Accounting Theory
Test Bank
Course Introduction
Accounting Theory explores the conceptual frameworks and underlying principles that form the foundation of accounting practices and standards. This course examines the evolution of accounting thought, the role of regulatory bodies, and the impact of social, ethical, and economic factors on accounting policy decisions. Students will analyze major theories, such as positive and normative accounting theory, and learn how these concepts influence the development, application, and interpretation of accounting information. Through critical examination of case studies and scholarly literature, the course fosters a deeper understanding of how accounting theory underpins reporting, disclosures, and the broader financial environment.
Recommended Textbook
Advanced Financial Accounting 9th Edition by Richard Baker
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Page 2
Chapter 1: Intercorporate Acquisitions and Investments in
Other Entities
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Sample Questions
Q1) A statutory consolidation is a type of business combination in which:
A)one of the combining companies survives and the other loses its separate identity.
B)one company acquires the voting shares of the other company and the two companies continue to operate as separate legal entities.
C)two publicly traded companies agree to share a board of directors.
D)each of the combining companies is dissolved and the net assets of both companies are transferred to a newly created corporation.
Answer: D
Q2) Point Co.purchased 90% of Sharpe Corp.'s voting stock on January 1,20X2 for $5,580,000.Prior to the acquisition,Point held a 10% equity position in Sharpe Company.On January 1,20X2 Point's 10% investment in Sharpe has a book value of $340,000 and a fair value of $620,000.On January 1,20X2 Point records the following:
A)Debit Gain on revaluation of Sharpe's stock $280,000
B)Credit Gain on revaluation of Sharpe's stock $280,000
C)Credit Investment in Sharpe stock $5,860,000
D)Debit Investment in Sharpe stock $6,200,000
Answer: A
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Page 3
Chapter 2: Reporting Intercorporate Investments and
Consolidation of Wholly Owned Subsidiaries With No
Differential
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Sample Questions
Q1) Under the cost method of accounting for a stock investment,the differential:
A)is written off.
B)is amortized.
C)is written down if related to limited-life assets.
D)is not amortized or written off.
Answer: D
Q2) Based on the information provided,what amount of total assets will be reported in the consolidated balance sheet prepared on December 31,20X4?
A)$425,000
B)$525,000
C)$650,000
D)$630,000
Answer: B
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Chapter 3: The Reporting Entity and Consolidation of
Less-Than-Wholly-Owned Subsidiaries With No Differential
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Q1) All of the following statements accurately describe Special Purpose Entities (SPEs)except for:
A)SPEs are corporations,trust or partnerships created for a single specified purpose.
B)SPEs usually have no substantive operations and are used for financing operations.
C)SPEs are used for asset securitization,risk sharing and taking advantage of tax statues.
D)A variable interest entity (VIE)is a type of SPE with a limited number of equity investors.
Answer: D
Q2) Company Pea owns 90 percent of Company Essone which in turn owns 80 percent of Company Esstwo.Company Esstwo owns 100 percent of Company Essthree.Consolidated financial statements should be prepared to report the financial status and results of operations for:
A)Pea.
B)Pea plus Essone.
C)Pea plus Essone plus Esstwo.
D)Pea plus Essone plus Esstwo plus Essthree.
Answer: D
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Chapter 4: Consolidation of Wholly Owned Subsidiaries
Acquired at More Than Book Value
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Q1) Based on the preceding information,what amount of retained earnings will be reported in the consolidated balance sheet prepared immediately after the business combination?
A)$300,000
B)$409,000
C)$259,000
D)$191,000
Q2) Based on the information provided,what amount of net income will be reported in the consolidated financial statements for the year?
A)$226,000
B)$55,000
C)$230,000
D)$171,000
Q3) Based on the preceding information,what amount will be reported for total accounts payable in the consolidated balance sheet for the year 20X8?
A)$56,000
B)$46,000
C)$60,000
D)$42,000
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Chapter 5: Consolidation of Less-Than-Wholly-Owned
Subsidiaries Acquired at More Than Book Value
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Q1) Based on the preceding information,what is the amount of write-off of differential associated with this acquisition recorded by Melkor during 20X9?
A)$0
B)$32,500
C)$26,000
D)$20,000
Q2) Based on the preceding information,what is the amount of comprehensive income attributable to the controlling interest for 20X9?
A)$138,750
B)$131,000
C)$128,750
D)$135,000
Q3) All of the following are examples of how a parent company may lose control over a subsidiary and discontinue future consolidation,except:
A)The parent sells some of its interest in the subsidiary.
B)The subsidiary issues additional common stock.
C)The subsidiary comes under the control of the government or other regulator.
D)The subsidiary issues a stock dividend or a stock split.
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Chapter 6: Intercompany Inventory Transactions
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Q1) When a parent and its subsidiary use a periodic inventory system rather than a perpetual system,the income and asset balances reported in the consolidated financial statements are:
I.affected only if there are upstream intercompany sales of inventory.
II.affected only if there are downstream intercompany sales of inventory.
A)I
B)II
C)Both I and II
D)Neither I nor II
Q2) Based on the information given above,what will be the consolidated net income for 20X6?
A)$357,500
B)$375,000
C)$490,000
D)$317,750
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8
Chapter 7: Intercompany Transfers of Services and
Noncurrent Assets
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Sample Questions
Q1) Based on the preceding information,what amount of consolidated net income should be reported in 20X8?
A)$3,262,000
B)$4,050,000
C)$3,254,100
D)$3,122,000
Q2) Based on the preceding information,in the preparation of the 20X8 consolidated financial statements,equipment will be:
A)debited for $1,000.
B)debited for $10,000.
C)credited for $15,000.
D)debited for $25,000.
Q3) Based on the preceding information,in the preparation of elimination entries related to the equipment transfer for the 20X8 consolidated financial statements,net effect on accumulated depreciation will be:
A)a decrease of $50,000.
B)an increase of $110,000.
C)an increase of $120,000.
D)a decrease of $160,000.
Page 9
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Chapter 8: Intercompany Indebtedness
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Q1) Based on the information given above,what was the effect of DEF's purchase of XYZ's bond on the noncontrolling interest amount reported in XYZ's June 30,20X8,consolidated balance sheet?
A)No effect
B)$35,000 increase
C)$8,500 decrease
D)$8,500 increase
Q2) Based on the information given above,what amount of interest expense will be eliminated in the preparation of the 20X9 consolidated financial statements?
A)$17,000
B)$13,300
C)$18,500
D)$22,200
Q3) Based on the information given above,what amount of gain or loss on bond retirement is included in the 20X7 consolidated income statement?
A)$6,600
B)$4,800
C)$6,000
D)$5,400
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Page 10
Chapter 9: Consolidation Ownership Issues
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Q1) Based on the preceding information,the eliminating entry to prepare the consolidated financial statements for Company A as of December 31,20X9 will include a credit to Investment in Company B-Common Stock for:
A)506,000
B)440,000
C)400,000
D)500,000
Q2) Based on the information provided,what amount will be reported as the noncontrolling interest in the consolidated balance sheet on January 1,20X9?
A)$70,000
B)$130,000
C)$118,000
D)$142,000
Q3) Based on the information provided,what amount of consolidated net income will X Corporation report for 20X8?
A)$148,750
B)$175,000
C)$150,000
D)$158,750
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Chapter 10: Additional Consolidation Reporting Issues
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Q1) Based on the preceding information,what amount will be reported in the consolidated cash flow statement as net cash used in financing activities for 20X9?
A)$40,000
B)$55,000
C)$90,000
D)$10,000
Q2) Which of the following observations concerning the comparisons between the direct and indirect approaches of presenting a cash flow statement is true?
A)The final number of cash flows from operating activities is different under the two approaches.
B)The direct approach provides a clearer picture of cash flows related to operations.
C)Authoritative bodies have generally expressed a preference for the indirect method.
D)A separate reconciliation of operating cash flows and net income is required under the indirect approach.
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Chapter 11: Multinational Accounting: Foreign Currency
Transactions and Financial Instruments
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Q1) Levin company entered into a forward contract to speculate in the foreign currency.It sold 100,000 foreign currency units under a contract dated November 1,20X8,for delivery on January 31,20X9:
In its income statement for the year ended December 31,20X8,what amount of loss should Levin report from this forward contract?
A.$0
B.$300
C.$200
D.$100
Q2) Company X denominated a December 1,20X9,purchase of goods in a currency other than its functional currency.The transaction resulted in a payable fixed in terms of the amount of foreign currency,and was paid on the settlement date,January 10,2010.Exchange rates moved unfavorably at December 31,20X9,resulting in a loss that should:
A.be included as a separate component of stockholders' equity at Dec.31,20X9.
B.be included as a component of income from continuing operations for 20X9.
C.be included as a deferred charge at December 31,20X9.
D.not be reported until January 10,2010,the settlement date.
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Chapter 12: Multinational Accounting: Issues in Financial
Reporting and Translation of Foreign Entity Statements
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Q1) Based on the preceding information,in the journal entry to record the amortization of the patent for 20X8 on the parent's books,Investment in Steamship Company will be debited for:
A)$5,000
B)$5,500
C)$4,500
D)$3,000
Q2) Based on the preceding information,at what amount is the inventory shown on the consolidated balance sheet for the year?
A)$45,000
B)$30,000
C)$40,000
D)$35,000
Q3) Based on the preceding information,at what dollar amount is the ending inventory shown in the trial balance of the consolidated worksheet?
A)$45,000
B)$50,000
C)$40,000
D)$35,000
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Chapter 13: Segment and Interim Reporting
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Q1) In 20X6 and 20X7,each of Putney Company's four operating segments met one of the three quantitative tests for segment reporting.In 20X8,Segment B failed to qualify under the prescribed tests because of abnormal financial conditions.The other three segments qualified for reporting.For 20X8,Segment B:
A)should be excluded from segment disclosure but referred to in the management letter to shareholders.
B)should be distinctly separated from the other three segments and listed as a "nonqualifying" segment.
C)should be combined with one of the other three segments and reported.
D)should be included in the segment disclosures at the discretion of management.
Q2) Trimester Corporation's revenue for the year ended December 31,20X8,was as follows:
Trimester has a reportable operating segment if that segment's revenue exceeds:
A)$65,500
B)$60,000
C)$64,500
D)$61,000
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Page 15
Chapter 14: Sec Reporting
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Q1) Form 10-Q
A) Provides preliminary information to investors about an upcoming issue.
B) Informs investors of an upcoming offering.
C) Required annual filing to the SEC.
D) Discloses unscheduled material events.
E) Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards.
F) Results in a thorough examination by the SEC of a registration statement.
G) Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered for sale.
H) Quarterly report to SEC.
I) Includes new or revised administrative practices and interpretations used in reviewing financial statements.
J) Includes the results of actions taken against accountants or other participants because false or misleading statements were filed.
K) Includes Regulations S-X and S-K.
Q2) Accounting and Auditing Enforcement Releases
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16
Chapter 15: Partnerships: Formation, operation, and
Changes in Membership
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Q1) Refer to the information provided above.David invests $40,000 for a one-fifth interest in the total capital of $220,000.The journal to record David's admission into the partnership will include:
A)a credit to Cash for $40,000.
B)a debit to Allen,Capital for $3,000.
C)a credit to David,Capital for $40,000.
D)a credit to Daniel,Capital for $1,000.
Q2) Refer to the above information.Tiffany is paid $60,000,and no goodwill is recorded.What is the Ron's capital balance after Tiffany withdraws from the partnership?
A)$74,000
B)$71,000
C)$75,000
D)$86,000
Q3) Apple and Betty are planning on beginning a new business.They plan on forming a partnership.Apple will contribute $300,000 and will not be working.Betty will be working full time.They plan on splitting profits equally.They approach you,as an accounting major,to confirm their thoughts.What do you recommend?
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Page 17
Chapter 16: Partnerships: Liquidation
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Q1) Refer to the information provided.Assume instead that the remaining inventory was sold for $10,000 in the second month.What payments will be made to Dennis and Lilly at the end of the second month?
A)Option A
B)Option B
C)Option C
D)Option D
Q2) Refer to the information provided above.Using a safe payments schedule,how much cash will be distributed to Dennis at the end of the first month?
A)$64,000
B)$60,000
C)$24,000
D)$36,000
Q3) A partnership may be involved in "Dissociation" or "Dissolution."
Required:
Describe "Dissociation" and "Dissolution."
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18
Chapter 17: Governmental Entities: Introduction and General Fund Accounting
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Q1) The general fund of Hatteras acquired a fire truck during the fiscal year ended June 30,20X9.The purchase order for the fire truck was recorded on February 15,20X9.Hatteras' acquisition of the fire truck required which of the following sequences of accounting activities?
I.Appropriation
II.Encumbrance
III.Expenditure
A)II,I,III.
B)I,III,II.
C)III,II,I.
D)I,II,III.
Q2) Which of the following describes how a governmental fund (e.g.general fund)accounts for a capital lease?
A)noncurrent liability
B)bond accounting
C)an asset and a lease liability
D)none of the above identifies the appropriate way to account for a capital lease.
Q3) Briefly discuss the various types of governmental funds and proprietary funds.
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Chapter 18: Governmental Entities: Special Funds and
Government-Wide Financial Statements
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Q1) During the fiscal year ended June 30,20X9,the city of Moorhead constructed a new courthouse which was budgeted to cost $5,000,000.Moorhead used a capital projects fund to account for the construction activities.In July of 20X8,a bid was accepted from Diamond Construction to build the courthouse for $4,800,000.On June 15,20X9,Diamond completed construction and submitted a bill to the city for $4,900,000.The city accepted the bill and paid Diamond the entire amount owed,except for a 10 percentage retainage.On the statement of revenues,expenditures,and changes in fund balance prepared for the capital projects fund for the year ended June 30,20X9,expenditures should be reported at
A)$4,900,000.
B)$4,800,000.
C)$4,410,000.
D)$4,320,000.
Q2) The costs of a building being constructed by a capital projects fund should be debited,or charged,to which of the following accounts in the capital projects fund?
A)Expenditures.
B)Building.
C)Construction in Progress.
D)Other Financing Uses.
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Chapter 19: Not-For-Profit Entities
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Q1) Based on the information provided,in Golden Path's statement of activities for the year ended December 31,20X8,what amount should be reported under the classification of program services?
A)$720,000
B)$910,000
C)$440,000
D)$760,000
Q2) Based on the preceding information,the increase in present value of the contributions receivable recognized at the end of the first year equals:
A)$5,000.
B)$1,264.
C)$4,212.
D)$787.
Q3) The FASB has issued five standards that have direct applicability to private,not-for-profit entities.From the list given below,match each standard to the area it deals with.
Q4) Received cash contributions restricted by donors for research.
Q5) "Basis for measuring investments in financial statements" describes which term listed above?
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Chapter 20: Corporations in Financial Difficulty
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Q1) Chapter 7 of the Bankruptcy Code provides for:
I.Reorganization.
II.Liquidation.
A)I only
B)II only
C)Both I and II
D)Neither I nor II
Q2) A debtor may file which type of petition when seeking judicial protection under the Bankruptcy Reform Act?
I.Voluntary
II.Involuntary
A)I only.
B)II only.
C)Either I or II.
D)Neither I nor II.
Q3) What are the conditions necessary for using fresh start reporting in reorganization?
Q4) Briefly explain the three classes of creditors specified in the Bankruptcy Code.
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