Intermediate Accounting II Exam
Review
Course Introduction
Intermediate Accounting II builds upon the foundational concepts introduced in the first intermediate accounting course, delving deeper into the measurement, recognition, and disclosure of financial statement elements. Topics include accounting for liabilities, stockholders' equity, complex revenue recognition issues, deferred taxes, pensions, leases, accounting changes, and error analysis. Emphasis is placed on understanding and applying generally accepted accounting principles (GAAP), preparing and analyzing comprehensive financial statements, and developing critical thinking skills necessary for complex reporting situations in real-world business environments.
Recommended Textbook
Advanced Accounting 13th Edition by Floyd A. Beams
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Page 2
Chapter 1: Business Combinations
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Q1) Under the acquisition method a combination is recorded using the fair-value principle.
A)True
B)False
Answer: True
Q2) Historically,much of the controversy concerning accounting requirements for business combinations involved the ________ method.
A)purchase
B)pooling of interests
C)equity
D)acquisition
Answer: B
Q3) Under the current GAAP,Goodwill arising from a business combination is A)charged to Retained Earnings after the acquisition is completed.
B)amortized over 40 years or its useful life,whichever is longer.
C)amortized over 40 years or its useful life,whichever is shorter.
D)never amortized.
Answer: D
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3
Chapter 2: Stock Investments - Investor Accounting and Reporting
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Q1) Equity investments at acquisitions require direct costs of registering equity securities be charged to additional paid-in capital.
A)True
B)False
Answer: True
Q2) Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1,2013 for $300,000.This investment was accounted for using the complete equity method and the correct balance in the Investment in Fish account on December 31,2015 was $440,000.The original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year.In 2016,Fish Corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in May.If Jabiru sold one-half of its investment in Fish on August 1,2016 for $500,000,how much gain was recognized on this transaction?
A)$278,950
B)$280,000
C)$280,950
D)$282,000
Answer: C
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Chapter 3: An Introduction to Consolidated Financial Statements
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Q1) A subsidiary can be excluded from consolidation when control does not rest with the majority owner.
A)True
B)False
Answer: True
Q2) A subsidiary can be excluded from consolidation if
A)control rests with the majority owner.
B)formation of joint ventures.
C)the acquisition of an asset or group of assets constitutes a business.
D)acquisition of a not-for-profit entity by a for-profit business.
Answer: B
Q3) When the fiscal periods of the parent and its subsidiaries differ,we prepare consolidated statements for and as of the end of both the parent's and the subsidiary's fiscal period.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Consolidated Techniques and Procedures
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Q1) In the consolidated balance sheet,the GAAP requires that the amount of goodwill be shown as a separate balance sheet item even if it is immaterial.
A)True
B)False
Q2) What amount of Inventory will be reported?
A)$170,000
B)$169,000
C)$186,500
D)$192,000
Q3) Which one of the following will increase consolidated retained earnings?
A)An increase in the value of goodwill associated with a subsidiary subsequent to the parent's date of acquisition
B)The amortization of a $10,000 excess in the fair value of a note payable over its recorded book value
C)The depreciation of a $10,000 excess in the fair value of equipment over its recorded book value
D)The sale of inventory by a subsidiary that had a $10,000 excess in fair value over recorded book value on the parent's date of acquisition
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Chapter 5: Intercompany Profit Transactions - Inventories
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Q1) If the sale referred to above was a downstream sale,by what amount must Inventory on the consolidated balance sheet be reduced to reflect the correct balance as of the end of 2014?
A)$3,000
B)$10,000
C)$14,000
D)$20,000
Q2) A downstream sale is a sale by a parent to a subsidiary.
A)True
B)False
Q3) The ending inventory of the purchasing affiliate reflects the intercompany transfer price.
A)True
B)False
Q4) What is Pouch's income from Shenley for 2014?
A)$27,200
B)$29,600
C)$39,200
D)$49,000
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Chapter 6: Intercompany Profit Transactions - Plant Assets
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Q1) A gain or loss on sales downstream from parent to subsidiary is initially included in parent income and must be 100% eliminated.
A)True
B)False
Q2) Snow Company is a wholly owned subsidiary of Penguin Corporation.On January 1,2011,Penguin transferred equipment to Snow for $195,000.The equipment had originally cost $250,000,but at the time of transfer,had a $180,000 book value and a five year remaining life.Both companies use the straight-line method of depreciation and assume no salvage value for the equipment.
Required: Prepare the consolidation worksheet entries for this asset on the following dates:
1.December 31,2011
2.December 31,2012
3.December 31,2013
Q3) The noncontrolling interest share for 2014 was
A)$18,000.
B)$22,000.
C)$23,000.
D)$27,000.
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Page 8
Chapter 7: Intercompany Profit Transactions - Bonds
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Q1) If an affiliate purchases bonds in the open market,the book value of the intercompany bond liability at the time of purchase is
A)always assigned to the parent company because it has control.
B)the par value of the bonds less the unamortized discount or plus the unamortized premium.
C)par value.
D)the par value of the bonds plus the unamortized discount or less the unamortized premium.
Q2) The loss on the retirement of bonds only appears in the consolidated income statement in the year in which we constructively retire the bonds.
A)True
B)False
Q3) If the price paid by an affiliate to acquire the debt of another is less than the book value of the debt,a constructive loss on retirement of debt occurs.
A)True
B)False
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9
Chapter 8: Consolidations - Changes in Ownership
Interests
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Q1) On January 1,2013,Starling Corporation held an 80% interest in Twig Corporation and the investment account balance was $900,000.On January 1,2013,Twig's total stockholders' equity was $1,125,000.
During 2013,Twig uniformly earned $234,000 and paid dividends of $37,500 on April 1 and again on October 1.On August 1,2013,Starling sold 30% of its investment in Twig for $262,500,thereby reducing its interest in Twig to 56%.
Required: Compute the following using the actual sales date assumption: 1.Gain or loss on sale.
2.Income from Twig for 2013.
3.Noncontrolling interest share for 2013.
Q2) What is Goldberg's percentage ownership in Savannah after Savannah issues its stock to Goldberg?
A)76.32%
B)80.43%
C)82.57%
D)83.43%
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Chapter 9: Indirect and Mutual Holdings
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Q1) Direct holdings result from direct investments in the voting stock of one or more investees.
A)True
B)False
Q2) Parent stock that is held by the subsidiary is considered outstanding stock and should be reflected as such on the consolidated balance sheet.
A)True
B)False
Q3) Indirect holdings are investments that enable the investor to control or significantly influence the decisions of an investee not directly owned through an investee that is indirectly owned.
A)True
B)False
Q4) The effect of mutually held parent stock is eliminated from consolidated financial statements by either the treasury stock approach or the conventional approach.
A)True
B)False
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Chapter 10: Subsidiary Preferred Stock, consolidated
Earnings Per Share, and Consolidated Income Taxation
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Q1) Parker Corporation owns an 80% interest in Sample Corporation's common stock.Throughout 2014,Sample had 10,000 shares of common stock outstanding and Parker had 100,000 shares of common stock outstanding.Sample's only dilutive security consists of $50,000 face amount of 8% bonds payable.Each $1,000 bond is convertible into 20 shares of Sample stock.Parker and Sample's separate incomes for the year are $100,000 and $75,000,respectively.Assume a 34% flat income tax rate. Required:
Compute the amount of basic and diluted earnings per share for Parker (Consolidated)and Sample Corporations.
Q2) Palm owns a 70% interest in Sable,a domestic subsidiary.Sable is not part of Palm's affiliated group.Palm will pay taxes on
A)none of the dividends it receives from Sable.
B)20% of the dividends it receives from Sable.
C)66% of the dividends it receives from Sable.
D)80% of the dividends it receives from Sable.
Q3) The GAAP requires that corporations report both basic and diluted earnings per share.
A)True
B)False
Page 12
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Chapter 11: Consolidation Theories, push-Down Accounting, and Corporate Joint Ventures
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Q1) The SEC requires push-down accounting for SEC filings of subsidiaries when the subsidiary has no substantial publicly-held debt or preferred stock outstanding and A)the parent has substantial ownership (5% or greater).
B)the parent has substantial ownership (20% or greater).
C)the parent has substantial ownership (50% or greater).
D)the parent has substantial ownership (90% or greater).
Q2) All companies holding a significant interest in a variable interest entity (VIE)must disclose the nature,purpose,size and activities of the VIE in the consolidated statements. A)True
B)False
Q3) Companies in which equity investors cannot provide financing for the entity's business risks and activities without additional financial support are considered variable interest entitites according to the GAAP. A)True B)False
Q4) Income attributable to the noncontrolling interest is treated as an expense. A)True B)False
Page 13
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Chapter 12: Derivatives and Foreign Currency: Concepts and Common Transactions
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Q1) Slade Corporation,a U.S.company,purchased materials on account from a manufacturer in Mexico on June 15.The invoice was denominated in the shipper's currency for 480,000 pesos.The goods were paid for on July 18.Slade closes their fiscal year on June 30,and used the following indirect quotes to measure the amounts related to the transactions.
June 15 $1.00 = 12.50 pesos
June 30 $1.00 = 12.80 pesos
July 18 $1.00 = 12.00 pesos
Required:
Show all related journal entries for Slade Company.
Q2) On April 1,2014,Button Industries enters into an agreement with Bows Incorporated to lock in the price of cotton.Button agrees to purchase (and Bows agrees to sell)100,000 pounds of cotton at $1.19 per pound,six months from the date of agreement.On October 1,2014,the price of cotton is $1.17 per pound.The contract allows for net settlement. Required:
Determine the net settlement on the forward contract.
Q3) Forward contracts are very standardized and easily traded in the markets. A)True B)False
Page 14
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Chapter 13: Accounting for Derivatives and Hedging Activities
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Q1) One characteristic of a derivative is it does not require or permit net settlements. A)True
B)False
Q2) On June 1,2014,Dapple Industries purchases an option contract for $5,000 on 10,000 gallons of aviation gas to minimize its purchasing cost price exposure.At the time,the market price is $2.50 per gallon and the option price of $2 per gallon will expire 6 months later.Dapple can exercise the option at its discretion.When Dapple prepares quarterly reports on June 30,Dapple is still holding the option.On June 30,the market price of aviation gas is $4.50 per gallon.The option is to be settled net. On August 1,Dapple exercises the option when the gas market price is $5.00 per gallon and purchases 40,000 gallons of gas.On August 15,Dapple uses all of the gas on a charter flight.
Required:
What are Dapple's journal entries with regard to the aviation gas option? Assume this is a cash flow hedge.Ignore the time value of money.
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Page 15
Chapter 14: Foreign Currency Financial Statements
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Q1) Paskin Corporation's wholly-owned Canadian subsidiary has a Canadian dollar functional currency.In translating the subsidiary's account balances into U.S.dollars for reporting purposes,which one of the following accounts would be translated at historical exchange rates?
A)Accounts Receivable
B)Notes Payable
C)Capital Stock
D)Retained Earnings
Q2) Under the temporal method monetary assets and liabilities are remeasured at historical rates and other assets and equities are remeasured at current exchange rates.
A)True
B)False
Q3) Accounts representing an allowance for uncollectible accounts are converted into U.S.dollars at
A)historical rates when the U.S.dollar is the functional currency.
B)current rates only when the U.S.dollar is the functional currency.
C)historical rates regardless of the functional currency.
D)current rates regardless of the functional currency.
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16
Chapter 15: Segment and Interim Financial Reporting
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Q1) Which of the following conditions would not indicate that two business segments should be classified as a single operating segment?
A)They have similar amounts of intersegment revenues or expenses.
B)They have a similar distribution method for products.
C)They have similar production processes.
D)They have similar products or services.
Q2) If the LIFO method is used for inventory to reduce taxable income,the IRS requires the LIFO method to be used for financial reporting purposes.
A)True
B)False
Q3) The Securities and Exchange Commission require that quarterly reports be prepared for the company's stockholders and for filing with the IRS.
A)True B)False
Q4) Management-approach-based segments are called operating segments. A)True
B)False
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17
Chapter 16: Partnerships - Formation,operations,and
Changes in Ownership Interests
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Q1) The death of a partner results in a dissociation and requires a settlement with the estate of the deceased partner.
A)True
B)False
Q2) The dissolution of a partnership involves selling off the assets,settling liabilities,and distributing the proceeds to the partners.
A)True
B)False
Q3) What will the profit and loss sharing ratios be after Oran's investment?
A)1:2:4:2
B)2:3:5:2
C)3:4:6:2
D)4:6:10:5
Q4) Partnerships
A)are required to prepare annual reports.
B)are required to file income tax returns but do not pay Federal income taxes.
C)are required to file income tax returns and pay Federal income taxes.
D)are not required to file income tax returns or pay Federal income taxes.
18
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Chapter 17: Partnership Liquidation
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Q1) If all partners are included in the first installment of an installment liquidation,then in future installments
A)cash will be distributed according to the residual profit and loss sharing ratios.
B)cash should not be distributed until all non-cash assets are converted into cash.
C)vulnerability rankings for each partner should be prepared.
D)a cash distribution plan must be prepared so that partners will know when they will be included in cash distributions.
Q2) A partnership is solvent if enough resources exist to pay creditors and make a cash distribution to the partners.
A)True
B)False
Q3) Safe payments are based on the assumptions that all partners are personally solvent and all noncash assets represent possible losses.
A)True
B)False
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Chapter 18: Corporate Liquidations and Reorganizations
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Q1) The duties of a debtor in possession in a Chapter 11 bankruptcy case do not include
A)filing a list of creditors and schedules of assets and liabilities with the bankruptcy court.
B)operating the business during the reorganization period.
C)filing a reorganization plan.
D)issuing an order of relief.
Q2) An executory contract is one that has been completely performed but not settled in terms of payment.
A)True
B)False
Q3) A company emerging from bankruptcy will have a reorganization value that
A)approximates the book value of the entity's assets prior to bankruptcy.
B)approximates the book value of the entity prior to bankruptcy.
C)approximates the fair market value of the entity without considering liabilities.
D)approximates the fair market value of the entity's liabilities.
Q4) The inability to make payments on time is equity insolvency.
A)True
B)False
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Page 20
Chapter 19: An Introduction to Accounting for State and Local Governmental Units
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Q1) What basis of accounting is used to prepare Government-wide financial statements?
A)Modified accrual basis
B)Accrual basis
C)Cash basis
D)Fiduciary basis
Q2) General governmental activities provide goods and services to citizens without regard to their ability to pay.
A)True
B)False
Q3) Centralized data processing,central motor pools and garages,centralized risk-financing activities,and central stores typically would be accounted for using what type of fund?
A)An agency fund
B)An enterprise fund
C)An internal service fund
D)A trust fund
Q4) Permanent funds report resources whose use is permanently restricted. A)True B)False
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Chapter 20: Accounting for State and Local Governmental Units
- Governmental Funds
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Q1) A restricted fund balance represents amounts that can only be spent for the specific purposes stipulated by constitution,external resource providers,or through enabling legislation.
A)True
B)False
Q2) Governments must record a liability for uncollected taxes instead of revenues for uncollected taxes if the taxes are going to be collected
A)30 days after the fiscal year end.
B)45 days after the fiscal year end.
C)60 days after the fiscal year end.
D)75 days after the fiscal year end.
Q3) When the donation of bonds is received,what account should be debited?
A)Encumbrance
B)Other Financing Sources
C)Other Financing Uses
D)Investment
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Chapter 21: Accounting for State and Local Governmental Units
- Proprietary and Fiduciary Funds
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Q1) Jefferson County had the following transactions in 2014.
1.$27,000 in membership fees was collected at the municipal pool.
2.A county collects $130,000 in sales taxes on behalf of the cities within its boundaries.
3.A $500,000 bond offering was issued at 102 to fund the construction of a new city hall.The premium on the bonds was transferred to the Debt Service Fund (nonreciprocal).
4.A private foundation contributes a stock portfolio with a fair value of $100,000 to the county.A trust agreement specifies the earnings on the fund is to be used by the local park which is owned and operated by a private foundation,and the principal is to be held intact indefinitely.
5.The county sends bills out for water and sewer provided to residents,amounting to $340,000.
Required:
Prepare the necessary journal entries for each of the above transactions for all funds affected.Be sure to identify the fund type for each entry.
Q2) Governments use proprietary funds to account for business-type activities. A)True B)False
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Chapter 22: Accounting for Not-For-Profit Organizations
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Q1) Which of the following is not true?
A)A not-for-profit entity operates for purposes other than to provide goods or services at a profit.
B)A not-for-profit entity may be governmental or non-governmental.
C)A not-for-profit entity may possess ownership interests like a corporation.
D)A not-for-profit entity receives resources from resource providers who do not expect commensurate or proportionate pecuniary return.
Q2) An alumnus made a donation of adjoining land to a not-for-profit,nongovernmental university.The donor made no specifications regarding the time period or use of the land.The university would record the gift as
A)an endowment asset.
B)temporarily restricted revenue.
C)unrestricted revenue.
D)permanently restricted support.
Q3) Not-for-profits account for revenues and expenses using the modified accrual basis of accounting.
A)True
B)False
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24
Chapter 23: Estates and Trusts
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Q1) Under the Uniform Probate Code,the personal representative must publish for what time period a notice in a newspaper of general circulation in the county in which the decedent resided?
A)For one week
B)For two weeks
C)For three weeks
D)For five weeks
Q2) An estate is subject to federal tax on income earned from the date of death until final settlement of the estate.
A)True
B)False
Q3) A fiduciary is an individual or an entity authorized to take possession of the property of others.
A)True
B)False
Q4) In accounting for interest income on bond investments included in the estate,bond premiums and discounts must be amoritized.
A)True
B)False
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