Governmental and Nonprofit Accounting Final Test Solutions
Course Introduction
This course provides an in-depth study of the accounting principles, standards, and practices unique to governmental and nonprofit organizations. Students will explore the conceptual framework underpinning fund accounting, financial reporting, and budgeting for these entities, focusing on the requirements set forth by the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB). Topics include fund structures, revenue and expenditure recognition, financial statement preparation, and auditing considerations for public agencies and nonprofit organizations. The course also addresses ethical issues, internal controls, and the impact of recent developments in the field, preparing students to understand and contribute to the financial management and accountability of government and nonprofit entities.
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 methods does the FASB consider the best indicator of fair values in the evaluation of goodwill impairment?
A) Senior executive's estimates
B) Financial analyst forecasts
C) Market value
D) The present value of future cash flows discounted at the firm's cost of capital
Answer: C
Q2) Goodwill arising from a business combination is
A) charged to Retained Earnings after the acquisition is completed.
B) amortized over 40 years or its useful life, whichever is longer.
C) amortized over 40 years or its useful life, whichever is shorter.
D) never amortized.
Answer: D
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Chapter 2: Stock Investments Investor Accounting and Reporting
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Q1) For 2010, 2011, and 2012, Squid Corporation earned net incomes of $40,000, $70,000, and $100,000, respectively, and paid dividends of $24,000, $32,000, and $44,000, respectively.On January 1, 2010, Squid had $500,000 of $10 par value common stock outstanding and $100,000 of retained earnings.
On January 1 of each of these years, Albatross Corporation bought 5% of the outstanding common stock of Squid paying $37,000 per 5% block on January 1, 2010, 2011, and 2012.All payments made by Albatross in excess of book value were attributable to equipment, which is depreciated over five years on a straight-line basis.
Required:
1.Assuming that Albatross uses the cost method of accounting for its investment in Squid, how much dividend income will Albatross recognize for each of the three years and what will be the balance in the investment account at the end of each year?
2.Assuming that Albatross has significant influence and uses the equity method of accounting (even though its ownership percentage is less than 20%), how much net investee income will Albatross recognize for each of the three years?
Answer: 11ea87ae_6166_fcb0_8726_e1dccec9c2d5_TB2662_00 11ea87ae_6166_fcb1_8726_97647abffe7c_TB2662_00
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4
Chapter 3: An Introduction to Consolidated Financial Statements
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Q1) A subsidiary can be excluded from consolidation if
A) control does not rest with the majority owner.
B) the subsidiary is in legal reorganization.
C) the subsidiary is operating under severe foreign-exchange restrictions.
D) All of the above are correct.
Answer: D
Q2) Pomograte Corporation bought 75% of Sycamore Company's common stock, with a book value of $900,000, on January 2, 2011 for $750,000.The law firm of Dewey, Cheatam and Howe was paid $55,000 to facilitate the purchase.At what amount should Pomograte's Investment in Sycamore account be reported on January 2, 2011?
A) $675,000
B) $695,000
C) $750,000
D) $845,000
Answer: C
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Chapter 4: Consolidated Techniques and Procedures
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Q1) Which of the following will be debited to the Investment account when the equity method is used?
A) Investee net losses
B) Investee net profits
C) Investee declaration of dividends
D) Depreciation of excess purchase cost attributable to investee equipment
Q2) What amount of Goodwill will be reported?
A) $54,400
B) $68,000
C) $72,000
D) $90,000
Q3) A parent company uses the equity method to account for its wholly-owned subsidiary.Which of the following will be a correct procedure for the Investment account?
A) A debit for a subsidiary loss and a credit for dividends received
B) A credit for subsidiary income and a debit for dividends received
C) A debit for subsidiary dividends received and a credit for a subsidiary loss
D) A credit for a subsidiary loss and a credit for dividends received
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Chapter 5: Intercompany Profit Transactions - Inventories
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Q1) Pirate Transport bought 80% of the outstanding voting stock of Seaways Shipping at book value several years ago.(At the time of purchase, the fair value and book value of Seaways' net assets were equal.)Pirate sells merchandise to Seaways at 120% above Pirate's cost.Intercompany sales from Pirate to Seaways for 2012 were $450,000.Unrealized profits in Seaways' December 31, 2011 inventory and December 31, 2012 inventory were $17,000 and $15,000, respectively.Seaways reported net income of $750,000 for 2012.
Required:
1.Determine Pirate's income from Seaways for 2012.
2.In General Journal format, prepare consolidation working paper entries at December 31, 2012 to eliminate the effects of the intercompany inventory sales assuming the perpetual inventory method is used.
Q2) If the intercompany sale was an upstream sale, the total amount of consolidated cost of goods sold for 2012 will be
A) $300,000.
B) $430,000.
C) $470,000.
D) $477,000.
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Page 7
Chapter 6: Intercompany Profit Transactions - Plant Assets
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Q1) On January 2, 2012, Pal Corporation sold warehouse equipment to SimCo, a wholly-owned subsidiary.The equipment had an original cost of $130,000 and a net book value of $100,000 when it was sold to SimCo for $150,000.Both companies agreed that the equipment had a five-year remaining life and compute depreciation on the straight-line method.The equipment has no salvage value.
Pal reported $470,000 in net income in 2012 (prior to reporting any income from SimCo), and SimCo reported $160,000 in net income.
Required:
1.Calculate consolidated net income for 2012.
2.Determine the controlling share of net income for the year if Pal only owned 75% of SimCo.
3.Determine the controlling share of net income for the year if Pal only owned 75% of SimCo AND the equipment transfer was upstream.
Q2) The noncontrolling interest share for 2012 was
A) $18,000.
B) $22,000.
C) $23,000.
D) $27,000.
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Page 8
Chapter 7: Intercompany Profit Transactions - Bonds
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Q1) If the bonds were originally issued at 106, and 80% of them were purchased by Scrawn on January 2, 2013 at 98, the gain or (loss)from the intercompany purchase was
A) $(384,000).
B) $(211,200).
C) $ 211,200.
D) $ 384,000.
Q2) There are several theories for allocating constructive gains or losses between purchasing and issuing affiliates.The Agency Theory
A) does so based on the par value of the bonds purchased.
B) assigns the entire constructive gain or loss to the parent based on their control of the decision to purchase the bonds.
C) assigns the entire constructive gain or loss to the subsidiary based on the need to have the noncontrolling interest share in the retirement of the debt.
D) assigns the entire constructive gain or loss to whichever company issued the bonds.
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9
Chapter 8: Consolidations - Changes in Ownership
Interests
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Q1) On September 1, 2011, Beck Corporation acquired an 80% interest in Johnsen Corporation for $700,000.Johnsen's stockholders' equity at January 1, 2011 consisted of $200,000 of Common Stock and $600,000 of Retained Earnings.The book values of its assets and liabilities were equal to their respective fair values on this date.All excess purchase cost was attributed to goodwill.
During 2011, Johnsen uniformly earned $78,000 and paid dividends of $9,000 on each of four dates: February 1, June 1, August 1, and December 1.
Required: Compute the following:
1.Implied goodwill associated with Johnsen Corporation based on Beck's purchase price on September 1, 2011.
2.Beck's income from Johnsen for 2011.
3.Preacquisition income for Beck Corporation and Subsidiary for 2011.
4.Noncontrolling interest share for 2011.
5.What is the balance in Beck's Investment in Johnsen account at December 31, 2011?
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Chapter 9: Indirect and Mutual Holdings
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Q1) Paine Corporation owns 90% of Achan Corporation, Achan Corporation owns 85% of Badge Corporation, and Badge Corporation owns 5% of Achan Corporation.The separate net incomes (excluding investment income)of Paine, Achan, and Badge are $400,000, $160,000, and $220,000, respectively.Assume the investments were acquired at a cost equal to the book value of each investment, which also equals the fair value.
Required:
1.Calculate revised net incomes for Paine, Achan, and Badge by using the conventional method.
2.Determine the controlling interest share of consolidated net income and the noncontrolling interest shares.
Q2) Controlling interest share of consolidated net income for Paint Corporation and Subsidiaries is:
A) $234,800.
B) $244,800.
C) $260,000.
D) $270,000.
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Chapter 10: Subsidiary Preferred Stock, Consolidated
Earnings Per Share, and Consolidated Income Taxation
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Q1) Pandy Corporation owns a 90% interest in Sakaj Corporation's common stock.Throughout 2010, Sakaj had 20,000 shares of common stock outstanding and Pandy had 50,000 shares of common stock outstanding.Sakaj's only dilutive security consists of 10,000 stock options, with an exercise price of $20 per share.The average price of Sakaj's stock is $50 per share in 2010.The options are exercisable for one share of Sakaj's common stock.Pandy's and Sakaj's separate net incomes for the year are $200,000 and $180,000, respectively.
Required:
Compute the amount of basic and diluted earnings per share for Pandy (Consolidated)and Sakaj Corporations.
Q2) What should be the noncontrolling interest share, preferred in the consolidated financial statements of Parminter for the year ending December 31, 2011?
A) $1,000
B) $2,000
C) $4,000
D) $5,000
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Page 12
Chapter
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Q1) With regard to a variable interest entity (VIE), Ann Company may meet the following two conditions: Condition I
Ann Company has the power to direct VIE activities that significantly impact VIE's economic performance.
Condition II
Ann Company has an obligation to absorb losses and/or a right to receive significant benefits from the VIE.
Ann Company must consolidate a VIE if
A) Condition I is met only.
B) Condition II is met only.
C) either Condition I or Condition II is met.
D) both Condition I and Condition II are met.
Q2) The SEC requires push-down accounting for SEC filings of subsidiaries when the subsidiary has no substantial publicly-held debt or preferred stock outstanding and A) the parent has substantial ownership (5% or greater).
B) the parent has substantial ownership (20% or greater).
C) the parent has substantial ownership (50% or greater).
D) the parent has substantial ownership (90% or greater).
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Page 13
Chapter 12: Derivatives and Foreign Currency: Concepts and Common Transactions
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Q1) What is the final amount of the loan payable that Sooty repaid?
A) $250,000
B) $287,500
C) $397,500
D) $402,500
Q2) A U.S.importer that purchased merchandise from a South Korean firm would be exposed to a net exchange gain on the unpaid balance if the
A) dollar weakened relative to the Korean won and the won was the denominated currency.
B) dollar weakened relative to the Korean won and the dollar was the denominated currency.
C) dollar strengthened relative to the Korean won and the won was the denominated currency.
D) dollar strengthened relative to the Korean won and the dollar was the denominated currency.
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14
Chapter 13: Accounting for Derivatives and Hedging
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Q1) What is the fair value of the forward contract at January 30?
A) $796 liability
B) $796 asset
C) $800 liability
D) $800 asset
Q2) 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
Q3) Assuming a present value factor of 1 for simplicity, what is the fair value of this forward contract on November 2?
A) $-0-
B) $100 asset
C) $100 liability
D) $38,100 asset
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Chapter 14: Foreign Currency Financial Statements
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Q1) Pelmer has a foreign subsidiary, Sapp Corporation of Germany, whose functional currency is the euro.Sapp's books are maintained in euros.On December 31, 2011, Sapp has an account receivable denominated in British pounds.Which one of the following statements is true?
A) Because all accounts of the subsidiary are translated into U.S. dollars at the current rate, the Account Receivable is not adjusted on the subsidiary's books before translation.
B) The Account Receivable is remeasured into the functional currency, thus eliminating the need for translation.
C) The Account Receivable is first adjusted to reflect the current exchange rate in euros and then translated at the current exchange rate into dollars.
D) The Account Receivable is adjusted to euros at the current exchange rate, and any resulting gain or loss is included as a translation adjustment in the stockholders' equity section of the subsidiary's separate balance sheet.
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Chapter 15: Segment and Interim Financial Reporting
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Q1) GAAP requires disclosures for each reportable operating segment for each of the following, except for A) Revenues.
B) Depreciation expense.
C) R&D expenditures.
D) Extraordinary items.
Q2) How does GAAP view interim accounting periods?
A) As discrete units for which net income may be separately determined
B) As integral units of the entire year for which each interim period is an essential part of an annual period
C) As integral units of the entire year with each interim period as an independent accounting period
D) As discrete units of the entire year using the same principles that are applied to the annual period
Q3) What is the threshold for reporting a major customer?
A) 5 percent of revenues
B) 5 percent of profits
C) 10 percent of revenues
D) 10 percent of profits
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Page 17
Chapter 16: Partnerships - Formation, Operations, and Changes in Ownership Interests
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Q1) The profit and loss sharing agreement for the Jill, Kelly, and Lila partnership provides that each partner receives a bonus of 5% on the original amount of partnership net income if net income is above $25,000.Jill and Kelly receive a salary allowance of $7,500 and $10,500, respectively.Lila has an average capital balance of $260,000, and receives a 10% interest allocation on the amount by which her average capital account balance exceeds $200,000.Residual profits and losses are allocated to Jill, Kelly, and Lila in their respective ratios of 7:5:8.
Required:
Prepare a schedule to allocate $88,000 of partnership net income to the partners.
Q2) In the Uniform Partnership Act, partners have I.mutual agency.
II)unlimited liability.
A) I only
B) II only
C) I and II
D) Neither I nor II
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Chapter 17: Partnership Liquidation
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Q1) Creditors of the partnership may seek the personal assets of the partners to satisfy amounts owed.When this happens
A) creditors may only file against partnership assets.
B) creditors must file against all partners and recover their claims based on the individual partner's profit and loss distribution percentage.
C) creditors must file against all partners and recover their claims based on the individual partner's percentage ownership.
D) creditors may file against an individual partner to recover their claims, or against any combination of partners.
Q2) What is the proper disposition of a partnership loan that was made from a partner who has a debit balance in the capital account?
A) The loan is ignored in liquidation.
B) The loan is offset against the debit balance in the capital account.
C) The loan is charged off to the capital accounts of all the partners in their profit and loss sharing ratios.
D) The loan is held for payment after all other capital accounts are covered.
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19
Chapter 18: Corporate Liquidations and Reorganizations
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Q1) Which condition must be met for fresh-start reporting for an emerging company from Chapter 11?
A) Holders of existing voting shares immediately before confirmation of the reorganization plan must receive more than fifty percent of the emerging entity.
B) The loss of control by voting shareholders must be temporary.
C) The reorganization value of the emerging entity's assets immediately before the date of the confirmation of the reorganization plan must be less than the total of all postpetition liabilities and allowed claims.
D) The fresh-start entity must have a deficit.
Q2) Gonne 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.Odemay Corporation holds a $100,000 mortgage note receivable from Gonne that is secured by equipment with a $120,000 book value and a $75,000 fair value. Required:
How much of the mortgage receivable will be recovered by Odemay?
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Chapter 19: An Introduction to Accounting for State and Local
Governmental
Units
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Q1) The accounting equation for a governmental fund is
A) Assets = Liabilities + Equity.
B) Current assets + Noncurrent assets - Current liabilities - Noncurrent liabilities = Net assets.
C) Current assets - Current liabilities = Fund Balance.
D) Assets = Liabilities + Fund Balance.
Q2) Governmental accounting differs from corporate financial accounting primarily because
A) the size of the government and the various levels would make it unreasonable to use corporate GAAP.
B) governments lack a profit motive and must focus on accountability to the public they serve.
C) the government has no stakeholders who require financial reporting.
D) the government has too many types of organizations to use one type of corporate GAAP.
Q3) The modified accrual basis of accounting is used for A) governmental funds.
B) proprietary funds.
C) internal service funds.
D) both A and C.
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Chapter 20: Accounting for State and Local Governmental Units
- Governmental Funds
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Q1) When the interest income of $50,000 is received, what account should be credited?
A) Other Financing Sources
B) Other Financing Uses
C) Deferred Revenue
D) Revenue
Q2) Bounty County had the following transactions in 2011.
1.The budget for the county was approved, showing estimated revenues of $320,000 from local income taxes, and total estimated expenditures of $316,000.
2.Tax bills were mailed amounting to $326,000, which are due in 60 days.All but 2% was expected to be collectible.
3.Taxes collected prior to the due date amounted to $260,800.The balance was delinquent.
4.$4,200 of taxes due were determined to be uncollectible and written off.
5.The year-end books were closed, with the expectation that the remaining taxes due would be collected evenly over the first two months after the fiscal year end.
Required:
Prepare the journal entries for the General Fund for the transactions.
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Page 22
Chapter 21: Accounting for State and Local Governmental Units
- Proprietary and Fiduciary Funds
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Q1) Journalize the following municipal zoo transactions in the Lackluster County Enterprise Fund:
1.The zoo issued $1,000,000 of 5% revenue bonds at 99 on July 1, 2011 (an interest payment date).The bond proceeds are to be used for a new polar bear exhibit and the issue will mature in 20 years.Interest is paid on January 1 and July 1.
2.Depreciation for the year-ended December 31, 2011 included $175,000 for buildings and $105,000 for outdoor exhibit areas.
3.The zoo paid $800,000 in construction costs for the new exhibit.The exhibit is still under construction.
4.Interest on the revenue bonds was accrued at year-end, December 31, 2011.Straight-line amortization is used for bond discounts and premiums.
Q2) The trust fund for a school library is required to prepare financial statements that include
A) Balance Sheet and Income Statement.
B) Statement of Revenues, Expenses and Changes in Fiduciary Net Assets.
C) Statement of Fund Balance and Statement of Changes in Fund Balance.
D) Statement of Fiduciary Net Assets and Statement of Changes in Fiduciary Net Assets.
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Page 23
Chapter 22: Accounting for Not-For-Profit Organizations
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Q1) A donor gives a Voluntary Health and Welfare Organization(VHWO)$1,000 cash that is restricted for a research project.What account does the VHWO credit when the VHWO receives the money?
A) Nonoperating Revenue
B) Permanently Restricted Revenue
C) Unrestricted Support
D) Temporarily Restricted Support
Q2) In a nonprofit, nongovernmental hospital, courtesy allowances are
A) charity care services.
B) revenue deductions.
C) expenses.
D) revenues earned even if the standard charge is above or below the allowance.
Q3) Which one of the following statements is not required for voluntary health and welfare organizations?
A) A statement of financial position
B) A statement of activities
C) A statement of functional expenses
D) A statement of changes in net assets
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Chapter 23: Estates and Trusts
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Q1) Under the amended Uniform Probate Code, if the decedent dies intestate, and if there are descendants from a prior marriage or relationship, the surviving spouse receives what?
A) $25,000 and 2/3 of the remaining intestate estate
B) $200,000 and 1/3 of the remaining intestate estate
C) $50,000 and 1/2 of the remaining intestate estate
D) $100,000 and 1/2 of the remaining intestate estate
Q2) Which of the following phrases is frequently used to refer to estate or trust accounting?
A) Non-profit accounting
B) Testamentary accounting
C) Fiduciary accounting
D) All of the above phrases are used to refer to estate or trust accounting.
Q3) Philiam Benedict dies on October 1, 2011, leaving his entire estate to his sole surviving niece, Muriel Finster.After all devise distributions and payments for estate expenses and liabilities, the fair value of Philiam's estate is $6,350,000.
Required:
Calculate the federal estate tax on Philiam's estate, assuming that federal estate taxes are paid at the 45% rate.
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