International Accounting Exam Preparation Guide
Course Introduction
International Accounting explores the principles and practices of accounting as they apply in the global context, examining how varying cultural, economic, and legal environments influence financial reporting and disclosure standards worldwide. The course covers comparative accounting systems, the harmonization and convergence of accounting standards particularly through the International Financial Reporting Standards (IFRS) and the challenges of consolidation, translation of foreign currency transactions, and performance evaluation of international operations. Students will also analyze the impact of international taxation, transfer pricing, and ethical considerations on multinational companies, equipping them with the skills needed to interpret and prepare financial statements for organizations with global operations.
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) The first step in estimating goodwill in the excess earnings approach is to:
A)determine normal earnings.
B)identify a normal rate of return for similar firms.
C)compute excess earnings.
D)estimate expected future earnings.
Answer: B
Q2) The two alternative views of consolidated financial statements are the parent company concept and the economic entity concept.Briefly explain the differences between the concepts.
Answer: Under the parent company concept,the consolidated financial statements reflect the stockholders' interests in the parent,plus their undivided interests in the net assets of the parent's subsidiaries.The focus is on the interests of the parent's shareholders.
Under the economic entity concept,control of the whole by a single management is emphasized.With this concept,consolidated financial statements are intended to provide information about a group of legal entities a parent company and its subsidiaries operating as a single unit.
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Chapter 2: Accounting for Business Combinations
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Q1) Once a reporting unit is determined to have a fair value below its carrying value,the goodwill impairment loss is computed by comparing the:
A)fair value of the reporting unit and the fair value of the identifiable net assets.
B)carrying value of the goodwill to its implied fair value.
C)fair value of the reporting unit to its carrying amount (goodwill included).
D)carrying value of the reporting unit to the fair value of the identifiable net assets.
Answer: B
Q2) Under the acquisition method,if the fair values of identifiable net assets exceed the value implied by the purchase price of the acquired company,the excess should be:
A)accounted for as goodwill.
B)allocated to reduce current and long-lived assets.
C)allocated to reduce current assets and classify any remainder as an extraordinary gain.
D)allocated to reduce any previously recorded goodwill on the seller's books and classify any remainder as an ordinary gain.
Answer: D
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Chapter 3: Consolidated Financial Statements Date of Acquisition
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Q1) Under the acquisition method,indirect costs relating to acquisitions should be:
A)included in the investment cost.
B)expensed as incurred.
C)deducted from other contributed capital.
D)none of these.
Answer: B
Q2) What is the method of presentation required by SFAS 160 of "non-controlling interest" on a consolidated balance sheet?
A)As a deduction from goodwill from consolidation.
B)As a separate item within the long-term liabilities section.
C)As a part of stockholders' equity.
D)As a separate item between liabilities and stockholders' equity.
Answer: C
Q3) One reason a parent company may pay an amount less than the book value of the subsidiary's stock acquired is:
A)an undervaluation of the subsidiary's assets.
B)the existence of unrecorded goodwill.
C)an overvaluation of the subsidiary's liabilities.
D)the existence of unrecorded contingent liabilities.
Answer: D
Page 5
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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) When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable net assets,the workpaper entry to allocate the difference between implied and book value includes a:
A)debit to Difference Between Implied and Book Value.
B)credit to Excess of Implied over Fair Value.
C)credit to Difference Between Implied and Book Value.
D)debit to Difference Between Implied and Book Value and credit to Excess of Implied over Fair Value.
Q2) If the fair value of the subsidiary's identifiable net assets exceeds both the book value and the value implied by the purchase price,the workpaper entry to eliminate the investment account:
A)debits Excess of Fair Value over Implied Value.
B)debits Difference Between Implied and Fair Value.
C)debits Difference Between Implied and Book Value.
D)credits Difference Between Implied and Book Value.
Q3) When the value implied by the acquisition price is below the fair value of the identifiable net assets the residual amount will be negative (bargain acquisition).Explain the difference in accounting for bargain acquisition between past accounting and proposed accounting requirements.
Page 7
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Chapter 6: Elimination of Unrealized Profit on Intercompany
Sales of Inventory
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Q1) Pinta Company owns 90% of the common stock of Simplex Company.Simplex Company sells merchandise to Pinta Company at 25% above cost.During 2016 and 2017 such sales amounted to $800,000 and $1,020,000,respectively.At the end of each year,Pinta Company had in its inventory one-fourth of the amount of goods purchased from Simplex Company during that year.Pinta Company reported income of $1,500,000 from its independent operations in 2016 and $1,720,000 in 2017.Simplex Company reported net income of $600,000 in each year and did not declare any dividends in either year.There were no intercompany sales prior to 2016.
Required:
A.Prepare,in general journal form,all entries necessary on the 2017 consolidated statements workpaper to eliminate the effects of intercompany sales.
B.Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement in 2017.
C.Calculate controlling interest in consolidated net income for 2017.
Q2) Determination of the noncontrolling interest in consolidated net income differs depending on whether intercompany sales are downstream or upstream.Explain the difference in calculating noncontrolling interest for downstream and upstream sales.
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Chapter 7: Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment
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Q1) Prince Company owns 104,000 of the 130,000 shares outstanding of Serf Corporation.Serf Corporation sold equipment to Prince Company on January 1,2017 for $740,000.The equipment was originally purchased by Serf Corporation on January 1,2016 for $1,280,000 and at that time its estimated depreciable life was 8 years.The equipment is estimated to have a remaining useful life of four years on January 1,2017.Both companies use the straight-line method to depreciate equipment.In 2018 Prince Company reported net income from its independent operations of $3,270,000,and Serf Corporation reported net income of $820,000 and declared dividends of $60,000.Prince Company uses the cost method to record the investment in Serf Company.
Required:
A.Prepare,in general journal form,the workpaper entries relating to the intercompany sale of equipment that are necessary in the December 31,2018 consolidated financial statements workpapers.
B.Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the consolidated income statement for 2018.
C.Calculate controlling interest in consolidated net income for 2018.
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Page 9
Chapter 8: Changes in Ownership Interest
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Q1) When the parent company sells a portion of its investment in a subsidiary,the workpaper entry to adjust for the current year's income sold to noncontrolling stockholders includes a:
A)debit to Subsidiary Income Sold.
B)debit to Equity in Subsidiary Income.
C)credit to Equity in Subsidiary Income.
D)credit to Subsidiary Income Sold.
Q2) Which one of the following statements regarding IFRS and accounting for step acquisitions is most correct?
A)Under IFRS goodwill is identified and net assets remeasured to fair value for all subsequent transactions,both increasing and decreasing the ownership percentage,after control is achieved.
B)IFRS requires the recording of additional goodwill on subsequent increases in the parent's ownership percentage.
C)Under IFRS acquisition accounting is applied only at the date that control is achieved.
D)IFRS requires the non-controlling interest to be measured at fair value.
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Chapter 9: Intercompany Bond Holdings and
Miscellaneous Topics Consolidated Financial Statements
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Q1) Search Company is a 90% owned subsidiary of Passage Company.On January 1,2016,Search Company purchased for $680,000 bonds of Passage Company that had a carrying value of $725,000 (par value $700,000).The bonds mature on December 31,2017.Both companies use the straight-line method of amortization and have a December 31 year-end.The increase in 2016 consolidated income (i.e.,income before subtracting noncontrolling interest)is:
A)$45,000.
B)$44,000.
C)$54,000.
D)$36,000.
Q2) 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.
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Page 11
Chapter 10: Insolvency Liquidation and Reorganization
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Q1) The final settlement with unsecured creditors is computed by dividing:
A)total net realizable value by total unsecured creditor claims.
B)net free assets by total secured creditor claims.
C)total net realizable value by total secured creditor claims.
D)net free assets by total unsecured creditor claims.
Q2) On January 1,2017,Deal Mart owed Money Bank $1,600,000,under an 8% note with three years remaining to maturity.Due to financial difficulties,Deal Mart was unable to pay the previous year's interest.Money Bank agreed to settle Deal Mart's debt in exchange for land having a fair market value of $1,310,000.Deal Mart purchased the land in 2003 for $1,000,000.
Required:
Prepare the journal entries to record the restructuring of the debt by Deal Mart.
Q3) A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to:
A)accept less than the full amount of their claims.
B)delay settlement of the claim until a later date.
C)force the debtor into a liquidation.
D)accrue interest at a higher rate.
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12
Chapter 11: International Financial Reporting Standards
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Q1) 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.
Q2) One difference between IFRS and GAAP in valuing inventories is that:
A)IFRS,but not GAAP,allows reversals so that inventories written down under lower-of-cost-or-market can be written back up to the original cost.
B)GAAP defines market value as replacement cost where IFRS defines market as the selling price.
C)GAAP strictly adheres to the historical cost concept and does not allow for write-downs of inventory values while IFRS embraces fair value.
D)IFRS,but not GAAP,requires that inventories be valued at the lower of cost or market.
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Chapter 12: Accounting for Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) On July 15,Pinta,Inc.purchased 88,500,000 yen Pinta of parts from a Tokyo company paying 20% down,and the balance is due in 90 days.Interest is payable at a rate of 8% on the unpaid balance.The exchange rate on July 15,was $1.00 = 118 Japanese yen.On October 13,the exchange rate was $1.00 = 114 Japanese yen.
Required:
Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S.dollars.
Q2) 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.
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Page 14
Chapter 13: Translation of Financial Statements of Foreign
Affiliates
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Q1) In preparing consolidated financial statements of a U.S.parent company and a foreign subsidiary,the foreign subsidiary's functional currency is the currency:
A)of the country the parent is located.
B)of the country the subsidiary is located.
C)in which the subsidiary primarily generates and spends cash.
D)in which the subsidiary maintains its accounting records.
Q2) If the functional currency is determined to be the U.S.dollar and its financial statements are prepared in the local currency,SFAS 52,requires which of the following procedures to be followed?
A)Translate the financial statements into U.S.dollars using the current rate method.
B)Remeasure the financial statements into U.S.dollars using the temporal method.
C)Translate the financial statements into U.S.dollars using the temporal method.
D)Remeasure the financial statements into U.S.dollars using the current rate method.
Q3) The translation process can be done using either the current rate method or the temporal method.Explain under what circumstances each of the methods is appropriate.
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Chapter 14: Reporting for Segments and for Interim
Financial Periods
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Q1) Which of the following does NOT have to be disclosed in interim reports?
A)Seasonal costs or expenses.
B)Significant changes in estimates.
C)Disposal of a segment of a business.
D)All of these must be disclosed.
Q2) During the second quarter of 2017,Clearwater Company sold a piece of equipment at a gain of $90,000.What portion of the gain should Clearwater report in its income statement for the second quarter of 2017?
A)$90,000
B)$45,000
C)$30,000
D)$ -0-
Q3) Selected data for a segment of a business enterprise are to be separately reported in accordance with SFAS No.131 when the revenues of the segment is 10% or more of the combined:
A)net income of all segments reporting profits.
B)external and internal revenue of all reportable segments.
C)external revenue of all reportable segments.
D)revenues of all segments reporting profits.
Page 16
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Chapter 15: Partnerships: Formation, operation and Ownership Changes
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Q1) Portney,Grey,and Ross are partners with capital balances of $80,000,$200,000,and $120,000,respectively.Profits and losses are shared in a 3:2:1 ratio.Grey decided to withdraw and the partnership revalued its assets.The value of inventory was decreased by $20,000 and the value of land was increased by $50,000.Portney and Ross then agreed to pay Grey $230,000 for his withdrawal from the partnership.
Required:
Prepare the journal entry to record Grey's withdrawal under the A.bonus method.
B.full goodwill method.
Q2) The profit and loss sharing ratio should be:
A)in the same ratio as the percentage interest owned by each partner.
B)based on relative effort contributed to the firm by the partners.
C)a weighted average of capital and effort contributions.
D)based on any formula that the partners choose.
Q3) Which of the following is an advantage of a partnership?
A)mutual agency
B)limited life
C)unlimited liability
D)none of these
Page 17
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Chapter 16: Partnership Liquidation
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Q1) In a partnership liquidation the final cash distribution to the partners should be made in accordance with the:
A)partners' profit and loss sharing ratio.
B)balances of the partners' capital accounts.
C)ratio of the capital contributions by the partners.
D)ratio of capital contributions less withdrawals by the partners.
Q2) If a partner with a debit capital balance during liquidation is personally solvent,the:
A)partner must invest additional assets in the partnership.
B)partner's debit balance will be allocated to the other partners.
C)other partners will give the partner enough cash to absorb the debit balance.
D)partnership will loan the partner enough cash to absorb the debit balance.
Q3) Offsetting a partner's loan balance against his debit capital balance is referred to as the:
A)marshaling of assets.
B)right of offset.
C)allocation of assets.
D)liquidation of assets.
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Chapter 17: Introduction to Fund Accounting
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Q1) The Expenditures account of a governmental unit is debited when:
A)the budget is recorded.
B)supplies are ordered.
C)supplies encumbered are received.
D)the supplies invoice is paid.
Q2) The GASB has the responsibility for establishing financial accounting standards for all of the following entities EXCEPT:
A)state and local government entities.
B)veterans hospitals.
C)school districts.
D)civic organizations.
Q3) 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.
Q4) Expendable fund entities prepare closing entries at the end of each period just as business enterprises do.Describe the necessary closing entries for expendable funds.
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Chapter 18: Introduction to Accounting for State and Local
Governmental Units
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Q1) GASB Statement No.34 specifies how governments report capital assets.Describe where capital assets are reported in government financial statements.
Q2) All of the following are Governmental (Expendable)Fund Entities EXCEPT the:
A)Capital Projects Fund.
B)Debt Service Fund.
C)Internal Service Fund.
D)Special Revenue Fund.
Q3) The activities of a municipal airport should be accounted for in the:
A)General Fund.
B)Internal Service Fund.
C)Special Revenue Fund.
D)Enterprise Fund.
Q4) Encumbrances would NOT appear in which fund?
A)General
B)Enterprise
C)Capital projects
D)Special revenue
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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) The basic financial statements for all NNOs include a:
A)Balance sheet and Statement of cash flows
B)Statement of activities and Statement of cash flows
C)Balance sheet and Statement of activities
D)Balance sheet,Statement of activities,and Statement of cash flows
Q2) GASB No.35 allows public colleges and universities to:
A)apply guidance designed for special-purpose governments.
B)use FASB standards to permit consistent reporting.
C)optionally follow FASB standards.
D)none of these are correct.
Q3) Which basis of accounting should a voluntary health and welfare organization use?
A)Cash basis for all funds
B)Modified accrual basis for all funds
C)Accrual basis for all funds
D)Accrual basis for some funds and modified accrual basis for other funds
Q4) Contributions to NNOS include gifts of cash,pledges,donated services,and gifts of noncash assets.Explain how contributions are recorded by NNOS.
Page 21
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