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MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following would NOT be a reason to obtain a greater understanding of accounting

practices in other nations? A) Departures from the historical cost principle may be possible in other nations. B) Financial results are disclosed in different currencies. C) Income-smoothing may have affected a foreign subsidiary's results; such smoothing practices are not permitted in North America. D) One needs to be aware of differing disclosure requirements from nation to nation, as this impacts the preparation of financial statements. Answer: B 2) Which of the following would be most affected by financial statements being prepared under

different accounting principles? A) Reduced comparability. C) Reduced reliability.

B) Increased complexity. D) Inaccurate asset valuations.

Answer: A 3) The CPA Canada Handbook -- Accounting is the handbook of Canadian accounting standards. Why

do companies in Canada ensure that their financial reporting is consistent with Canadian GAAP? A) Their bank requires them to do so. B) Compliance with the CPA Canada Handbook - Accounting pronouncements is usually required by many legal statutes. C) Reporting under the CPA Canada Handbook - Accounting is required by public companies' boards of directors. D) Their auditors require them to do so. Answer: B 4) Which decision has Canada made with respect to financial reporting for private enterprises? A) To adopt the IFRS standards for small and medium-sized enterprises. B) To look to US GAAP for standards. C) To retain the current standards. D) To develop and maintain its own standards for private enterprises. Answer: D 5) Starting in 2011, what is the definition of a private enterprise (PE) under Canadian GAAP? A) A corporation that has less than 500 shareholders and is not listed on a stock exchange. B) A corporation that has no public shareholders. C) A corporation which is not profit oriented. D) 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. Answer: D

6) Which enterprises must report under IFRS in Canada? A) Public companies, private companies and not-for-profit organizations. B) All corporations, government agencies and private companies. C) Public companies and private companies whose shareholders' equity is in excess of

$500,000,000 at any particular year end. D) Publicly accountable enterprises. Answer: D 7) What approach did Canada first decide to take with respect to convergence with IFRS? A) Harmonization of CPA Canada Handbook with IFRS. B) Substituting IFRS for Canadian GAAP when approved by the IASB. C) Reviewing them with all publically accountable entities to see which ones would be acceptable. D) Adopting some but not necessarily all IFRSs by reviewing them on a case by case basis. Answer: A 8) What choice(s) do private enterprises have in their financial reporting in Canada? A) They may adopt accounting principles that are appropriate to the circumstances. B) They may elect to continue with differential reporting. C) They have no choice at all; they will need to report under IFRS. D) They may elect to report under either IFRS or ASPE. Answer: D 9) For which of the following types of organizations does the CPA Canada Handbook not provide

specific accounting standards? A) Proprietorships. C) Publicly accountable enterprises.

B) Private enterprises. D) Not-for-profit organizations.

Answer: A 10) Which of the following is NOT a reason why a Canadian private company would elect to report

under IFRS? A) It is likely to be less expensive than reporting under ASPE. B) The company seeks comparability with public companies of a similar size. C) The company is a subsidiary of a Canadian public company. D) The company is planning to go public in the near future. Answer: A 11) The current ratio measures: A) profitability of assets.

B) solvency.

C) liquidity.

D) profitability of owners' investment.

Answer: C 12) The formula for the current ratio is: A) current assets / current liabilities

B) net income / shareholders' equity

C) total debt / shareholders' equity

D) current assets - current liabilities

Answer: A 2

13) The debt-to-equity ratio measures: A) profitability of owners' investment.

B) liquidity.

C) solvency.

D) profitability of assets.

Answer: C SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 14) One of the underlying assumptions of the Historical Cost Principle is that a stable unit of measure

(currency) should be used for Financial Reporting. Is this always the case? Answer: The Historical Cost Principle is not very useful when inflation rates are high. As a result of the eroding purchase power associated with periods of high inflation, many countries have had to experiment with price-level adjustments. These adjustments often include asset revaluations to reflect their current values.

15) 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. is a public company based in Canada and follows IFRS while Y Inc. is a private enterprise based in Canada and follows ASPE. The following were the condensed income statements for both companies for the last year before both adopted IFRS.

Sales: Less: Cost of Goods Sold Gross Margin Administrative Expenses Net Income:

X Inc. Y Inc. $1,000,000 $2,000,000 $500,000 $1,600,000 $500,000 $400,000 $200,000 $300,000 $300,000

$100,000

Required: Given the information provided, what are some possible causes for the differing results of these companies? Answer: There could be many possible explanations for these differing results. Y Inc.'s net income is $100,000, compared to X Inc.'s $300,000. Conversely, Y Inc.'s sales are twice those of X Inc. What is particularly noteworthy is Y Inc.'s 20% gross margin compared to X Inc.'s 50% gross margin. This could be due to the accelerated depreciation on Y Inc.'s property, plant and equipment or provisions made for future maintenance costs. Smoothing practices may have been applied to reduce Y Inc.'s income, and of course, its tax liability. Y Inc.'s income may have been further reduced by higher estimates (for example: bad debt expense, warranty costs and so forth) which are not necessarily be indicative of economic conditions. Note: Once again, the above analysis is not necessarily exhaustive. Students may be able to identify other valid differences. 16) Briefly discuss the anticipated changes to accounting standards in Canada over the next few years. Answer: 1. The format and structure of financial statements may change to present a cohesive

relationship between the various statements; 2. The Conceptual Framework will be revised to create a sound foundation for future accounting standards that are principles based, internally consistent, and internationally converged. Relevance and faithful representation will be the fundamental qualitative characteristics of financial information. The definitions of assets and liabilities may change to focus more on rights and obligations to eliminate the reference to past events. When and how to use various measurement bases may be clarified. 4

17) What disclosure requirements must be met when a Canadian company adopts IFRS for the first

time? Answer: 1. The company must reconcile its equity reported under the previous GAAP to its equity in

accordance with IFRS for both the date of transition to IFRS and the end of the latest period reported under the previous GAAP. 2. The company must reconcile its total comprehensive income in accordance with IFRS to that reported in the latest statements prepared under the previous GAAP. 3. The company must provide sufficient detail to enable users to understand the material adjustments to the statement of financial position, the statement of comprehensive income and the statement of cash flows. 18) List some of the key differences between IFRS and ASPE. Answer: Some key differences between IFRS and ASPE are:

> disclosure > impaired loans > property, plant, and equipment revaluation option > asset impairment (test for impairment if indicator requires, and subsequent reversal of impairment loss) > development costs > post-employment benefits (recognition of actuarial gains/losses) > income taxes > interest capitalization > compound financial instruments > preferred shares in tax planning arrangements > value of conversion option for convertible bonds (See Exhibit 1.1 "Some Key Differences between IFRS and ASPE" for a full list and a description of the difference.)

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following types of share investment does NOT qualify as a strategic investment? A) Controlled investments.

B) Joint Control investments.

C) Investments without significant influence.

D) Significant influence investments.

Answer: C 2) A significant influence investment is one that: A) allows the investor to exercise significant influence over the strategic and operating policies of

the Associate. B) allows the investor to exercise significant influence over the strategic operating and financing policies of the Associate. C) allows the investor to exercise significant influence over only the operating policies of the Associate. D) allows the investor to exercise significant influence over only the financing policies of the Associate. Answer: B 3) What is the dominant factor used to distinguish portfolio investments from significant influence

investments? A) The percentage of equity held by the investor. B) Use of the Equity Method to account for and report the investment. C) The investor's intention to establish or maintain a long-term operating relationship with the investee. D) Use of the Cost Method to account for and report the investment. Answer: C 4) Which of the following statements is TRUE under IFRS 9? A) Other Comprehensive Income (OCI) is included in Retained Earnings. B) Unrealized gains and losses on equity investments may be included in Other Comprehensive

Income (OCI) only if a decision to do so is made when the investment is acquired. C) All unrealized gains and losses on equity investments flow through Other Comprehensive Income (OCI). D) Unrealized gains and losses on fair value through profit and loss (FVTPL) securities are included in Other Comprehensive Income. Answer: B 5) Gains and losses on fair value through profit or loss (FVTPL) securities: A) are included in net income only when realized. B) are never recorded until the securities are sold. C) are included in net income, regardless of whether they are realized or not. D) are included in net income only when the investment has become permanently impaired. Answer: C

6) How are realized gains from the sale of investments accounted for at fair value through Other

Comprehensive Income (FVTOCI) accounted for under IFRS 9? A) They are transferred to Retained Earnings without going through net income. B) They are transferred to net income in the period of the sale. C) They remain in Accumulated Other Comprehensive Income. D) They are transferred to Contributed Surplus. Answer: A 7) When using the cost method of accounting, which method should be used to determine the carrying

value of shares sold when a portion of the shares making up an investment is sold? A) Specific cost. B) Last in, first out. C) Average cost. D) First in, first out. Answer: C 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) 20% or more. B) Between 20% and 50%. C) 25% or more. D) Less than 20%. Answer: B 9) Which of the following methods uses procedures closest to those used in preparing consolidated

financial statements? A) Fair value through profit or loss (FVTPL). B) The equity method. C) Fair value through other comprehensive income. D) The cost method. Answer: B 10) Which of the following is NOT a possible indicator of significant influence? A) The Associate's new CEO was previously CEO of the investor company. B) The investor has the ability to elect members to the Board of Directors. C) The investor has engaged in numerous intercompany transactions with the Associate. D) The investor has the right to participate in the policy-making process. Answer: A 11) Which of the following statements is CORRECT? A) An ownership interest between 0 and 10% can never imply significant influence. B) An ownership interest between 20% and 50% always implies significant influence. C) Significant influence is still possible if the Investor owns less than 20% of the voting shares of

the Associate. D) Control is only possible if the Investor owns more than 50% of the voting shares of the

Associate. Answer: C

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) the Acquisition Differential. C) the Excess Book Value.

B) Goodwill. D) the Fair Value Increment.

Answer: A 13) Any unallocated positive acquisition differential is normally: A) expensed during the year following the acquisition. B) charged to Retained Earnings. C) pro-rated across the Associate's identifiable net assets. D) recorded as Goodwill. Answer: D 14) When are gains on intercompany transfers of assets between an investor and a significant influence

investment recognized as part of the investment income accounted for by the parent under the equity method? A) They are never recognized. B) In the period(s) when the assets are sold to third parties or consumed. C) In the period when the intercompany transfer takes place. D) They are recognized only when the investment is sold. Answer: B 15) The ________ investment must be shown as a current asset, whereas the other investments could be

current or non-current, depending on management's intention. A) FVTPL B) cost method C) FVTOCI

D) equity method

Answer: A 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) exactly the same C) almost similar except for the fair value methods D) almost similar except for the equity method Answer: B 17) Reportingin accordance with the Accounting Standards for Private Enterprises (ASPE) is permitted

in certain instances for: A) all Canadian companies. B) privately held companies. C) publicly held companies. D) Canadian companies consolidating their foreign subsidiaries. Answer: B

18) When reporting under the Accounting Standards for Private Enterprises (ASPE) which method must

be used to report investments where the investor has significant influence over the investee? A) It may use the cost method for some such investments and the equity method for other such investments. B) It must use the cost method to report all such investments. C) It must use the equity method to report all such investments. D) It may use the cost method, equity method, or at fair value but must account for all such investments by the same method. Answer: D

On January 1, 2016, X Inc. purchased 12% of the voting shares of Y Inc. for $100,000. The investment is reported at cost. X does not have significant influence over Y. Y's net income and declared dividends for the following three years are as follows: Net Income $50,000 $70,000 $30,000

2016 2017 2018

Dividends $20,000 $80,000 $60,000

19) Which of the following journal entries would have to be made to record X's purchase of Y's shares? A)

Debit Investment in Y $12,000 Cash

Credit

Debit Credit Investment in Y $112,000 Cash $112,000

$12,000

D) No entry required.

Debit Credit Investment in Y $100,000 Cash $100,000 Answer: C

20) Which of the following journal entries would have to be made to record X's share of Y's net income

for 2016? A)

Investment in Y Investment Income

Debit Credit $50,000 $50,000

Investment in Y Investment Income

Debit Credit $12,000 $12,000

D) No entry required.

Investment in Y Investment Income

Debit $6,000

Credit $6,000

Answer: D 21) Which of the following journal entries would have to be made to record X's share of Y's dividends

paid for 2016? A)

Cash Investment in Y

Debit Credit $2,400 $2,400

Cash Dividend Income D) No entry required.

Investment in Y Dividend Income

Debit Credit $2,400 $2,400

Answer: B

Debit Credit $2,400 $2,400

Common Shares Retained Earnings Total Liabilities and Equity

$ 100,000 $50,000 $1,000,000

49) Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets

Keen Inc. Lax Inc. (carrying value) (carrying value) $300,000 $ 80,000 $ 60,000 $ 24,000 $ 30,000 $ 54,000 $310,000 $280,000 --$ 12,000 $700,000 $450,000

Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$150,000 $400,000 $100,000 $ 50,000 $700,000

$200,000 $120,000 $ 60,000 $ 70,000 $450,000

Lax Inc. (fair value) $ 80,000 $ 24,000 $ 50,000 $300,000 $ 16,000

$200,000 $100,000

Assuming that Keen Inc. purchases 80% of Lax Inc. for $240,000, prepare the consolidated balance sheet on the date of acquisition under the Entity Theory. Answer: Keen Inc. Consolidated Balance Sheet as at October 31, 2018 Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Goodwill Total Assets

$ 140,000 $84,000 $80,000 $ 610,000 $16,000 $ 130,000 $1,060,000

Accounts Payable Bonds Payable Total Liabilities

$ 350,000 $ 500,000 $ 850,000 14

Non-Controlling Interest Common Shares Retained Earnings Shareholders' Equity

$60,000 $ 100,000 $50,000 $ 210,000

Total Liabilities and Equity

$1,060,000

50) Keen Inc. and Lax Inc. had the following balance sheets on October 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

Keen Inc. Lax Inc. (carrying value) (carrying value) $300,000 $ 80,000 $ 60,000 $ 24,000 $ 30,000 $ 54,000 $310,000 $280,000 --$ 12,000 $700,000 $450,000 $150,000 $400,000 $100,000 $ 50,000 $700,000

$200,000 $120,000 $ 60,000 $ 70,000 $450,000

Lax Inc. (fair value) $ 80,000 $ 24,000 $ 50,000 $300,000 $ 16,000

$200,000 $100,000

Assume that the following draft balance sheet was prepared by a co-worker subsequent to Keen's 80% purchase of Lax Inc. for $240,000. Assuming this balance sheet is devoid of technical errors, what can be concluded about the balance sheet below? Keen Inc. Consolidated Balance Sheet, as at October 31, 2018 Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Goodwill

$124,000 $ 79,200 $ 70,000 $550,000 $ 12,800 $104,000 15

Total Assets

$940,000

Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$310,000 $480,000 $100,000 $ 50,000 $940,000

Answer: This balance sheet was prepared using the Proprietary Theory. There is no non-controlling

interest (NCI) section on the balance sheet, and Keen's consolidated balance sheet amounts (with the exception of the shareholders' equity section) include Keen's book values and 80% of Lax's fair values. 51) Jean Inc and John Inc had the following balance sheets on August 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

Jean Inc. John Inc. (carrying value) (carrying value) $1,200,000 $300,000 $ 400,000 $ 64,000 $ 240,000 $ 80,000 $ 860,000 $256,000 --$ 20,000 $2,700,000 $720,000 $1,500,000 $ 600,000 $ 500,000 $ 100,000 $2,700,000

$300,000 $240,000 $ 60,000 $120,000 $720,000

John Inc. (fair value) $300,000 $ 64,000 $ 60,000 $300,000 $ 36,000

$300,000 $210,000

On August 31, 2018, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for $400,000. Prepare Jean Inc's consolidated balance sheet on the date of acquisition using the Proprietary Theory.

Answer:

Jean Inc. Consolidated Balance Sheet as at August 31, 2018 Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Goodwill Total Assets

$1,070,000 $ 457,600 $ 294,000 $1,130,000 $32,400 $ 175,000 $3,159,000

Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$1,770,000 $ 789,000 $ 500,000 $ 100,000 $3,159,000

52) Jean and John Inc had the following balance sheets on August 31, 2018:

Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Total Assets Accounts Payable Bonds Payable Common Shares Retained Earnings Total Liabilities and Equity

$300,000 $240,000 $ 60,000 $120,000 $720,000

John Inc. (fair value) $300,000 $ 64,000 $ 60,000 $300,000 $ 36,000

$300,000 $210,000

On August 31, 2018, Jean's date of acquisition, Jean Inc. purchased 90% of John Inc. for $400,000. Prepare Jean Inc.'s consolidated balance sheet on the date of acquisition using the Entity Theory. 17

Answer:

Jean Inc. Consolidated Balance Sheet as at August 31, 2018 Cash Accounts Receivable Inventory Plant and Equipment (net) Trademark Goodwill Total Assets

$1,100,000 $ 464,000 $ 300,000 $1,160,000 $36,000 $ 194,444 $3,254,444

Accounts Payable Bonds Payable Total Liabilities

$1,800,000 $ 810,000 $2,610,000

Common Shares Retained Earnings Non-Controlling Interest Total Shareholders' Equity

$ 500,000 $ 100,000 $44,444 $ 644,444

Total Liabilities and Equity

$3,254,444

· Note that Jean's imputed acquisition cost of acquiring 100% of John Inc. would be $400,000/0.9 or $444,444 (rounded). · Goodwill would be calculated as follows: Imputed acquisition cost of 100% of John Inc: Less: Fair Value of John's Net Assets: Goodwill:

$444,444 ($250,000) $194,444

Non-Controlling Interest would be 10% of John Inc.'s fair values including Goodwill: i.e. 10% * ($250,000 + $194,444) = $44,444.

53) Company A Inc. owns a controlling interest in Company B. which is located overseas. Company A

and B are in entirely different lines of business. Company A wishes to file a request allowing it to not consolidate its financial statements with those of Company B. Assuming that Company A is based in Canada, is this allowed? Explain. Answer: Generally speaking, this practice is not allowed. IFRS requires that all subsidiaries be consolidated, unless the subsidiary is subject to any long-term restrictions which prevent it from transferring funds to the Parent, or if the nature of the Parent Company's control over the subsidiary is temporary. IFRS describes control as the power to govern the financial and operating policies of an enterprise so as to benefit from its activities. Although Control is presumed to exist when a company owns more than 50% of the voting shares of another, evidence of control may still exist without such a controlling interest. It should be noted that some countries allow for exclusions for temporary control, non-homogeneous subsidiaries, subsidiaries that are bankrupt or under reorganization or subsidiaries that are immaterial in size. It should also be noted that the non-homogeneous exclusion was used in the past, both in the United States and Canada. N.B. The determination of control/significant influence, etc., is covered at length in Chapters 2 and 3. However, its inclusion in this chapter is still, arguably, very relevant. 54) X Company Purchases a (100%) controlling interest in Y Company by issuing $2,000,000 worth of

common shares. An agreement was drawn whereby X Company would pay 10% of any earnings in excess of $750,000 to Y's shareholders in the first year following the acquisition. On that date, X's shares had a market value of $80 per share. Required: a) Assuming that Y's net income was $950,000, prepare any journal entries (for company X) that you feel may be necessary to reflect Y's results under IFRS 3 Business Combinations. Assume that on the acquisition date no provision was made for the contingent consideration. b) Assuming that the agreement called for Y's shareholders to be compensated for any decline in X's share price, what journal entries would be required under IFRS 3, if the market value of X's shares dropped to $64? Answer: a) Loss from Contingent Consideration Cash

$20,000 $20,000

b) Common shares-old shares Common shares-new shares

$20,000 $20,000