Intermediate Accounting II
Textbook Exam Questions
Course Introduction
Intermediate Accounting II is a continuation of the study of financial accounting principles and practices introduced in Intermediate Accounting I. This course delves deeper into complex accounting topics such as liabilities, stockholders equity, investments, revenue recognition, income taxes, pensions, leases, accounting changes, and error analysis. Emphasis is placed on the application of generally accepted accounting principles (GAAP) to real-world situations, the preparation and interpretation of financial statements, and the use of accounting information for decision-making. Through problem-solving, case studies, and analysis of current standards, students develop a more comprehensive understanding of advanced accounting concepts and their implications in the business environment.
Recommended Textbook
Modern Advanced Accounting in Canada9th Edition by Darrell Herauf
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12 Chapters
713 Verified Questions
713 Flashcards
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Page 2
Chapter 1: Conceptual and Case Analysis Frameworks for Financial Reporting
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Sample Questions
Q1) What approach did Canada first decide to take with respect to convergence with IFRS?
A) Harmonization of CPA Canada Handbook with IFRS.
B) Substituting IFRS for Canadian GAAP when approved by the IASB.
C) Adopting some but not necessarily all IFRSs by reviewing them on a case by case basis.
D) Reviewing them with all publically accountable entities to see which ones would be acceptable.
Answer: A
Q2) The CPA Canada Handbook - Accounting is the handbook of Canadian accounting standards. Why do companies in Canada ensure that their financial reporting is consistent with Canadian GAAP?
A) Their bank requires them to do so.
B) Their auditors require them to do so.
C) Reporting under the CPA Canada Handbook - Accounting is required by public companies' boards of directors.
D) Compliance with the CPA Canada Handbook - Accounting pronouncements is usually required by many legal statutes.
Answer: D
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Chapter 2: Investments in Equity Securities
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Sample Questions
Q1) On January 1, 2019, Joyce Inc. paid $600,000 to purchase 25% of Mark Inc's outstanding voting shares. Joyce has significant influence over Mark. Mark's earnings for 2019 and 2020 were $100,000 and $200,000 respectively. Mark declared and paid dividends in the amount of $20,000 and $10,000 during 2019 and 2020, respectively.
Required:
Calculate the balance in the Investment in Mark Inc. account as at December 31, 2020. Answer: Joyce Inc.
Investment in Mark Account
As at December 31, 2020 \(\begin{array}{|l|c|}
\hline \text { Acquisition cost: } & \$ 600,000 \\
\hline \text { Pro-rata share of Mark's 2019 Net Income } & \$ 25,000 \\
\hline \text { Pro-rata share of Mark's 2019 Dividends } & (\$ 5,000) \\\hline \text { Pro-rata share of Mark's 2020 Net Income } & \$ 50,000 \\
\hline \text { Pro-rata share of Mark's 2020 Dividends } & (\$ 2,500) \\
\hline \text { Investment in Mark Inc. as at December 31,2020 } & \$ 667,500\\ \hline \end{array}\)
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Page 4
Chapter 3: Business Combinations
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Sample Questions
Q1) In general, which of the following statements about the income tax implications of the form of a business combination is true?
A) An acquisition of shares is generally better for the acquirer but worse for the vendor.
B) An acquisition of net assets is generally better for the acquirer but worse for the vendor.
C) An acquisition of shares is generally better for both the acquirer and the vendor.
D) An acquisition of net assets is generally better for both the acquirer and the vendor
Answer: B
Q2) Which of the following is considered to be part of the acquisition cost of a subsidiary?
A) Due diligence fees paid to lawyers.
B) The fair value of assets transferred by the acquirer.
C) The costs of issuing debt or shares.
D) Amounts paid to accountants for advice.
Answer: B
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Chapter 4: Consolidation of Non-Wholly Owned
Subsidiaries
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Sample Questions
Q1) Which of the following is a TRUE statement pertaining to a bargain purchase?
A) A bargain purchase occurs when the total consideration is less than the net book value of the subsidiary's identifiable net assets.
B) A bargain purchase occurs when the total consideration is less than the fair market value of the subsidiary's identifiable net assets.
C) A bargain purchase occurs when the total consideration is greater than the fair market value of the subsidiary's identifiable net assets.
D) A bargain purchase occurs when the total consideration is greater than the net book value of the subsidiary's identifiable net assets.
Q2) Why might the fair value of the non-controlling interest in a subsidiary on the date that it is acquired in a business combination not be proportionate to the price per share paid by the parent company to acquire control? How do the IFRS recognize this?
Q3) Various methods have been proposed as solutions to preparing consolidated financial statements for non-wholly owned subsidiaries. Provide the methods and include your reasoning to support the method(s) that is/are being adopted under IFRS.
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Page 6
Chapter 5: Consolidation Subsequent to Acquisition Date
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Sample Questions
Q1) Selectron Inc. acquired 60% of Insor Inc. on January 1, 2019 for $180,000, when Insor's Common Shares and Retained Earnings were worth $60,000 and $180,000 respectively. Insor's fair values approximated their book values on that date. Selectron currently uses the Equity Method to account for its investment in Insor.
During 2019, investment income in the amount of $12,000 and dividends in the amount of $1,200 were recorded in Selectron's Investment in Insor account. During 2020, investment income in the amount of $24,000 and dividends in the amount of $2,400 were recorded in Selectron's Investment in Insor account. Insor declares dividends in the amount of 10% of its earnings.
Required:
a) Compute Insor's net income for 2019 and 2020.
b) Compute the amount of dividends declared by Insor in each year.
c) Compute the balance in the non-controlling interest account as at December 31, 2020.
Q2) Prepare a consolidated balance sheet for Par Inc. as at June 30, 2021.
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Chapter 6: Intercompany Inventory and Land Profits
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Sample Questions
Q1) On June 30, 2018, Parent Company sold some land to its subsidiary for $240,000. The land had cost Parent Company $120,000 when it was acquired three years previously. The transaction was subject to income tax at a rate of 20%. On June 30, 2020, the subsidiary sold the land to an outside party for $275,000. This transaction was also subject to income tax at a 20% rate. Parent Company owns 75% of the outstanding shares of its subsidiary and accounts for its investment using the cost method. On December 31, 2018, the land account balance in the books of Parent Company is $300,000 and in the books of the subsidiary is $300,000. No acquisition differential was allocated to land. What will be the amount of land in the consolidated balance sheet at December 31, 2018?
A) $480,000
B) $504,000
C) $510,000
D) $600,000
Q2) When are profits from intercompany land sales realized?
A) They are realized only when sold to outsiders.
B) They are realized once legal ownership of the land has been transferred.
C) They are realized when consideration has been received for the land.
D) They are realized when an agreement is signed with respect to ownership of the land.
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Page 8
Chapter 7: A Intercompany Profits in Depreciable Assets B
Intercompany
Bondholdings
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Q1) Duff Inc. owns 75% of Paddy Corp. and uses the Equity Method to account for its investment. Paddy purchased $120,000 face value of Duff's 12% par value bonds on January 1, 2020 for $100,000, when Duff's bond liability consisted of $240,000 par of 12% bonds maturing on January 1, 2030.
There was an unamortized bond discount of $20,000 attached to the bonds on that date. Interest payment dates are June 30 and December 31 each year. Straight line amortization is used.
Both companies have a December 31 year end. Intercompany bond gains and losses are to be allocated to each company.
During 2020, Paddy earned a net income of $80,000 and paid dividends of $20,000. What amount of interest expense, excluding amortization of the bond discount, (if any) would have to be eliminated in 2020 as a result of the intercompany sale of the bonds?
A) None
B) $12,000
C) $12,200
D) $14,400
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Page 9
Chapter 8: Consolidated Cash Flows and Changes in Ownership
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Sample Questions
Q1) ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting shares for $350,000 on January 1, 2020. On the date of acquisition, 123's common shares and retained earnings were valued at $120,000 and $180,000, respectively. 123's book values approximated its fair values on the acquisition date with the exception of a patent and a trademark, neither of which had been previously recorded. The fair values of the patent and trademark on the date of acquisition were $30,000 and $20,000 respectively.
On January 2, 2020, ABC sold 7,000 shares of 123 on the open market for $57,750. ABC Inc. uses the equity method to account for its investment in 123 Inc. What would be the carrying amount of the "Investment in 123 Inc." account after the sale?
A) $350,000.
B) $70,000.
C) $280,000.
D) $292,250.
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Chapter 9: Other Consolidation Reporting Issues
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Q1) John Inc and Victor Inc. formed a joint venture on January 1, 2020. John invested plant and equipment with a book value of $500,000 and a fair value of $800,000 for a 30% interest in the venture which was to be called Jinxtor Ltd. Victor contributed assets with a fair value of $2,000,000 (including $200,000 in cash) for its 70% stake in Jinxtor. Jinxtor reported a net income of $3,000,000 for 2020. John's plant and equipment were estimated to provide an additional 5 years of utility to Jinxtor. The transactions set out above were considered to be of commercial substance.
Assume that the facts provided above with respect to the Jinxtor Joint Venture remain unchanged except that John receives $200,000 in return for investing its plant and equipment.
What would be the realized portion of the unrealized gain taken into income for the year ended on December 31, 2020 arising from John's investment in Jinxtor?
A) Nil
B) $13,500
C) $28,500
D) $60,000
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11
Chapter 10: Foreign Currency Transactions
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Q1) On January 1, 2020, Canadian Music International (CMI), a manufacturer of high-end recording equipment based in Toronto, shipped US$120,000 worth of inventory to its main U.S. distributor in Chicago, with full payment of these goods due by February 28, 2020. CMI has a January 31 year end. A list of significant dates and exchange rates is shown below. \[\begin{array} { | l | l | }
\hline \text { Transaction Date: Jaruaary } 1,2020 & \text { US } \$ 1 = \text { CDN } \$ 1.141 \\
\hline \text { Year-End Date: Jaruary } 31,2020 & \text { US } \$ 1 = \text { CDN } \$ 1.142 \\
\hline \text { Setternent Date: February 28, 2020 } & \text { US } \$ 1 = \text { CDN } \$ 1.145 \\
\hline
\end{array}\] The invoice price billed by CMI was US$120,000.
What is the amount of CMI's foreign exchange gain or loss at year-end?
A) CDN$120 loss
B) CDN$480 gain
C) CDN$120 gain
D) Nil; foreign exchange gains or losses are deferred to settlement
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Page 12
Chapter 11: Translation and Consolidation of Foreign Operations
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Q1) Which of the following statements is correct?
A) If the functional currency of the foreign operation is different than the parent's functional currency, the monetary items must be translated using closing rates.
B) If the functional currency of the foreign operation is different than the parent's functional currency, the monetary items must be translated using average rates.
C) If the functional currency of the foreign operation is different than the parent's functional currency, the shareholders' equity must be translated using closing rates.
D) If the functional currency of the foreign operation is the same as the parent's functional currency, the non-monetary items recorded at cost must be translated using average rates.
Q2) Under the functional currency translation (FCT) method, which of the following statements is correct?
A) The relationship of balance sheet items is best preserved.
B) A single historic rate is used to translate all income statement items.
C) A net asset exposure is most likely.
D) Historic rates are used to translate most non-monetary items.
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Chapter 12: Accounting for Not-For-Profit and Public Sector Organizations
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Q1) A statement of changes in net assets in the financial statements of a not-for-profit organization corresponds most closely to which of the following in the financial statements of a profit-oriented business which reports under IFRS?
A) The statement of financial position.
B) The statement of cash flows.
C) The income statement.
D) The statement of changes in shareholders' equity.
Q2) Describe what fund accounting is and why is it used for not-for-profit organizations.
Q3) Assuming a not-for-profit organization used the restricted fund method and had separate funds for the purpose for which donations were intended, how should investment income earned on donation revenue be accounted for if the donation revenue was a restricted contribution but there was no restriction placed on the use of the investment income?
A) As investment income in the general fund.
B) As investment income in the restricted fund.
C) As donation revenue in the restricted fund.
D) As a direct increase in net assets in the restricted fund.
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Page 14