Consolidated Financial Statements
Study Guide Questions
Course Introduction
This course explores the preparation and analysis of consolidated financial statements in accordance with applicable accounting standards. Students will learn how to account for business combinations, non-controlling interests, and intercompany transactions, and how to present financial information for groups of companies as a single economic entity. Topics include acquisition method of consolidation, elimination entries, goodwill measurement, and the treatment of subsidiaries, associates, and joint ventures. Through practical examples and case studies, students will develop the skills necessary to prepare accurate consolidated financial statements and understand their importance in financial reporting and decision-making.
Recommended Textbook
Advanced Financial Accounting 6th Edition by Thomas
H. Beechy
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Chapter 1: Setting the Stage
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Q1) How does a company usually take a "big bath" in a loss year?
A)Reduces its long-term liabilities
B)Expenses as many of its costs as possible
C)Recognizes revenue as soon as possible
D)Writes-down its assets
Answer: D
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
Q3) What effect does income smoothing have on risk analysis?
A)Reduces the business risk of a company
B)Increases the financial risk of a company
C)Reduces the audit risk of a company
D)Has no effect on risk analysis
Answer: A
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Page 3
Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Chow HK Ltd.acquired 40% of the common shares of Welsh Trading Co.Chow paid a purchase price discrepancy (PPD)and uses the equity method to report the investment.Which of the following adjustment does Chow not have to make in calculating its share of Welsh's earnings?
A)Dividends received from Welsh
B)Amortization of PPD
C)Elimination of PPD
D)Elimination of unrealized gains/losses on intercompany transactions
Answer: A
Q2) At the beginning of 20X1,Anwar Ltd.acquired 15% of the voting shares of Cruz Co.for $150,000.Anwar does not have any significant influence over Cruz.Anwar reports the investment using the cost method.In 20X1,Cruz earned net income of $70,000 and paid dividends of $40,000.In 20X2,Cruz earned net income of $80,000 and paid dividends of $100,000.At the end of 20X2,what is the balance of Anwar's "Investment in Cruz" account?
A)$150,000
B)$150,150
C)$154,500
D)$172,500
Answer: A
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Chapter 3: Business Combinations
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Q1) 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
Q2) What does push down accounting refer to?
A)Writing down assets where value is impaired
B)Applying the lower of cost or market approach
C)Recording fair values on a subsidiary's books after a business combination
D)Recording all consolidation adjustments on the books of the subsidiary.
Answer: C
Q3) Sya Ltd.acquired all the assets and liabilities of Littman Ltd.by issuing common shares to Littman.After this transaction,Littman owned 30% of Sya's outstanding shares.Which of the following statements is true?
A)Littman Ltd.ceases to exist.
B)Littman must record its receipt of Sya shares using the equity method.
C)Sya must prepare single-entity and consolidated financial statements.
D)Sya should not treat this transaction as an inter-corporate investment.
Answer: D
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Chapter 4: Wholly-Owned Subsidiaries: Reporting
Subsequent to Acquisition
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Q1) A company has a subsidiary that has an intangible capital asset.It has not been recorded on the subsidiary's books,but at the date of acquisition,the asset had a fair value of $200,000 and an indefinite economic life.How should the company show the asset on its consolidated statement of financial position?
A)$200,000 less any impairment losses
B)$200,000 less accumulated amortization (calculated over 10 years)and any impairment losses
C)$200,000 less accumulated amortization (calculated over 40 years)and any impairment losses
D)The company should not show the asset on the consolidated financial statement as the subsidiary does not do so.
Q2) What does "one-line consolidation" refer to?
A)Cost method
B)Equity method
C)Direct method of consolidation
D)Worksheet method of consolidation
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Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Which consolidation method does not include incorporating 100% of a subsidiary's revenues and expenses?
A)Proportionate consolidation
B)Parent-company method
C)Parent-company extension method
D)Entity method
Q2) Fleming Ltd.acquired 75% of Donner Ltd.at April 30,20X1.Both companies have April 30<sup>th</sup> year-ends.Which of the following should be made to the opening non-controlling interest (NCI)balance to arrive at the April 30,20X2 NCI balance on Fleming's statement of financial position?
A)Add in the NCI's share of Donner's fiscal 20X2 net income and subtract the NCI's share of Donner's dividends declared.
B)Subtract the NCI's share of Donner's fiscal 20X2 net income and add in the NCI's share of Donner's dividends declared.
C)Add in both the NCI's share of Donner's fiscal 20X2 net income and dividends declared.
D)Subtract both the NCI's share of Donner's fiscal 20X2 net income and dividends declared.
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Page 7
Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Cooper Ltd.acquired 70% of the common shares of Effy Ltd.at January 2,20X1.At December 31,20X3,Effy sold a machine to Cooper for $180,000.Effy had purchased the machine a few years ago for $250,000.At the time of sale to Cooper,the machine had a carrying value of $150,000 and a remaining useful life of 6 years.Both companies do not claim amortization for assets purchased in the second half of the year.For Cooper's December 31,20X3 consolidated financial statements,what net book value should be shown for the machine?
A)$125,000
B)$150,000
C)$180,000
D)$250,000
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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Page 8
Chapter 7: Segmented and Interim Reporting
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Q1) In practice,most companies use the discrete approach in preparing their internal interim financial statements.Which of the following costs is usually not included in the financial statements?
A)Insurance
B)Income taxes
C)Maintenance
D)Bonuses to employees
Q2) Which of the following is not included among requirements for interim financial reports for public companies?
A)Statement of comprehensive income
B)Statement of financial position
C)Statement of cash flows
D)Summary of significant accounting policies
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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Page 9
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) On June 1,20X4,Chua (Canada)Co.entered into a 90-day forward contract to sell $500,000 Singapore dollars (SGD)to its bank on August 29,20X4.The following information has been provided:
June 1,90-day forward rate SGD$1 = $0.7750
July 1,60-day forward rate SGD$1 = $0.7630
August 29,spot rate SGD$1 = $0.748
Chua has a June 30 year-end.What is the exchange gain (loss)at June 30,20X4?
A)$(6,000)
B)$0
C)$1,500
D)$6,000
Q3) Compare and contrast accounting for foreign currency transactions and hedges under IFRS and ASPE.
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Page 10
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 accounts would be translated to the reporting currency at the current rate of exchange for an integrated subsidiary?
A)Sales occurring evenly throughout the year
B)Deposits received from customers for services to be rendered
C)Capital assets
D)Inventory carried at market under the lower-of-cost-or-market principle
Q3) What is the risk of an apparent gain or loss arising from the restatement of financial statements prepared in one currency to another currency called?
A)Transaction exposure
B)Accounting exposure
C)Economic exposure
D)Restatement exposure
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Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) For a not-for-profit organization,an expenditure is ________.
A)any payment for expenses or to settle a liability
B)a payment,a liability incurred,or a transfer of property to obtain goods or services
C)any cost associated with the consumption of goods or services
D)a capital acquisition only
Q2) Which of the following reporting objectives for not-for-profit organizations allows the users to determine whether restricted funds were spent in accordance with the intended purpose?
A)Cash flow prediction
B)Performance evaluation
C)Stewardship
D)Measuring the cost of services rendered
Q3) When is it not appropriate to use an encumbrance system?
A)When there is a significant lag between purchase orders and the receipt of goods
B)When reporting is done on an expenditure basis
C)When only a small part of expenditures for goods and services are discretionary
D)When commitments and expenditures are made on a decentralized basis
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Page 12
Chapter 11: Public Sector Financial Reporting
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Q1) Which of the following is not a typical characteristic of a non-business organization?
A)No equity investors
B)May have restrictive funds
C)Rely on the sale of goods and services
D)Provision of collective goods and services
Q2) What is the only item that will appear under the investing section of a government statement of cash flow?
A)Sale and purchase of financial assets
B)Sale and purchase of nonfinancial assets
C)Sale and purchase of tangible capital assets
D)Amortization of tangible capital assets
Q3) Which of the following statements about the valuation of Crown property on the statement of financial position is true?
A)Crown property is valued at acquisition cost.
B)Crown property is valued at fair market value.
C)Crown property is valued at its depreciated value.
D)Crown property is not recognized on the financial statements.
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13
Chapter 12: Income Tax Allocation
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Q1) Foster Ltd.acquired 100% of Benson Ltd.The carrying values of Benson's capital assets differed from their fair values and their fair values differ from their adjusted cost bases for tax purposes.Which of the following statements is true?
A)The difference between Benson's carrying values and its fair values creates a deferred tax asset or liability that is part of the allocation of the acquisition cost.
B)The difference between Benson's fair values and its adjusted cost bases for tax purposes creates a deferred tax asset or liability that is part of the allocation of the acquisition cost.
C)The difference between Benson's carrying values and its adjusted cost bases for tax purposes creates a deferred tax asset or liability that is part of the allocation of the acquisition cost.
D)No deferred tax asset or liability arises from the above situation.
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Chapter 13: Income Tax Allocation Subsequent to Acquisition
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Q1) Which of the following statements is true with respect to adjusting the deferred tax account on consolidation?
A)Deferred taxes only need to be adjusted for unrealized profits in inventory at the end of the year.
B)Deferred taxes only need to be adjusted for unrealized profits in inventory at the beginning of the year.
C)Deferred taxes need to be adjusted for unrealized profits in inventory at both the beginning and the end of the year.
D)Deferred taxes do not need to be adjusted for unrealized profits.
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15
Chapter 14: Good will Impairment Test
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Q1) 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
Q2) 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
Q3) 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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16
Chapter 15: Step Purchases
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Q1) Frey Ltd.acquired 70% of Sabo Ltd.in 20X4.On January 1,20X8,Frey acquired another 10% of Sabo's common shares for $250,000.Under the entity method,the balance of the non-controlling interest at December 31,20X7 was $660,000.What adjustment should be made to consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$30,000
B)$136,667
C)$220,000
D)$250,000
Q2) Frey Ltd.acquired 70% of Sabo Ltd.in 20X4.On January 1,20X8,Frey acquired another 10% of Sabo's common shares for $250,000.Under the parent-company extension method,the balance of the non-controlling interest at December 31,20X7 was $600,000.What adjustment should be made to consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$50,000
B)$66,667
C)$200,000
D)$250,000
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17
Chapter 16: Decreases in Ownership Interest
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Q1) Frey Ltd.acquired 70% of Sabo Ltd.several years ago.On January 1,20X8,Frey reduced its holding in Sabo by 10%.The shares were sold for $160,000.At December 31,20X7,under the entity method,the balance of Frey's share of Sabo's net assets was $84,000.What adjustment should be made to the consolidated shareholders' equity to reflect Frey's reduction in interest in Sabo to 60%?
A)$76,000
B)$84,000
C)$148,000
D)$160,000
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) 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.
Q3) 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.
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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) 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
Q2) 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
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