Course Introduction
Accounting Theory
Study Guide Questions
Accounting Theory explores the foundational principles, concepts, and frameworks that underpin modern accounting practices. This course examines the philosophical, historical, and institutional contexts shaping accounting standards and decision-making. Students will analyze the development and application of accounting theories, the rationale behind standard-setting processes, and the ethical and social implications of financial reporting. Emphasis is placed on the critical evaluation of accounting practices in response to changing economic, regulatory, and global environments, preparing students to thoughtfully engage with current and emerging issues in the field.
Recommended Textbook
Advanced Financial Accounting 7th Edition by
Thomas H. Beechy
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Page 2
Chapter 1: Setting the Stage
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Q1) What accounting standards are private banks and investment funds required to follow for their consolidated, general-purpose, publicly issued financial statements?
A)IFRS
B)ASPE
C)NFP accounting standards
D)PSAB recommendations
Answer: A
Q2) Which GAAP approach for private companies would smaller countries that do not have well-established standard-setting processes be most likely to use?
A)IFRS for SMEs
B)Full IFRS
C)Disclosed basis of accounting
D)Code law requirement
Answer: A
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Bud Ltd. owns 100% of Calla Co. Calla owns 55% of Daisy Ltd., and Daisy owns 90% of Fern Ltd. Which of the following statements is true?
A)Only Bud has to prepare consolidated financial statements.
B)Only Bud and Calla have to prepare consolidated financial statements.
C)Only Bud and Daisy have to prepare consolidated financial statements.
D)Bud, Calla, Daisy, and Fern have to prepare non-consolidated financial statements.
Answer: D
Q2) Carr Co. owns 100% of the common shares of Ice Tops Ltd. Carr records its investment in Ice Tops using the cost method. Carr and Ice Tops have transactions with each other. In preparing Carr's consolidated financial statements, which of the following should be done?
A)Ice Tops's retained earnings should be deducted from Carr's retained earnings.
B)Ice Tops's share capital should be added to Carr's share capital.
C)Dividends received by Carr from Ice Tops should be deducted from Carr's dividend income.
D)Carr's receivable from Ice Tops should be netted with Carr's accounts receivable.
Answer: C
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Page 4
Chapter 3: Business Combinations
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Q1) How should negative goodwill be shown on the consolidated financial statements of the acquirer?
A)As a gain on the statement of comprehensive income
B)As a loss on the statement of comprehensive income
C)As a liability on the statement of financial position
D)As a separate amount under shareholders' equity on the statement of financial position
Answer: A
Q2) How should the cost of issuing debt in an acquisition be recognized?
A)Expensed
B)Amortized over the term of the debt
C)Deducted from the value of the debt
D)Deducted from shareholders' equity
Answer: C
Q3) What is the most common valuation method used for intangible assets?
A)Market-based
B)Income-based
C)Cost-based
D)Amortized cost
Answer: B
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Chapter 3: Appendix A: AIncome Tax Allocation
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Q1) Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the amount of the deferred tax liability on Castle's consolidated SFP?
A)$40,000
B)$60,000
C)$100,000
D)$280,000
Q2) Castle Ltd. acquired 100% of Bello Ltd. At the time of acquisition, Bello had assets with a tax value of $700,000, carrying value of $800,000, and fair value of $950,000. Both Castle and Bello are subject to a tax rate of 40%. What is the effect of recognizing the deferred tax in accounting for the acquisition?
A)Increase in liabilities and goodwill
B)Decrease in liabilities and goodwill
C)Decrease in liabilities and increase in goodwill
D)Increase in liabilities and decrease in goodwill
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Chapter 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) Under the equity method, what entry should Bateman record on its books?
A) \[\begin{array} { | c | c | }
\hline \text { DR Investment in Thivan } & 100,000 \\
\hline \text { CR Dividend income } & 100,000 \\
\hline
\end{array}\]
B) \[\begin{array} { | l | c | }
\hline \text { DR Investment in Thivan } & 100,000 \\
\hline \text { CR Equity in earnings of Thivan } & 100,000 \\
\hline
\end{array}\]
C) \[\begin{array} { | c | c | }
\hline \text { DR Dividends receivable } & 100,000 \\
\hline \text { CR Investment in Thivan } & 100,000 \\
\hline \end{array}\]
D)No entry is required until the dividends are paid.
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7
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Q1) At the time of acquisition, the fair values of these assets were higher than their carrying values and their tax bases. In Morin's consolidation each year, it must adjust for the deferred taxes that resulted from these temporary differences. Which of the following statements is true?
A)The consolidation adjustment will always result in an increase in the deferred tax liability.
B)The consolidation adjustment will always result in a decrease in the deferred tax liability.
C)The consolidation adjustment can result in either an increase or a decrease in the deferred tax liability.
D)The consolidation adjustment is required only if the tax basis changes.
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Q1) 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
Q2) For private enterprises that have acquired goodwill in a business combination, which of the following is considered a change of circumstances for purposes of testing for goodwill impairment?
A)A large unfavourable income tax reassessment
B)Sale of a capital asset for a small loss
C)A major competitor has ceased operations
D)Retirement of the subsidiary's operations manager
Q3) Under IFRS, 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
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Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Jordan Ltd. acquired 80% of Cool Co. in 20X1. During 20X1, Cool sold inventory to Jordan. At the end of 20X2, the goods were still in Jordan's inventory. Jordan correctly eliminated the $10,000 of unrealized profits on its 20X2 consolidated financial statements and the goods were finally sold in 20X3. In preparing its 20X3 consolidated financial statements, what adjustments should be made with respect to the previously unrealized profit?
A)Increase cost of sales by $10,000, increase retained earnings by $8,000, and increase the non-controlling interest by $2,000.
B)Decrease cost of sales by $10,000, decrease retained earnings by $8,000, and decrease the non-controlling interest by $2,000.
C)Increase both cost of sales and retained earnings by $10,000.
D)No entry is required.
Q2) Explain why a parent might want to own less than 100% of the shares of a subsidiary.
Q3) What is cost of sales on the consolidated statement of income for 20X6?
A)$687,000
B)$680,000
C)$685,600
D)$660,000
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Chapter 5: Appendix A: Step Purchases
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Q1) Under the entity method, the balance of the non-controlling interest at December 31, 20X7, was $660,000. What adjustment should be made to the consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$30,000
B)$136,667
C)$220,000
D)$250,000
Q2) Dinh Co. acquired 60% of Ludo Ltd. five years ago. In the current year, Dinh purchased additional shares from the NCI to bring its holdings to 75%. How should the difference between the purchase consideration paid and the adjustment to the value of the NCI be treated?
A)It should be taken directly to equity, split equally between the shareholders of the parent and the NCI.
B)It should be taken directly to equity, split proportionately between the shareholders of the parent and the NCI.
C)It should be taken directly to equity, all attributed to the shareholders of the parent.
D)It should be taken directly to equity, all attributed to the NCI.
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Chapter 5: Appendix B: 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)Gumble 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 the NCI
D)this may increase the NCI
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12
Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Pal Co. owns 70% of the outstanding common shares of Sadd Ltd. Sadd sold an asset to Pal at a loss. There is no evidence of impairment in the value of the asset sold to Pal. Which of the following statements about the loss is true?
A)The loss should not be eliminated because this is an upstream sale.
B)The loss should not be eliminated because there is no impairment in the value of the asset.
C)The loss should not be eliminated because Pal does not own 100% of Sadd.
D)The loss should be eliminated.
Q2) A few years ago, Locke Ltd. purchased a machine from its wholly owned subsidiary, Dubois Ltd., for $90,000. Locke has just sold the machine to an unrelated party for a $15,000 gain. At the time of the sale, there was still an unrealized gain of $50,000 from the purchase from Dubois. With this sale of the asset to the unrelated party, what is the amount of gain that should be recognized on Locke's consolidated financial statements?
A)$15,000
B)$50,000
C)$55,000
D)$65,000
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Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) Under IFRS, which of the following statements is true?
A)Preferred shares must be classified as debt.
B)Preferred shares must be classified as equity.
C)Preferred shares can be classified as debt or equity depending on the rights attached to them.
D)Preferred shares can be classified as debt or equity at the option of the issuing company.
Q2) Restricted shares may have a cocktail provision. When might a coattail provision take effect?
A)When a company increases its dividends
B)When a buyer tries to acquire control of a company
C)When a company reacquires some of its shares
D)When a company issues preferred shares
Q3) 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
Page 14
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Chapter 6: Appendix B: Intercompany Bond Holdings
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Q1) Gill Ltd. is the wholly owned subsidiary of Basaraba Ltd. Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount. The bonds have an unamortized premium attached. This transaction, in effect, retires the bond and results in a gain. How should the gain be shown?
A)It will appear on Basaraba's separate-entity statement of comprehensive income only.
B)It will appear on both Basaraba's separate-entity and consolidated statements of comprehensive income.
C)It will appear on Basaraba's consolidated statement of comprehensive income only.
D)It will be added to the value of the bonds payable on Basaraba's statement of financial position.
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 its carrying value on the subsidiary's books
C)the bond's market value and its carrying value on the subsidiary's books
D)the bond's par value and carrying value
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Chapter 7: Segment and Interim Reporting
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Q1) When can benefits of an income tax loss in an interim period not be recognized in that period?
A)If the loss will be offset by taxable income later in that year
B)If the loss can be used as a loss carryback
C)If it is more likely than not that a tax loss carryforward benefit will be realized
D)If the loss occurs in the first interim period
Q2) In Canada and the United States, at a minimum, how often are interim financial statements required to be issued?
A)Monthly
B)Bi-monthly
C)Quarterly
D)Semi-annually
Q3) Under the revenue test only, which segments are reportable?
A)Segments A and C only
B)Segments B and D only
C)Segments B, C, and D only
D)All the segments are reportable.
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Chapter 8: Foreign Currency Transactions and Hedges
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Q1) Required:
The company uses the net method to record hedging transactions. Prepare the journal entries that HCB should make to record the events described above.
Q2) What is the effect of fluctuations in exchange rates on accounts payable?
A)Deferred and amortized
B)Deferred to maturity
C)Recognized immediately in income
D)Recognized if losses, deferred if gains
Q3) What is the amount of the premium or discount on the forward exchange contract on December 1, 20X9?
A)A premium of $3,000
B)A discount of $3,000
C)A premium of $5,000
D)A discount of $5,000
Q4) Which approach to foreign currency transactions does IFRS support?
A)One-transaction approach
B)Two-transaction approach
C)Economic theory approach
D)Rate theory approach
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Chapter 9: Reporting Foreign Operations
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Q1) Machinery, land, and buildings were purchased on June 30, 20X4
Bralta is the Brazilian subsidiary of Altapro Co., a Canadian company. Under the current-rate method, what is the balance of the total assets?
A)$2,108,625
B)$2,154,000
C)$2,161,688
D)$2,183,620
Q2) Under the temporal method, which of the following items would be translated using the year-end spot rate?
A)Inventory
B)Land
C)Long-term debentures
D)Building
Q3) Under the temporal method, at what exchange rate is depreciation 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
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Page 18
Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) A university needs to know the cost of delivering each of its programs. Which basis would be the most appropriate for the university to use on its statement of operations?
A)Disbursement basis
B)Expense basis
C)Expenditure basis
D)Cash basis
Q2) Which of the following statements about incorporated not-for-profit (NFP)organizations is true?
A)Incorporated NFP organizations can only issue preferred share capital.
B)Incorporated NFP organizations do not have share capital.
C)Incorporated NFP organizations can only be government-owned.
D)NFP organizations cannot be incorporated.
Q3) A not-for-profit organization is not required to capitalize and amortize its capital assets if the organization ________.
A)has assets that total less than $500,000
B)has a two-year average annual gross consolidated revenue of less than $500,000
C)has an annual change to net assets of less than $500,000
D)has less than 10 full-time employees
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Chapter 10: Appendix A: Fund Accounting
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Q1) The Khoo Music Society, a not-for-profit organization, is purchasing musical instruments to donate to some local schools. Khoo ordered the instruments on August 1, 20X1, and requested the following delivery schedule: \(\begin{array}{|l|c|c|}
\hline\text { September } 15,20 \mathrm{X} 1 & \text { woodwinds } & (\$ 3,000) \\
\hline \text { October } 15,20 \mathrm{X} 1 & \text { strings } & (\$ 5,000) \\
\hline \text { October } 31,20\mathrm{X} 1 & \text { brass } & (\$ 6,000) \\
\hline \text { November } 15,20\mathrm{X} 1 & \text { drums } & (\$ 6,000) \\
\hline
\end{array}\) Khoo uses an encumbrance system and has properly recorded the necessary journal entry at August 1, 20X1. At November 15, 20X1, which of the following accounts should be debited and which statement will be affected?
A)Estimated commitments/statement of operations
B)Encumbrances-instruments/statement of operations
C)Estimated commitments/statement of financial position
D)Encumbrances-instruments/statement of financial position
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Chapter 11: Public Sector Financial Reporting
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Q1) What do the total tangible capital assets 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
Q2) Tangible capital assets owned by governments are viewed differently than tangible capital assets owned by business enterprises. Explain this difference and describe how tangible capital assets are reported for governments.
Q3) 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.
Q4) The Public Sector Accounting Board suggested several objectives for the financial statements of federal, provincial, and territorial governments. List and briefly explain each of the four objectives and how these objectives are met with the various financial statements issued by governments.
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