Governmental and Nonprofit Accounting Midterm Exam

Course Introduction

Governmental and Nonprofit Accounting explores the unique accounting principles, standards, and financial reporting requirements applicable to state and local governments, as well as nonprofit organizations. The course emphasizes fund accounting, the measurement of financial position and performance, budgeting, and regulatory compliance. Students learn how to prepare and analyze key financial statements, understand the role of audits and internal controls, and address issues related to fundraising, grants, and stewardship of donor resources. Through real-world examples and case studies, this course prepares students to meet the challenges of financial management and accountability in the public and nonprofit sectors.

Recommended Textbook

Advanced Accounting 6th Edition by

Debra C. Jeter

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Chapter 1: Introduction to Business Combinations and the

Conceptual Framework

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Q1) Stock given as consideration for a business combination is valued at:

A)fair market value

B)par value

C)historical cost

D)None of these

Answer: A

Q2) A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition?

A)Cash

B)Issuing Debt

C)Issuing Stock

D)All of these

Answer: D

Q3) The third period of business combinations started after World War II and is called:

A)horizontal integration.

B)merger mania.

C)operating integration.

D)vertical integration.

Answer: B

Page 3

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Chapter 2: Accounting for Business Combinations

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Q1) The fair value of net identifiable assets of a reporting unit exclusive of goodwill of Y Company is $270,000.The carrying value of the reporting unit's net assets on Y Company's books is $320,000,including $50,000 goodwill.If the reported goodwill impairment for the unit is $10,000,what would be the fair value of the reporting unit?

A)$320,000

B)$310,000

C)$270,000

D)$290,000

Answer: B

Q2) With an acquisition,direct and indirect expenses are:

A)expensed in the period incurred.

B)capitalized and amortized over a discretionary period.

C)considered a part of the total cost of the acquired company.

D)charged to retained earnings when incurred.

Answer: A

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Chapter 3: Consolidated Financial Statements Date of Acquisition

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Q1) IFRS defines control as:

A)the direct or indirect ability to determine the direction of management and policies through ownership,contract,or otherwise.

B)the power to govern the entity's financial and operating policies as to obtain benefits from its activities.

C)the power to direct the activities that impact economic performance,the obligation to absorb expected losses,and the right to receive expected residual returns.

D)having a majority of the ownership interests entitled to elect management.

Answer: B

Q2) A newly acquired subsidiary has pre-existing goodwill on its books.The parent company's consolidated balance sheet will:

A)treat the goodwill the same as other intangible assets of the acquired company.

B)will always show the pre-existing goodwill of the subsidiary at its book value.

C)not show any value for the subsidiary's pre-existing goodwill.

D)do an impairment test to see if any of it has been impaired.

Answer: C

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Chapter 4: Consolidated Financial Statements After Acquisition

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Q1) In the preparation of a consolidated statement of cash flows using the indirect method of presenting cash flows from operating activities,the amount of the noncontrolling interest in consolidated income is:

A)combined with the controlling interest in consolidated net income.

B)deducted from the controlling interest in consolidated net income.

C)reported as a significant noncash investing and financing activity in the notes.

D)reported as a component of cash flows from financing activities.

Q2) Prime Industries acquired an 80 percent interest in Sands Company by purchasing 24,000 of its 30,000 outstanding shares of common stock at book value of $105,000 on January 1,2016.Sands reported net income in 2016 of $45,000 and in 2017 of $60,000 earned evenly throughout the respective years.Prime received $12,000 dividends from Sands in 2016 and $18,000 in 2017.Prime uses the equity method to record its investment. Prime should record investment income from Sands during 2017 of:

A)$18,000.

B)$60,000.

C)$48,000.

D)$33,600.

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Chapter 5: Allocation and Depreciation of Differences

Between Implied and Book Values

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Q1) Under push down accounting,the workpaper entry to eliminate the investment account includes a:

A)debit to Goodwill.

B)debit to Revaluation Capital.

C)credit to Revaluation Capital.

D)debit to Revaluation Assets.

Q2) Sleepy Company,a 70%-owned subsidiary of Pickle Corporation,reported net income of $600,000 and paid dividends totaling $225,000 during Year 3.Year 3 amortization of differences between current fair values and carrying amounts of Sleepy's identifiable net assets at the date of the business combination was $112,500.The noncontrolling interest in consolidated net income of Sleepy for Year 3 was:

A)$146,250.

B)$33,750.

C)$67,500.

D)$180,000.

Q3) Push down accounting is an accounting method required for the subsidiary in some instances such as the banking industry.Briefly explain the concept of push down accounting.

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Chapter 6: Elimination of Unrealized Profit on Intercompany

Sales of Inventory

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Q1) The noncontrolling interest's share of the selling affiliate's profit on intercompany sales is considered to be realized under:

A)partial elimination.

B)total elimination.

C)100% elimination.

D)both total and 100% elimination.

Q2) The amount of intercompany profit eliminated is the same under total elimination and partial elimination in the case of:

A)upstream sales where the selling affiliate is a less than wholly owned subsidiary.

B)all downstream sales.

C)horizontal sales where the selling affiliate is a wholly owned subsidiary.

D)all downstream sales and horizontal sales where the selling affiliate is a wholly owned subsidiary.

Q3) Noncontrolling interest in consolidated income is never affected by:

A)upstream sales.

B)downstream sales.

C)horizontal sales.

D)Noncontrolling interest is affected by all sales.

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Chapter 7: Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment

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Q1) On January 1,2008,Perry Company purchased a 90% interest in Sludge Company for $800,000,the same as the book value on that date.On January 1,2017,Sludge sold new equipment to Perry for $16,000.The equipment cost $11,000 and had a five year estimated life as of January 1,2017. During 2018,Perry sold merchandise to Sludge at 20% above cost in the amount (selling price)of $126,000.At the end of the year,Sludge had $42,000 of this merchandise in its ending inventory.At the beginning of 2018,Sludge had $48,000 of inventory purchased in 2017 from Perry.

Required:

A.Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the consolidated financial statements for 2018.

B.Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the consolidated income statement for 2018.Sludge Company reported $40,000 of net income in 2018.

Q2) When there have been intercompany sales of depreciable property,workpaper entries are necessary to accomplish several financial reporting objectives.Identify three of these financial reporting objectives for depreciable property.

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Chapter 8: Changes in Ownership Interest

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Q1) When the parent company sells a portion of its investment in a subsidiary,the workpaper entry to adjust for the current year's income sold to noncontrolling stockholders includes a:

A)debit to Subsidiary Income Sold.

B)debit to Equity in Subsidiary Income.

C)credit to Equity in Subsidiary Income.

D)credit to Subsidiary Income Sold.

Q2) P Corporation purchased an 80% interest in S Corporation on January 1,2016,at book value for $300,000.S's net income for 2016 was $90,000 and no dividends were declared.On May 1,2016,P reduced its interest in S by selling a 20% interest,or one-fourth of its investment for $90,000.What would be the balance in the Investment of S Corporation account on December 31,2016?

A)$300,000.

B)$225,000.

C)$279,000.

D)$261,000.

Q3) A parent's ownership percentage in a subsidiary may change for several reasons.Identify three reasons the ownership percentage may change.

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Chapter 9: Intercompany Bond Holdings and Miscellaneous Topics Consolidated

Financial Statements

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Q1) Pointe Company purchased bonds issued by Sentient Company on the open market at a premium.Sentient Company is a 100% owned subsidiary of Pointe Company.Pointe intends to hold the bonds until maturity.In a consolidated balance sheet,the difference between the bond carrying values in the two companies would be:

A)included as a decrease to retained earnings.

B)included as an increase to retained earnings.

C)reported as a deferred debit to be amortized over the remaining life of the bonds.

D)reported as a deferred credit to be amortized over the remaining life of the bonds.

Q2) Soren Corporation is an 80% owned subsidiary of Passia Company.Soren purchased bonds of Passia Company for $103,000.Passia Company reported the bond liability on the date of purchase at $100,000 less unamortized discount of $5,000.Assuming that the constructive gain or loss is material,the consolidated income statement should report an:

A)ordinary loss of $8,000.

B)ordinary gain of $8,000.

C)extraordinary loss of $8,000 adjusted for income tax effects.

D)extraordinary gain of $8,000 adjusted for income tax effects.

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Chapter 10: Insolvency Liquidation and Reorganization

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Q1) When fresh-start reporting is used according to Statement of Position (SOP)90-7 (now incorporated in FSB ASC topic 852),the implication is that a new firm exists.Which of the following statements is NOT correct about fresh-start accounting?

A)Assets are reported at fair values.

B)Beginning retained earnings is reported at zero.

C)The fair value of the assets must be less than the post liabilities and allowed claims.

D)The original owners must own less than 50% of the voting stock after reorganization.

Q2) A corporation that is unable to pay its debts as they become due is:

A)bankrupt.

B)overdrawn.

C)insolvent.

D)liquidating.

Q3) The duties of the trustee include:

A)appointing creditors' committees in liquidation cases.

B)approving all payments for debts incurred before the bankruptcy filing.

C)examining claims and disallowing any that are improper.

D)calling a meeting of the debtor's creditors.

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Chapter 11: International Financial Reporting Standards

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Q1) Bruges Electronics Inc.offers one model of laptop computer for £1000 and a two-year warranty for £250.The retailer,as part of a Boxing Day promotion,offers a limited-time offer for the laptop,including delivery and the two-year warranty for £1,180.The cost of the computer to Bruges is £700.Any warranty repairs are assumed to be done ratably over time.Bruges accounts for transactions using the customer consideration model. In the first twelve months following the sale,Bruges incurred £980 of costs servicing the computers under warranty.

In the first twelve months following the sale,Bruges would reduce the Contract liabilitywarranty account by:

A)£784.

B)£980

C)£1,180.

D)£1,380.

Q2) Property,plant and equipment are valued at:

A)historical cost under both IFRS and US GAAP.

B)historical cost or revalued amounts under both IFRS and US GAAP.

C)revalued amounts under IFRS.

D)historical cost under US GAAP while IFRS allows the assets to be valued at either historical cost or revalued amounts.

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Chapter 12: Accounting for Foreign Currency Transactions and Hedging Foreign

Exchange Risk

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Q1) Greco,Inc.a U.S.corporation,bought machine parts from Franco Company of Germany on March 1,2017,for 70,000 marks,when the spot rate for marks was $0.5395.Greco's year-end was March 31,2017,when the spot rate for marks was $0.5445.Greco bought 70,000 marks and paid the invoice on April 20,2017,when the spot rate was $0.5495.How much should be shown in Greco's income statements as foreign exchange (transaction)gain or loss for the years ended March 31,2017 and 2018?

A)2017,$0; 2018,$0

B)2017,$0; 2018,$350 loss

C)2017,$350 loss; 2018,0

D)2017,$350 loss; 2018,$350 loss

Q2) There are a number of business situations in which a firm may acquire a forward exchange contract.Identify three common situations in which a forward exchange contract can be used as a hedge.

Q3) Accounting for a foreign currency transaction involves the terms measured and denominated.Describe a foreign currency transaction and distinguish between the terms measured and denominated.

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Chapter 13: Translation of Financial Statements of Foreign

Affiliates

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Q1) When the functional currency is identified as the U.S.dollar,land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated using the:

A)historical rate in effect when the land was purchased.

B)current rate in effect at the balance sheet date.

C)forward rate.

D)average exchange rate for the current period.

Q2) The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called:

A)verification.

B)translation.

C)remeasurement.

D)None of these.

Q3) The translation process can be done using either the current rate method or the temporal method.Explain under what circumstances each of the methods is appropriate.

Q4) To accomplish the objectives of translation,two translation methods are used depending on the functional currency of the foreign entity.Describe the two translation methods.

Page 15

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Chapter 14: Reporting for Segments and for Interim

Financial Periods

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Q1) Advertising costs may be accrued or deferred to provide an appropriate expense in each period for:

A)Interim Reporting,Yes; Annual Reporting,No

B)Interim Reporting,Yes; Annual Reporting,Yes

C)Interim Reporting,No; Annual Reporting,No

D)Interim Reporting,No; Annual Reporting,Yes

Q2) An entity is permitted to aggregate operating segments if the segments are similar regarding the:

A)nature of the production processes.

B)types or class of customers.

C)methods used to distribute products or provide services.

D)all of these.

Q3) For external reporting purposes,it is appropriate to use estimated gross profit rates to determine the ending inventory value for:

A)Interim Reporting,No; Annual Reporting,No

B)Interim Reporting,No; Annual Reporting,Yes

C)Interim Reporting,Yes; Annual Reporting,No

D)Interim Reporting,Yes; Annual Reporting,Yes

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Chapter 15: Partnerships: Formation, operation and Ownership Changes

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Q1) When the goodwill method is used and the book value acquired is less than the value of the assets invested,total implied capital is computed by:

A)multiplying the new partner's capital interest by the capital balances of existing partners.

B)dividing the total capital balances of existing partners by their collective capital interest.

C)dividing the new partner's investment by his (her)capital interest.

D)dividing the new partner's investment by the existing partners' collective capital interest.

Q2) The principal types of partnerships are general partnerships,limited partnerships,and joint ventures.Describe the characteristics of each type of partnership.

Q3) In the absence of an agreement among the partners:

A)interest is allowed on capital investments.

B)interest is charged on partners' drawings.

C)interest is allowed on advances to the firm made by partners beyond agreed investments.

D)compensation is allowed partners for extra time devoted to the partnership.

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Chapter 16: Partnership Liquidation

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Q1) In a partnership liquidation the final cash distribution to the partners should be made in accordance with the:

A)partners' profit and loss sharing ratio.

B)balances of the partners' capital accounts.

C)ratio of the capital contributions by the partners.

D)ratio of capital contributions less withdrawals by the partners.

Q2) An advance cash distribution plan specifies the order in which each partner will receive cash and the dollar amount each will receive as it becomes available for distribution.Identify the four steps in the preparation of an advance cash distribution plan.

Q3) Which of the following statements is correct?

A)Personal creditors have first claim on partnership assets.

B)Partnership creditors have first claim on partnership assets.

C)Partnership creditors have first claim on personal assets.

D)Partnership creditors have first claim on partnership assets; and partnership creditors have first claim on personal assets.

Q4) The Uniform Partnership Act specifies specific steps in distributing available partnership assets in liquidation.Describe the steps used to distribute partnership assets during the liquidation process.

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Chapter 17: Introduction to Fund Accounting

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Q1) Expendable fund entities prepare closing entries at the end of each period just as business enterprises do.Describe the necessary closing entries for expendable funds.

Q2) What journal entry should be made at the end of the fiscal year to close out encumbrances for which goods and services have not been received?

A)Debit reserve for encumbrance and credit encumbrances.

B)Debit reserve for encumbrances and credit fund balance.

C)Debit fund balance and credit encumbrances.

D)Debit encumbrances and credit reserve for encumbrances.

Q3) Governmental units include all of the following EXCEPT:

A)counties.

B)school districts.

C)industrial development districts.

D)voluntary health and welfare organizations.

Q4) Which of the following requires the use of the encumbrance system?

A)Capital projects fund

B)Debt service fund

C)Internal service fund

D)Enterprise fund

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Chapter 18: Introduction to Accounting for State and Local

Governmental Units

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Q1) Which of the following is NOT a budgetary account?

A)Appropriations

B)Estimated Revenues

C)Encumbrances

D)Reserve for Encumbrances

Q2) An interfund transfer should be reported in a governmental fund operating statement as a(n):

A)due from (to)other funds

B)other financing source (use)

C)revenue or expenditure

D)none of these

Q3) There are eleven categories of government fund entities that fall under three subheadings.What are the subheadings of government fund entities? What are the main characteristics that set these three subheadings apart?

Q4) Encumbrances would NOT appear in which fund?

A)General

B)Enterprise

C)Capital projects

D)Special revenue

Chapter 19: Accounting for Nongovernment Nonbusiness

Organizations: Colleges and Universities, hospitals, and

Other Health Care Organizations

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Q1) Most property,plant and equipment transactions of hospitals are accounted for in the:

A)fund for renewals and replacements.

B)general fund.

C)plant replacement and expansion fund.

D)unexpended plant fund.

Q2) Resources of an unrestricted fund that are designated by the governing board for endowment purposes are accounted for in the unrestricted fund by all NNOs EXCEPT:

A)voluntary health and welfare organizations.

B)hospitals.

C)colleges and universities.

D)other NNOs.

Q3) A good reason for NNOs to adopt fund accounting even though FASB standards do NOT require it is because:

A)the capital assets are significant.

B)the donated services are significant.

C)the program services are involved with more than one type of revenue.

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D)restrictions are placed by donors in many cases.

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