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fundamentals of advanced accounting

Questions and Answers of Fundamentals Of Advanced Accounting

In other cases, the parent chooses to let the new subsidiary remain in operation as a separate legal entity. How does this decision affect the accounting process?
The assets and liabilities of some sub¬ sidiary organizations are added directly to the records of the parent company.
Why have standard setters designated fair value as the fundamental basis for recording a business combination?
In assessing the relationship between two companies, how is control determined?
When one company gains control over another company, how should the relationship between the two parties be presented for external reporting purposes?
Why do firms engage in business combinations?
Distinguish between measurement and denomination in a particular currency.AppendixLO1
Assume that one euro can be exchanged for 1.20 U.S. dollars. What is the exchange rate if the exchange rate is quoted directly? Indirectly?AppendixLO1
What is the difference between official and floating foreign exchange rates? Does the United States have floating exchange rates?AppendixLO1
What is a spot rate with respect to foreign currency transactions? Could a spot rate ever be a historical rate? Could a spot rate ever be a fixed exchange rate? Discuss.AppendixLO1
Assume that a U.S. corporation imports electronic equipment from Japan in a transaction denominated in U.S. dollars. Is this transaction a foreign currency transaction? A foreign transaction? Explain
How are assets and liabilities denominated in foreign currency measured and recorded at the transaction date? At the balance sheet date?AppendixLO1
Criticize the following statement: "Exchange losses arise from foreign import activities, and exchange gains arise from foreign export activities."AppendixLO1
When are exchange gains and losses reflected in a business's financial statements?AppendixLO1
A U.S. corporation imported merchandise from a British company for 1,000 when the spot rate was $1.45. It issued financial statements when the current rate was $1.47, and it paid for the merchandise
Define the term derivative and provide examples of risks that derivative contracts are designed to reduce.AppendixLO1
Explain the objective of hedge accounting and how this objective should improve the transparency of financial statements.AppendixLO1
Explain the differences between options, forward contracts, and futures contracts and the potential bene- fits and potential costs of each type of contract.AppendixLO1
Hedge effectiveness must be documented before a particular hedge qualifies for hedge accounting. Describe the most common approaches used to determine hedge effectiveness and when they are appro-
A hedged firm purchase or sale commitment typically qualifies for fair value hedge accounting if the hedge is documented to be effective. Compare the accounting for both the derivative and the firm
Interest rate swaps were used in the chapter to highlight the differences between fair value and cash flow hedge accounting. Explain what type of risk is being hedged when a pay-fixed,
Interest rate swaps were used in the chapter to highlight the differences between fair value and cash flow hedge accounting. Explain what type of risk is being hedged when a receive-fixed,
Explain the circumstances under which fair value hedge accounting should be used and when cash flow hedge accounting should be used.AppendixLO1
Statement No. 138 allows companies to account for certain hedges of existing foreign currency- denominated receivables and payables as cash flow hedges. Under Statement No. 133, hedges of existing
Briefly describe how derivatives are accounted for according to the International Accounting Standards Board. Is the accounting similar to U.S. GAAP? How is it different?AppendixLO1
Describe how to account for a forward contract that is intended as a hedge of an identifiable foreign currency commitment.AppendixLO1
What is an operating segment?AppendixLO1
What is a reportable segment according to FASB Statement No. 131? What criteria are used in determining what operating segments are also reportable segments?AppendixLO1
How are the segments that are not reportable segments handled in the required disclosures of FASB Statement No. 131?AppendixLO1
Revenue information for Mahoney Corporation is as follows:Segment and Interim Financial Reporting 527 Consolidated revenue (from the income statement) $400,000 Intersegment sales and transfers 80.000
Describe the 10% operating-profit test for determining reportable segments.AppendixLO1
Describe the 10% asset test for determining reportable segments.AppendixLO1
Describe the 10% revenue test for determining reportable segments.AppendixLO1
Assume an enteiprise has 10 operating segments. Five operating segments qualify as reportable segments by passing one of the 10% tests. However, their combined revenues from sales to unaffiliated
What disclosures are required for the reportable segments and all remaining segments in the aggregate?AppendixLO1
When is an enterprise required to include information in its financial statements about its foreign and domestic operations?AppendixLO1
Must a major customer be identified by name?AppendixLO1
Do the requirements of FASB Statement No. 131 apply to financial statements for interim periods? If so, how?AppendixLO1
Explain how a company estimates its annual effective tax rate for interim reporting purposes.AppendixLO1
What is the difference between the internal theory and the discrete theory with respect to interim financial reporting?AppendixLO1
Describe the minimum financial information to be disclosed in interim reports under the provisions of APB Opinion No. 28.AppendixLO1
Explain the terms preacquisition earnings and preacquisition dividends.AppendixLO1
How are preacquisition earnings accounted for by a parent company under the equity method? How are they accounted for in the consolidated income statement?AppendixLO1
Assume that an 80% investor of Sub Company acquires an additional 10% interest in Sub halfway through the current fiscal period. Explain the effect of the 10% acquisition by the parent company on
Isn’t preacquisition income really noncontrolling interest expense? If so, why separate preacquisition income and noncontrolling interest expense in the consolidated income statement ?AppendixLO1
How is the gain or loss determined for the sale of part of an investment interest that is accounted for as a one-line consolidation? Is the amount of gain or loss affected by the accounting method
When a parent company sells a part of its interest in a subsidiary during an accounting period, is the income applicable to the interest sold up to the time of sale included in consolidated net
Assume that a subsidiary has 10,000 shares of stock outstanding, of which 8,000 shares are owned by the parent company. What equity method adjustment will be necessaiy on the paient-company books if
Assume that a subsidiary has 10,000 shares of stock outstanding, of which 8,000 shares are owned by the parent company. If the parent company purchases an additional 2,000 shares of stock directly
How do the treasury stock transactions of a subsidiary affect the parent company’s accounting for its investment under the equity method?AppendixLO1
Can gains or losses to a parent company (investor) result from a subsidiary s (investee s) treasury stock transactions? Explain.AppendixLO1
Do common stock dividends and stock splits by a subsidiary affect the amounts that appear in the consol¬ idated financial statements? Explain, indicating the items, if any, that would be
The effect of unrealized profits and losses on sales between affiliated companies is eliminated in prepar¬ ing consolidated financial statements. When are profits and losses on such sales realized
In eliminating unrealized profit on intercompany sales of inventory items, should gross profit or net profit be eliminated?AppendixLO1
Is the amount of intercompany profit to be eliminated from consolidated financial statements affected by the existence of a noncontrolling interest? Explain.AppendixLO1
What effect does the elimination of intercompany sales and purchases (or cost of goods sold) have on consolidated net income?AppendixLO1
What effect does the elimination of intercompany accounts receivable and accounts payable have on consolidated working capital?AppendixLO1
Explain the designations upstream sales and downstream sales. Of what significance are these designa¬ tions in computing parent-company and consolidated net income?AppendixLO1
Would failure to eliminate unrealized profit in inventories at December 31, 2006, have any effect on consolidated net income in 2007? 2008?AppendixLO1
Under what circumstances is noncontrolling interest expense affected by intercompany sales activity?AppendixLO1
How does a parent company adjust its investment income for unrealized profit on sales it makes to its subsidiaries (a) in the year of the sale and (b) in the year in which the subsidiaries sell the
How is the combined cost of goods sold affected by unrealized profit in (a) the beginning inventory of the subsidiary and (b) the ending inventory of the subsidiary ?AppendixLO1
Is the effect of unrealized profit on consolidated cost of goods sold influenced by (a) the existence of a noncontrolling interest and (b) the direction of intercompany sales?AppendixLO1
Unrealized profit in the ending inventory is eliminated in consolidation working papers by increasing cost of sales and decreasing the inventory account. How is unrealized profit in the beginning
Describe the computation of minority interest in a year in which there is unrealized inventory profit from upstream sales in both the beginning and ending inventories of the parent company.AppendixLO1
Consolidation working paper procedures are usually based on the assumption that any unrealized profit in the beginning inventory of one year is realized through sales in the following year. If the
Explain why the noncash investments of partners should be recorded at their fair values.AppendixLO1
Is there a conceptual difference between partner drawings and withdrawals? A practical difference?AppendixLO1
In the absence of an agreement for the division of profits, how are they divided under the Uniform Partnership Act? Does your answer also apply to losses? Does it apply if one partner invests three
Why do some profit sharing agreements provide for salary and interest allowances?AppendixLO1
Are partner salary allowances expenses of the partnership?AppendixLO1
When a profit sharing agreement specifies that profits should be divided using the ratio of capital balances, how should capital balances be computed?AppendixLO1
Explain how a partner could have a loss from partnership operations for a period even though the partner¬ ship had net income.AppendixLO1
The concept of partnership dissolution has a technical meaning under the provisions of the Uniform Partnership Act. Explain the concept.AppendixLO1
If a partner sells his or her partnership interest directly to a third party, the partnership may or may not be dissolved. Under what conditions is the partnership dissolved?AppendixLO1
If a partnership is dissolved with the death or retirement of a partner, how do you explain the fact that some partnerships have been in existence for 50 years or more?AppendixLO1
How does the purchase of an interest from existing partners differ from acquiring an interest by investment in a partnership?AppendixLO1
What alternative approaches can be used in recording the admission of a new partner?AppendixLO1
Why is the goodwill procedure best described as a revaluation procedure?AppendixLO1
Explain the bonus procedure for recording an investment in a partnership. When is the bonus applicable to old partners, and when is it applicable to new partners?AppendixLO1
The goodwill procedure was used to record the investment of a new partner in the XYZ Partnership, but immediately thereafter, the entire business was sold for an amount equal to the recorded capital
Bob invests $10,000 cash for a 25% interest in the capital and earnings of the BOP Partnership. Explain how this investment could give rise to (a) recording goodwill, (b) the write-down of the
How are consolidated financial statements affected by the manner in which the parent company accounts for its subsidiary investments?AppendixLO1
Is it ever acceptable for a parent company to use the cost method of accounting for its investments in subsidiary corporations? Explain.AppendixLO1
If a parent company in accounting for its subsidiary investment amortizes patents on its separate books, why is it necessary to include an adjustment for patents amortization in the consolidation
How is noncontrolling interest expense entered in consolidation working papers? Is there an alternative method?AppendixLO1
How are the working paper procedures for the investment in subsidiary, income from subsidiary, and subsidiary’s stockholders’ equity accounts alike?AppendixLO1
If a parent company uses the equity method but does not amortize the difference between investment cost and book value acquired on its separate books, its net income and retained earnings will not
Are working paper adjustments and eliminations entered on the parent-company books? The subsidiary books? Explain.AppendixLO1
The financial statement and trial balance working paper approaches illustrated in the chapter generate comparable information, so why learn both approaches?AppendixLO1
In what way do the adjustment and elimination entries for consolidation working papers differ for the financial statement and trial balance approaches?AppendixLO1
When is it necessary to adjust the parent-company’s retained earnings account in the preparation of consolidation working papers? In answering this question, explain the relationship between
What approach would you use to check the accuracy of the consolidated retained earnings and noncon¬ trolling interest amounts that appear in the balance sheet section of completed consolidation
Explain why noncontrolling interest expense is added to consolidated net income in determining cash flows from operating activities.AppendixLO1
Consolidated net income is a measurement of income to the stockholders of the parent company, but does a change in cash as reflected in a statement of cash flows also relate to other stockholders of
Compare the contemporary, parent-company, and entity theories of consolidated financial statements.AppendixLO1
Which, if any, of the consolidation theories would be changed by FASB pronouncements? (For example, assume that a new FASB statement requires noncontrolling interest expense to be computed as the
Under the entity theory of consolidation, a total valuation of the subsidiary is imputed on the basis of the price paid by the parent company for its controlling interest. Do you see any practical or
Assume that Pabst Corporation acquires 60% of the voting common stock of Seller Corporation for $6,000,000 and that a consolidated balance sheet is prepared immediately after the business
Why might the current practice of valuing the equity of noncontrolling shareholders at book value overstate the value of the noncontrolling interest?AppendixLO1

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