Intermediate Accounting II
Chapter Exam Questions
Course Introduction
Intermediate Accounting II is a continuation of the study of financial accounting principles and standards, building upon concepts introduced in earlier accounting coursework. This course delves deeper into the preparation and analysis of complex financial statements, focusing on topics such as liabilities, equity, investments, pensions, leases, income taxes, and revenue recognition. Students will explore current accounting issues, apply relevant Financial Accounting Standards Board (FASB) guidelines, and develop critical thinking skills needed to address real-world accounting scenarios. Through problem-solving and case studies, learners will strengthen their understanding of how accounting decisions impact business operations and financial reporting.
Recommended Textbook
Advanced Financial Accounting 7th Edition by Thomas H. Beechy
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Chapter 1: Setting the Stage
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Q1) Why has the reputation of U.S. accounting standards decreased in recent years?
A)The U.S. deficit is at a record high.
B)Many U.S. businesses have declared bankruptcy.
C)There have been some notable American accounting scandals, such as Enron.
D)Lengthy prison sentences have been given to unethical American executives, such as Bernie Madoff.
Answer: C
Q2) A Hong Kong-based company is listed on the Toronto Stock Exchange, but not on the Hong Kong Stock Exchange. If there are any issues about the company's reporting, the primary enforcement rests ________.
A)in Hong Kong
B)with the OSC
C)with the SEC
D)with an international tribunal
Answer: A
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Bela Ltd. has invested in several domestic manufacturing corporations. Which of the following investments would most likely be accounted for under the equity method on Bela's financial statements?
A)A holding of 15,000 of the 50,000 outstanding common shares of Earthwise Co.
B)A holding of 3,000 of the 10,000 outstanding preferred shares of Earthbent Co.
C)A holding of 5,000 of the 60,000 outstanding common shares of Earth-Kind Co.
D)A holding of 20,000 of the 25,000 outstanding common shares of Earth-Clean Co.
Answer: A
Q2) Bud Ltd. owns 100% of Calla Co. Calla owns 55% of Daisy Ltd., and Daisy owns 90% of Fern Ltd. Which of the following statements is true?
A)Only Bud has to prepare consolidated financial statements.
B)Only Bud and Calla have to prepare consolidated financial statements.
C)Only Bud and Daisy have to prepare consolidated financial statements.
D)Bud, Calla, Daisy, and Fern have to prepare non-consolidated financial statements.
Answer: D
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Chapter 3: Business Combinations
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Q1) Perez Co. plans to acquire Roo Co. Roo has substantial depreciable assets that have fair values in excess of their book values. Considering only the income tax impact, which of the following statements is true?
A)Perez would prefer to purchase Roo's assets and Roo would prefer to sell its shares to Perez.
B)Perez would prefer to purchase Roo's shares and Roo would prefer to sell its assets to Perez.
C)Both Perez and Roo would prefer Perez to purchase Roo's shares.
D)Both Perez and Roo would prefer Perez to purchase Roo's assets.
Answer: A
Q2) Perez Co. acquired Roo Co. in a business combination. Perez issued new shares to Roo's shareholders in exchange for their outstanding shares. What type of share exchange is this?
A)Direct exchange
B)Indirect exchange
C)Hostile takeover
D)Reverse takeover
Answer: A
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Page 5
Chapter 3: Appendix A: AIncome Tax Allocation
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Q1) Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the effect of recognizing the deferred tax in accounting for the acquisition?
A)Increase in liabilities and goodwill
B)Decrease in liabilities and goodwill
C)Decrease in liabilities and increase in goodwill
D)Increase in liabilities and decrease in goodwill
Q2) O'Ball Ltd. wants to acquire Kiro Ltd. to take advantage of its tax losses and credit carryforwards. In what way can O'Ball accomplish this?
A)O'Ball can purchase Kiro's net assets.
B)O'Ball can do a share exchange with Kiro.
C)O'Ball can either purchase Kiro's net assets or purchase Kiro's shares.
D)O'Ball can either purchase Kiro's net assets or do a share exchange with Kiro.
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Chapter 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) Paranich Co. acquired Crowley Co. in a business combination at December 31, 20X4. Crowley has a capital asset that it has been amortizing at a rate of $10,000 per year. At the time of the acquisition, the asset had a book value of $70,000 and a fair value of $77,000. The asset has a remaining life of seven years. With respect to this asset, how much amortization expense should Paranich report on its December 31, 20X5, consolidated financial statements?
A)$ 1,000
B)$ 7,700
C)$10,000
D)$11,000
Q2) At the time of acquisition, Mitzi's baking system had a fair value of $140,000. At the end of 20X3, how much amortization expense should Mitzi report?
A)$0
B)$14,000
C)$15,000
D)$17,500
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Q1) What deferred income tax adjustment must Morin make for its consolidated financial statements?
A)Adjustment for any changes in temporary differences due to the difference between carrying values and tax bases of Lightfoot's depreciable capital assets
B)Adjustment for any changes in temporary differences due to the amortization of fair value increments
C)Adjustment for any changes in temporary differences due to the amortization of goodwill
D)No adjustment is necessary.
Q2) Which of the following statements is true with respect to adjusting the deferred tax account on consolidation?
A)Deferred taxes only need to be adjusted for unrealized profits in inventory at the end of the year.
B)Deferred taxes only need to be adjusted for unrealized profits in inventory at the beginning of the year.
C)Deferred taxes need to be adjusted for unrealized profits in inventory at both the beginning and the end of the year.
D)Deferred taxes do not need to be adjusted for unrealized profits.
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Q1) How should goodwill acquired in a business combination be allocated?
A)Proportionately to assets
B)Proportionately to fair-value increments
C)To cash-generating units
D)It is not allocated.
Q2) Under IFRS, how often should goodwill acquired in a business combination be tested for impairment?
A)Whenever there is an indication of impairment
B)Whenever there is a change in circumstances in the business
C)At least once a year
D)At least once every two years
Q3) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE).
Q4) For private enterprises that have acquired goodwill in a business combination, how often should goodwill be tested for impairment?
A)At least once a year
B)At least once every two years
C)Whenever the parent company deems it necessary
D)Whenever there is a change in circumstances
Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) In preparing consolidation working papers, why is it necessary to eliminate intercompany profits?
A)To nullify the effect of intercompany transactions on consolidated financial statements
B)To defer intercompany profits until the following year
C)To allocate unrealized profits until the following year
D)To differentiate between realized and unrealized profits
Q2) What is cost of sales on the consolidated statement of income for 20X6?
A)$687,000
B)$680,000
C)$685,600
D)$660,000
Q3) Amber Ltd. purchased 80% of Patel Ltd. for $1,000,000. At the time of acquisition, the carrying value of Patel's net identifiable assets was $1,000,000 and the fair value was $1,350,000. What is the amount of the goodwill under the entity method?
A)$(100,000)
B)$100,000
C)$280,000
D)$350,000
Page 10
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Chapter 5: Appendix A: Step Purchases
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Q1) Under the entity method, the balance of the non-controlling interest at December 31, 20X7, was $660,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$30,000
B)$136,667
C)$220,000
D)$250,000
Q2) Husch Ltd. acquired 35% of the common shares of Megia Ltd. on June 30, 20X1. Husch uses the equity method to record its investment. On June 30, 20X8, Husch acquired another 40% of Megia's common shares. At June 30, 20X8, how should the original 35% ownership be treated?
A)The original valuation of the 35% is added to the valuation of the 40%.
B)The original 35% investment is deemed to have been disposed of and reacquired at the fair value at June 30, 20X8, and added to the new acquisition.
C)The carrying value of the original 35% at June 30, 20X8, is added to the new acquisition.
D)The original 35% is irrelevant to the new acquisition and should be ignored.
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Chapter 5: Appendix B: Decreases in Ownership Interest
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Q1) Gumble Ltd. has owned 65% of the common shares of Lopez for several years. This year, Gumble reduced its interest in Lopez to 10%. Which of the following statements is true?
A)Gumble must change from reporting under consolidation to the equity method.
B)Gumble must change from reporting under consolidation to the cost method.
C)Gumble must change from reporting under the equity method to the cost method.
D)Gumble is not required to change its reporting method.
Q2) A parent company reduced its ownership in its subsidiary from 80% to 15%. How should this be reported on the parent's consolidated financial statements?
A)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at fair value
B)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at book value
C)As a write-down to the retained interest
D)As an adjustment to the shareholders' equity
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Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Which of the following adjustments is not a cumulative operations adjustment in the consolidation process?
A)Recognize the NCI's share of the subsidiary's retained earnings from the acquisition date to the beginning of the year of the consolidated financial statements.
B)Eliminate the gains and losses from intercompany transactions that have not been realized at the beginning of the year of the consolidated financial statements.
C)Eliminate the flow-through to retained earnings of fair-valued assets and liabilities on intercompany transactions that have since been sold to external parties.
D)Recognize the NCI in earnings.
Q2) What is the amount of the non-controlling interest that should be reported under the entity method?
A)$192,000
B)$250,000
C)$304,000
D)$320,000
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Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) Ngo Ltd.'s subsidiary has restricted shares. What must Ngo look at in determining non-controlling interest?
A)Number of shares only
B)Participation in earnings only
C)Participation in dividends only
D)Participation in earnings and dividends
Q2) A parent company owns a subsidiary's preferred and common shares. How should the acquisition of the preferred shares be treated?
A)In the same manner as common shares
B)As a retirement of shares
C)As an expense
D)As a deduction from retained earnings
Q3) Under IFRS, which of the following statements is true?
A)Preferred shares must be classified as debt.
B)Preferred shares must be classified as equity.
C)Preferred shares can be classified as debt or equity depending on the rights attached to them.
D)Preferred shares can be classified as debt or equity at the option of the issuing company.
Page 14
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Chapter 6: Appendix B: Intercompany Bond Holdings
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Q1) For gains on intercompany bond holdings, which method of allocating the gain emphasizes substance over form?
A)Allocating the gain to the parent company as the parent company has ultimate control
B)Allocating the gain to the bond purchasing company as the bonds will be retired under consolidation
C)Allocating the gain to the bond issuing company under the agency approach
D)Allocating the gain between the issuing and purchasing companies under the par-value approach
Q2) A subsidiary has purchased some bonds from its parent company. Under the par-value method, the non-controlling interest is allocated its share of the difference between ________.
A)the bond's market value and face value
B)the bond's face value and its carrying value on the subsidiary's books
C)the bond's market value and its carrying value on the subsidiary's books
D)the bond's par value and carrying value
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Chapter 7: Segment and Interim Reporting
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Q1) Which of the following is not included among requirements for interim financial reports for public companies?
A)Statement of comprehensive income
B)Statement of financial position
C)Statement of cash flows
D)Summary of significant accounting policies
Q2) The thresholds for segmental financial reporting exclude ________.
A)10% of total internal and external revenues
B)10% of total internal and external expenses
C)10% of total assets
D)10% of the absolute value of the larger of aggregate segment profits or aggregate segment losses
Q3) Under IAS 34, which of the following costs is not viewed as a constructive obligation?
A)Contingent lease payments in excess of a contractual base amount
B)Year-end bonuses
C)Quantity discounts or rebates
D)Maintenance costs
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Chapter 8: Foreign Currency Transactions and Hedges
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Q1) Assume that the transaction qualifies as a cash-flow hedge. What is the net exchange gain (loss)that McBride should recognize in the period from May 1 to July 31, 20X2?
A)$(2,200)
B)$(1,800)
C)$ 0
D)$400
Q2) Under IFRS, a hedging relationship qualifies for special hedge accounting rules only if it meets five conditions.
Required:
Explain the conditions that must be met for a derivative to qualify for special hedge accounting. Identify what qualifies as a hedged item. Identify what qualifies as a hedging instrument. Outline the conditions required for a hedge to be effective.
Q3) At December 31, what is the balance of Gillard's forward contract payable?
A)$515,000
B)$515,650
C)$515,750
D)$515,850
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Chapter 9: Reporting Foreign Operations
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Q1) For publicly accountable companies, with foreign operations in countries with a hyper-inflationary economy, what should be done prior to translation?
A)The subsidiary's financial statements must be adjusted for changes in the price levels of the subsidiary's country.
B)The subsidiary's financial statements must be adjusted for changes in the price level of the parent's country.
C)The subsidiary's financial statements must be adjusted by the average inflation rate of the subsidiary and the parent companies' countries.
D)No adjustment is required unless the changes in price levels of the subsidiary country exceed 1000%.
Q2) Under the current-rate method, what is the accounting treatment for exchange gains and losses arising from the current year?
A)Reported as equity
B)Reported in other comprehensive income
C)Reported in consolidated net income
D)Included in opening consolidated retained earnings
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Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) Quick Care, a not-for-profit organization, received an externally restricted contribution. Quick Care does not have a separate restricted fund for the contribution. Under the restricted fund method, the contribution will be recognized as which of the following?
A)A direct increase to net assets
B)Revenue in the endowment fund
C)Revenue in the general fund using the deferral method
D)Revenue in the general fund for unrestricted contributions
Q2) The primary objective of using an encumbrance system is to keep track of an organization's ________.
A)purchase of goods and services
B)commitments made for the acquisition of goods and services
C)purchase of capital assets
D)expenditures
Q3) The disbursement basis for recognizing resource outflows uses which of the following bases?
A)The full accrual basis
B)The accrual basis only as applied to liabilities
C)The accrual basis only as applied to expenses
D)The cash basis
Page 19
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Chapter 10: Appendix A: Fund Accounting
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Q1) Sparrow Pension Plan is a not-for-profit organization that administers the pension fund held for the employees of Sparrow Tech Ltd. What type of fund is the pension fund?
A)Reserve fund
B)Self-sustaining fund
C)Fiduciary fund
D)Endowment fund
Q2) Which statements are affected by inter-fund loans?
A)Statement of operations and consolidated statements
B)Statement of financial position of the individual funds and consolidated statements
C)Statement of operations and statement of financial position of the individual funds
D)Statement of financial position of the individual funds and statement of changes in net assets
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Chapter 11: Public Sector Financial Reporting
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Q1) Which of the following are combined to produce the accumulated deficit or surplus on a government's statement of financial position?
A)Net assets and net debt
B)Financial assets and net debt
C)Financial assets and liabilities
D)Tangible capital assets and net debt
Q2) The Public Sector Accounting Board suggested several objectives for the financial statements of federal, provincial, and territorial governments. List and briefly explain each of the four objectives and how these objectives are met with the various financial statements issued by governments.
Q3) The PSAB has identified a number of key characteristics of public sector entities. Which of the following is not one of these characteristics?
A)Have non-exchange transactions
B)Importance of budgets
C)Legislated financial framework
D)May have equity ownership
Q4) Clearly distinguish between a government business organization and a non-business government organization.
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