Intermediate Accounting II
Pre-Test Questions
Course Introduction
Intermediate Accounting II builds upon the foundational concepts introduced in the first part of the course, diving deeper into the theory and application of accounting standards. This course focuses on the complex areas of financial reporting, including long-term liabilities, investments, income taxes, pensions, leases, and shareholders equity. Students will critically analyze financial statements, learn how to apply relevant accounting standards (such as those issued by the FASB or IFRS), and explore the ethical considerations involved in accounting practices. Through a combination of lectures, problem-solving exercises, and case studies, students will enhance their technical competence and prepare for advanced studies or careers in accounting and finance.
Recommended Textbook
Advanced Accounting 6th Edition by Debra
C. Jeter
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Page 2
Chapter 1: Introduction to Business Combinations and the
Conceptual Framework
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Q1) Which of the following situations best describes a business combination to be accounted for as a statutory merger?
A)Both companies in a combination continue to operate as separate,but related,legal entities.
B)Only one of the combining companies survives and the other loses its separate identity.
C)Two companies combine to form a new third company,and the original two companies are dissolved.
D)One company transfers assets to another company it has created.
Answer: B
Q2) Many of FASB's recent pronouncements indicate a shift away from historical cost accounting toward:
A)an elevated status for the Statements of Financial Accounting Concepts.
B)convergence of standards.
C)fair value accounting.
D)representationally faithful reporting.
Answer: C
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Chapter 2: Accounting for Business Combinations
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Q1) Parental Company and Sub Company were combined in an acquisition transaction.Parental was able to acquire Sub at a bargain price.The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Parental.After eliminating previously recorded goodwill,there was still some "negative goodwill." Proper accounting treatment by Parental is to report the amount as:
A)paid-in capital.
B)a deferred credit,which is amortized.
C)an ordinary gain.
D)an extraordinary gain.
Answer: C
Q2) Under SFAS 141R,what value of the assets and liabilities is reflected in the financial statements on the acquisition date of a business combination?
A)Carrying value
B)Fair value
C)Book value
D)Average value
Answer: B
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Chapter 3: Consolidated Financial Statements Date of Acquisition
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Q1) Reasons a parent company may pay more than book value for the subsidiary company's stock include all of the following EXCEPT:
A)the fair value of one of the subsidiary's assets may exceed its recorded value because of appreciation.
B)the existence of unrecorded goodwill.
C)liabilities may be overvalued.
D)stockholders' equity may be undervalued.
Answer: D
Q2) In which of the following cases would consolidation be inappropriate?
A)The subsidiary is in bankruptcy.
B)Subsidiary's operations are dissimilar from those of the parent.
C)The parent owns 90 percent of the subsidiary's common stock,but all of the subsidiary's nonvoting preferred stock is held by a single investor.
D)Subsidiary is foreign.
Answer: A
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Chapter 4: Consolidated Financial Statements After Acquisition
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Q1) Consolidated net income for a parent company and its partially owned subsidiary is best defined as the parent company's:
A)recorded net income.
B)recorded net income plus the subsidiary's recorded net income.
C)recorded net income plus the its share of the subsidiary's recorded net income.
D)income from independent operations plus subsidiary's income resulting from transactions with outside parties.
Q2) On January 1,2017,Panda Company purchased 25% of Skill Company's common stock; no goodwill resulted from the acquisition.Panda Company appropriately carries the investment using the equity method of accounting and the balance in Panda's investment account was $190,000 on December 31,2017.Skill reported net income of $120,000 for the year ended December 31,2017 and paid dividends on its common stock totaling $48,000 during 2017.How much did Panda pay for its 25% interest in Skill?
A)$172,000
B)$202,000
C)$208,000
D)$232,000
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Page 6
Chapter 5: Allocation and Depreciation of Differences
Between Implied and Book Values
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Q1) Push down accounting is an accounting method required for the subsidiary in some instances such as the banking industry.Briefly explain the concept of push down accounting.
Q2) Under which set of circumstances would it not be appropriate to assume the value the noncontrolling shares is the same as the controlling shares?
A)The acquisition is for less than 100% of the subsidiary.
B)The fair value of the noncontrolling shares can be inferred from the value implied by the acquisition price.
C)Active market prices for shares not obtained by the acquirer imply a different value.
D)The amount of the "control premium" cannot be determined .
Q3) In preparing consolidated working papers,beginning retained earnings of the parent company will be adjusted in years subsequent to acquisition with an elimination entry whenever:
A)a noncontrolling interest exists.
B)it does not reflect the equity method.
C)the cost method has been used only.
D)the complete equity method is in use.
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Page 7
Chapter 6: Elimination of Unrealized Profit on Intercompany
Sales of Inventory
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Q1) P Corporation acquired a 60% interest in S Corporation on January 1,2017,at book value equal to fair value.During 2017,P sold merchandise that cost $225,000 to S for $315,000.One-third of this merchandise remained in S's inventory at December 31,2017.S reported net income of $200,000 for 2017.P's income from S for 2017 is:
A)$60,000.
B)$90,000.
C)$120,000.
D)$102,000.
Q2) P Company sold merchandise costing $240,000 to S Company (90% owned)for $300,000.At the end of the current year,one-third of the merchandise remains in S Company's inventory.Applying the lower-of- cost-or-market rule,S Company wrote this inventory down to $92,000.What amount of intercompany profit should be eliminated on the consolidated statements workpaper?
A)$20,000.
B)$18,000.
C)$12,000.
D)$10,800.
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Page 8
Chapter 7: Elimination of Unrealized Gains or Losses on
Intercompany Sales of Property and Equipment
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Q1) In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a gain,the noncontrolling interest in consolidated income is computed by multiplying the noncontrolling interest percentage by the subsidiary's reported net income:
A)minus the net amount of unrealized gain on the intercompany sale.
B)plus the net amount of unrealized gain on the intercompany sale.
C)minus intercompany gain considered realized in the current period.
D)plus intercompany gain considered realized in the current period.
Q2) Petunia Company owns 100% of Sage Corporation.On January 1,2017 Petunia sold equipment to Sage at a gain.Petunia had owned the equipment for four years and used a ten-year straight-line rate with no residual value.Sage is using an eight-year straight-line rate with no residual value.In the consolidated income statement,Sage's recorded depreciation expense on the equipment for 2017 will be reduced by:
A)10% of the gain on sale.
B)12 1/2% of the gain on sale.
C)80% of the gain on sale.
D)100% of the gain on sale.
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Chapter 8: Changes in Ownership Interest
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Q1) P Corporation purchased an 80% interest in S Corporation on January 1,2016,at book value for $300,000.S's net income for 2016 was $90,000 and no dividends were declared.On May 1,2016,P reduced its interest in S by selling a 20% interest,or one-fourth of its investment for $90,000.What will be the Consolidated Gain on Sale and Subsidiary Income Sold for 2016?
A)Consolidated Gain on Sale,$9,000; Subsidiary Income Sold,$6,000
B)Consolidated Gain on Sale,$9,000; Subsidiary Income Sold,$15,000
C)Consolidated Gain on Sale,$15,000; Subsidiary Income Sold,$6,000
D)Consolidated Gain on Sale,$15,000; Subsidiary Income Sold,$15,000
Q2) A parent's ownership percentage in a subsidiary may change for several reasons.Identify three reasons the ownership percentage may change.
Q3) The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the parent company's share of the subsidiary's net assets:
A)increasing.
B)decreasing.
C)remaining unchanged.
D)increasing,decreasing,or remaining unchanged.
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Chapter 9: Intercompany Bond Holdings and Miscellaneous Topics Consolidated Financial Statements
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Q1) Which of the following methods of allocating the gain or loss on an intercompany bond retirement is the soundest conceptually?
A)The gain (loss)is allocated to the company that issued the bonds.
B)The gain (loss)is allocated to the company that purchased the bonds.
C)The gain (loss)is allocated to the parent company.
D)The gain (loss)is allocated between the purchasing and issuing companies.
Q2) Parker Company owns 90% of the outstanding common stock of Stagger Company.On January 1,2014,Stagger Company issued $500,000,12%,ten-year bonds. On January 1,2016,Parker Company paid $315,000 for Stagger Company bonds with a par value of $300,000 and a carrying value of $297,600.Both companies use the straight-line method to amortize bond premiums and discounts.Parker Company accounts for the investment using the cost method of accounting.
Parker Company would report a balance in the Investment in Stagger Company Bonds account on December 31,2016,of:
A)$315,000.
B)$297,600.
C)$313,125.
D)$300,000
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Chapter 10: Insolvency Liquidation and Reorganization
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Q1) Tangent Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims.Unsecured claims will be paid at the rate of thirty cents on the dollar.Arrow holds a note receivable from Tangent for $90,000 collateralized by an asset with a book value of $60,000 and a liquidation value of $30,000.The amount to be realized by Arrow on this note is:
A)$30,000.
B)$48,000.
C)$60,000.
D)$90,000.
Q2) When fresh-start reporting is used according to Statement of Position (SOP)90-7 (now incorporated in FSB ASC topic 852),the implication is that a new firm exists.Which of the following statements is NOT correct about fresh-start accounting?
A)Assets are reported at fair values.
B)Beginning retained earnings is reported at zero.
C)The fair value of the assets must be less than the post liabilities and allowed claims.
D)The original owners must own less than 50% of the voting stock after reorganization.
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Chapter 11: International Financial Reporting Standards
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Q1) Property,plant and equipment are valued at:
A)historical cost under both IFRS and US GAAP.
B)historical cost or revalued amounts under both IFRS and US GAAP.
C)revalued amounts under IFRS.
D)historical cost under US GAAP while IFRS allows the assets to be valued at either historical cost or revalued amounts.
Q2) New terminology introduced under the joint IFRS- US GAAP Customer Consideration
(Allocation)Model includes all of the following EXCEPT:
A)revenue recognition voids.
B)contract rights.
C)net contract asset/ liability.
D)performance obligations.
Q3) The roles of the IASC Foundation include:
A)establishing global standards for financial reporting.
B)coordinating the filing requirements of stock exchange regulatory agencies.
C)financing IASB operations.
D)all of these are roles of the IASC Foundation.
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Page 13
Chapter 12: Accounting for Foreign Currency Transactions and Hedging Foreign
Exchange
Risk
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Q1) A transaction loss would result from:
A)an increase in the exchange rate applicable to an asset denominated in a foreign currency.
B)a decrease in the exchange rate applicable to a liability denominated in a foreign currency.
C)the import of merchandise when the transaction is denominated in a foreign currency.
D)a decrease in the exchange rate applicable to an asset denominated in a foreign currency.
Q2) A discount or premium on a forward contract is deferred and included in the measurement of the related foreign currency transaction if the contract is classified as a:
A)hedge of a net investment in a foreign entity.
B)hedge of an exposed asset or liability position.
C)hedge of an identifiable foreign currency commitment.
D)contract acquired to speculate in the movement of exchange rates.
Q3) There are a number of business situations in which a firm may acquire a forward exchange contract.Identify three common situations in which a forward exchange contract can be used as a hedge.
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Chapter 13: Translation of Financial Statements of Foreign
Affiliates
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Q1) Which of the following would be restated using the current exchange rate under the temporal method?
A)Marketable securities carried at cost.
B)Inventory carried at market.
C)Common stock.
D)None of these.
Q2) Which of the following would be restated using the average exchange rate under the temporal method?
A)cost of goods sold
B)depreciation expense
C)amortization expense
D)None of these
Q3) The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called:
A)verification.
B)translation.
C)remeasurement.
D)None of these.
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Chapter 14: Reporting for Segments and for Interim
Financial Periods
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Q1) To determine whether a substantial portion of a firm's operations are explained by its segment information,the combined revenue from sales to unaffiliated customers of all reportable segments must constitute at least:
A)10% of the combined revenue of all operating segments.
B)75% of the combined revenue of all operating segments.
C)10% of the combined revenue from sales to unaffiliated customers of all operating segments.
D)75% of the combined revenue from sales to unaffiliated customers of all operating segments.
Q2) In SFAS No.131,the FASB requires all public companies to report a variety of information for reportable segments.Define a reportable segment and identify the information to be reported for each reportable segment.
Q3) Which of the following is NOT required to be disclosed by SFAS No.131?
A)Information concerning the enterprise's products.
B)Information related to an enterprise's foreign operations.
C)Information related to an enterprise's major suppliers.
D)All of theses are required disclosures.
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Page 16
Chapter 15: Partnerships: Formation, operation and Ownership Changes
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Q1) Robbie and Ruben are partners operating a portable toilet lease and maintenance operation.For 2017,net income was $50,000 (without taking into consideration the salary allowances).Robbie and Ruben have salary allowances of $90,000 and $60,000,respectively,and remaining profits and losses are shared 6:4. If their agreement specifies that salaries are allowed only to the extent of income,based on a prorata share of their salary allowances,the division of profits would be:
A)$20,000 and $30,000
B)$50,000 and $-0-
C)$30,000 and $20,000
D)$25,000 and $25,000
Q2) The partnership agreement of Powell,Gaunt,and Holl allows Gaunt a bonus of 10% of income after the bonus,salaries of $30,000 per partner and interest of 6% on average capital balances of $120,000,$150,000,and $180,000 for Powell,Gaunt,and Holl,respectively.The amount of Gaunt's bonus,assuming income before bonus,salaries,and interest of $315,000,is
A)$18,000.
B)$22,000.
C)$19,800.
D)$31,500.
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Chapter 16: Partnership Liquidation
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Q1) In an advance plan for installment distributions of cash to partners of a liquidating partnership,each partner's loss absorption potential is computed by:
A)dividing each partner's capital account balance by the percentage of that partner's capital account balance to total partners' capital.
B)multiplying each partner's capital account balance by the percentage of that partner's capital account balance to total partners' capital.
C)dividing the total of each partner's capital account less receivables from the partner plus payables to the partner by the partner's profit and loss percentage.
D)some other method.
Q2) Which of the following statements is correct?
A)Personal creditors have first claim on partnership assets.
B)Partnership creditors have first claim on partnership assets.
C)Partnership creditors have first claim on personal assets.
D)Partnership creditors have first claim on partnership assets; and partnership creditors have first claim on personal assets.
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18
Chapter 17: Introduction to Fund Accounting
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Q1) The two basic statements prepared for expendable fund entities are a balance sheet and a(n):
A)income statement.
B)statement of revenue.
C)statement of expenditures and encumbrances.
D)none of these.
Q2) Customers' meter deposits which cannot be spent for normal operating purposes would be classified as restricted cash in the balance sheet of which fund?
A)Internal Service
B)Trust
C)Agency
D)Enterprise
Q3) Which of the following requires the use of the encumbrance system?
A)Capital projects fund
B)Debt service fund
C)Internal service fund
D)Enterprise fund
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Page 19
Chapter 18: Introduction to Accounting for State and Local Governmental Units
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Q1) The following events take place:
1.Interest payments in the amount of $20,000 that are the responsibility of the Debt Service Fund are paid by the General Fund.
2.The Internal Service Fund bills the Special Revenue Fund $25,000 for services performed.
3.The Special Revenue Fund transfers $10,000 to the Internal Service Fund as a temporary loan.
4.The General Fund transfers $150,000 to start an Internal Service Fund.
Required:
Identify the interfund activity as a loan,services provided and used,interfund transfer,or interfund reimbursement and prepare entries in general journal form to record the transactions on the records of the fund involved.
Q2) For state and local government units,the full accrual basis of accounting should be used for what type of fund?
A)Special revenue
B)General
C)Debt service
D)Internal service
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Chapter 19: Accounting for Nongovernment Nonbusiness
Organizations: Colleges and Universities, hospitals, and
Other Health Care Organizations
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Q1) Which of the following groups of not-for-profit entities must use fund accounting to be in conformity with GAAP?
A)Governmental,Yes; Nongovernmental,Yes
B)Governmental,Yes; Nongovernmental,No
C)Governmental,No; Nongovernmental,Yes
D)Governmental,No; Nongovernmental,No
Q2) Which of the following statements related to pledges is incorrect?
A)Pledges are signed commitments to contribute specific amounts of money on a future date or in installments.
B)Pledges are recorded as revenues when a promise to give is nonrevocable and unconditional.
C)Pledges are generally enforceable contracts.
D)All of these are correct.
Q3) All of the following are a plant fund in colleges and universities EXCEPT:
A)unexpended plant fund.
B)funds for renewals and replacements.
C)investment in plant.
D)plant replacement and expansion fund.
Page 21
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