Student name:__________ 1) In which of the following situations would professional judgment NOT be required in decision making?
A) Recognition of revenue. B) The making of accounting estimates. C) Disclosure of information in the notes to the financial statements. D) Use of IFRS or ASPE for publicly traded companies in Canada.
2) Which of the following statements pertaining to generally accepted accounting principles (GAAP) is INCORRECT?
A) The process of developing GAAP is political. B) If a proposal for a new financial reporting is not accepted by users, it is unlikely to become part of GAAP. C) If an entity that follows GAAP encounters transactions that are not addressed by the CPA Canada Handbook, it is permitted to adopt accounting practices that are consistent with industry practice. D) Publicly traded companies are required to submit financial statements that comply with GAAP to the securities commissions under which they are registered.
3) Which of the following examples does NOT demonstrate the interrelationships of financial statement elements?
A) A sale on account will increase assets and equity. B) Depreciation of equipment will decrease assets and decrease equity. C) The payment of a payable will decrease liabilities and increase assets. D) The contribution of capital will increase an asset and increase equity.
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4) Which of the following statements pertaining to GAAP for publicly accountable enterprises (PAEs) is correct?
A) PAEs include not-for-profit organizations. B) Commencing in 2011, most Canadian PAEs are required to elect to report under either IFRS or ASPE on a prospective basis. C) PAEs include an entity, that as one of its primary businesses, holds assets in a fiduciary capacity for a broad group of outsiders. D) CPA Canada and the Financial Accounting Standards Board (FASB) harmonized the accounting standards of the United States and Canada for PAEs beginning in 1998.
5) Which of the following statements pertaining to private enterprises (PEs) is INCORRECT?
A) PEs may adopt either ASPE or IFRS but once a set of standards is adopted, the PEs are not permitted to apply some standards from ASPE and others from IFRS. B) The accounting standards for a PE are included in a separate part of the CPA Canada Handbook. C) PEs with annual revenues over $10,000,000, are required to report under IFRS. D) A PE is a profit-oriented enterprise that has none of its issued and outstanding financial instruments traded in a public market and does not hold assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses.
6) Which of the following organizations are required to use only the IFRS (Part I) in Canada?
A) All corporations, government agencies and private companies. B) Public companies and private companies whose shareholders' equity is in excess of $500,000,000 at any particular year-end. C) Public companies, private companies and not-for-profit organizations. D) Government business enterprises.
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7) Which of the following statements pertaining to Not-for-Profit-Organizations (NFPO) is INCORRECT?
A) A government NFPO has the choice to follow either the 4200 series of the CPA Canada Public Sector Accounting (PSA) Handbook or the PSA Handbook without the 4200 series. B) A non-government NFPO has a choice to follow Part I (IFRS) or Part III of the CPA Canada Handbook. C) A government NFPO has a choice to follow Part I (IFRS) of the CPA Canada Handbook or the CPA Canada Public Sector Accounting Handbook. D) A non-government NFPO that applies Part III of the CPA Canada Handbook will also apply relevant sections from Part II (ASPE) of the CPA Canada Handbook.
8) For which of the following types of organizations does the CPA Canada Handbook NOT provide specific accounting standards?
A) Publicly accountable enterprises. B) Private enterprises. C) Not-for-profit organizations. D) Proprietorships.
9) Which of the following is NOT a reason why a Canadian private company would elect to report under IFRS?
A) The company is planning to go public in the near future. B) The company seeks comparability with public companies of a similar size. C) It is likely to be less expensive than reporting under ASPE. D) The company is a subsidiary of a Canadian public company.
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10)
The current ratio measures:
A) liquidity. B) solvency. C) profitability of assets. D) profitability of owners' investment.
11)
The formula for the current ratio is:
A) current assets - current liabilities B) current assets/current liabilities C) total debt/shareholders' equity D) net income/shareholders' equity
12)
The debt-to-equity ratio measures:
A) liquidity. B) solvency. C) profitability of assets. D) profitability of owners' investment.
13)
Which three major skills must be demonstrated to be successful as an accountant?
A) Knowledge, creativity and organization. B) Creativity, mathematical skills and adaptability. C) Knowledge, critical thinking and organization. D) Creativity, professionalism and interpersonal skills.
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14) A generic framework for case analysis is recommended not only for integration and analysis cases in an academic setting but can also be applied to business decision-making situations. Which of the following steps in a case analysis would NOT be appropriate?
A) Identifying the needs of the users. B) Identifying and ranking the issues that must be addressed. C) Creating a list of alternatives that are relevant and viable to the situation. D) Providing all identified alternatives to the users in the final report.
15) Explain the purpose or use of "The Conceptual Framework for Financial Reporting" ( Conceptual Framework) in relation to International Financial Reporting Standards (IFRS).
16) X Inc. and Y Inc. are virtually identical companies with identical cost structures and very similar business practices operating in the same lines of business. X Inc. and Y Inc. are both public companies based in Canada and follow IFRS. The following are the condensed income statements for both companies: X Inc. Sales:
Y Inc.
$1,000,000
$2,000,000
Cost of Goods Sold
500,000
1,600,000
Gross Margin
$500,000
$400,000
Administrative Expenses
200,000
300,000
Net Income
$300,000
$100,000
Less:
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Required: Given the information provided, what are some possible causes for the differing results of these companies?
17)
Briefly discuss the external users need for high-quality financial information.
18)
Explain ways that management can mispresent the financial situation of a company.
19) Provide the procedures used to analyze a company's financial statements to determine its future prospects.
20) Rate-regulated companies are permitted to use U.S. GAAP because IASB has not yet developed its own standards.
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⊚ ⊚
true false
21) ASPE is often different than IFRS due to the cost of preparing financial statements to comply with complex standards being greater than the benefit received by users of those statements. ⊚ ⊚
true false
22) IAS 1 has a mandatory requirement that Canadian companies use the titles balance sheet or income statement for their financial statements. ⊚ ⊚
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Answer Key Test name: ch 1 1) D 2) C 3) C 4) C 5) C 6) D 7) C 8) D 9) C 10) A 11) B 12) B 13) A 14) D 20) TRUE 21) TRUE 22) FALSE
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Student name:__________ 1) Beginning on or after January 1, 2018, IFRS 9 requires all non-strategic investments to be reported using which of the following methods?
A) Fair value B) Cost C) Historical D) Impaired value
2)
An investment in an associate is an investment in a corporation that
A) allows the investor to exercise significant influence over the strategic operating and financing policies of the investee. B) allows the investor to exercise significant influence over only the financing policies of the investee. C) allows the investor to exercise significant influence over only the operating policies of the investee. D) allows the investor to exercise significant influence over all decision making for the investee.
3) Which of the following is the primary factor used to distinguish between non-strategic investments and strategic investments?
A) The rate of return. B) The amount paid for the investment. C) The level of influence over the strategic decisions of the investee company. D) The length of time the investment is held by the investor.
4)
Which of the following statements is TRUE under IFRS 9?
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A) All unrealized gains and losses on equity investments flow through other comprehensive income (OCI). B) Unrealized gains and losses on fair value through profit and loss (FVTPL) investments are included in other comprehensive income (OCI). C) Unrealized gains and losses on equity investments may be included in other comprehensive income (OCI) only if management irrevocably elects to do so on initial acquisition. D) Cumulative gains or losses in accumulated other comprehensive income (AOCI) are transferred to net income when the equity investment is sold.
5)
Gains and losses on fair value through profit or loss (FVTPL) investments:
A) are included in net income, regardless of whether they are realized or not. B) are included in net income only when the investment has become permanently impaired. C) are included in net income only when realized. D) are not recorded until the securities are sold.
6) How are realized gains from the sale of fair value through other comprehensive income (FVTOCI) equity investments accounted for under IFRS 9?
A) They are recycled to net income from accumulated other comprehensive income. B) They remain in accumulated other comprehensive income. C) They are transferred from accumulated other comprehensive income directly to retained earnings. D) They are transferred from net income to contributed surplus.
7)
Which of the following statements is TRUE regarding the equity method?
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A) The equity method is used for reporting gains or losses for non-strategic investments. B) The investor's share of the associate's dividends declared is reported in net income. C) The investor's investment in the associate changes in direct relation to the changes taking place in the associate's equity accounts. D) The equity method reports unrealized gains and losses on revaluations to fair value in net income.
8) What percentage of ownership is used as a guideline to determine that significant influence exists under IAS 28 Investments in Associates and Joint Ventures?
A) 25% or more B) 1% to 20% C) 20% to 50% D) 50% or more
9) Which of the following methods uses procedures closest to those used in preparing consolidated financial statements?
A) The fair value through profit or loss (FVTPL) approach B) The cost method C) The fair value through other comprehensive income (FVTOCI) approach D) The equity method
10)
Which of the following is NOT a possible indicator of significant influence?
A) The investor can elect members to the Board of Directors. B) The investor has the right to participate in the policy-making process. C) The investor has engaged in numerous intercompany transactions with the associate. D) The associate's new CEO was previously CEO of the investor company.
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11)
Which of the following statements is CORRECT?
A) Significant influence is only possible if the investor owns more than 50% of the voting shares of the associate. B) An ownership interest between 20% and 50% always implies significant influence. C) An ownership interest of greater than 0% but less than 10% can never imply significant influence. D) Significant influence is possible even if the investor owns less than 20% of the voting shares of the associate.
12) The difference between the investor's cost and the investor's percentage of the carrying value of the net identifiable assets of the associate is known as:
A) goodwill. B) the acquisition differential. C) the fair value increment. D) the excess book value.
13)
Any unallocated positive acquisition differential is normally:
A) pro-rated across the associate's identifiable net assets. B) charged to retained earnings. C) recorded as goodwill. D) expensed during the year following the acquisition.
14) When are gains on intercompany transfers of assets between an investor and an associate recognized as part of investment income that is accounted for by the investor under the equity method?
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A) In the period when the intercompany transfer takes place. B) In the period(s) when the assets are sold to outside entities or consumed by the purchaser. C) They are never recognized. D) They are recognized only when the investment in the associate is sold.
15) ___________ Investments are classified as current if they are actively traded and intended by management to be sold within one year.
A) fair value through profit or loss (FVTPL) B) cost method C) equity method D) fair value through other comprehensive income (FVTOCI)
16) When analyzing and interpreting financial statements, although the reporting methods show different values for liquidity, solvency and profitability, the real economic situation is ________ for the four different methods.
A) completely different B) identical C) almost similar except for the equity method D) almost similar except for the fair value methods
17) Which of the following reporting requirements under Accounting Standards for Private Enterprises (ASPE) is NOT permitted for non-strategic investments in equity instruments?
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A) If the equity instruments are quoted in an active market, they are reported at fair value. B) If the equity instruments are quoted in an active market, they are reported using either the equity method or cost method. C) If the equity instruments are not quoted in an active market, they are reported at cost less any reduction for impairment. D) An irrevocable election may be made to measure any equity investment at fair value.
18) When reporting under the Accounting Standards for Private Enterprises (ASPE), which of the following statements is true where the investor has significant influence over the investee?
A) If the investee's equity securities are traded in an active market, the investor is permitted to use the cost method, equity method or elect to use fair value. B) The investor is permitted to use either the cost method or equity method regardless of whether the investee's equity shares are traded in an active market or not. C) If the investee's equity securities are not traded in an active market, the investor is permitted to use the cost method. D) The investor may irrevocably elect to account for such investments at fair value with all fair value changes reported in other comprehensive income.
19) Which of the following statements is correct when an investment changes from significant influence to FVTPL?
A) The equity method will continue to be used until the entire investment is sold. B) On the date of change, the investor is required to remeasure at fair value any investment the investor retains in the former associate. C) When the investor loses significant influence, the change in reporting method is accounted for retrospectively. D) The investor will, on a prospective basis, account for its remaining investment using the cost method.
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20) Using the cost method, which of the following entries would have to be made to record X's acquisition of Y's shares on January 1, 2022?
A) Debit Investment in Y
Credit
100,000
Cash
100,000
B) Debit Investment in Y
Credit
12,000
Cash
12,000
C) Debit Investment in Y
Credit
112,000
Cash
112,000
D) No entry required.
21) Using the cost method, which of the following entries would have to be made to record X's share of Y's net income for 2022?
A) Debit Investment in Y
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Credit
6,000
7
Investment income
6,000
B) Debit Investment in Y
Credit
50,000
Investment income
50,000
C) Debit Investment in Y
Credit
12,000
Investment income
12,000
D) No entry required.
22) Using the cost method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2022?
A) Debit Dividend income receivable
Credit
2,400
Dividend income
2,400
B) Debit Dividend income receivable
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Credit
2,400
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Investment in Y
2,400
C) Debit Investment in Y
Credit
2,400
Dividend income
2,400
D) No entry required.
23) Using the cost method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2023?
A) Debit Dividend income receivable
Credit
9,600
Dividend income
9,600
B) Debit Dividend income receivable
Credit
9,600
Investment in Y
9,600
C) Debit Dividend income receivable
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Credit
9,600
9
Dividend income
8,400
Investment in Y
1,200
D) No entry required.
24) Using the cost method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2024?
A) Debit Investment in Y
Credit
7,200
Dividend income
7,200
B) Debit Dividend income receivable
Credit
7,200
Investment in Y
7,200
C) Debit Dividend income receivable Dividend income
Credit
7,200 7,200
D) No entry required.
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25) Using the cost method, what would be the carrying value of X's Investment in Y at the end of 2024?
A) $100,000 B) $98,800 C) $90,000 D) $91,200
26) Using the equity method, which of the following entries would have to be made to report X's acquisition of Y's shares?
A) Debit Investment in Y
Credit
100,000
Cash
100,000
B) Debit Investment in Y
Credit
12,000
Cash
12,000
C) Debit Investment in Y Goodwill
Credit
112,000 112,000
D) No entry required.
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27) Using the equity method, which of the following entries would have to be made to record X's share of Y's net income for 2022?
A) Debit Investment in Y
Credit
6,000
Equity method income
6,000
B) Debit Investment in Y
Credit
8,400
Equity method income
8,400
C) Debit Investment in Y
Credit
2,400
Equity method income
2,400
D) No entry required.
28) Using the equity method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2022? A) Debit
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Credit
12
Dividend income receivable
2,400
Dividend income
2,400
B) Debit Dividend income receivable
Credit
2,400
Investment in Y
2,400
C) Debit Investment in Y
Credit
6,000
Dividend income
6,000
D) No entry required.
29) Using the equity method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2023?
A) Debit Dividend income receivable
Credit
9,600
Dividend income
9,600
B) Debit
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Credit
13
Dividend income receivable
9,600
Investment in Y
9,600
C) Debit Dividend income receivable
Credit
9,600
Dividend income
7,200
Investment in Y
2,400
D) No entry required.
30) Using the equity method, which of the following entries would have to be made to record X's share of Y's dividends declared for 2024?
A) Debit Dividend income receivable
Credit
7,200
Dividend income
7,200
B) Debit Dividend income receivable Investment in Y
Credit
7,200 7,200
C)
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Debit Dividend income receivable
Credit
7,200
Dividend income
6,000
Investment in Y
1,200
D) No entry required.
31) Using the equity method, what would be the carrying value of X's Investment in Y at the end of 2024?
A) $100,000 B) $98,800 C) $118,000 D) $80,800
32) When an investment is accounted for using the equity method, how are the investor's share of the investee's income from non-operating sources (such as gains or losses from discontinued operations) to be accounted for by the investor?
A) Any such gains or losses are to be charged directly to retained earnings net of tax. B) Any such gains or losses are included with the revenue and expenses from operations. The investor's pro- rata share of these after-tax gains and losses is added to or deducted from the investment account. C) Any such gains or losses are shown separately, net of tax, below income from operations on the investor's income statement. The investor's pro- rata share of these after-tax gains and losses is added to or deducted from the investment account. D) No specific accounting treatment is required. These items are only required to be disclosed in notes to the financial statements.
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33) If the investor sells part of its investment in an associate reported by the equity method, which of the following is used to calculate the gain or loss on the sale of these shares?
A) The average carrying amount of the investment B) The FIFO method C) The LIFO method D) The specific identification method
34) If an investment reported by the equity method suffers an impairment loss and the value in use of the investment subsequently recovers, which of the following is the appropriate treatment?
A) It may be revalued to fair value with the revaluation gain going to other comprehensive income, even if the recorded gain will exceed the original impairment loss. B) If the recoverable amount increases in subsequent periods, the impairment loss can be reversed. C) It may be revalued to fair value with the revaluation gain going to net income, even if the recorded gain will exceed the original impairment loss. D) None; once an investment has been written down, it cannot subsequently be written up.
35) If an investor is reporting in compliance with the International Financial Reporting Standards (IFRS) and has an investment with significant influence over the investee, what are the disclosure requirements for the investor if the investment is in shares which are actively traded on an exchange?
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A) The investment must be reported at fair value through profit and loss (FVTPL). B) The investment must be reported at fair value through other comprehensive income (FVTOCI). C) The investment must be reported using the equity method with the fair value disclosed in the notes to the financial statements. D) The investment must be reported using the cost method. No additional disclosure is required.
36) How does the accounting for other comprehensive income differ between the International Financial Reporting Standards (IFRS) and the Accounting Standards for Private Enterprises (ASPE)?
A) Under IFRS, realized gains are transferred from other comprehensive income to net income when realized; under ASPE, realized gains are transferred from other comprehensive income directly to retained earnings. B) Under ASPE, realized gains are transferred from other comprehensive income to net income when realized; under IFRS, realized gains are transferred from other comprehensive income directly to retained earnings. C) There is no difference between accounting for other comprehensive income under IFRS and under ASPE. D) Other comprehensive income does not exist under ASPE.
37) Which of the following statements is true regarding an investment in associate that meets the criteria to be classified as held for sale?
A) The investment in associate is to be reported as a non-current asset. B) The intention of management is to recover the carrying value of the investment through continued operations. C) The sale of the investment in associate must be highly probable. D) The investment in associate is to be measured at fair value.
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38) In the situation where an investor's share of an associate's losses exceeds the carrying amount of the investment, which of the following is a true statement?
A) After the investor's interest is reduced to zero, any additional losses will, on a pro-rata basis, reduce the value of other investments the investor may have in the associate. B) After the investor's interest is reduced to zero, any additional losses will be recognized as a gain in the computation of net income. C) After the investor's interest is reduced to zero, any additional losses will reduce any existing trade receivables, trade payables or any long-term receivables for which adequate collateral exists. D) After the investor's interest is reduced to zero, any additional losses will be recognized as a liability to the extent the investor has legal obligations on behalf of the associate.
39) Post Corporation acquired 20,000 of the 100,000 outstanding common shares of Stamp Company on January 1, 2022, for cash consideration of $200,000. During 2022, Stamp Company had net income of $120,000 and paid dividends of $80,000. Post Corporation has a December 31st year end. At the end of 2022, shares of Stamp Company were trading for $11 each.
39.1) Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through profit or loss (FVTPL). What entry will the company make to record the dividends received from Stamp Company for 2022?
A) Debit Cash Dividend income
Credit
16,000 16,000
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Debit Cash
Credit
16,000
Investment in Stamp Company
16,000
C) Debit Cash
Credit
16,000
OCI-unrealized gain
16,000
D) No entry required.
39.2) Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through profit or loss (FVTPL). What entry will the company make at December 31, 2022, to record the revaluation of the investment?
A) Debit Investment in Stamp Company
Credit
20,000
Unrealized gain (net income)
20,000
B) Debit Investment in Stamp Company Unrealized gain (OCI)
Credit
20,000 20,000
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Debit Unrealized loss (net income)
Credit
20,000
Investment in Stamp Company
20,000
D) No entry required.
39.3) Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through profit or loss (FVTPL). What will the balance in the Investment in Stamp Company be as at December 31, 2022?
A) $200,000 B) $208,000 C) $220,000 D) $240,000
39.4) Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through other comprehensive income (FVTOCI). What entry will the company make at December 31, 2022, to record the revaluation of the investment?
A) Debit Investment in Stamp Company
Credit
20,000
Unrealized gain (net income)
20,000
B) Debit
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Credit
20
Investment in Stamp Company
20,000
OCI-Unrealized gain
20,000
C) Debit Unrealized loss (net income)
Credit
20,000
Investment in Stamp Company
20,000
D) No entry required.
39.5) Assume Post Corporation does not have significant influence and reports its nonstrategic investment in Stamp Company at fair value through other comprehensive income (FVTOCI). What entry will the company make to record the dividends received from Stamp Company for 2022?
A) Debit Cash
Credit
16,000
Dividend income
16,000
B) Debit Cash Investment in Stamp Company
Credit
16,000 16,000
C)
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Debit Cash
Credit
16,000
OCI-Unrealized Gain
16,000
D) No entry required.
39.6) Assume Post Corporation does not have significant influence and accounts for its non-strategic investment in Stamp Company at fair value through other comprehensive income (FVTOCI). What will the balance in the Investment in Stamp Company be as at December 31, 2022?
A) $200,000 B) $208,000 C) $220,000 D) $240,000
39.7) Assume Post Corporation has significant influence and accounts for its investment in Stamp Company using the equity method. What entry will the company make to record the dividends received from Stamp Company for 2022?
A) Debit Cash
Credit
16,000
Dividend income
16,000
B) Debit
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Credit
22
Cash
16,000
Investment in Stamp Company
16,000
C) Debit Cash
Credit
16,000
OCI-Unrealized gain
16,000
D) No entry required.
39.8) Assume Post Corporation has significant influence and accounts for its investment in Stamp Company using the equity method. What entry will the company make to record the revaluation of the investment at December 31, 2022?
A) Debit Investment in Stamp Company
Credit
20,000
Unrealized gain (net income)
20,000
B) Debit Investment in Stamp Company
Credit
20,000
OCI-Unrealized gain
20,000
C) Debit
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Credit
23
Unrealized loss (net income)
20,000
Investment in Stamp Company
20,000
D) Debit Investment in Stamp Company
Credit
24,000
Equity method income
24,000
39.9) Assume both Post Corporation and Stamp Company are private companies (i.e., shares are not traded in an active market). Post Corporation accounts for its investment in Stamp Company using the cost method. What will the balance in the Investment in Stamp Company be at December 31, 2022?
A) $200,000 B) $208,000 C) $220,000 D) $240,000
39.10) Assume both Post Corporation and Stamp Company are private companies (i.e., shares are not traded in an active market). Post Corporation accounts for its investment in Stamp Company using the cost method. What entry will the company make to record the dividends received from Stamp Company for 2022?
A) Debit Cash Dividend Income
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Credit
16,000 16,000
24
B) Debit Cash
Credit
16,000
OCI-Unrealized gain
16,000
C) Debit Cash
Credit
16,000
Investment in Stamp Company
16,000
D) No entry required.
39.11) Assume both Post Corporation and Stamp Company are private companies (i.e., shares are not traded in an active market). Post Corporation accounts for its investment in Stamp Company using the cost method. What entry will the company make to record the revaluation of the investment at December 31, 2022?
A) Debit Investment in Stamp Company
Credit
20,000
Unrealized gain (net income)
20,000
B) Debit Investment in Stamp Company
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Credit
20,000
25
OCI-Unrealized gain
20,000
C) Debit Unrealized loss (net income) Investment in Stamp Company
Credit
20,000 20,000
D) No entry required.
39.12) Assume Post Corporation has significant influence and accounts for its investment in Stamp Company using the equity method. What will the balance in the Investment in Stamp Company be at December 31, 2022?
A) $200,000 B) $208,000 C) $220,000 D) $240,000
40) Ocean Enterprises Inc. (Ocean) acquired 15% of the 100,000 outstanding common shares of Whale Ltd. (Whale) on January 1, 2022, for a cash consideration of $180,000 and a further 10% of the company's common shares a year later for $130,000. On July 1, 2023, Ocean sold half of its holding in Whale for proceeds of $175,000. Whale earned income of $150,000 in 2022 and $180,000 in 2023 (evenly over both years) and paid a regular semi-annual dividend of $40,000 on June 30th and December 31st of each year. Ocean does not have significant influence over Whale. The company's shares were trading for $13 at the end of 2022 and $11.75 at the end of 2023.
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40.1) Assume Whale has classified the investment as fair value through profit and loss (FVTPL). Prepare dated journal entries for Ocean for 2022 to account for its investment in Whale and any related income therefrom.
40.2) Assume Whale has classified the investment as fair value through profit and loss (FVTPL). Prepare dated journal entries for Ocean for 2023 to account for its investment in Whale and any related income therefrom.
40.3) Assume Whale has classified the investment as fair value through other comprehensive income (FVTOCI). Prepare dated journal entries for Ocean for 2023 to account for its investment in Whale and any related income therefrom.
41) On January 1, 2022, Joyce Inc. paid $600,000 to purchase 25% of Mark Inc.'s outstanding voting shares. Joyce has significant influence over Mark and reports the investment using the equity method. Mark's earnings for 2022 and 2023 were $100,000 and $200,000, respectively. Mark declared and paid dividends in the amount of $20,000 and $10,000 during 2022 and 2023, respectively. Required: Calculate the balance in the Investment in Mark Inc. account as at December 31, 2023.
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42) X Ltd. (X) purchased 40% of Y Ltd. (Y) on January 1, 2022, for $400,000. Y paid dividends of $50,000 in each year. Y's income statements for 2022 and 2023 showed the following. 2022
2023
Income (loss) before income taxes
$100,000
($60,000)
Income tax expense (recovery)
40,000
(15,000)
Net income (loss)
$60,000
($45,000)
Other comprehensive income (net of tax)
20,000
25,000
Comprehensive income (loss)
$80,000
($20,000)
At December 31, 2022, the fair value of the investment was $440,000 and at December 31, 2023, the fair value of the investment was $420,000. Required: Prepare X's journal entries for 2022 and 2023, assuming that this is a non-strategic investment and is accounted for at fair value through profit and loss (FVTPL).
43) X Ltd. (X) purchased 40% of Y Ltd. (Y) on January 1, 2022, for $400,000. Y paid dividends of $50,000 in each year. Y's income statements for 2022 and 2023 showed the following. 2022
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Income (loss) before income taxes
$100,000
($60,000)
Income tax expense (recovery)
40,000
(15,000)
Net income (loss)
$60,000
($45,000)
28
Other comprehensive income (net of tax)
20,000
25,000
Comprehensive income (loss)
$80,000
($20,000)
At December 31, 2022, the fair value of the investment was $440,000, and at December 31, 2023, the fair value of the investment was $420,000 Required: Prepare X's journal entries for 2022 and 2023, assuming that this is a significant influence investment and will be reported using the equity method.
44) Abbot Corporation (Abbot) has made a series of investments in Pine Corp. (Pine), one of its major customers. Abbot has a December 31 year end. The management of Abbot has been impressed by the products produced and sold by Pine and its market success. These investments are only going to be held for a short period of time. The market price of Pine stock on December 31, 2022 and 2023, was $200 and $250, respectively, per share. Dividends of $1.00 per share were declared and paid on December 31 of each year. The following are the share purchases and sales that Abbot entered in 2022 and 2023: Date
No. of Shares
Total
Cost (per share)
March 31, 2022
1,000
1,000
$75
June 30, 2022
1,000
2,000
$125
September 30, 2022
1,000
3,000
$175
September 30, 2023
(3,000)
0
$240
Assume that Abbot accounts for its investment in Pine at fair value through profit and loss (FVTPL). Required: a) Prepare the journal entries to record the transactions in 2022 and 2023 with respect to Abbot's investment in Pine. b) How would Abbot disclose the investment in Pine on its balance sheet?
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45) Abbot Corporation (Abbot) has made a series of investments in Pine Corp. (Pine), one of its major customers. Abbot has a December 31 year end. The management of Abbot has been impressed by the products produced and sold by Pine and its market success. These investments are only going to be held for a short period of time. The market price of Pine stock on December 31, 2022 and 2023, was $200 and $250, respectively, per share. Dividends of $1.00 per share were declared and paid on December 31 of each year. The following are the share purchases and sales that Abbot entered in 2022 and 2023: Date
No. of Shares
Total
Cost (per share)
March 31, 2022
1,000
1,000
$75
June 30, 2022
1,000
2,000
$125
September 30, 2022
1,000
3,000
$175
September 30, 2023
(3,000)
0
$240
Assume that Abbot accounts for its investment in Pine at fair value through other comprehensive income (FVTOCI). Required: a) Prepare the journal entries to record the transactions in 2022 and 2023 with respect to Abbot's investment in Pine. b) How would Abbot disclose the investment in Pine on its balance sheet?
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46) Pry Corporation (Pry) acquired 20,000 of the 100,000 outstanding common shares of Syrt Company (Syrt) on January 1, 2022, for cash consideration of $200,000. During 2022, Syrt had net income of $120,000 and paid dividends of $80,000. At the end of 2022, shares of Syrt were trading for $11 each. Pry has a December 31 year end for all years. During 2023, Syrt had a net loss of $60,000 and paid dividends of $40,000. Net income for the first half of the year was $80,000 and the net loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2023, Pry sold 5,000 shares of Syrt for a consideration of $12 per share. At the end of 2023, the share price of Syrt had fallen to $6 per share. The average of market analysts' forecasts was that the share price could be expected to rise to $8 per share over the next five years. (Assume that the future recoverable value of the shares is assessed to be $8 per share.) Required: Provide journal entries for Pry for all transactions relating to its investment in Syrt for the year 2023 if it accounts for its investment in Syrt as a fair value through profit and loss (FVTPL) investment.
47) On January 1, 2022, Black Corporation (Black) purchased 15,000 of the 100,000 (15%) outstanding shares of White Corporation (White) for cash consideration of $498,000. From Black's perspective, White has a fair value through profit or loss (FVTPL) investment. The fair value of Black's investment was $520,000 at December 31, 2022. On January 1, 2023, Black purchased an additional 30% of White's shares for cash consideration of $1,040,000. The second share purchase allowed Black to exert significant influence over White. During the two years, White reported the following results: Net Income
Dividends Declared and Paid
2022
$400,000
$240,000
2023
$540,000
$250,000
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Required: With respect to this investment, prepare Black's journal entries for both 2022 and 2023.
48) Dragon Corporation (Dragon) acquired a 7% interest in the outstanding shares of Slayer Inc. (Slayer) on January 1, 2022, at a cost of $200,000. Dragon was a private company and reported in compliance with the Accounting Standards for Private Enterprises (ASPE). Dragon accounted for Slayer, whose shares are not publicly traded, using the cost method. Slayer reported net income and made dividend payments to its shareholders as noted below. On December 31, 2024, Slayer declared bankruptcy because of a series of losses as noted. Income
Dividends—Declared and Paid on June 30th
2022
50,000
20,000
2023
(10,000)
20,000
2024
(40,000)
20,000
Required: (a) Prepare the journal entries that Dragon would make in 2022, 2023 and 2024. (b) Prepare the general ledger account for Dragon's investment in Slayer at all relevant dates.
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49) Ronen Corporation owns 35% of the outstanding voting shares of Western Communications Inc. over which it exerts significant influence. The carrying value of its investment as at October 31, 2022 was $3,750,000. Ronen has now designated its investment in Western as fair value through profit or loss (FVTPL) because of the open market purchase of a 55% interest in Western by Overhaul Corp. Western is in financial distress. The market value of Ronen's 35% interest is now $2,000,000. Required: a) What is the accounting result of a change from the equity method of accounting to FVTPL? b) Do any journal entries need to be recorded by Ronen because of this change? If so, what is the entry?
50) Past Corporation (Past) acquired 22,000 of the 100,000 outstanding common shares of Stomp Company (Stomp) on January 1, 2022, for cash consideration of $240,000. Both Past and Stomp have December 31 year ends. During 2022, Stomp had net income of $160,000 and paid dividends of $55,000. At the end of 2022, shares of Stamp Company were trading for $14 each. During 2023, Stomp Company had a net loss of $60,000 and paid dividends of $40,000. Net income for the first half of the year was $80,000 and the net loss in the second half of the year was $140,000. The dividends were paid on June 30. On July 2, 2023, Past sold 5,000 shares of Stomp for a consideration of $16 per share. At the end of 2023, the share price of Stomp had fallen to $6 per share. The average of market analysts' forecasts was that the share price could be expected to rise to $8 per share over the next five years. (Assume that the future recoverable value of the shares is assessed to be $8 per share.) Required: Provide journal entries for Past for all transactions relating to its investment in Stomp for the year 2023 if it accounts for its investment in Stomp using the equity method. Round all calculations to nearest dollar.
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51) One of the changes introduced in IFRS 9 Financial Instruments was that realized gains on investments valued at fair value with revaluations through other comprehensive income were to be taken to retained earnings without being recycled through net income. Briefly explain how this eliminated one possible method of earnings management that previously allowed companies' discretion in managing net income.
52) If an investor's ownership interest in a significant influence investment increases or decreases, all changes from accounting at fair value to the use of the equity method (or viceversa) are to be handled prospectively. ⊚ ⊚
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Answer Key Test name: ch 2 1) A 2) A 3) C 4) C 5) A 6) C 7) C 8) C 9) D 10) D 11) D 12) B 13) C 14) B 15) A 16) B 17) B 18) C 19) B 20) C 21) D 22) A 23) A 24) C 25) A 26) A Version 1
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27) A 28) B 29) A 30) B 31) B 32) C 33) A 34) B 35) C 36) D 37) C 38) D 39) Section Break 39.1) A 39.2) A 39.3) C 39.4) B 39.5) A 39.6) C 39.7) B 39.8) D 39.9) A 39.10) A 39.11) D 39.12) B 40) Section Break 52) TRUE
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Student name:__________ 1) The Board of Directors of Company B is aware of a potential takeover bid from Company A. The assets of Company B that are of primary interest to Company A are transferred to other companies. Which of the following tactics were employed by Company B to prevent Company A from acquiring control of Company B?
A) Pac-man defence B) Selling the crown jewels C) Poison pill D) White knight
2) On January 1, 2022, A Company issued 6,000 new common shares to the shareholders of B Corporation to acquire 100% of their shares in B Corporation. Prior to the new share issuance by A Company, it had 5,000 common shares issued and outstanding. The former shareholders of B Corporation would now own 55% (6,000/11,000) of the outstanding shares. What is the outcome of this transaction?
A) The legal parent, A Company, is treated as the subsidiary and the legal subsidiary, B Corporation, is treated as the parent for reporting purposes. Therefore, the consolidated balance sheet would incorporate B Corporation's net assets at carrying value and A Company's net assets at fair value. B) Since A Company shares were issued to the shareholders of B Company for the purchase, A Company will be the parent company and B Corporation, the subsidiary for reporting purposes. Therefore, the consolidated balance sheet would incorporate A Company's net assets at carrying value and B Corporation's net assets at fair value. C) Since neither A Company nor B Corporation can be identified as the acquirer, the consolidated balance sheet would incorporate A Company's net assets at carrying value and B Corporation's net assets at carrying value. D) Since neither A Company nor B Corporation can be identified as the acquirer, consolidated financial statements are not required. Each entity is only required to prepare separate-entity financial statements.
3)
Which of the following would NOT be included in the acquisition cost?
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A) Share issue costs B) Fair value of any shares issued C) Fair value of contingent consideration D) Fair value of assets transferred
4) How should the total consideration given to acquire control through a share purchase be allocated prior to preparing consolidated financial statements?
A) The total consideration given should be allocated to the carrying amount of the acquired company's identifiable net assets. B) The total consideration given should be allocated to the fair value of the acquired company's identifiable net assets and goodwill. C) The total consideration given should be allocated to the acquisition differential. D) The total consideration given should be reflected as an increase in the acquirer's investment (in the subsidiary) account.
5) Which of the following statements pertaining to the preparation of consolidated financial statements is correct?
A) Consolidation entries are made in the accounting records of both the parent and subsidiary. B) The acquisition differential appears on the consolidated balance sheet as an asset. C) The parent company's investment in subsidiary account is eliminated and does not appear on the consolidated balance sheet. D) The subsidiary's shareholders' equity accounts are combined with the parent's shareholders' equity accounts.
6) According to IFRS 10, there are conditions, that if met, a parent company will not be required to present consolidated financial statements for external reporting purposes. Which of the following is NOT one of the conditions?
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A) The parent company's ultimate parent issued consolidated financial statements that comply with IFRS for public use. B) The parent company is a wholly owned subsidiary. C) The parent company's shareholders unanimously agreed that consolidated financial statements are not required. D) The parent company shares are not traded in a public market.
7) Company Y purchases a controlling interest in Company Z on January 1, 2022. Which of the following would appear as the shareholders' equity amount on Company Y's consolidated balance sheet on the date of acquisition?
A) Company Y's shareholders' equity. B) The combined shareholders' equity of both companies. C) Company Y's shareholders' equity as well as Company Y's proportional share of Company Z's net assets at book value. D) Company Y's shareholders' equity as well as Company Y's proportional share of Company Z's net assets at fair market value.
8) The process of preparing consolidated financial statements involves the elimination of intercompany transactions between a parent company and its subsidiary. Where would these entries be recorded?
A) On the parent's books only. B) On the subsidiary's books. C) The entries are not recorded in the books of either company. The entries are only made on the consolidated working papers. D) The elimination of any intercompany transaction must be reflected on the books of both companies.
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9) IFRS 10 Consolidated Financial Statements outlines the requirements for identifying the company that is the acquirer in a business combination when it's not clear who that is. Which is NOT a consideration in determining which company is the acquirer?
A) The ability to direct relevant activities that most significantly affect returns of the investee. B) The shareholder group that holds the largest number of voting shares. C) The company that is paying cash for the business. D) Any by-laws or provisions of the incorporation acts of each company that set out how a business combination will occur in law.
10) How should the acquirer in a business combination account for intangible assets which are readily identifiable but difficult to measure at fair value?
A) They should be ignored since the cost of determining the fair value outweighs the benefit. B) The fair value should be determined using one of the techniques described in Appendix B of IFRS 13. C) They should be included in goodwill. D) They should be accounted for at an amount deemed reasonable by management.
11) Which of the following regarding the preparation of consolidated financial statement is correct?
A) Once the parent company prepares consolidated financial statements, it no longer needs to prepare separate-entity financial statements. B) Only the subsidiary is required to prepare separate-entity financial statements. C) Consolidated financial statements are required by the parent company for reporting purposes only; each company must continue to prepare its own separate-entity financial statements. D) Consolidated financial statements are only required when both the parent and subsidiary companies are publicly traded.
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12) Assume that two companies wish to engage in a business combination involving a share exchange. Once the share exchange is consummated, each shareholder group will have an equal number of voting shares. Which of the following statements best describes the course of action that must be taken under these circumstances?
A) Other factors must be examined to determine which shareholder group has control. B) The company with the largest net assets (at fair market value) is deemed to be the acquirer. C) No acquirer can be identified since no shareholder group has majority voting control, so the share exchange must be annulled. D) The Boards of Directors of both companies must enter into discussions to agree on which party will be the acquirer.
13) Company A makes a hostile take-over bid for control of Company B. In response, Company B makes a counter-offer to purchase shares from Company A's shareholders. Which of the following best describes Company B's response?
A) Pac-man defence B) Selling the crown jewels C) Poison pill D) Hostile defence
14) One company is considering entering into a business combination with another. The potential acquirer wishes to acquire the subsidiary's assets and liabilities but wishes to prepare consolidated financial statements using the fair market values of its own assets and liabilities as well of those of its potential subsidiary. Can this be accomplished? (Assume that each of the methods is currently allowable under GAAP)
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A) Yes, this is permissible under the acquisition method. B) Yes, this is permissible under the equity method. C) Yes, this is permissible under the new-entity method. D) No, this would not be possible under any circumstances.
15) 1234567 Inc. is contemplating a business combination with 7654321 Inc. One company is incorporated under the Canada Business Corporations Act and the other under the Business Corporations Act for Ontario. Is a statutory amalgamation permissible under these circumstances?
A) Yes, provided the combination is accounted for using the Acquisition Method. B) Yes, provided the surviving corporation continues the businesses of the predecessor corporations. C) No, a statutory amalgamation would not be possible, since one company is incorporated under federal law and the other under provincial law. D) Cannot be determined from the information given.
16) Company A wishes to acquire control of Company B's business. A consultant recommended that Company A can do this through a purchase of assets rather than a purchase of shares. Which of the following statements regarding the above scenario is INCORRECT?
A) Company A needs to purchase Company B's nets assets. B) Company A only needs to acquire the assets of Company B that it needs to strategically enhance its own business operations. C) Company A needs to acquire the assets that constitute Company B's business. D) Company A needs to purchase all the assets of Company B and assume all of its liabilities.
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17) A Inc. purchased 100% of B Inc.'s voting shares for cash. The assets and liabilities reported in the consolidated balance sheet of A Inc. prepared on the date of acquisition will include which of the following?
A) The book value of A's assets and liabilities plus the book value of B's assets and liabilities. B) The fair market value of A's assets and liabilities plus the book value of B's assets and liabilities. C) The book value of A's assets and liabilities plus the fair market value of B's assets and liabilities. D) The fair market value of A's assets and liabilities plus the fair market value of B's assets and liabilities.
18)
Which of the following must be possible in order for a business combination to exist?
A) Control of another company's net assets that constitute a business. B) A contract with another company to lease the assets that will be used in a business. C) Acquisition of shares of another company. D) Ownership of all another company's operating assets.
19) Company A (A) purchased 100% of the voting shares of Company B (B) for $100,000 cash on January 1, 2022. Immediately before the acquisition, A and B reported cash balances of $300,000 and $150,000 respectively. If consolidated financial statements were prepared immediately following the acquisition, how much cash would be reported on A's consolidated balance sheet?
A) $250,000 B) $350,000 C) $450,000 D) $550,000
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20) A Inc. is contemplating a business combination with B Inc. A Inc.'s management is considering the acquisition of a majority of B's voting shares. The fair market values of B's assets far exceed their book values. Which of the following statements pertaining to this situation is correct?
A) The purchase of B's shares would likely be the cheaper method of acquiring control, but it would only be more advantageous to the shareholders of B Inc. from a tax perspective. B) The purchase of B's shares would likely be the cheaper method of acquiring control, and it would be more advantageous to the consolidated entity from a tax standpoint. C) The purchase of B's shares would be more expensive method of acquiring control due to the high fair value of B's assets. D) The purchase of B's shares would likely be a more expensive way of acquiring control, but it would be more advantageous to the consolidated entity from a tax standpoint.
21) IFRS 3 outlines the accounting requirements for business combinations. Which of the following statements is correct?
A) Companies may choose between the new entity method and the acquisition method when accounting for business combinations. B) The new-entity method can be used if management determines the users of the company's consolidated financial statements would benefit from the fair value reporting of both the parent and subsidiary on acquisition date. C) The only acceptable method of accounting for business combinations is the acquisition method. D) The new entity method can only be used when cash is the sole consideration offered by the acquirer in a business combination.
22) XYZ Inc. owns 55% of DEF Inc.'s 100,000 outstanding voting shares. Another company, GHI Inc., owns 40%, with the remaining shares being held by many individual investors. GHI Inc. also owns $25,000,000 worth of DEF Inc.'s $1,000 par value bonds, each of which is convertible to one voting share of DEF Inc. Which of the following statements regarding the control of DEF Inc. is correct?
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A) XYZ Inc. has control over DEF Inc. as it owns a majority of DEF Inc.'s currently outstanding voting shares. B) XYZ Inc. does not have control over DEF Inc. because GHI Inc. will have enough voting shares to control DEF Inc. if it exercised its conversion rights for the bonds. C) XYZ Inc. has de facto control over DEF Inc. D) As long as GHI Inc. does not exercise its option to convert its bonds to voting shares, XYZ Inc. has control over DEF Inc.
23) A Inc. purchased 100% of the voting shares of B Inc. on July 1, 2022. Which of the following statements is TRUE?
A) The 2022 consolidated income statement will include only the income of A Inc. from January 1, 2022 to June 30, 2022 and income for both A Inc. and B Inc. from July 1, 2022 to December 31, 2022. B) The 2022 consolidated income statement will include income for both A Inc. and B Inc. for the entire year. C) The 2021 income statement (i.e., the comparative year), will retroactively include income for both A Inc. and B Inc. D) The 2022 consolidated income statement will only include income from A Inc.
24) Company A owns 80% of the voting shares of Company B, which in turn owns 70% of the shares of Company C. There are no outstanding conversion rights, warrants or options which would enable holders of other instruments to acquire additional voting shares of any of these companies. In this scenario, which of the following statements is TRUE?
A) Company A has no control over Company C because it does not own any shares of Company C. B) Company A has direct control over Company C. C) Company A has indirect control over Company C. D) Company A does not have control over Company C's net assets.
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25) Yurt Inc. (Yurt) owns 42% of North Inc.'s (North) voting shares. Yurt is the largest single shareholder of North's voting shares, with the rest of North's shares being widely held by individual investors. There was a very poor turnout at North's recent annual meeting, enabling Yurt to easily elect the majority of North's Board of Directors. Which of the following statements accurately describes this situation?
A) Yurt cannot control North because it cannot exercise control over North without the cooperation of North's other shareholders. B) Yurt controls North because it is North's single largest shareholder group. C) Yurt is deemed to control North because it has elected the majority of North's Board members and the other shareholders are not organized in such a way to actively cooperate when they vote. D) At this point, Yurt has significant influence and would only be able to control North if it acquires more than 50% of North's voting shares.
26)
Which of the following statements is correct?
A) Under the new-entity method, both the parent and subsidiary company's net assets are recorded at their fair market values at the date of acquisition. B) Under the acquisition method, the acquirer company's net assets are revalued to fair value to reflect the substance of the transaction which, in essence is, a new company has been formed. C) As of January 1st, 2011, the new-entity method must be used to account for business combinations where an acquirer can be identified. D) The acquisition method is consistent with the historical cost principle while the newentity method is not.
27)
How is negative goodwill treated under the acquisition method?
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A) The acquiring company could potentially report a gain on acquisition. B) The acquiring company will report a loss on acquisition. C) The negative goodwill will be included in other comprehensive income, as it is an unrealized gain. D) The negative goodwill is prorated and allocated to the fair value of the identifiable net assets of the acquired company.
28)
Under the new-entity method, which of the following statements is TRUE?
A) The net assets of the acquiring company remain at book value while those of the acquired company are reported at fair value. B) The net assets of the acquiring company are reported at fair value while those of the acquired company are reported at book value. C) The net assets of both companies are reported at fair market value. D) The net assets of both companies are reported at book value.
29) Appendix B of IFRS 3 provides an extensive list of what must be disclosed for each business combination. Which of the following items is NOT included in that list?
A) The acquisition-date fair value of the total consideration given. B) The primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree. C) The percentage of voting equity interests acquired. D) The net assets of both companies at book value as disclosed in the financial statements of each company prior to the business combination.
30) When is a parent company allowed to comprehensively revalue the assets and liabilities of a subsidiary to its fair values at the acquisition date using push-down accounting, following a business combination?
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A) When reporting under ASPE and there is a significant non-controlling interest B) When reporting under ASPE and there is an insignificant (or no) non-controlling interest C) When reporting under IFRS and there is a significant non-controlling interest D) When reporting under IFRS and there is an insignificant (or no) non-controlling interest
31) Which of the following is required when preparing a consolidated balance sheet on the date of the formation of a subsidiary by its parent company?
A) The assets and liabilities of the subsidiary must be revalued to fair value. B) The goodwill from the business combination must be calculated. C) The parent's investment account must be eliminated against the subsidiary's share capital. D) The parent's investment account must be eliminated against the subsidiary's retained earnings.
32) Company A currently owns 70% of the voting shares of Company B. Which of the following would result in the loss of control of Company B?
A) The Receiver has taken control of the assets of Company B and will continue to operate the business to maximize the sale's value of Company B's assets. B) The Receiver has seized a specific asset of Company B to satisfy the terms of a loan agreement, but the seizure does not affect the ability of Company B to continue in business under Company A's direction. C) The Canadian government has imposed restrictions over Company B's ability to sell its merchandise in certain markets. D) The non-controlling shareholder of Company B has the right to approve capital expenditures exceeding $5,000,000.
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33) Which of the following is NOT one of the elements that must exist for an investor to have control over an investee?
A) The investor has existing rights to currently direct activities that significantly affect the investee's returns. B) The investor must have exposure to returns that vary resulting from the investee's performance. C) The investor must be able to use its power to affect the amount of its returns from its involvement. D) The investor must currently own more than 50% of the voting shares to have control over the investee.
34) In general, which of the following statements about the income tax implications for the following forms of business combinations is true?
A) An acquisition of shares is generally better for the acquirer but worse for the vendor. B) An acquisition of net assets is generally better for the acquirer but worse for the vendor. C) An acquisition of shares is generally worse for both the acquirer and the vendor. D) An acquisition of net assets is generally better for both the acquirer and the vendor.
35) Which of the following is NOT considered to be part of the acquisition cost of a subsidiary?
A) Any cash paid to the seller. B) The fair value of contingent consideration. C) Present value of any promises by the acquirer to pay cash in the future. D) The cost of issuing shares as part of the consideration.
36)
Which of the following is part of the acquisition cost of a subsidiary?
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A) Due diligence fees paid to lawyers. B) The fair value of assets transferred by the acquirer. C) The costs of issuing debt or shares. D) Amounts paid to accountants for advice.
37) On December 31, 2022, A Company (A) has capital assets with a cost of $250,000 and accumulated depreciation of $150,000 and B Company (B) has capital assets with a cost of $180,000 and accumulated depreciation of $80,000. B's capital assets have a fair value of $200,000 on that date. If A acquires B on January 1, 2023, and prepares a consolidated balance sheet on that date, at what values should the capital assets appear on that balance sheet (using the net method)?
A) Cost of $430,000 and accumulated depreciation of $230,000. B) Cost of $450,000 and accumulated depreciation of $150,000. C) Cost of $450,000 and accumulated depreciation of $230,000. D) Cost of $680,000 and accumulated depreciation of $230,000.
38) IFRS 3 outlines the accounting requirements for business combinations. Which of the following statements pertaining to the accounting requirements is INCORRECT?
A) All business combinations should be accounted for using the acquisition method. B) The acquisition date is the date the acquirer obtains control of the acquiree. C) The acquirer is required to measure 100% of the fair value of the acquiree on acquisition date even if the acquirer only purchases 70% of the voting shares. D) The acquirer should only recognize and measure identifiable assets that are presented on the acquiree's balance sheet at acquisition date.
39) Which method under ASPE is a private company permitted to use to report its subsidiaries?
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A) The private company is only permitted to use the consolidation method. B) The private company can use the consolidation method, equity method or cost method. C) The private company is only permitted to use the equity method. D) The private company is permitted to choose between the equity method or cost method.
40) IOU Inc. (IOU) purchased 100% of the outstanding common shares of UNI Inc. (UNI) for cash of $900,000. On the date of acquisition, UNI's assets included $2,000,000 of inventory, and land with a book value of $120,000. UNI also had $1,400,000 in liabilities on that date. UNI's book values were equal to their fair market values, except for the company's land, which was estimated to have a fair market value of $170,000.
40.1)
How much goodwill will be created by IOU's acquisition of UNI?
A) $130,000 B) $50,000 C) $180,000 D) Can't be measured with the information provided.
40.2) Assuming that the purchase of the common shares of UNI Inc. was properly recorded at cost, which of the following journal entries is required to prepare consolidated financial statements the day following the acquisition?
A) Debit Investment in UNI
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Cash
900,000
B) Debit
Credit
Inventory
2,000,000
Land
170,000
Goodwill
130,000
Liabilities
1,400,000
Investments in UNI
900,000
C) Debit Net Assets
720,000
Acquisition differential
180,000
Cash
Credit
900,000
D) No entry.
40.3) UNI?
Which of the following is the correct journal entry to record IOU's acquisition of
A) Debit Investment in UNI Cash
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B) Debit Inventory
2,000,000
Land
170,000
Goodwill
130,000
Credit
Liabilities
1,400,000
Cash
900,000
C) Debit Net Assets
720,000
Acquisition differential
180,000
Cash
Credit
900,000
D) No journal entry required by IOU. The journal entry is recorded by UNI.
40.4) UNI also had patent rights with a fair market value on acquisition date of $20,000 that were not shown on its balance sheet because the rights had been developed internally. How much goodwill would be created by IOU's acquisition of UNI?
A) $130,000 B) $110,000 C) $70,000 D) $180,000
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41) Parent Inc. (Parent) and Sub Inc. (Sub) had the following balance sheets on December 31, 2022: Parent
Sub
Current Assets
$60,000
$10,000
Fixed Assets (net)
100,000
60,000
Total Assets
$160,000
$70,000
Current Liabilities
$42,000
$35,000
Bonds Payable
20,000
12,000
Common Shares
90,000
12,000
Retained Earnings
8,000
11,000
$160,000
$70,000
Total Liabilities and Equity
On January 1, 2023, Parent purchased all of Sub's common shares for $50,000 in cash. On that date, Sub's current assets and fixed assets had a fair value of $18,000 and $48,000, respectively. Consolidated financial statements were prepared on that date.
41.1) Which of the following is the correct amount for current assets on the consolidated balance sheet?
A) $70,000 B) $28,000 C) $78,000 D) $120,000
41.2) Which of the following is the correct amount for fixed assets on the consolidated balance sheet?
A) $172,000 B) $100,000 C) $148,000 D) $160,000
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41.3) Which of the following is the correct amount for the goodwill arising from this business combination?
A) No goodwill acquired B) $23,000 C) $27,000 D) $31,000
41.4) Which of the following is the correct amount for the shareholders' equity section of the consolidated balance sheet?
A) $102,000 B) $90,000 C) $98,000 D) $121,000
42) A Corporation had net income of $50,000 in 2022 and $60,000 in 2023, excluding any income from its investment in B Company. B Company had net income of $30,000 in 2022 and $40,000 in 2023. On January 1, 2023, A Corporation acquired all of the outstanding common shares of B Company for a cash payment of $300,000. Assume that there was no acquisition differential on this business combination.
42.1) What net income would A Corporation report for 2022 in its comparative consolidated financial statements at the end of 2023?
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A) $30,000 B) $50,000 C) $80,000 D) $100,000
42.2) What net income would A Corporation report for 2023 in its comparative consolidated financial statements at the end of 2023?
A) $40,000 B) $60,000 C) $80,000 D) $100,000
43)
On April 1, 2022, the balance sheets of Optimum Inc. and Electra Inc. were as follows: Optimum Inc
Electra Inc
Cash and short-term securities
$380,000
$20,000
Inventory
50,000
10,000
Plant and equipment (net)
320,000
120,000
Total Assets
$750,000
$150,000
Current liabilities
$75,000
$15,000
Bonds payable
100,000
30,000
Common shares
150,000
55,000
Retained earnings
425,000
50,000
Total Liabilities and Equity
$750,000
$150,000
On that date, the fair values of Electra's assets and liabilities were as follows:
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Cash and short-term securities
$32,000
Inventory
$12,000
Plant and equipment (net)
$150,000
Current liabilities
$15,000
Bonds payable
$32,000 20
On April 1, 2022, Optimum issued 5,000 new common shares with a market value of $60.00 per share as consideration for Electra's net assets. Prior to the issue, Optimum had 10,000 outstanding common shares. Required: a) Calculate the amount of goodwill arising from this combination. b) Prepare the journal entry to record Optimum's acquisition of Electra's assets. c) Prepare Optimum's balance sheet immediately following its acquisition of Electra's assets. d) Prepare Electra's balance sheet following the acquisition.
44) Sonic Enterprises Inc has decided to purchase 100% of the voting shares of Jackson Inc. for $325,000 in cash on May 1, 2022. On that date, just prior to the acquisition, the balance sheets of each of these companies were as follows: Sonic Inc
Jackson Inc
Cash and short-term securities
$750,000
$30,000
Inventory
60,000
20,000
Plant and equipment (net)
280,000
140,000
Total assets
$1,090,000
$190,000
Current liabilities
$150,000
$25,000
Bonds payable
120,000
30,000
Common shares
120,000
70,000
Retained earnings
700,000
65,000
Total liabilities and equity
$1,090,000
$190,000
On that date, the fair values of Jackson's assets and liabilities were as follows:
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Cash and short-term securities
$28,000
Inventory
$22,000
Plant and equipment (net)
$180,000
Current liabilities
$25,000
21
Bonds payable
$15,000
Sonic's book values approximated their fair values on that date. Required: a) Calculate the amount of goodwill arising from this combination. b) Prepare the journal entry to record Sonic's acquisition of Jackson's shares. c) Prepare Sonic's consolidated balance sheet immediately following its acquisition of Jackson's assets.
45) Park Place Inc. has decided to purchase 100% of the voting shares of Baltic Ltd. for $825,000 in cash on July 1, 2022. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows: Park Place Inc.
Baltic Ltd.
Cash and short-term securities
$900,000
$200,000
Inventory
50,000
120,000
Plant and equipment (net)
350,000
150,000
Goodwill
------------
80,000
Total assets
$1,300,000
$550,000
Current liabilities
$180,000
$160,000
Bonds payable
400,000
100,000
Common shares
500,000
200,000
Retained earnings
220,000
90,000
Total liabilities and equity
$1,300,000
$550,000
On that date, the fair values of Baltic Ltd. assets and liabilities were as follows:
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Cash and short-term securities
$350,000
Inventory
$70,000
Plant and equipment (net)
$300,000
Current liabilities
$160,000
22
Bonds payable
$105,000
In addition to the above, an independent appraiser determined that Baltic Ltd. had trademarks with a fair market value of $180,000 which had not been reported on its balance sheet. In addition, Park Place Inc.'s fair market values were equal to their book values with the exception of the Company's inventory and plant and equipment, which were said to have fair values of $30,000 and $480,000, respectively. Based on the information provided: a) Calculate the amount of goodwill arising from this combination. b) Prepare the journal entry to record Park Place Inc.'s acquisition of Baltic Ltd. shares. c) Prepare Park Place Inc.'s consolidated balance sheet immediately following its acquisition of Baltic Ltd.'s voting shares.
46) On July 1, 2022, Park Place Inc. issued shares with a fair value of $825,0000 to the shareholders of Baltic Ltd for all of their shares. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows: Park Place Inc.
Baltic Ltd.
Cash and short-term securities
$900,000
$200,000
Inventory
50,000
120,000
Plant and equipment (net)
350,000
150,000
Goodwill
-
80,000
Total assets
$1,300,000
$550,000
Current liabilities
$180,000
$160,000
Bonds payable
400,000
100,000
Common shares
500,000
200,000
Retained earnings
220,000
90,000
Total liabilities and equity
$1,300,000
$550,000
On that date, the fair values of Baltic Ltd. assets and liabilities were as follows:
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23
Cash and short-term securities
$350,000
Inventory
$70,000
Plant and equipment (net)
$300,000
Current liabilities
$160,000
Bonds payable
$105,000
In addition to the above, an independent appraiser determined that Baltic Ltd. had trademarks with a fair market value of $180,000 which had not been reported on its balance sheet. In addition, Park Place Inc.'s fair market values were equal to their book values with the exception of the Company's inventory and plant and equipment, which were said to have fair values of $30,000 and $480,000, respectively. Based on the information provided: a) Calculate the amount of goodwill arising from this combination. b) Prepare the journal entry to record Park Place Inc.'s acquisition of Baltic Ltd. shares. c) Prepare Park Place Inc.'s consolidated balance sheet immediately following its acquisition of Baltic Ltd.'s voting shares.
47) Park Place Inc. has decided to purchase 100% of the voting shares of Baltic Ltd. for $825,000 in cash on July 1, 2022. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows: Park Place Inc.
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Baltic Ltd.
Cash and short-term securities
$900,000
$200,000
Inventory
50,000
120,000
Plant and equipment (net)
350,000
150,000
Goodwill
-
80,000
Total assets
$1,300,000
$550,000
Current liabilities
$180,000
$160,000
Bonds payable
400,000
100,000
Common shares
500,000
200,000
Retained earnings
220,000
90,000
24
Total liabilities and equity
$1,300,000
$550,000
On that date, the fair values of Baltic Ltd. assets and liabilities were as follows: Cash and short-term securities
$350,000
Inventory
$70,000
Plant and equipment (net)
$300,000
Current liabilities
$160,000
Bonds payable
$105,000
In addition to the above, an independent appraiser determined that Baltic Ltd. had trademarks with a fair market value of $180,000 which had not been reported on its balance sheet. In addition, Park Place Inc.'s fair market values were equal to their book values with the exception of the Company's inventory and plant and equipment, which were said to have fair values of $30,000 and $480,000, respectively. Prepare any disclosure required for Park Place Inc. under IFRS. Assume Baltic Ltd. has a reliable and specialized workforce that produces high-end loudspeakers for touring musicians and that Park Place Inc. manufactures stage equipment needed for live music performances.
48) Park Place Inc. has decided to purchase 100% of the voting shares of Baltic Ltd. for $825,000 in cash on July 1, 2022. On the date just prior to the acquisition, the balance sheets of each of these companies were as follows: Park Place Inc.
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Baltic Ltd.
Cash and short-term securities
$900,000
$200,000
Inventory
50,000
120,000
Plant and equipment (net)
350,000
150,000
Goodwill
-
80,000
Total assets
$1,300,000
$550,000
Current liabilities
$180,000
$160,000
Bonds payable
400,000
100,000
Common shares
500,000
200,000
Retained earnings
220,000
90,000
25
Total liabilities and equity
$1,300,000
$550,000
On that date, the fair values of Baltic Ltd. assets and liabilities were as follows: Cash and short-term securities
$350,000
Inventory
$70,000
Plant and equipment (net)
$525,000
Current liabilities
$160,000
Bonds payable
$105,000
In addition to the above, an independent appraiser deemed that Baltic Ltd. had trademarks with a fair market value of $480,000 which had not been accounted for. In turn, Park Place Inc. fair market values were equal to their book values with the exception of the Company's inventory and plant and equipment, which were said to have fair values of $30,000 and $480,000, respectively. Calculate the goodwill arising from this business combination and state how it would be shown in the consolidated balance sheet on the acquisition date.
49) Assume that X Inc. wishes to enter into a business combination with Y Inc. on January 1, 2022. X is unsure whether it should purchase Y's assets or liabilities or whether it should purchase all of Y's outstanding voting shares. X and Y are incorporated in different jurisdictions. On January 1, 2022, Y Inc. was estimated to have various intangibles estimated to be worth a total of $1,000,000. Of this amount, $250,000 can be attributable to a trademark owned by Y. Required: In the absence of any other figures, prepare a brief report explaining anything that would be of interest the Board of Directors of X Inc.
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50) Company Inc. owns all of the outstanding voting shares of Firm Inc. On January 1st, 2022, Firm Inc. would like to purchase all of the voting shares of its main competitor, N-CORP Inc. Briefly discuss the purported accounting implications of this transaction.
51) Telecom Inc has decided to purchase the shares of Intron Inc. for $300,000 in cash on July 1, 2022. On the date, the balance sheets of each of these companies were as follows: Telecom Inc
Intron Inc
Cash and short-term securities
$920,000
$200,000
Inventory
150,000
20,000
Plant and equipment (net)
330,000
180,000
Total assets
$1,400,000
$400,000
Current liabilities
$420,000
$90,000
Bonds payable
700,000
200,000
Common shares
180,000
60,000
Retained earnings
100,000
50,000
Total liabilities and equity
$1,400,000
$400,000
On that date, the fair values of Intron's assets and liabilities were as follows:
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Cash and short-term securities
$200,000
Inventory
$15,000
Plant and equipment (net)
$250,000
Current liabilities
$90,000
Bonds payable
$210,000
27
Required: Based on the information provided, answer the following: a) Prepare the journal entry to record the purchase of Intron's shares. b) Prepare the consolidation entries (eliminating entries) that are required to prepare the consolidated financial statements.
52) Telecom Inc has decided to purchase the shares of Intron Inc. for $300,000 in cash on July 1, 2022. On the date, the balance sheets of each of these companies were as follows: Telecom Inc
Intron Inc
Cash and short-term securities
$920,000
$200,000
Inventory
150,000
20,000
Plant and equipment (net)
330,000
180,000
Total assets
$1,400,000
$400,000
Current liabilities
$420,000
$90,000
Bonds payable
700,000
200,000
Common shares
180,000
60,000
Retained earnings
100,000
50,000
Total liabilities and equity
$1,400,000
$400,000
On that date, the fair values of Intron's assets and liabilities were as follows:
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Cash and short-term securities
$200,000
Inventory
$15,000
Plant and equipment (net)
$400,000
Current liabilities
$90,000
Bonds payable
$210,000
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Required: Prepare the consolidated balance sheet on date of acquisition.
53) Great Western Manufacturing Inc. ("GWM") was acquired by Great Eastern Holding Ltd) ("GEH") in 2022. The Vice President, Finance of GWM has asked you, the manager in charge of this year's audit, whether GWM must prepare consolidated financial statements for the year ended December 31, 2022. GWM has about fifteen wholly owned subsidiaries and has in the past prepared consolidated financial statements. Required: Prepare a discussion around the need to prepare consolidated financial statements.
54) George Inc. acquired all of the outstanding shares of Martha Limited by paying $200,000 in cash, issuing a debenture for $300,000 and issuing 10,000 common shares with a fair value of $50 each. George Inc. incurred costs of $60,000 in investigation, accounting and legal fees directly related to the acquisition. In addition, the company incurred costs of $10,000 for the issue of the debenture and another $10,000 for the issue of the additional shares. Required: Prepare the journal entries necessary to record the acquisition and related costs on the books of George Inc.
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55) Arthur Ltd. and Blaine Ltd. formed a corporation, Weather Ltd., to develop a new technology to monitor changes in weather patterns. Each of the investor's own 50% of the voting shares of Weather Ltd. Arthur Ltd. is unilaterally responsible for all decisions regarding developing and obtaining regulatory approval for the technology, whereas Blaine Ltd. is unilaterally responsible for all decisions regarding the manufacturing and marketing of the technology. Explain how you would determine which of the two investor's control Weather Ltd.
56) Alpha Company (Alpha) owns 42% of the voting shares of Bet Ltd. (Bet). Another individual shareholder, Joe, owns 15% of the voting shares of Bet and the remaining voting shares are owned by Number Corp. Alpha can control Bet if Joe and Alpha enter an irrevocable agreement to have Joe convey his voting rights to Alpha. ⊚ ⊚
true false
57) IFRS 3 defines a business combination as a transaction or event in which an acquiror obtains ownership of the assets of another company. ⊚ ⊚
58)
true false
Consolidated financial statements are not required for all business combinations. ⊚ ⊚
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true false
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59) Consolidated financial statements are required to be prepared even though no shares are acquired in the business combination as long as a contractual arrangement is signed by the acquiring company and the acquiree ‘s shareholders to give it control. ⊚ ⊚
true false
60) Goodwill exists where assets that were previously used in the vendor's business are now used in the acquirer's business. ⊚ ⊚
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true false
31
Answer Key Test name: ch 3 1) B 2) A 3) A 4) B 5) C 6) C 7) A 8) C 9) D 10) B 11) C 12) A 13) A 14) C 15) C 16) B 17) C 18) A 19) B 20) A 21) C 22) B 23) A 24) C 25) C 26) A Version 1
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27) A 28) C 29) D 30) B 31) C 32) A 33) D 34) B 35) D 36) B 37) B 38) D 39) B 40) Section Break 40.1) A 40.2) D 40.3) A 40.4) B 41) Section Break 41.1) B 41.2) C 41.3) D 41.4) C 42) Section Break 42.1) B 42.2) D 56) TRUE 57) FALSE 58) TRUE 59) TRUE Version 1
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60) FALSE
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Student name:__________ 1) Which of the following is the best approach to determine the fair value of the noncontrolling interest under the fair value enterprise method?
A) Use the trading price of shares of a comparable company in an active market. B) Use the market trading prices of the outstanding subsidiary shares (not owned by the parent) a few weeks before and after the acquisition. C) Use a valuation model based on the subsidiary's residual income projections. D) Use the share price paid by the parent.
2) On the date of acquisition, consolidated retained earnings and consolidated common shares in shareholders' equity are equal to:
A) the sum of the parent and subsidiary's shareholders' equity. B) the sum of the parent's shareholders' equity plus its pro-rata share of the subsidiary's shareholders' equity. C) the parent's shareholders' equity. D) the subsidiary's shareholders' equity.
3) A Co. has acquired an 80% controlling interest in B Co. If using the proportionate consolidation method, the consolidated balance sheet on the date of acquisition, will contain:
A) the parent's pro-rata share of the assets and liabilities of the subsidiary at book value. B) 100% of the assets and liabilities of the subsidiary at fair market value. C) 100% of the assets and liabilities of the subsidiary at book value. D) the parent's pro-rata share of the assets and liabilities of the subsidiary at fair market value.
4)
In which of the following situations will there be an acquisition differential?
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A) The total consideration given and the carrying amount of the net assets of the acquired company at the date of acquisition are the same amount. B) The total consideration given exceeds the carrying amount of net assets of the acquired company at the date of acquisition. C) When the parent company establishes a new company as a subsidiary. D) The carrying amount of the net assets of the acquired company are equal to their fair value and no goodwill is acquired in the business combination.
5) Which of the following is the correct journal entry to record the gain of $5,000 resulting from a bargain purchase (i.e., negative goodwill) if the parent company uses the equity method to account for its investment in the subsidiary?
A) Debit Investment in subsidiary
Credit
5,000
Gain on bargain purchase of subsidiary
5,000
B) Debit Investment in subsidiary
Credit
5,000
Goodwill
5,000
C) Debit Goodwill Gain on bargain purchase of subsidiary
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Credit
5,000 5,000
2