is accounting for a partnership different from accounting for a corporation?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) A local partnership has assets of cash of $130,000 and land recorded at $700,000. All liabilities have been paid and the partners are all personally insolvent. The partners' capital accounts are as follows Roberts, $500,000, Ferry, $300,000 and Mones, $30,000. The partners share profits and losses 5:3:2.
If the land is sold for $450,000, how much cash will Mones receive in the final settlement?
A) $0.
B) $15,000.
C) $300,000.
D) $217,500.
E) $362,500.
Q2) What should occur when a solvent partner has a deficit balance?
Q3) Safe capital balances
At the start of a liquidation, this document provides guidance for all payments made to the partners throughout the liquidation.
Q4) Predistribution plan
One or more partners may have a negative capital balance often as a result of losses incurred in disposing of assets.
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18
Chapter 16: Accounting for State and Local Governments
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Q1) What is the purpose of fund financial statements?
Q2) When a city holds pension monies for city employees, the monies should be recorded in
A) the General Fund.
B) an Expendable Trust Fund.
C) a Fiduciary Fund.
D) an Agency Fund.
E) a Special Revenue Fund.
Q3) Simple City has recorded the purchase order of two trucks for a total of $100,000. Prepare the journal entries to reflect that the two trucks have been received with a voucher price of $105,000. This amount has been approved but not yet paid. Identify the fund in which the entries are recorded.
Q4) What assets would be included in the accounting records of a city's general fund?
Q5) What are the two groups of financial statements mandated by GASB Statement No. 34? For each group, what are the names of the individual statements that must be produced?
Q6) What are the two proprietary fund types?
Q7) What is the definition of the term fund?
Page 19
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Chapter 17: Accounting for State and Local Governments
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Q1) Which of the following is a financial statement of a proprietary fund?
A) Balance sheet.
B) Statement of Operations.
C) Statement of Changes in Cash Flows.
D) Statement of Net Assets.
E) Statement of Revenues, Expenditures, and Changes in Fund Balance.
Q2) Which statement is false regarding the government-wide Statement of Net Assets?
A) the purpose of the Statement of Net Assets is to report the economic resources of the government as a whole.
B) assets are reported excluding capital assets.
C) capital assets are reported net of depreciation.
D) investments are reported at fair value rather than historical cost.
E) Business-type activities include Enterprise Funds.
Q3) What information is required in the introductory section of a state or local government's CAFR?
Q4) What three criteria must be met to identify a governmental unit as a primary government?
Q5) What information is required in the financial section of a state or local government's CAFR?
Q6) What is meant by the term legally independent?
Page 20
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Chapter 18: Accounting and Reporting for Private
Not-For-Profit Organizations
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Q1) How does a recipient not-for-profit organization record the receipt of a gift that will be transferred without restriction to another charitable organization? What if the donor retains the right to revoke or redirect the gift?
Q2) For a not-for-profit organization, when is recognition of contributions of artworks and historical treasures not required?
Q3) Which of the following is not true about a merger of two not-for-profit organizations?
A) The two organizations will continue to legally exist but there will be a new governing board.
B) Neither organization is considered to be acquired.
C) Identifiable assets and liabilities are not adjusted to their fair values at the date of the merger.
D) The two entities will together form an entirely new organization with a new governing board.
E) There will be no acquisition value or goodwill determination.
Q4) What two classifications are used for the expenses incurred by voluntary health and welfare organizations?
Q5) What are the objectives of accounting for a not-for-profit organization?
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Chapter 19: Accounting for Estates and Trusts
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Q1) When there are not enough assets in the estate to satisfy all legacies in the will, the distribution schedule goes through a process of:
A) Ademption.
B) Amendment.
C) Abatement.
D) Accretion.
E) Aggregation.
Q2) The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds
$50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record ordinary repairs to the rental property of $5,000.
Q3) What is meant by "an individual dies intestate"?
Q4) How may real property be treated in identifying estate property subject to probate?
Q5) What are the three goals of probate laws?
Q6) What is the difference between an executor and an administrator?
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