Intermediate Accounting II
Exam Answer Key
Course Introduction
Intermediate Accounting II is a comprehensive course that builds upon foundational accounting principles to explore more complex topics such as long-term liabilities, stockholders equity, dilutive securities, earnings per share, revenue recognition, income taxes, pensions, and leases. Emphasizing the application of U.S. Generally Accepted Accounting Principles (GAAP), this course trains students to analyze, interpret, and prepare a wide array of financial statements and disclosures for corporations. Through case studies, real-world examples, and in-depth problem-solving, students develop critical thinking skills necessary for addressing advanced accounting challenges and gain exposure to the ethical considerations inherent in financial reporting.
Recommended Textbook
Advanced Accounting 11th Edition by Joe Ben Hoyle
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Chapter 1: The Equity Method of Accounting for Investments
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Q1) A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true?
A) A cumulative effect change in accounting principle must occur.
B) A prospective change in accounting principle must occur.
C) A retrospective change in accounting principle must occur.
D) The investor will not receive future dividends from the investee.
E) Future dividends will continue to reduce the investment account.
Answer: B
Q2) A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has been deemed appropriate. Which of the following statements is true?
A) A cumulative effect change in accounting principle must occur.
B) A prospective change in accounting principle must occur.
C) A retrospective change in accounting principle must occur.
D) The investor will not receive future dividends from the investee.
E) Future dividends will continue to be recorded as revenue.
Answer: C
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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 merger?
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 merger is no longer a legal option.
Answer: C
Q2) What is the primary difference between recording an acquisition when the subsidiary is dissolved and when separate incorporation is maintained?
Answer: When the subsidiary is dissolved, the acquirer records in its books the fair value of individual assets and liabilities acquired as well as the resulting goodwill from the acquisition. However, when separate incorporation is maintained, the acquirer only records the total fair value of assets and liabilities acquired, as well as the resulting goodwill, in one account as an investment.
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Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2010 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2011 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. Assuming Gataux generates cash flow from operations of $27,200 in 2010, how will Beatty record the $12,000 payment of cash on April 1, 2011 in satisfaction of its contingent obligation?
A) Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and Credit Cash $12,000.
B) Debit Contingent performance obligation $3,461, debit Loss from revaluation of contingent performance obligation $8,539, and Credit Cash $12,000.
C) Debit Goodwill and Credit Cash, $12,000.
D) Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and Credit Cash $12,000.
E) No entry.
Answer: B
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5
Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?
A) Income from subsidiary is not recognized until there is an entire year of consolidated operations.
B) Income from subsidiary is recognized from date of acquisition to year-end.
C) Excess cost over acquisition value is recognized at the beginning of the fiscal year.
D) No goodwill can be recognized.
E) Income from subsidiary is recognized for the entire year.
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. Prepare a proper presentation of consolidated net income for 2011.
Q3) Where should a non-controlling interest appear on a consolidated balance sheet?
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Chapter 5: Consolidated Financial StatementsIntercompany Asset Transactions
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Q1) Pepe, Incorporated acquired 60% of Devin Company on January 1, 2010. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2010 and 2011, respectively. Pepe uses the equity method to account for its investment in Devin. What is the gain or loss on equipment reported by Devin for 2010?
A) $54,000 gain.
B) $21,000 loss.
C) $21,000 gain.
D) $9,000 loss.
E) $9,000 gain.
Q2) On November 8, 2011, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized?
A) Proportionately over a designated period of years.
B) When Wood Co. sells the land to a third party.
C) No gain can be recognized.
D) As Wood uses the land.
E) When Wood Co. begins using the land productively.
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Chapter 6: Intercompany Debt, Consolidated Statement of
Cash Flows, and Other Issues
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Q1) The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000.
(2)) Non-controlling interest in Stage's net income was $30,000.
(3)) Graham paid dividends of $15,000.
(4)) Stage paid dividends of $10,000.
(5)) Excess acquisition-date fair value over book value was expensed by $6,000.
(6)) Consolidated accounts receivable decreased by $8,000.
(7)) Consolidated accounts payable decreased by $7,000.
How is the amount of excess acquisition-date fair value over book value recognized in a consolidated statement of cash flows assuming the indirect method is used?
A) It is ignored.
B) $6,000 subtracted from net income.
C) $4,800 subtracted from net income.
D) $6,000 added to net income.
E) $4,800 added to net income.
Q2) How does the existence of a non-controlling interest affect the preparation of a consolidated statement of cash flows?
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Sample Questions
Q1) In a father-son-grandson combination, which of the following statements is true?
A) Companies that are solely in subsidiary positions must have their realized income computed first in the consolidation process.
B) Father-son-grandson configurations never require consolidation unless one company owns 100% of at least one other member of the combined group.
C) The order of the computation of realized income is not important in the consolidation process.
D) The parent must have its realized income computed first in the consolidation process.
E) None of the above.
Q2) Explain how the treasury stock approach treats shares of the parent's common stock that are owned by the subsidiary and the rationale behind the approach.
Q3) How is the amortization of goodwill treated for income tax purposes? How does the amortization of goodwill affect deferred income taxes?
Q4) Under what conditions must a deferred income tax asset be recorded?
Q5) What ownership structure is referred to as a connecting affiliation? Describe briefly or illustrate with a diagram.
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Chapter 8: Segment and Interim Reporting
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Q1) On February 23, 2011, Cleveland, Inc. paid property taxes of $300,000 for the calendar year 2011.
How much of this expense should be included in Cleveland's net income for the quarter ending March 31, 2011?
Q2) All of the following are required to be reported in interim financial statements for a material operating segment except:
A) Segment assets.
B) Segment revenues from external customers.
C) Intersegment revenues.
D) Segment profit or loss.
E) Reconciliation of segment profit or loss to total income before taxes.
Q3) Which of the following are required to be disclosed in interim reports?
A) Cash flows from investing activities.
B) Change in cash.
C) Total current liabilities.
D) Total assets.
E) Gross revenues.
Q4) Which items of information are required to be included in interim reports for each operating segment?
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.
Q2) What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?
Q3) On June 1, CamCo received a signed agreement to sell inventory for ¥500,000. The sale would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was ¥1 =$.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.
Q4) How does a foreign currency forward contract differ from a foreign currency option?
Q5) What is the major assumption underlying the one-transaction perspective?
Q6) How is the fair value of a Forward Contract determined by U.S. GAAP?
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) What is a company's functional currency?
A) the currency of the primary economic environment in which it operates.
B) the currency of the country where it has its headquarters.
C) the currency in which it prepares its financial statements.
D) the reporting currency of its parent for a subsidiary.
E) the currency it chooses to designate as such.
Q2) Under the temporal method, common stock 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) 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) How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?
Q5) Under what circumstances would the remeasurement of a foreign subsidiary's financial statements be required?
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) What were the major objectives of the Treaty of Rome?
Q2) A company acquired a new piece of equipment on January 1, 2009 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2011, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years. At what amount should the equipment be reported on the December 31, 2011 balance sheet under U.S. GAAP?
A) $160,000
B) $150,000
C) $146,000
D) $140,000
E) $116,000
Q3) What accounting topics were covered under the FASB short-term convergence project?
Q4) What problems are caused by diverse accounting practices?
Q5) What are the two major types of legal systems used around the world?
Q6) How did the early International Accounting Standards (IAS) obtain support from a sufficient number of board members?
Q7) What is meant by harmonization of accounting standards?
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) What is blue sky legislation?
Q2) Which one of the following is not a characteristic of the Public Company Accounting Oversight Board?
A) Minimizes self-regulation in the accounting profession.
B) Has the authority to amend, modify, repeal, or reject any audit standard of the ASB.
C) Only one member can be an accountant, past or present.
D) SEC has oversight and enforcement authority over the Board.
E) Enforces auditing, quality control, and independence standards and rules.
Q3) How has the Sarbanes-Oxley Act of 2002 changed the role of the audit committee?
Q4) When is the SEC's Registration Form S-4 used?
Q5) Which one of the following regulates the initial offering of securities by a company or underwriter?
A) The Securities Act of 1933.
B) The Securities Exchange Act of 1934.
C) The Investment Company Act of 1940.
D) The Investment Advisers Act of 1940.
E) The Sarbanes-Oxley Act of 2002.
Q6) Why is the SEC's Rule 14c-3 important to the accounting profession?
Page 14
Q7) What is the primary focus of the Sarbanes-Oxley Act of 2002?
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) Assuming all of the following expenses have priority, in what order are they prioritized?
A) Administrative expenses, employee claims for wages, unpaid taxes, claims for the return of customer deposits.
B) Employee claims for wages, unpaid taxes, administrative expenses, claims for the return of customer deposits.
C) Unpaid taxes, administrative expenses, employee claims for wages, return of customer deposits.
D) Administrative expenses, employee claims for wages, claims for the return of customer deposits, unpaid taxes.
E) Unpaid taxes, return of customer deposits, employee claims for wages, administrative expenses.
Q2) What is the purpose of Chapter 7 of the Bankruptcy Reform Act?
Q3) What are the four categories of debts in a Statement of Financial Affairs?
Q4) What is the difference between a liquidation and a reorganization?
Q5) What is the meaning of the phrase debtor in possession?
Q6) What term is used for a bankruptcy forced upon a debtor by its creditors?
Q7) What is meant by a "partially secured liability"?
Q8) To what does the term Chapter 11 bankruptcy refer? Page 15
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Chapter 14: Partnerships: Formation and Operation
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Q1) Jell and Dell were partners with capital balances of $600 and $800 and an income sharing ratio of 2:3. They admitted Zell to a 30% interest in the partnership, and the total amount of goodwill credited to the original partners was $700. What amount did Zell contribute to the business?
A) $900.
B) $560.
C) $600.
D) $590.
E) $630.
Q2) When the hybrid method is used to record the withdrawal of a partner, the partnership
A) revalues assets and liabilities and records goodwill to the continuing partner but not to the withdrawing partner.
B) revalues liabilities but not assets, and no goodwill is recorded.
C) can recognize goodwill but does not revalue assets and liabilities.
D) revalues assets but not liabilities, and records goodwill to the continuing partner but not to the withdrawing partner.
E) revalues assets and liabilities but does not record goodwill.
Q3) Why are the terms of the Articles of Partnership important to partners?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All liabilities have been paid. The partners' capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, how much cash will Harry receive in the final settlement?
A) $5,000.
B) $9,000.
C) $18,000.
D) $28,000.
E) $55,000.
Q2) What events or circumstances might force the termination of a partnership and liquidation of its assets?
Q3) Xygote, Yen, and Zen were partners who were liquidating their partnership. Each partner has a deficit balance in their respective capital account. All assets from the partnership have been liquidated and all of the liabilities had been paid. How should any additional cash coming into the partnership be distributed to the partners?
Q4) What is the purpose of a predistribution plan?
Q5) For a partnership, how should liquidation gains and losses be accounted for?
Q6) What should occur when a solvent partner has a deficit balance?
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Chapter 16: Accounting for State and Local Governments
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Q1) Property taxes of 1,500,000 are levied for Miner County. The county expects that 5% will be uncollectible.
Required:
Prepare the required journal entry and identify the fund in which it is recorded.
Q2) Shell City transfers $100,000 from the General Fund to the Debt Service fund.
Required:
Prepare the required journal entries and identify the funds in which they are recorded.
Q3) Which of the following statements is true about Fund Balance classifications for the governmental funds?
A) A restricted fund balance is for monies the governing board has appropriated.
B) An assigned fund balance has been designated for a specific purpose and is restricted to use for only that purpose.
C) An unassigned fund balance has no restriction for use of the money and is only applicable to the General Fund.
D) A committed fund balance has been designated by an outside party for a particular use.
E) A non-spendable fund balance is designated only for Permanent Fund balances.
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Chapter 17: Accounting for State and Local Governments
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Q1) What three criteria must be met to identify a governmental unit as a primary government?
Q2) A method of depreciation for infrastructure assets that allows the expensing of all maintenance costs each year instead of computing depreciation is called
A) Government-wide depreciation.
B) Proprietary depreciation.
C) GASB depreciation.
D) Modified approach.
E) Alternative depreciation.
Q3) What information is required in the introductory section of a state or local government's CAFR?
Q4) The Town of Wakefield opened a solid waste landfill in 2010 that was at 20% capacity on December 31, 2010 and at 50% capacity on December 31, 2011. The city initially anticipated closure costs of $2.3 million but in 2011 revised the estimate of the closure costs to be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed.
What is the journal entry that should be recorded on December 31, 2011 for Government-wide Financial Statements?
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Chapter 18: Accounting for Not-For-Profit Organizations
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Q1) A local social worker, earning $12 per hour working for the state government, contributed 600 hours of time at no charge to the Yelton Center, a voluntary health and welfare organization. If not for these donated services, an additional staff person would have been hired by the organization.
Required:
How should the Yelton Center record the contributed services?
Q2) Which one of the following is a voluntary health and welfare organization?
A) Charity raising money for underprivileged children.
B) Nursing home.
C) Clinic.
D) Hospital.
E) Preschool.
Q3) Unconditional transfers of cash or other resources to an entity in a voluntary nonreciprocal transaction is the GAAP definition for A) miscellaneous revenues.
B) contributions.
C) unconditional promises to give.
D) exchange transactions.
E) pledges.
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Chapter 19: Accounting for Estates and Trusts
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Q1) When an estate does not have sufficient assets to satisfy all claims against it, what claim has the highest priority?
A) expenses of administering the estate.
B) federal income taxes.
C) state income taxes.
D) medical expenses of the final illness.
E) back wages owed to any employees.
Q2) What guidelines must be followed to classify a transaction as associated with the principal of an estate or as an income transaction?
A) generally accepted accounting principles.
B) federal estate laws.
C) state estate laws.
D) the Internal Revenue Code.
E) the decedent's intentions or state laws.
Q3) What is meant by "an individual dies intestate"?
Q4) In settling an estate, what is the meaning of the term legacy?
Q5) In settling an estate, what is the meaning of the term devise?
Q6) What are the four levels of claims in the order of priority of the Uniform Probate Code?
Page 22
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