Graduate Financial Accounting
Final Test Solutions
Course Introduction
Graduate Financial Accounting provides an in-depth exploration of advanced accounting principles, frameworks, and analytical techniques essential for effective decision-making in a complex business environment. The course covers topics such as financial statement analysis, revenue recognition, asset and liability valuation, accounting for business combinations, and consolidation. Students will engage with International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP), examining the impact of evolving regulations on financial reporting. Emphasis is placed on ethical considerations, interpretation of financial results, and the role of accounting in strategic planning, preparing graduates for leadership roles in finance and accounting professions.
Recommended Textbook
Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor?
1) Debit to the Investment account, and a Credit to the Equity in Investee Income account.
2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend Revenue.
3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment account.
A) Entries 1 and 2.
B) Entries 2 and 3.
C) Entry 1 only.
D) Entry 2 only.
E) Entry 3 only.
Answer: D
Q2) When should an investor not use the equity method for an investment of 21% in another corporation?
Answer: When the investor does not have significant influence with regard to the investee.
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Chapter 2: Consolidation of Financial Information
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Sample Questions
Q1) How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation?
A) Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed.
B) Direct combination costs are a part of the acquisition costs, and the stock issuance costs are a reduction to additional paid-in capital.
C) Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital.
D) Both are treated as part of the acquisition consideration transferred.
E) Both are treated as a reduction to additional paid-in capital.
Answer: C
Q2) How are stock issuance costs accounted for in an acquisition business combination?
Answer: Stock issuance costs reduce the balance in the acquirer's Additional Paid-In Capital in an acquisition business combination.
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4
Chapter 3: Consolidationssubsequent to the Date of Acquisition
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Sample Questions
Q1) Prince Company acquires Duchess, Inc. on January 1, 2009. The consideration transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000. If push-down accounting is used, what amounts in the Building account appear in Duchess' separate balance sheet and in the consolidated balance sheet immediately after acquisition?
A) $400,000 and $1,600,000.
B) $500,000 and $1,700,000.
C) $400,000 and $1,700,000.
D) $500,000 and $2,000,000.
E) $500,000 and $1,600,000.
Answer: B
Q2) What accounting method requires a subsidiary to record acquisition fair value allocations and the amortization of allocations in its internal accounting records?
Answer: The appropriate method is termed push-down accounting.
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Page 5
Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with ten-year useful lives. The book value of these assets was $830,000, and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net assets was $3,500,000. Using the acquisition method, determine the amount of goodwill associated with Caldwell's purchase of Club.
Q2) On January 1, 2010, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2010 and $126,000 in 2011 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2010 and $364,000 in 2011. Use the economic unit concept to account for this acquisition. What is the non-controlling interest balance as of December 31, 2011?
Q3) Where should a non-controlling interest appear on a consolidated balance sheet?
Q4) How is a non-controlling interest in the net income of an entity reported in the income statement?
Page 6
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Chapter 5: Consolidated Financial Statementsintra-Entity
Asset Transactions
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Q1) Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2011. Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value of $120,000. How should this transaction be accounted for by the consolidated entity?
Q2) Strickland Company sells inventory to its parent, Carter Company, at a profit during 2010. One-third of the inventory is sold by Carter in 2010.
In the consolidation worksheet for 2011, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Strickland Company.
E) Sales.
Q3) How does a gain on an intra-entity sale of equipment affect the calculation of a non-controlling interest?
Q4) When is the gain on an intra-entity transfer of land realized?
Q5) How is the gain on an intra-entity transfer of a depreciable asset realized?
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Chapter 6: Variable Interest Entities, Intra-Entity Debt,
Consolidated Cash Flows, and Other Issues
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Q1) Regency Corp. recently acquired $500,000 of the bonds of Safire Co., one of its subsidiaries, paying more than the carrying value of the bonds. According to the most practical view of this intra-entity transaction, to whom would the loss be attributed?
A) To Safire because the bonds were issued by Safire.
B) The loss should be allocated between Safire and Regency based on the purchase price and the original face value of the debt.
C) The loss should be amortized over the life of the bonds and need not be attributed to either party.
D) The loss should be deferred until it can be determined to whom the attribution can be made.
E) To Regency because Regency is the controlling party in the business combination.
Q2) How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected in a consolidated statement of cash flows?
Q3) Parent Corporation had just purchased some of its subsidiary's outstanding bonds on the open market. What items related to these bonds will have to be accounted for in the consolidation process?
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Chapter 7: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Sample Questions
Q1) A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true?
A) If the foreign currency appreciates, a foreign exchange gain will result.
B) If the foreign currency depreciates, a foreign exchange loss will result.
C) No foreign exchange gain or loss will result.
D) If the foreign currency appreciates, a foreign exchange loss will result.
E) Any gain or loss will be included in comprehensive income.
Q2) Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2010, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2011, the U.S. dollar equivalent was $144,000. In Mills' 2011 consolidated income statement, how much should have been reported as a foreign exchange gain?
A) $0.
B) $36,000.
C) $48,000.
D) $10,000.
E) $12,000.
Q3) What is meant by the spot rate?
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Chapter 8: Translation of Foreign Currency Financial Statements
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Sample Questions
Q1) Under the current rate method, common stock would be translated at what rate?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
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) Where is the disposition of a remeasurement gain or loss reported in the parent company's financial statements?
A) Net income/loss in the income statement.
B) Cumulative translation adjustment as a deferred asset.
C) Cumulative translation adjustment as a deferred liability.
D) Other comprehensive income.
E) Retained earnings.
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Chapter 9: Partnerships: Formation and Operation
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Q1) On January 1, 2011, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Noris, the partnership contract included the following provisions: Salary of $40,000 a year to Noris.
Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%
During the fiscal year ended December 31, 2011, the partnership had income of $90,000 prior to recognition of salary to Noris. Record the journal entry for the admission of Noris. Goodwill is not to be recorded.
Q2) By what methods can a person gain admittance to a 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) How is accounting for a partnership different from accounting for a corporation?
Q5) What events cause the dissolution of a partnership?
Q6) Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?
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11
Chapter 10: Partnerships: Termination and Liquidation
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Sample Questions
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) When a partnership is insolvent and a partner has a deficit capital balance, that partner is legally required to:
A) declare personal bankruptcy.
B) initiate legal proceedings against the partnership.
C) contribute cash to the partnership.
D) deliver a note payable to the partnership with specific payment terms.
E) None of the above. The partner has no legal responsibility to cover the capital deficit balance.
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Chapter 11: Accounting for State and Local Governments
Part 1
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Sample Questions
Q1) The City of Kamen collected $17,000 from parking meters that must be transferred to the county government.
Required:
For fund financial statements, prepare the journal entry for this transaction including the fund type in which the entry would have been recorded.
Q2) When a city collects fees from citizens who use the public swimming pool, the money should be recorded in
A) the General Fund.
B) an Enterprise Fund.
C) a Capital Projects Fund.
D) an Agency Fund.
E) an Internal Service Fund.
Q3) The Town of Anthrop receives a $10,000 grant to make the Town Hall handicapped-accessible.
Required:
Prepare the journal entry, and identify the fund in which it is recorded, to record the receipt of the grant.
Q4) What is the purpose of government-wide financial statements?
Q5) Under modified accrual accounting, when are expenditures recorded?
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Chapter 12: Accounting for State and Local Governments
Part 2
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Sample Questions
Q1) For fund 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) Other Financing Sources - Capital Lease.
Q2) Marie Todd works for the City of Rochester and volunteered to work the New Years Eve holiday in December, 2010. In exchange for working the holiday, the city will grant her 2 vacation days compensated at $500 per day. Marie decided to take these vacation days during January, 2011.
Assuming that Marie works in an activity reported within the General fund, for Fund financial statements, what are the journal entries to record these events?
Q3) What three criteria must be met to identify a governmental unit as a primary government?
Q4) What three criteria must be met before a governmental unit can elect to not capitalize and therefore report a work of art or historical treasure as an asset?
Q5) What is meant by the term fiscally independent?
Page 14
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