Governmental and Nonprofit Accounting Mock Exam
Course Introduction
This course provides a comprehensive overview of accounting principles, standards, and practices unique to governmental and nonprofit organizations. Students will explore fund accounting, the regulatory environment, financial reporting requirements, and budgeting processes specific to public sector and nonprofit entities. The curriculum emphasizes the interpretation and preparation of financial statements in accordance with GASB (Governmental Accounting Standards Board) and FASB (Financial Accounting Standards Board) guidelines, as well as the evaluation of accountability and stewardship in resource management. Through case studies and applied exercises, participants gain practical skills essential for financial decision-making and ethical oversight in governmental and nonprofit settings.
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 2, 2012, Hull Corp. paid $516,000 for 24% (48,000 shares) of the outstanding common stock of Oliver Co. Hull used the equity method to account for the investment. At the end of 2012, the balance in the investment account was $620,000. On January 2, 2013, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2013, Oliver reported income of $118,000 and paid dividends of $30,000.
Required:
(A.) Prepare the journal entry to record the sale of the 12,000 shares.
(B.) After the sale has been recorded, what is the balance in the investment account?
(C.) What percentage of Oliver Co. stock does Hull own after selling the 12,000 shares?
(D.) Because of the sale of stock, Hull can no longer exercise significant influence over the operations of Oliver. What effect will this have on Hull's accounting for the investment?
(E.) Prepare Hull's journal entries related to the investment for the rest of 2013.
Answer: 11ea8e0c_b195_af39_b636_152e7517e287_TB2311_00_TB2311_00
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Chapter 2: Consolidation of Financial Information
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Q1) Which of the following statements is true regarding a statutory consolidation?
A) The original companies dissolve while remaining as separate divisions of a newly created company.
B) Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company.
C) The acquired company dissolves as a separate corporation and becomes a division of the acquiring company.
D) The acquiring company acquires the stock of the acquired company as an investment.
E) A statutory consolidation is no longer a legal option.
Answer: A
Q2) 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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4
Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision?
A) It is the only method allowed by the SEC.
B) It is relatively easy to apply.
C) It is the only internal reporting method allowed by generally accepted accounting principles.
D) Operating results on the parent's financial records reflect consolidated totals.
E) When the initial method is used, no worksheet entries are required in the consolidation process.
Answer: B
Q2) Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate incorporation. How would this loan be treated on a consolidated balance sheet?
Answer: The loan represents an intra-entity payable for Hans and receivable for Dutch, and each receivable and payable would be eliminated in preparing a consolidated balance sheet.
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) Beta Corp. owns less than one hundred percent of the voting common stock of Shedds Co. Under what conditions will Beta be required to prepare consolidated financial statements?
Q2) How does a parent company account for the sale of a portion of an investment in a subsidiary?
Q3) One company buys a controlling interest in another company on April 1. How should the preacquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?
Q4) When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What amount should have been reported for the land in a consolidated balance sheet, assuming the investment was obtained prior to the date the purchase method of accounting for new business combinations was discontinued?
A) $70,000.
B) $75,000.
C) $85,000.
D) $92,500.
E) $100,000.
Page 6
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Chapter 5: Consolidated Financial Statements Intra-Entity
Asset Transactions
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Q1) Edgar Co. acquired 60% of Stendall Co. on January 1, 2013. During 2013, Edgar made several sales of inventory to Stendall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2013. Consolidated cost of goods sold for 2013 was $2,140,000 because of a consolidating adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory.
How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Stendall to Edgar?
A) Consolidated cost of goods sold would have remained $2,140,000.
B) Consolidated cost of goods sold would have been more than $2,140,000 because of the controlling interest in the subsidiary.
C) Consolidated cost of goods sold would have been less than $2,140,000 because of the non-controlling interest in the subsidiary.
D) Consolidated cost of goods sold would have been more than $2,140,000 because of the non-controlling interest in the subsidiary.
E) The effect on consolidated cost of goods sold cannot be predicted from the information provided.
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7
Chapter 6: Variable Interest Entities, Intra-Entity Debt, Consolidated Cash
Flows, and Other Issues
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Q1) On January 1, 2013, Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co. At the same time, Parent purchased sixty percent of Foxboro's outstanding preferred stock. In preparing consolidated financial statements, how should the acquisition of the preferred stock be accounted for?
Q2) Which of the following is not a potential loss or return of a variable interest entity?
A) Entitles holder to residual profits.
B) Entitles holder to benefit from increases in asset fair value.
C) Entitles holder to receive shares of common stock.
D) If the variable interest entity cannot repay liabilities, honoring a debt guarantee will produce a loss.
E) If leased asset declines below the residual value, honoring the guarantee will produce a loss.
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?
Q4) What documents or other sources of information would be used to prepare a consolidated statement of cash flows?
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Q1) Dean, Inc. owns 90 percent of Ralph, Inc. During the current year, Dean sold merchandise costing $80,000 to Ralph for $100,000. At the end of the year, 30 percent of this merchandise was still on hand. The tax rate is 30 percent. Assuming that separate income tax returns are being filed, what deferred income tax asset is created?
A) $0.
B) $1,100.
C) $1,800.
D) $6,000.
E) $9,000.
Q2) Dotes, Inc. owns 40% of Abner Co. Dotes accounts for its investment using the equity method. Abner follows a policy of paying dividends equal to 30% of its income each year. During the current year, Abner reported net income of $216,000. Dotes has an effective income tax rate of 32%.
Required:
What journal entry would Dotes record at the end of the current year for income taxes relating to the investment in Abner? Assume the investment is to be held for an indefinite time and that all amounts are to be rounded to the nearest dollar.
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Chapter 8: Segment and Interim Reporting
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Q1) What is the appropriate treatment in an interim financial report for variances arising from the use of a standard costing system?
A) The variances are always ignored for interim reporting.
B) The variances should always be reflected in gross profit on an interim income statement.
C) The variances expected to be absorbed by year-end should not be reflected in the interim statement.
D) The variances should always be reflected in the interim income statement but not the interim balance sheet.
E) The variances should only be reflected in the interim balance sheet.
Q2) According to U.S. GAAP, what revenues and expenses included in segment profit or loss need to be disclosed?
Q3) Faru Co. identified five industry segments: (1) plastics, (2) metals, (3) lumber, (4) paper, and (5) finance. Each of these segments had been consolidated appropriately by the company in producing its annual financial statements. Information describing each segment is presented below (in thousands).
Q4) According to U.S. GAAP, how should common costs be allocated to individual segments to determine segment profit or loss?
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Page 10
Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) How is the fair value of a Forward Contract determined by U.S. GAAP?
Q2) On June 1, CamCo received a signed agreement to sell inventory for ×500,000. The sale would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was ×1 = $.004167, and the 90-day forward rate was ×1 = $.00427. At what amount would CamCo record the Forward Contract on June 1?
A) $2,083.
B) $0.
C) $2,110.
D) $2,532.
E) $2,135.
Q3) What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates?
Q4) What factors create a foreign exchange gain?
Q5) What is meant by the spot rate?
Q6) What is the major assumption underlying the one-transaction perspective?
Q7) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?
Q8) What is the purpose of a hedge of foreign exchange risk? Page 11
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) According to U.S. GAAP for a local currency perspective, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency?
A) the temporal method.
B) the current rate method.
C) the current/noncurrent method.
D) the monetary/nonmonetary method.
E) the noncurrent rate method.
Q2) For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is required to ready the financial statements for consolidation?
A) Current/Noncurrent Method.
B) Monetary/Nonmonetary Method.
C) Current Rate Method.
D) Temporal Method.
E) Indirect Method.
Q3) What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary? What justification can be given for using this exchange rate?
Q4) Contrast the purpose of remeasurement with the purpose of translation.
Page 13
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) Which of the following statements is false regarding providers of financing?
A) There is less pressure to provide accounting information in those countries in which financing is primarily by banks.
B) In countries where capital stock is the primary source of financing, accounting emphasizes the income statement.
C) Disclosures are less extensive in those countries financed primarily by stock.
D) Bankers tend to focus more on solvency and stockholders focus more on profitability.
E) As companies become more dependent on financing by stock, more information is demanded.
Q2) What are the six key FASB initiatives to further convergence?
Q3) What are recognition differences in international reporting and what would be an example of a difference?
Q4) What are the four different ways IFRS can be used by a country?
Q5) What problems are caused by diverse accounting practices?
Q6) What accounting topics were covered under the FASB short-term convergence project?
Q7) What are the two major types of legal systems used around the world?
Page 14
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) What is the primary focus of the Sarbanes-Oxley Act?
A) Accounting standards and the registration of securities.
B) Regulation of the continuous reporting by publicly owned companies.
C) Accounting standards and registration of investment companies that engage in investing and trading in securities.
D) Accounting standards and penalties against persons who profit from illegal use of inside information.
E) Regulation of independent audit firms and audit standards.
Q2) 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.
Q3) What are the four interconnected goals that the SEC has tried to achieve?
Q4) What are some of the reasons for the corporate scandals of 2001 and 2002?
Q5) What is blue sky legislation?
Q6) What information needs to be included in Form 10-Q?
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) The statement of financial affairs should be prepared
A) under the going concern assumption.
B) under the concept of conservatism.
C) under the assumption that liquidation will occur.
D) under the continuity concept.
E) only for a company in Chapter 7 bankruptcy.
Q2) Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building).
Total payment on the bond is calculated to be what amount?
Q3) What is the role of the trustee in the liquidation of a company?
Q4) What is an order for relief?
Q5) 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?
Q6) What are duties of the creditors committee in Chapter 7 liquidation?
Q7) How is the presentation of an income statement during a reorganization different from a normal income statement?
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Chapter 14: Partnerships: Formation and Operation
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Q1) Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively.
What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill method?
A) $290,000.
B) $176,000.
C) $80,000.
D) $120,000.
E) $230,000.
Q2) The dissolution of a partnership occurs
A) only when the partnership sells its assets and permanently closes its books.
B) only when a partner leaves the partnership.
C) at the end of each year, when income is allocated to the partners.
D) only when a new partner is admitted to the partnership.
E) when there is any change in the individuals who make up the partnership.
Q3) Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to?
Q4) What events cause the dissolution of a partnership?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) What accounting transactions are not recorded by an accountant during partnership liquidation?
A) The conversion of partnership assets into cash.
B) The allocation of gains and losses from sales of assets.
C) The payment of liabilities and expenses.
D) The initiation of legal action by creditors of the partnership.
E) Write-off of remaining unpaid debts.
Q2) Which of the following statements is true concerning the distribution of safe payments?
A) The distribution of safe payments assumes that any capital deficit balances will prove to be a total loss to the partnership.
B) Safe payments are equal to the recorded capital balances of partners with positive capital balances.
C) The distribution of safe payments may only be made after all liabilities have been paid.
D) In computing safe payments, partners with positive capital balances are assumed to absorb an equal share of any deficit balance(s).
E) There are no safe payments until the liquidation is complete.
Q3) Why is a Schedule of Liquidation prepared?
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Page 18
Chapter 16: Accounting for State and Local Governments
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Q1) What organization is responsible for establishing accounting principles for governmental entities? By whom was this organization established?
Q2) What are the five types of governmental funds?
Q3) What is the definition of the term fund?
Q4) What are the two proprietary fund types?
Q5) Which statement is not correct?
A) Governmental funds account for expenditures of financial resources rather than matching revenues and expenses.
B) The Fund Balance Reserved for Encumbrances account is not closed at the end of a fiscal year.
C) Revenues from licenses and permit fees are recognized when received in cash if using the modified accrual basis of accounting for governmental funds.
D) A fund is an independent accounting entity composed of cash and other financial resources, segregated for the purpose of carrying on specific activities and objectives.
E) Commitments for purchase orders are recorded as expenses.
Q6) When should property taxes be recognized under modified accrual accounting?
Q7) What is the purpose of fund financial statements?
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Chapter 17: Accounting for State and Local Governments
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Q1) According to the GASB (Governmental Accounting Standards Board), which one of the following is not a criterion for determining whether a government is legally separate?
A) The government can determine its own budget.
B) The government can issue debt.
C) The government has corporate powers including the right to sue and be sued.
D) The government has the power to levy taxes.
E) The government can issue preferred stock.
Q2) For government-wide financial statements, what account is credited when a piece of equipment is leased on a capital lease?
A) Equipment-Capital Lease
B) Encumbrances-Long Term
C) Encumbrances-Lease Obligations
D) Capital Lease Obligation
E) The lease is not recorded.
Q3) What is meant by the term fiscally independent?
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?
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Chapter 18: Accounting and Reporting for Private
Not-For-Profit Organizations
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Q1) A not-for-profit organization receives a computer as a donation (valued at $2,000). Prepare the journal entry for the transaction.
Q2) 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.
Q3) What two classifications are used for the expenses incurred by voluntary health and welfare organizations?
Q4) For the month of December 2013, 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.
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) 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 the property of the estate.
Q2) 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.
Q3) In settling an estate, what is the meaning of the term devise?
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