Advance Accounting MCQ

1) Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow: January 1, 1 pound = $2.10; October 25, 1 pound = $2.25; December 31, 1 pound = $2.20; Average for 20X8: 1 pound = $2.21. Based on the preceding information, the receipt of the dividend will result in a credit to the investment account for:

Answer

$16,800

$17,680

$18,000

$17,600

2) Which division of the SEC develops and administers the disclosure requirements for the securities acts and reviews all registration statements and other issue-oriented disclosures?

Answer

Division of Enforcement

Division of Corporation Finance

Division of Investment Management

Division of Market Regulation

3) In a statement of realization and liquidation, unusual revenue items are reported under:

Answer

assets.

extraordinary items.

supplementary items.

These are never reported.

4) Which combination of accounts and exchange rates is correct for the translation of a foreign entity's financial statements from the functional currency to U.S. dollars?

Answer

Current - Salary Expense, Sales, Depreciation Expense

Current - Accounts Payable, Inventories, Investments

Historical - Common Stock, Dividends Payable, Retained Earnings

Weighted Average - Retained Earnings, Land, Inventories

5) In 20X6 and 20X7, each of Putney Company's four operating segments met one of the three quantitative tests for segment reporting. In 20X8, Segment B failed to qualify under the prescribed tests because of abnormal financial conditions. The other three segments qualified for reporting. For 20X8, Segment B:

Answer

should be excluded from segment disclosure but referred to in the management letter to shareholders.

should be distinctly separated from the other three segments and listed as a "nonqualifying" segment.

should be combined with one of the other three segments and reported.

should be included in the segment disclosures at the discretion of management.

6) According to the provisions of the Sarbanes-Oxley Act,

Answer

accounting firms can provide both audit and non-audit services to the same company.

the auditor should report directly to, and have its work overseen by, the company's management.

audit committees should be composed of non-management members of a company's board of directors.

both the lead audit partner and the audit review partner for publicly held companies should be rotated at least every two years.

7) An investor purchases a put option with a strike price of $100 for $3. This option is considered "in the money" if the underlying is trading:

Answer

below $100.

at $100.

above $100.

above $103.

8) Which of the following observations is true of the shelf registration rule?

Answer

It is an option available to all listed companies.

Shelf registration is limited to 25 percent of the company's currently outstanding stock.

It allows private placements of an unlimited amount of securities.

It allows large companies to select the optimal time to sell their stock.

9) On December 5, 20X8, Texas-based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 20X9. The transaction is denominated in Saudi riyals. Imperial's fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are: December 5, 20X8, 1 riyal=$0.265; December 31, 20X8, 1 riyal=$0.262; January 10, 20X9, 1 riyal=$0.264. Based on the preceding information, what journal entry would Imperial make on December 31, 20X8, to revalue foreign currency payable to equivalent U.S. dollar value?

Answer

Debit Accounts Payable (SAR) $300, Credit Foreign Currency Transaction Gain $300

Debit Accounts Payable (SAR) $100, Credit Foreign Currency Transaction Gain $100

Debit Foreign Currency Transaction Loss $300, Credit Accounts Payable (SAR) $300

Debit Foreign Currency Transaction Loss $300, Credit Accounts Payable (SAR) $300

10) A transfer of assets by a company in financial difficulty is considered a sale if: I. the transfer includes a recourse provision allowing the buyer to return the asset; II. the transferee obtains the right to pledge or exchange the transferred assets; III. the transferred assets have been isolated from the transferor; IV. the transferor does not maintain effective control over the transferred assets.

Answer

I, II, and IV

Both I and III

Both I and II

II, III, and IV

11) When the local currency of the foreign subsidiary is the functional currency, a foreign subsidiary's income statement accounts would be converted to U.S. dollars by:

Answer

translation using historical exchange rates.

remeasurement using current exchange rates at the time of statement preparation.

translation using average exchange rate for the period.

remeasurement using the current exchange rate at the time of statement preparation.

12) Regulation S-X and Regulation S-K:

Answer

govern the preparation of financial statements and associated disclosures.

govern the registration requirements for private placements.

outline responsibilities for audit committees of publicly held companies.

prohibit artificial pyramids of capital in public utilities.

13) Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $0.7025 and 1 Cyprus pound = $2.5132. Based on the information given above, how many U.S. dollars must be paid for a purchase of citrus fruits costing 10,000 Cyprus pounds?

Answer

$25,132

$15,132

$3,979

$35,775

14) Schedule 13D is filed:

Answer

by entities that acquire a beneficial ownership of more than 5 percent of a class of registered equity securities.

to broadly report material information that is being provided to securities analysts, selected institutional investors, or others.

to disclose material items related to asset-backed securities such as a bond issue.

by management to report the existence and effectiveness of the company's internal control over financial reporting.

15) The preparation of which of the following items is covered by Regulation S-K?

Answer

Descriptions of business

Pro forma disclosures

Schedules

Reports of accountants

16) All of the following are management tools available for a U.S. company to hedge its net investment in a foreign affiliate except for:

Answer

Forward exchange contracts

Foreign currency commitments

Intercompany financing arrangements including intercompany transactions

None of the above.

17) Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows: SPOT RATES: December 1, 20X8= $0.89; December 31, 20X8=$0.91; January 30, 20X9=$0.92. FORWARD RATES: December 1, 20X8=$0.90 (60 days); December 31, 20X8=$0.93 (30 days). Based on the preceding information, the entries on January 30, 20X9, include a:

Answer

Debit to Dollars Payable to Exchange Broker, $184,000.

Credit to Foreign Currency Transaction Gain, $4,000.

Credit to Foreign Currency Receivable from Exchange Broker, $180,000.

Debit to Foreign Currency Units (SFr), $184,000.

18) All of the following are benefits the United States will gain from the adoption of globally consistent accounting standards except for:

Answer

Reduction in reporting costs as the need for multiple sets of financial statements decreases.

Increased quality of information available to investors.

Continued expansion of capital markets across national borders, facilitating more efficient use of global capital.

Nearly seamless transition with minimal expenses related to corporate governance considerations.

19) All of the following stockholders' equity accounts of a foreign subsidiary are translated at historical exchange rates except:

Answer

retained earnings.

common stock.

additional paid-in capital.

preferred stock.

20) Which regulation resulted in the creation of the Public Company Accounting Oversight Board?

Answer

Investment Advisers Act

Securities Investor Protection Act

Sarbanes-Oxley Act

Trust Indenture Act

21) All of the following situations require a retrospective application of a change in a reporting entity except for:

Answer

Presenting consolidated financials rather than individual statements for separate entities.

Changing the specific subsidiaries that make up a consolidated entity.

Presenting foreign subsidiaries in addition to domestic subsidiaries.

Changing entities that are included in combined financial statements.

22) How would a company report a change in an accounting principle made on the last day of the third quarter?

Answer

Retrospective application to all pre-change interim periods reported.

No change is required.

Apply to current and prospective interim periods only.

Apply to prospective interim periods only.

23) Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 20X8, with payment due on December 2, 20X8. Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge. The spot rates were: Sept. 5, 20X8--1 pound = $0.1835; Dec. 2, 20X8--1 pound = $0.1865. Based on the preceding information, in the entry made on December 2nd to revalue foreign currency receivable to current equivalent U.S. dollar value,

Answer

Accounts Payable will be debited for $18,350.

Foreign Currency Units will be debited for $18,500.

Foreign Currency Transaction Gain will be credited for $150.

Other Comprehensive Income will be credited for $300.

24) Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is expected to be $45 per unit. The company is planning to reduce its inventory and expects to replace only 1,500 of these units by December 31, the end of its fiscal year. The company replaced 1,500 units in November at an actual cost of $50 per unit. Based on the preceding information, in the entry in August to record the sale of the 2,000 units:

Answer

Cost of Goods Sold will be debited for $70,000.

Inventory will be credited for $85,000.

Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for $15,000.

Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for $67,000.

25) Levin company entered into a forward contract to speculate in the foreign currency. It sold 100,000 foreign currency units under a contract dated November 1, 20X8, for delivery on January 31, 20X9: Spot Rate 11/1/2008 = $0.035; Spot Rate 12/31/2008= $0.037. 30-day forward rate 11/1/2008=$0.034; 30-day forward rate 12/31/2008=$0.036. 90-day forward rate 11/1/2008=$0.033; 90-day forward rate 12/31/2008=$0.035. In its income statement for the year ended December 31, 20X8, what amount of loss should Levin report from this forward contract?

Answer

$0

$300

$200

$100

26) The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31, 20X8, before any necessary year-end adjustment relating to the following: (1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 20X8. (2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier's local currency unit (LCU) on January 15, 20X9. The U.S. dollar-equivalent of the payable was $50,000 on the December 1, 20X8, invoice date and $53,000 on December 31, 20X8. Based on the information provided, in Newsprint's 20X8 consolidated income statement, what amount should be included as foreign exchange loss in computing net income, if the U.S. dollar is the functional currency and the remeasurement method is appropriate?

Answer

$15,000

$10,000

$25,000

$28,000

27) Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $0.7025 and 1 Cyprus pound = $2.5132. Based on the information given above, the indirect exchange rates for the Singapore dollar and the Cyprus pound are:

Answer

1.7655 Singapore dollars and 1.4235 Cyprus pounds respectively.

0.2975 Singapore dollars and 1.5132 Cyprus pounds respectively.

2.1622 Singapore dollars and 0.4625 Cyprus pounds respectively.

1.4235 Singapore dollars and 0.3979 Cyprus pounds respectively.

28) On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows: Jan. 1, 20X8 (NKrl = $0.20); June 1, 20X8 (NKrl = $0.23); Dec.31, 20X8 (NKrl = $0.24); Average for 20X8 (NKrl = $0.22). Assume the kroner is the functional currency. Based on the preceding information, what amount of translation adjustment is required for increase in differential?

Answer

3,000

5,500

4,500

5,000

29) On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows: Jan. 1, 20X8 (NKrl = $0.20); June 1, 20X8 (NKrl = $0.23); Dec.31, 20X8 (NKrl = $0.24); Average for 20X8 (NKrl = $0.22). Assume the kroner is the functional currency. Based on the preceding information, in the journal entry to record the receipt of dividend from Steamship,

Answer

Investment in Steamship Company will be credited for $3,450.

Cash will be debited for $3,300.

Investment in Steamship Company will be credited for $4,000.

Cash will be debited for $3,600.

30) Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates at various dates during 20X8 follow: January 1, 20X8 (I Eg = $0.1835); December 31, 20X8 (1 Eg= $0.1850); average for 20X8 (1 Eg = $0.1830). Goodwill suffered an impairment of 20 percent during the year. If the functional currency is the Egyptian pound, how much goodwill impairment loss should be reported on Infinity's consolidated statement of income for 20X8?

Answer

$3,670

$3,700

$3,680

$3,690

31) Pro forma disclosures are:

Answer

used to disclose unscheduled material events.

interim financial statements that need not be audited.

materials submitted to shareholders for votes on corporate matters.

"what-if" presentations often taking the form of summarized financial statements.

32) APB Opinion 28 (ASC 270) uses which view of interim reporting?

Answer

Integral

Discrete

Segmental

33) Identify the regulation that created an entity which insures investors from possible losses if an investment house enters bankruptcy.

Answer

Federal Deposit Insurance Protection Act

Securities Investor Protection Act

Investment Advisers Act

Federal Bankruptcy Acts

34) On December 5, 20X8, Texas-based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 20X9. The transaction is denominated in Saudi riyals. Imperial's fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are: December 5, 20X8, 1 riyal=$0.265; December 31, 20X8, 1 riyal=$0.262; January 10, 20X9, 1 riyal=$0.264. Based on the preceding information, what was the overall foreign currency gain or loss on the accounts payable transaction?

Answer

$300 loss

$200 loss

$100 gain

$200 gain

35) Which of the following items are likely to be reported in the supplementary items section of a statement of realization and liquidation?

Answer

Creditors' claims settled during the period.

Trustee's administration fees.

New obligations incurred by the trustee.

Assets subsequently acquired by the trustee.

36) If the functional currency is the local currency of a foreign subsidiary, what exchange rates should be used to translate the items below, assuming the foreign subsidiary is in a country that has not experienced hyperinflation over three years?

Answer

Common Stock (Current Rate), Premium on Bonds Payable (Historical Rate), Sales (Average Rate)

Common Stock (Historical Rate), Premium on Bonds Payable (Current Rate), Sales (Average Rate)

Common Stock (Historical Rate), Premium on Bonds Payable (Historical Rate), Sales (Average Rate)

Common Stock (Current Rate), Premium on Bonds Payable (Current Rate), Sales (Current Rate)

37) Derby Company pays its executives a bonus of 6 percent of income before deducting the bonus and income taxes. For the quarter ended March 31, 20X8, Derby had income before the bonus and income tax of $12,000,000. For the year ended December 31, 20X8, Derby estimates that its income before bonus and income taxes will be $70,000,000. For the quarter ended March 31, 20X8, what is the amount of the bonus that Derby should deduct on its income statement?

Answer

$4,200,000

$720,000

$1,050,000

$180,000

38) Which of the following observations regarding the use of fresh start accounting is true?

Answer

It is always required under Chapter 11 bankruptcy proceedings.

Prior shareholders will have control of the emerging company.

It results in a new reporting entity.

It is used under Chapter 7 bankruptcy proceedings.

39) The payment to general unsecured creditors is often termed:

Answer

a "preference payment."

a "dividend."

a "write-off."

a "bonus."

40) The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both current and historical exchange rates. Assuming that the local currency of the foreign subsidiary is the functional currency, what total amount should appear for these assets on the U.S. company's consolidated balance sheet? HISTORICAL RATES: Prepaid Insurance $60,000, Buildings (net) $480,000, Inventories at Cost ($300,000), Investments at Cost ($120,000); CURRENT RATE: Prepaid Insurance $48,000, Buildings (net) $240,000, Inventories at Cost ($288,000), Investments at Cost ($60,000);

Answer

$636,000

$648,000

$708,000

$960,000

41) Which of the following observations is true of the discrete view of interim reporting?

Answer

An interim period is viewed as an installment of an annual period.

Recognition and adjustment of certain income or expense items may be affected by judgments about the expected results of the entire year's operations.

Each interim period is considered as a basic accounting period to be evaluated as if it were an annual accounting period.

One interim period would not bear the entire expense that benefits more than one interim period.

42) As defined by the Bankruptcy Code, creditors with priority: I. have collateral claim against specific assets; II. are unsecured creditors who have priority over other unsecured creditors; III. are the first to be paid from any proceeds available to unsecured creditors.

Answer

I only

II only

I, II and II

Both II and III

43) Samuel Corporation foresees a downturn in its business in the medium term. It expects to sustain an operating loss of $160,000 for the full year ending December 31, 20X8. Samuel's tax rate is 35 percent. Anticipated tax credits for 20X8 total $8,000. No permanent differences are expected. Realization of the full tax benefit of the expected operating loss and realization of anticipated tax credits are assured beyond any reasonable doubt because they will be carried back. For the first quarter ended March 31, 20X8, Samuel reported an operating loss of $30,000. How much of a tax benefit should Samuel report for the interim period ended March 31, 20X8?

Answer

$8,000

$12,000

$13,500

$15,500

44) If the U.S. dollar is the currency in which the foreign affiliate's books and records are maintained and the U.S. dollar is also the functional currency,

Answer

the translation method should be used for restatement.

the remeasurement method should be used for restatement.

either translation or remeasurement could be used for restatement.

no restatement is required.

45) Under which nonjudicial action do creditors agree to assist the debtor in managing the most efficient payment of creditors' claims?

Answer

Debt restructuring arrangement

Creditors' committee management

Transfer of assets

Composition agreement

46) "Preference payments" made by the debtor to one creditor to the detriment of all other creditors within 90 days before the bankruptcy petition was filed:

Answer

is reduced from the monies available to the general unsecured creditors.

is usually written off.

may be recovered and returned to the cash available for all creditors.

are not recovered, as management assurances are binding.

47) Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On November 2, 20X8, Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as of December 31, 20X8, when the exchange rate has increased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:

Answer

$460 loss

$387 loss

$387 gain

$460 gain

48) Simon Company has two foreign subsidiaries. One is located in France, the other in England. Simon has determined the U.S. dollar is the functional currency for the French subsidiary, while the British pound is the functional currency for the English subsidiary. Both subsidiaries maintain their books and records in their respective local currencies. What methods will Simon use to convert each of the subsidiary's financial statements into U.S. dollars?

Answer

English (Translation), French (Translation)

English (Remeasurement, French (Remeasurement)

English (Remeasurement), French (Translation)

English (Translation), French (Remeasurement)

49) Under Chapter 11 proceedings, what represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the entity's assets?

Answer

Reorganization value

Fire sale value

Fresh start value

Excess value

50) Dover Company owns 90% of the capital stock of a foreign subsidiary located in Italy. Dover's accountant has just translated the accounts of the foreign subsidiary and determined that a debit translation adjustment of $80,000 exists. If Dover uses the fully adjusted equity method for its investment, what entry should Dover record in order to recognize the translation adjustment?

Answer

Debit Investment in Italian Subsidiary $72,000, Credit Other Comprehensive Income - Translation Adjustment $72,000

Debit Other Comprehensive Income-Translation Adjustment $80,000, Credit Investment in Italian Subsidiary $80,000

Debit Other Comprehensive Income - Translation Adjustment $72,000, Credit Investment in Italian Subsidiary $72,000.

Debit Other Comprehensive Income - Translation Adjustment $80,000, Credit Investment in Italian Subsidiary $80,000.