Course Introduction
Accounting Theory
Study Guide Questions
Accounting Theory explores the fundamental principles and concepts that underlie the practice and development of accounting. This course examines the evolution of accounting thought, the roles and objectives of accounting in society, and the theoretical frameworks guiding accounting standards and policies. Students analyze key issues such as measurement, recognition, disclosure, ethics, and the political, economic, and social factors that influence accounting regulation. Through critical discussion and evaluation of landmark research, the course prepares students to understand, interpret, and contribute to the ongoing debates shaping the future of accounting as a discipline.
Recommended Textbook
Advanced Financial Accounting 6th Edition by Thomas H. Beechy
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Page 2
Chapter 1: Setting the Stage
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Q1) A company has chosen accounting policies that result in maximizing its net income.Which of the following is not a reason for doing this?
A)To comply with loan agreement maintenance tests
B)For favourable performance evaluation
C)For cash flow prediction
D)To attract new investors
Answer: C
Q2) Sheng Ltd. ,a private company,is seeking financing.Why might it be advantageous for Sheng to use IFRS rather than Accounting Standards for Private Enterprises (ASPE)?
A)It is less costly for Sheng to prepare IFRS financial statements.
B)It will give Sheng the appearance of an international company.
C)It will lower Sheng's audit fees.
D)It might enable Sheng to negotiate a lower cost of financing.
Answer: D
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3
Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Townsend Ltd.has the following shareholders:
Palermo Co.- 60%
Nix Ltd.- 30%
Riley Ltd.- 10%
Nix does not conduct any business with Townsend,nor has it been able to secure a seat on the Board of Directors.Which of the following statements is true?
A)Nix has significant influence over Townsend.
B)Nix should consider Townsend to be a special purpose entity.
C)Nix should consider Townsend to be an associated company.
D)Nix should treat Townsend as a non-strategic investment.
Answer: D
Q2) Bela Ltd.has invested in several domestic manufacturing corporations.Which of the following investments would most likely be accounted for under the equity method on Bela's financial statements?
A)A holding of 15,000 of the 50,000 outstanding common shares of Earthwise Co.
B)A holding of 3,000 of the 10,000 outstanding preferred shares of Earthbent Co.
C)A holding of 5,000 of the 60,000 outstanding common shares of Earth-Kind Co.
D)A holding of 20,000 of the 25,000 outstanding common shares of Earth-Clean Co.
Answer: A
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Chapter 3: Business Combinations
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Q1) Which of the following is not a reason why a private enterprise may be acquired as a bargain purchase?
A)It is a family business and the next generation does not want to to continue the business.
B)The owner has health problems and does not have a successor.
C)The business only has equity financing and has no debt financing.
D)The owner is no longer interested in the business.
Answer: C
Q2) At December 31,20X0,Crowe Company has 80,000 common shares outstanding while Dylan Inc.has 40,000 common shares outstanding.Crowe wishes to gain control over Dylan and will enter into a reverse takeover of Dylan to gain Dylan's listing on the stock exchange.In order to facilitate the reverse takeover,which of the following would have to occur?
A)Dylan would have to issue more than 40,000 shares.
B)Dylan would have to issue less than 40,000 shares.
C)Crowe would have to issue less than 80,000 shares.
D)Crowe would have to issue more than 80,000 shares.
Answer: A
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Page 5
Chapter 4: Wholly-Owned Subsidiaries: Reporting
Subsequent to Acquisition
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Q1) Inventory was acquired as part of a business combination at the end of 20X1.The inventory was sold in 20X2.How should the fair value increment for the inventory at acquisition be treated for consolidation at the end of 20X2?
A)It should be added to inventory.
B)It should be added to sales.
C)It should be added to the cost of goods sold.
D)It should be added to retained earnings.
Q2) Piri Ltd.acquired 100% of the commons shares of Golden Co.This business combination resulted in $100,000 of goodwill.Piri allocated the goodwill to three cash-generating units.At its year-end,Piri conducts a goodwill impairment test.Which of the following statements about the impairment test is true?
A)The impairment test is applied to Golden Co.as a whole.
B)The impairment test is applied to the business combination as a whole.
C)The impairment test is applied to each of the three cash-generating units to which goodwill has been allocated.
D)Piri is not required to conduct an impairment test unless its circumstances have changed materially from its previous year.
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Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Which of the following statements about IFRS 3,Business Combinations is true?
A)IFRS 3 allows organizations to use either the parent-company method or the entity method.
B)IFRS 3 allows organizations to use either the parent-company extension method or the entity method.
C)IFRS 3 allows organizations to use either the parent-company method or the parent-company extension method.
D)IFRS 3 allows organizations to use either the parent-company method,the parent-company extension method,or the entity method.
Q2) Pooke Co.acquired 75% of Finch Ltd.3 years ago.In calculating the balance for the non-controlling interest,Pooke started with the net income from Finch's current year-end single-entity financial statements.Which of the following adjustments must be added to Finch's net income in calculating Finch's adjusted net income?
A)Amortization of fair value increments
B)Unrealized gain on an upstream sale of a capital asset
C)Unrealized profit on upstream sales of inventory in the current year
D)Realized profits in the current year on upstream sales of inventory from the previous year
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Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Chandler Ltd.owns 65% of Stork Co.and accounts for its investment using the cost method.During 20X3,Chandler sold its only land holding to Stork for a $25,000 profit.At the end of 20X4,Stork showed the land on its single-entity financial statement at a value of $100,000.What balance should Chandler show on its consolidated statement of financial position for the land?
A)$0
B)$75,000
C)$100,000
D)$125,000
Q2) On the consolidated statement of financial position,which balances differ Between the parent-company extension method and the entity method?
A)Retained earnings and goodwill
B)Retained earnings and non-controlling interest
C)Goodwill and non-controlling interest
D)Common shares and retained earnings
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8
Chapter 7: Segmented and Interim Reporting
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Q1) The recommendation for interim income tax expense requires the use of which of the following rates in the first quarter?
A)Estimated average
B)Marginal
C)Applicable progressive
D)Loss carryforward
Q2) Under IFRS 8,certain reconciliations,such as total reportable segment revenues to the entity's revenues,are required.Why are these reconciliations required?
A)To prove that the consolidated financial statements balance
B)To ensure that all reportable segments have been identified
C)To show the relative contribution of each segment to the total
D)To show how reportable segments were identified
Q3) Rules for interim reporting require that comparative information be presented.What comparative information should the current statement of financial position include?
A)The same quarter,last year
B)The immediate preceding quarter
C)The year end,last year
D)As budgeted for the period
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Chapter 8: Foreign Currency Transactions and Hedges
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Q1) What exchange rate is usually used to report non-monetary assets on the statement of financial position?
A)Historical rate
B)Spot rate
C)Closing rate
D)Fair value
Q2) Which of the following list would not be effective as a hedge for a Canadian company with a large number of transactions in Japan?
A)Japanese yen held by a Canadian bank.
B)Canadian funds held by a Japanese bank.
C)A forward contract for the purchase of yen.
D)A forward contract for the sale of yen.
Q3) Under IFRS 8,at which exchange rate should monetary assets and liabilities be translated?
A)The exchange rate at the statement of financial position date
B)The closing rate
C)The historical rate
D)The fair value rate
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Chapter 9: Reporting Foreign Operations
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Q1) Under the current-rate method,at what exchange rate is amortization expense translated?
A)At the average rate for the year
B)At the historical rate when the related assets were acquired
C)At the closing rate
D)At the rate at the beginning of the fiscal period
Q2) Which of the following factors is a primary indicator used to choose a functional currency?
A)Autonomy of the subsidiary
B)Proportion of intercompany transactions
C)Sources of competitive forces and regulations
D)Ability of subsidiary to generate cash flows to service its debts
Q3) For private enterprises that use the current-rate method,how does reporting under Accounting Standards for Private Enterprises (ASPE)differ from reporting under IFRS?
A)Exchange gains and losses are reported as other comprehensive income.
B)Exchange gains and losses are reported as net income.
C)Exchange gains and losses are reported as a separate component of shareholders' equity.
D)The current-rate method is not permitted under ASPE.
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Page 11
Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) Sydney won a lottery and made a $500,000 endowment contribution to his alma mater to provide scholarships.Under the deferral method,in the year of contribution,the university should recognize the contribution as which of the following?
A)Unrestricted revenue
B)Restricted revenue
C)Deferred revenue
D)An increase to net assets
Q2) Baseball for All (BFA)is a non-profit organization that runs baseball tournaments and clinics for all ages.It also buys equipment that is needed at the tournaments.It receives government funding from the municipality and tournament and clinic fees that are paid by participants.Generally,annual revenues have been $350,000.This year,BFA received a special grant of $150,000 to buy new equipment.Equipment in the amount of $180,000 was purchased.The equipment is expected to last 5 years.
Required:
Discuss the various methods that BFA can use to record the purchase of the equipment allowed under Canadian GAAP and prepare the appropriate journal entries.As part of your explanation,explain the differences between the expenditure basis and expense basis of reporting.
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Chapter 11: Public Sector Financial Reporting
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Q1) The CICA's Public Sector Accounting Board (PSAB)identified nine unique characteristics of governments that differentiate them from private sector reporting.List these nine characteristics.
Q2) One of the objectives of government is to provide services to the public.In order to meet legislated social goals,another major goal of government is to ________.
A)create a surplus
B)reduce taxation
C)redistribute wealth
D)increase Crown assets
Q3) What does the net debt indicate on a government's statement of financial position?
A)How much revenue the government must raise to cover its past spending
B)The government's ability to provide future services and programs
C)The government's financial position
D)The government's ability to raise revenues to meet its current year expenditures
Q4) In general,there are three types of government organizations.Identify and describe these three types and the accounting standards that are followed by each type of entity.
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Chapter 12: Income Tax Allocation
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Q1) O'Ball Ltd.wants to acquire Kiro Ltd.to take advantage of its tax losses and credit carry forwards.In what way can O'Ball accomplish this?
A)O'Ball can purchase Kiro's net assets.
B)O'Ball can do a share exchange with Kiro.
C)O'Ball can either purchase Kiro's net assets or purchase Kiro's shares.
D)O'Ball can either purchase Kiro's net assets or do a share exchange with Kiro.
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Chapter 13: Income Tax Allocation Subsequent to Acquisition
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Q1) Morin Co.acquired all the shares of Lightfoot Ltd.Lightfoot has a number of amortizable capital assets and has properly recorded the related deferred income taxes on its books.What deferred income tax adjustment must Morin make for its consolidated financial statements?
A)Adjustment for any changes in temporary differences due to the difference between carrying values and tax bases of Lightfoot's depreciable capital assets
B)Adjustment for any changes in temporary differences due to the amortization of fair value increments
C)Adjustment for any changes in temporary differences due to the amortization of goodwill
D)No adjustment is necessary.
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Chapter 14: Good will Impairment Test
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Q1) How often should goodwill acquired in a business combination be tested for impairment?
A)Whenever there is an indication of impairment
B)Whenever there is a change in circumstances in the business
C)At least once a year
D)At least once every two years
Q2) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE).
Q3) How should goodwill acquired in a business combination be allocated?
A)Proportionately to assets
B)Proportionately to fair-value increments
C)To cash-generating units
D)It is not allocated.
Q4) For private enterprises that have acquired goodwill in a business combination,how often should goodwill be tested for impairment?
A)At least once a year
B)At least once every two years
C)Whenever the parent company deems it necessary
D)Whenever there is a change in circumstances
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Chapter 15: Step Purchases
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Q1) Husch Ltd.acquired 35% of the common shares of Megia Ltd.on June 30,20X1.Husch uses the equity method to record its investment.On June 30,20X8,Husch acquired another 40% of Megia's common shares.At June 30,20X8,how should the original 35% ownership be treated?
A)The original valuation of the 35% is added to the valuation of the 40%.
B)The original 35% investment is deemed to have been disposed of and reacquired at the fair value at June 30,20X8 and added to the new acquisition.
C)The carrying value of the original 35% at June 30,20X8 is added to the new acquisition.
D)The original 35% is irrelevant to the new acquisition and should be ignored.
Q2) When an inter-corporate investment is acquired in stages,when does the equity method first becomes appropriate?
A)The initial investment is made
B)The intent to control is determined
C)Significant influence is first achieved
D)When control is attained
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Page 17
Chapter 16: Decreases in Ownership Interest
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Q1) Gumble Ltd.has owned 65% of the common shares of Lopez for several years.This year,Gumble reduced its interest in Lopez to 10%.Which of the following statements is true?
A)Gumble must change from reporting under consolidation to the equity method.
B)Gumble must change from reporting under consolidation to the cost method.
C)Gumbel must change from reporting under the equity method to the cost method.
D)Gumble is not required to change its reporting method.
Q2) When a subsidiary issues shares,________.
A)no gain or loss is recognized
B)a gain or loss is always recognized
C)this reduces minority interest
D)this may increase minority interest
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18
Chapter 17: Preferred and Restricted Shares of Investee Corporation
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Q1) A parent company owns a subsidiary's preferred and common shares.How should the acquisition of the preferred shares be treated?
A)In the same manner as common shares
B)As a retirement of shares
C)As an expense
D)As a deduction from retained earnings
Q2) Ngo Ltd.'s subsidiary has restricted shares.What must Ngo look at in determining non-controlling interest?
A)Number of shares only
B)Participation in earnings only
C)Participation in dividends only
D)Participation in earnings and dividends
Q3) What is a coattail provision?
A)It allows preferred shares to be converted to common shares.
B)It allows restricted shares to become fully voting shares under limited circumstances.
C)It allows common shares to be converted to preferred shares.
D)It allows restricted shares to receive additional dividends.
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Page 19
Chapter 18: Intercompany Bond Holdings
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Q1) Soft Limited owns 70% of the shares of Hard Co.On January 1,20X5,Hard Co.issued
$1,000,000 bonds payable at 6%,due in December 31,20X10.The bonds were issued for $907,542,representing a yield of 8%.The interest is paid annually on December 31.On January 1,20X6,Soft purchased $300,000 face value of the Hard bonds for $287,700 when the bonds were yielding 7%.
Required:
Both companies use the effective interest rate to amortize the bonds.Prepare the journal eliminating journal entries relating to the bonds as they would appear on the consolidated worksheet.The agency method is used.Calculate the consolidated bonds payable account at December 31,20X6,assuming there are no other bonds outstanding.
Q2) A subsidiary has purchased some bonds from its parent company.Under the par-value method,the non-controlling interest is allocated its share of the difference between ________.
A)the bond's market value and face value
B)the bond's face value and carrying value
C)the bond's market value and carrying value
D)the bond's par value and carrying value
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Page 20
Chapter 19: Fund Accounting
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Q1) Which statements are affected by inter-fund loans?
A)Statement of operations and consolidated statements
B)Statement of financial position of the individual funds and consolidated statements
C)Statement of operations and statement of financial position of the individual funds
D)Statement of financial position of the individual funds and statement of changes in net assets
Q2) Sparrow Pension Plan is a not-for-profit organization that administers the pension fund held for the employees of Sparrow Tech Ltd.What type of fund is the pension fund?
A)Reserve fund
B)Self-sustaining fund
C)Fiduciary fund
D)Endowment fund
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