Governmental and Nonprofit Accounting Exam Materials
Course Introduction
Governmental and Nonprofit Accounting explores the principles, standards, and practices unique to accounting and financial reporting in the public and nonprofit sectors. The course covers fund accounting, budgeting processes, financial statement preparation, and the regulatory environment governing these organizations. Students learn to apply Generally Accepted Accounting Principles (GAAP) and the standards set by the Governmental Accounting Standards Board (GASB) and Financial Accounting Standards Board (FASB) to analyze and interpret financial information. Emphasis is placed on understanding how accountability, transparency, and stewardship influence accounting procedures and how financial data supports decision-making in public service and mission-driven entities.
Recommended Textbook
Advanced Accounting 11th Edition by Joe Ben Hoyle
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19 Chapters
1785 Verified Questions
1785 Flashcards
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Page 2
Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) How would a change be made from the fair value method to the equity method of accounting for investments?
Answer: According to GAAP, the investment account and retained earnings of the investor should be adjusted to retrospectively restate results of operations of prior periods.
Q2) Which of the following results in a decrease in the investment account when applying the equity method?
A) Dividends paid by the investor.
B) Net income of the investee.
C) Net income of the investor.
D) Unrealized gain on intra-entity inventory transfers for the current year.
E) Purchase of additional common stock by the investor during the current year.
Answer: D
Q3) Charlie Co. owns 30% of the voting common stock of Turf Services Inc. Charlie uses the equity method to account for its investment. On January 1, 2011, the balance in the investment account was $624,000. During 2011, Turf Services reported net income of $120,000 and paid dividends of $30,000.
What is the balance in the investment account as of December 31, 2011?
Answer: 11ea8f9b_5afe_eb51_b161_a358681612ac_TB4176_00
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Page 3
Chapter 2: Consolidation of Financial Information
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Sample Questions
Q1) How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation?
A) Stock issuance costs are a part of the acquisition costs, and the direct combination costs are expensed.
B) Direct combination costs are a part of the acquisition costs, and the stock issuance costs are a reduction to additional paid-in capital.
C) Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital.
D) Both are treated as part of the acquisition consideration transferred.
E) Both are treated as a reduction to additional paid-in capital.
Answer: C
Q2) How are stock issuance costs accounted for in an acquisition business combination?
Answer: Stock issuance costs reduce the balance in the acquirer's Additional Paid-In Capital in an acquisition business combination.
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4
Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) Why is push-down accounting a popular internal reporting technique?
Answer: Push-down accounting has become popular for the parent's internal reporting purposes for two reasons. First, this method simplifies the consolidation process each year. If acquisition value allocations and subsequent amortization are recorded by the subsidiary, they do not need to be repeated each year on a consolidation worksheet. Second, recording of amortization by the subsidiary enables that company's information to provide a good representation of the impact that the acquisition has on the earnings of the business combination. For example, if the subsidiary earns $100,000 each year but annual amortization is $80,000, the acquisition is only adding $20,000 to the income of the combination each year rather than the $100,000 that is reported by the subsidiary unless push-down accounting is used.
Q2) What accounting method requires a subsidiary to record acquisition fair value allocations and the amortization of allocations in its internal accounting records?
Answer: The appropriate method is termed push-down accounting.
Q3) From which methods can a parent choose for its internal recordkeeping related to the operations of a subsidiary?
Answer: The parent can choose from among the initial value method, equity method, and partial equity method.
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Sample Questions
Q1) Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What is the total amount of goodwill recognized at the date of acquisition?
A) $150,000.
B) $250,000.
C) $0.
D) $120,000.
E) $170,000.
Q2) When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true in the presentation of consolidated financial statements?
A) Preacquisition earnings are deducted from consolidated revenues and expenses.
B) Preacquisition earnings are added to consolidated revenues and expenses.
C) Preacquisition earnings are deducted from the beginning consolidated stockholders' equity.
D) Preacquisition earnings are added to the beginning consolidated stockholders' equity.
E) Preacquisition earnings are ignored in the consolidated income statement.
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Chapter 5: Consolidated Financial StatementsIntercompany Asset Transactions
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Sample Questions
Q1) Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory. Compute consolidated sales.
A) $10,000,000.
B) $10,126,000.
C) $10,140,000.
D) $10,200,000.
E) $10,260,000.
Q2) McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2011, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000, and they were sold to Lawler for $100,000. At the end of 2011, Lawler still held 30% of the inventory.
Required:
How should the sale between Lawler and Ritter be accounted for in a consolidation worksheet? Show worksheet entries to support your answer.
Q3) How is the gain on an intra-entity transfer of a depreciable asset realized?
Page 7
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Chapter 6: Intercompany Debt, Consolidated Statement of
Cash Flows, and Other Issues
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Sample Questions
Q1) Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price.
On January 1, 2010, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2012, for 95% of the face value. Both companies utilized the straight-line method of amortization.
What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2013?
Q2) Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity?
A) The power to direct the most significant economic performance activities.
B) The power through voting or similar rights to direct activities which significantly impact economic performance.
C) The obligation to absorb potentially significant losses of the entity.
D) No ability to make decisions about the entity's activities.
E) The right to receive potentially significant benefits of the entity.
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Sample Questions
Q1) Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise was still being held. The tax rate is 30 percent. Assuming that a consolidated income tax return is being filed, what deferred income tax asset is created?
A) $0.
B) $360.
C) $450.
D) $2,250.
E) $3,600.
Q2) What are the benefits or advantages of filing a consolidated income tax return?
Q3) What term is used to describe a parent and subsidiaries that are eligible to file a consolidated income tax return?
Q4) Under what conditions must a deferred income tax asset be recorded?
Q5) X Co. owned 80% of Y Corp., and Y Corp. owned 15% of X Co. Under the treasury stock approach, how would the dividends paid by X Co. to Y Corp. be handled on a consolidation worksheet?
Q6) What ownership structure is referred to as a connecting affiliation? Describe briefly or illustrate with a diagram.
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Chapter 8: Segment and Interim Reporting
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Sample Questions
Q1) Provo, Inc. has an estimated annual tax rate of 35 percent in the first quarter of 2011. Pretax income for the first quarter was $300,000. At the end of the second quarter of 2011, Provo expects the annual tax rate to be 32 percent because of anticipated tax credits. Pretax income for the second quarter was $350,000. Assume no items in either quarter requiring the net-of-tax presentation. How much income tax expense is recognized in the first quarter of 2011?
A) $0.
B) $26,250.
C) $96,000.
D) $105,000.
E) $112,000.
Q2) What two disclosure guidelines for operating segment information are designed to ensure the consistency of data reported from year to year?
Q3) What are the two approaches that can be followed in preparing interim reports?
A) Indiscrete and terminal.
B) Discrete and terminal.
C) Metric and integral.
D) Discrete and integral.
E) Discrete and metric.
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Page 10
Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Sample Questions
Q1) Where can you find exchange rates between the U.S. dollar and most foreign currencies?
Q2) U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except
A) Recognized foreign currency denominated assets and liabilities.
B) Unrecognized foreign currency firm commitments.
C) Forecasted foreign currency denominated transactions.
D) Net investment in foreign operations.
E) Deferred foreign currency gains and losses.
Q3) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?
Q4) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?
Q5) How does a foreign currency forward contract differ from a foreign currency option?
Q6) How is the fair value of a Forward Contract determined by U.S. GAAP?
Q7) Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.
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Chapter 10: Translation of Foreign Currency Financial Statements
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Sample Questions
Q1) Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2011, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2011, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2011 was U.S. $.68, and the 2011 year-end exchange rate was U.S. $.65.
Amortization of the patent, translated, for 2011 would be
A) $7,000.
B) $10,000.
C) $6,800.
D) $9,000.
E) $6,500.
Q2) Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2011, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Sample Questions
Q1) What problems are caused by diverse accounting practices?
Q2) Which of the following is not true about IFRS?
A) The IASB does not have the ability to enforce proper usage of IFRS.
B) IFRS is available to any organization or nation that wishes to use those standards.
C) IFRS is a comprehensive set of financial reporting standards.
D) IFRS includes only pronouncements issued by the IASB.
E) IFRS are considered as generally accepted accounting principles.
Q3) Which of the following statements is false regarding providers of financing?
A) There is less pressure to provide accounting information in those countries in which financing is primarily by banks.
B) In countries where capital stock is the primary source of financing, accounting emphasizes the income statement.
C) Disclosures are less extensive in those countries financed primarily by stock.
D) Bankers tend to focus more on solvency and stockholders focus more on profitability.
E) As companies become more dependent on financing by stock, more information is demanded.
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Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Sample Questions
Q1) Which one of the following regulates the initial offering of securities by a company or underwriter?
A) The Securities Act of 1933.
B) The Securities Exchange Act of 1934.
C) The Investment Company Act of 1940.
D) The Investment Advisers Act of 1940.
E) The Sarbanes-Oxley Act of 2002.
Q2) What is a wrap-around filing?
Q3) Which one of the following requires the registration of mutual funds that engage in investing and trading in securities?
A) The Securities Act of 1933.
B) The Securities Exchange Act of 1934.
C) The Investment Company Act of 1940.
D) The Foreign Corrupt Practices Act of 1977.
E) The Sarbanes-Oxley Act of 2002.
Q4) When is the SEC's Registration Form S-4 used?
Q5) What is blue sky legislation?
Q6) Why was the Public Utility Holding Company Act of 1935 created?
Page 14
Q7) How are the operations of the SEC funded?
Q8) What is shelf registration?
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Page 15
Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Sample Questions
Q1) What are the three categories of assets in a Statement of Financial Affairs?
Q2) Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building).
Total unsecured liabilities are calculated to be what amount?
Q3) How should liabilities (except for deferred income taxes) be reported by a company using fresh start accounting?
A) at the undiscounted sum of future cash payments.
B) at book value prior to the reorganization.
C) as partially secured liabilities.
D) at the present value of future cash payments.
E) as unsecured liabilities.
Q4) What term is used for a bankruptcy forced upon a debtor by its creditors?
Q5) How is the presentation of an income statement during a reorganization different from a normal income statement?
Q6) What is the purpose of Chapter 7 of the Bankruptcy Reform Act?
Q8) What is an order for relief? Page 16
Q7) What is meant by a "partially secured liability"?
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Page 17
Chapter 14: Partnerships: Formation and Operation
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Sample Questions
Q1) Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital of the remaining partners?
A) Donald, $40,000; Todd, $30,000
B) Donald, $30,000; Todd, $10,000
C) Donald, $50,000; Todd, $50,000
D) Donald, $24,000; Todd, $18,000
The $30,000 bonus is deducted from the remaining partners according to their relative profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.
Donald = $40,000 - (1/3 x $30,000) = $30,000.
Todd = $30,000 - (2/3 x $30,000) = $10,000.
Q2) The dissolution of a partnership occurs
A) only when the partnership sells its assets and permanently closes its books.
B) only when a partner leaves the partnership.
C) at the end of each year, when income is allocated to the partners.
D) only when a new partner is admitted to the partnership.
E) when there is any change in the individuals who make up the partnership.
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) What is the purpose of a predistribution plan?
Q2) Which of the following statements is true concerning the distribution of safe payments?
A) The distribution of safe payments assumes that any capital deficit balances will prove to be a total loss to the partnership.
B) Safe payments are equal to the recorded capital balances of partners with positive capital balances.
C) The distribution of safe payments may only be made after all liabilities have been paid.
D) In computing safe payments, partners with positive capital balances are assumed to absorb an equal share of any deficit balance(s).
E) There are no safe payments until the liquidation is complete.
Q3) What is the role of the accountant during the liquidation process?
Q4) What is a safe cash payment?
Q5) For a partnership, how should liquidation gains and losses be accounted for?
Q6) What events or circumstances might force the termination of a partnership and liquidation of its assets?
Q7) Why is a Schedule of Liquidation prepared?
Page 19
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Chapter 16: Accounting for State and Local Governments
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Q1) The City of Kamen transferred $27,000 into a Pension Trust Fund. Of this amount, $19,000 was contributed by the city with the remainder coming from the employees.
Required:
For fund financial statements, prepare the journal entry for this transaction including the fund type in which the entry would have been recorded.
Q2) Which type of fund is not included in the Government-Wide Financial Statements?
A) Governmental Funds
B) Proprietary Funds
C) Fiduciary Funds
D) Debt Service Funds
E) Special Revenue Funds
Q3) What is the definition of the term fund?
Q4) On January 1, 2011, Wakefield City purchased $40,000 office supplies. During the year $35,000 of these supplies were used.
Required:
Record the journal entries for these transactions using the consumption method. (Disregard the encumbrance entries.)
Q5) Under modified accrual accounting, when are expenditures recorded?
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Chapter 17: Accounting for State and Local Governments
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Q1) For fund financial statements, what account is credited when a piece of equipment is leased on a capital lease?
A) Equipment - Capital Lease.
B) Encumbrances - Long Term.
C) Encumbrances - Lease Obligations.
D) Capital Lease Obligation.
E) Other Financing Sources - Capital Lease.
Q2) Drye Township has received a donation of a rare painting worth $1,000,000. For Drye's government-wide financial statements, three criteria must be met before Drye can opt not to recognize the painting as an asset. Which of the following is not one of the three criteria? (1.) The painting is held for public exhibition, education, or research in furtherance of public service, rather than financial gain.
(2)) The painting is scheduled to be sold immediately at auction.
(3)) The painting is protected, kept unencumbered, cared for, and preserved.
A) Item 1 is not one of the three criteria.
B) Item 2 is not one of the three criteria.
C) Item 3 is not one of the three criteria.
D) All three items are required criteria.
E) None of the three items are required criteria.
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Chapter 18: Accounting for Not-For-Profit Organizations
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Q1) A gift to a not-for-profit school that is not restricted by the donor is credited to:
A) Fund Balance.
B) Deferred Revenues.
C) Contribution Revenues.
D) Non-Operating Revenues.
E) Encumbrances.
Q2) What term is used by voluntary health and welfare organizations for contributions?
Q3) The Yelton Center is a voluntary health and welfare organization. During 2010, unrestricted pledges of $780,000 were received by the center, sixty percent of which were payable in 2010, with the remainder payable in 2011 (for use in 2011). Officials estimated that fifteen percent of these pledges will be uncollectible.
Required:
How much should the Yelton Center report as revenue for 2010?
Q4) For not-for-profit organizations, what is the difference in identification of "control" between a merger and an acquisition?
Q5) What financial statements would normally be prepared by a voluntary health and welfare organization?
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Page 22
Chapter 19: Accounting for Estates and Trusts
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Q1) Which of the following is not subtracted to arrive at the taxable value of an estate?
A) Liabilities.
B) Charitable bequests.
C) Funeral expenses.
D) Estate administration expenses.
E) Deduction for property conveyed to children of decedent.
Q2) What choices does an executor of an estate have in determining the values of assets included in the estate for tax purposes?
Q3) The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record the payment of the estate's liabilities for debts incurred prior to the decedent's death.
Q4) What is a remainderman of trust property?
Q5) What is the purpose of the Uniform Probate Code?
Q6) What is meant by estate accounting?
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