Corporate Accounting
Exam Answer Key
Course Introduction
Corporate Accounting is a specialized branch of accounting that focuses on the financial activities of corporations. This course covers the preparation, analysis, and interpretation of financial statements in compliance with accounting standards and legal requirements. Key topics include share capital transactions, debentures, profit distribution, amalgamation, absorption, reconstruction of companies, and the analysis of financial reports for decision-making. Students will gain an in-depth understanding of the regulatory framework governing corporate entities and the practical skills necessary to handle complex accounting issues faced by modern corporations.
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) Which of the following is true about the standards for publicly accountable enterprises in the CICA Handbook, Part I?
A)The standards are similar to U.S. GAAP.
B)The standards are adaptations of IFRS that have been tailored to Canadian circumstances.
C)The standards are similar to ASPE.
D)The standards are identical, word for word, to IFRS.
Answer: D
Q2) What do business enterprises have that NFPs do not have?
A)Specified products or services
B)Identifiable customers or clients
C)Employees
D)Boards of directors
Answer: B
Q3) In Canada, who developed the accounting standards for private enterprises?
A)International Accounting Standards Board
B)Accounting Standards Board
C)Financial Accounting Standards Board
D)Ontario Securities Commission
Answer: B
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Forest Ltd. reports its investment in Leeds Co. on an equity basis. During the year, Forest received $10,000 in dividends from Leeds. How should Forest report these dividends?
A)As an increase to the "Investment in Leeds Co." account on its statement of financial position
B)As a decrease to the "Investment in Leeds Co." account on its statement of financial position
C)As dividend income on its statement of changes in equity-retained earnings section
D)As dividend income in its statement of comprehensive income
Answer: B
Q2) In changing from the cost method to consolidation, which of the following is not required?
A)Replacement of the "Investment in Subsidiary" account with the assets and liabilities of the subsidiary
B)Elimination of intercompany transactions and balances
C)Elimination of the subsidiary's share capital account
D)Elimination of the subsidiary's retained earnings since acquisition
Answer: D
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Chapter 3: Business Combinations
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Q1) Which accounting method yields the same results as push-down accounting?
A)Equity method
B)Cost method
C)Consolidation
D)Revaluation
Answer: D
Q2) Which of the following statements is not true about revaluation accounting?
A)Revaluation must be done regularly.
B)Revaluation can be applied to tangible assets whose fair values can be reliably measured.
C)Revaluation can be applied to intangible assets if the assets have an active market.
D)Revaluation is applied to individual assets.
Answer: D
Q3) How should accounting fees for an acquisition be treated?
A)Expensed in the period of acquisition
B)Capitalized as part of the acquisition cost
C)Deferred and amortized
D)Deferred until the company is disposed of or wound-up
Answer: A
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Page 5
Chapter 3: Appendix A: AIncome 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 differed from their tax bases. Which of the following statements is true?
A)The difference between Benson's carrying values and its fair values created 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 created 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 4: Wholly Owned Subsidiaries: Reporting
Subsequent Acquisitions
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Q1) Bateman uses the equity method to record this investment and has properly reflected Thivan's dividend declaration on its books. What journal entry should Bateman make when it receives the dividends?
A) \[\begin{array} { | l | c | }
\hline \text { DR Cash } & 100,000 \\
\hline \text { CR Investment in Thivan } & 100,000 \\
\hline
\end{array}\]
B) \[\begin{array} { |l | c | }
\hline \text { DR Cash } & 100,000 \\
\hline \text { CR Dividend revenue } & 100,000 \\
\hline
\end{array}\]
C) \[\begin{array} { | l | c | }
\hline \text { DR Cash } & 100,000 \\
\hline \text { CR Dividends receivable } & 100,000 \\
\hline
\end{array}\]
D)No entry is required as the journal entry for dividends declared was already received.
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Q1) 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.
Q2) 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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Q1) 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
Q2) 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.
Q3) 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
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Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Sunny Co. purchased 80% of Reuben Ltd. for $1,200,000. At the date of acquisition, the carrying value of Reuben's net identifiable assets was $1,000,000, and the fair value was $1,300,000. What is the amount of the goodwill under the entity method?
A)$0
B)$200,000
C)$240,000
D)$300,000
Q2) Devon Ltd. acquired 90% of Luka Ltd. for $100,000 less than the fair value. How should this $100,000 be treated on Devon's consolidated financial statements?
A)As goodwill on the consolidated statement of financial position
B)Allocated as fair value increments over Luka's net identifiable assets
C)As a gain on the consolidated statement of comprehensive income
D)As a separate item under shareholders' equity
Q3) Explain why a parent might want to own less than 100% of the shares of a subsidiary.
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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) A parent company reduced its ownership in its subsidiary from 80% to 15%. How should this be reported on the parent's consolidated financial statements?
A)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at fair value
B)As a disposal of its interest in the subsidiary and a reacquisition of the retained interest at book value
C)As a write-down to the retained interest
D)As an adjustment to the shareholders' equity
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) Tooker Co. acquired 80% of the outstanding common shares of Vu Ltd. There were no fair value increments or goodwill that arose with the purchase. During 20X1, Tooker sold $7,000 of inventory to Vu for a gross profit of 40%. At the end of 20X1, $3,000 of the inventory is still in Vu's inventory. On their separate-entity income statements for 20X1, Tooker and Vu reported net income of $4,200 and $3,100, respectively. What is the non-controlling interest's share of consolidated net income at the end of 20X1?
A)$620
B)$840
C)$1,220
D)$1,460
Q2) A parent company uses the equity method to record its investment in its subsidiary.
To check the balance of the consolidated retained earnings, what amount should be added to the parent company's separate-entity retained earnings?
A)Balance of the equity in the earnings of the subsidiary account
B)Net income from the subsidiary company's separate-entity statement of income
C)Balance of the investment account
D)Increase in the balance of the investment account
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Page 13
Chapter 6: Appendix A: Preferred and Restricted Shares of Investee Corporation
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Q1) 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
Q2) 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.
Q3) 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
Page 14
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Chapter 6: Appendix B: Intercompany Bond Holdings
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Q1) Basaraba Ltd. owns 75% of the outstanding common shares of Gill 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. Under the par-value approach to dealing with a gain on elimination of intercompany bond holdings, which of the following statements is true?
A)The gain is allocated all to the purchaser.
B)The gain is allocated all to the issuer.
C)The gain is allocated to both the purchaser and issuer as though they do not have any affiliation with each other.
D)The gain is eliminated on consolidation.
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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Page 15
Chapter 7: Segment and Interim Reporting
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Q1) Which of the following is not a threshold for identifying a reportable segment?
A)The segment contributes at least 10% of the organization's total revenues.
B)The segment contributes at least 10% of the organization's operating profits.
C)The segment contributes at least 10% of the organization's combined assets of all operating segments.
D)The segment contributes at least 10% of the organization's total expenses.
Q2) The thresholds for segmental financial reporting exclude ________.
A)10% of total internal and external revenues
B)10% of total internal and external expenses
C)10% of total assets
D)10% of the absolute value of the larger of aggregate segment profits or aggregate segment losses
Q3) Which of the following is not a requirement in defining an operating segment?
A)The particular component must be generating revenue.
B)The particular component's operating results must be reviewed regularly by responsible company officers.
C)The particular component's financial information is routinely available through the organization's financial reporting system.
D)The particular component incurs expenses in its normal cost of activities.
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Page 16
Chapter 8: Foreign Currency Transactions and Hedges
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Q1) Which of the following cannot usually be a hedged item?
A)Accounts receivable
B)Accounts payable
C)Derivative instrument
D)Purchase order
Q2) What is a currency swap an example of?
A)A futures contract
B)A call option
C)A derivative instrument
D)A forward contract
Q3) Chua has a June 30 year-end. What is the net exchange gain (loss)on the contract?
A)$(13,500)
B)$(6,000)
C)$6,000
D)$13,500
Q4) 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.
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Chapter 9: Reporting Foreign Operations
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Q1) 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
Q2) Which of the following is an indication that a parent company and a foreign subsidiary are integrated?
A)Control of the subsidiary by the parent
B)Financing of subsidiary operations provided by the parent
C)A high volume of intercompany transactions
D)Sales prices of the subsidiary's goods are set by local market conditions
Q3) A company has translated its foreign subsidiary's financial statements using the temporal method. What is the accounting treatment for exchange gains and losses arising from previous years?
A)Reported as equity
B)Reported in other comprehensive income
C)Reported in consolidated net income
D)Included in opening consolidated retained earnings
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Page 18
Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) Contributions received by NFPs may be restricted. Funds can be received in the form of endowment contributions and contributions that are externally restricted by the donor or internally restricted by the board.
Required:
Explain the differences between endowment contributions and contributions that are externally restricted by the donor or internally restricted by the board. Discuss the accounting treatment for each type of restricted contribution if the NFP uses the deferral method of reporting.
Q2) During the year, a not-for-profit art gallery acquired a number of pieces for its collection. Which of the following choices for reporting the acquisitions is not in accordance with the CICA Handbook?
A)Capitalize, but do not depreciate
B)Capitalize and depreciate
C)Immediate write-off
D)Note disclosure only
Q3) Describe the four fundamental ways in which not-for-profit organizations differ from business enterprises. What are the reporting objectives of NFPs?
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Page 19
Chapter 10: Appendix A: 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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Chapter 11: Public Sector Financial Reporting
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Q1) Under the modified equity method, government business enterprises must follow
A)the PSA Handbook
B)IFRS
C)ASPE
D)either the PSA Handbook or IFRS
Q2) What is reported on the statement of remeasurement gains and losses?
A)Any realized remeasurement gains and losses
B)Any unrealized remeasurement gains and losses
C)Realized and unrealized gains and losses arising from foreign currency translations
D)Realized gains and losses arising from the disposal of portfolio investments
Q3) Describe the major differences in characteristics that exist when comparing a large government agency to a large public company.
Q4) One of the largest sources of revenue for governments is government transfers. Government transfers represent non-exchange revenue. Explain what "government transfer" is and why it is a non-exchange transaction. How are government transfers reported? Be sure to address reporting from the transferor and the recipient perspectives, separately.
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