Deck 9: Additional Financial Reporting Issues

Question 1

Holding monetary assets during a period of inflation results in:

A)purchasing power gains.
B)purchasing power losses.
C)transaction gains.
D)translation losses.

Answer 1

B

Question 2

What is a "holding gain?"

A)The increase in owners' equity resulting from maintaining monetary assets during a period of inflation
B)The increase in income resulting from general purchasing power accounting during a period of inflation
C)The increase in owners' equity resulting from holding nonmonetary assets during a period of inflation
D)The increase in income caused by paying liabilities with cheaper dollars

Answer 2

C

Question 3

Which method of accounting for changing prices (inflation) reflects current replacement cost of specific assets?

A)Current replacement cost method
B)General purchasing power method
C)Temporal method
D)Current rate method

Answer 3

A

Question 4

Which of the following is NOT a characteristic which is indicative of hyperinflation under IAS 29?

A)The cumulative inflation rate over a three-year period is 75% or higher.
B)Interest rates, wages, and prices are linked to a price index.
C)The price of credit sales includes a "buffer" to compensate for the expected loss in purchasing power over the credit period.
D)The general population thinks about prices in terms of a stable foreign currency, and prices may actually be quoted in that currency.

Question 5

Under general purchasing power accounting, how is the gain or loss in purchasing power reported?

A)As a prior period adjustment to Retained Earnings
B)As an element of accumulated comprehensive income on the Balance Sheet
C)As an element of income in the current year
D)All of the above methods are acceptable

Question 6

Since 2003, what method for supplemental disclosure of inflation-adjusted financial statements is required of all companies affected by the IASB standards?

A)No rule is currently in place that generally requires inflation-adjusted financial statements.
B)General purchasing power method must be used.
C)Current replacement cost method must be used.
D)Companies have the option of using current cost or historical cost.

Question 7

What does it mean to say that the inflation rate last year was 5%?

A)All prices are 5% less at the end of the year than they were at the beginning of the year.
B)The price of specific products increased 5% between the beginning and the end of the year.
C)On average, a typical basket of goods costs 5% more at the end of the year than it did at the beginning of the year.
D)The general purchasing power of the dollar has increased 5% between the beginning of the year and the end of the year.

Question 8

How do multinational corporations combine operations?

A)The acquired firm is dissolved and is merged into the acquiring company.
B)One company acquires a majority of shares of another company, but both entities continue to exist.
C)Two or more entities dissolve their legal status and merge to create a new corporation.
D)All of the above.

Question 9

Prior to 2007, which method of accounting for inflation most closely represented the supplemental reporting required in Mexico?

A)Current replacement cost
B)Current cost
C)General purchasing power
D)Historical cost

Question 10

According to IAS 27, how can effective control be achieved without owning more than 50% of another company's voting shares?

A)Representation on the company's board of directors
B)Being the primary entity exercising voting rights
C)Through a contract between the entities
D)All of the above may result in control by one corporation over another.

Question 11

Which of the following is potentially a problem associated with historical cost-based financial statements in periods of inflation?

A)Asset understatement
B)Overpayment of income taxes
C)Overstated income
D)All of the above are potential problems

Question 12

Which method of accounting for inflation is used under U.S.GAAP?

A)Current Replacement Cost method
B)General Purchasing Power method
C)Both Current Replacement Cost and General Purchasing Power methods must be used
D)Inflation accounting is not required under U.S.GAAP.

Question 13

Why inflation accounting is NOT required in the United States and the United Kingdom since late 1980s?

A)Accounting regulators in the U.S.and U.K.have not addressed the issue of inflation accounting in their pronouncements.
B)Inflation is insignificant in the U.S.and the U.K.since late 1980's.
C)Accounting regulators could not agree on a method for adjusting financial statements for the effect of inflation.
D)Corporations in the U.S and U.K.voluntarily report inflation-adjusted financial statements, making the regulations unnecessary.

Question 14

A representative market basket of products cost $250 at the beginning of the year, and the same collection of products costs $280 at the end of the year.What is the annual rate of inflation?

A)10.7%
B)12%
C)112%
D)-10.7%

Question 15

Which method of accounting for changing prices (inflation) updates assets by applying inflation rates to historical costs?

A)Current replacement cost method
B)Current rate method
C)Temporal method
D)General purchasing power method

Question 16

Which of the following countries requires companies to use current replacement cost accounting to prepare primary financial statements?

A)The Netherlands
B)Mexico
C)Brazil
D)None of the above

Question 17

Holding monetary liabilities during a period of inflation results in:

A)purchasing power gains.
B)purchasing power losses.
C)transaction gains.
D)translation losses.

Question 18

What issue of reporting effects of changing prices is addressed by IAS 29, issued by the International Accounting Standards Board in 1989?

A)Choice between current replacement cost and general purchasing power method
B)Making inflation-adjusted reporting optional or required
C)Specifying the European Central Bank as the official source of inflation rates in the European Union
D)Mandating inflation adjustment for primary financial statements of companies in hyperinflationary economies

Question 19

Which method most closely represents the requirement of IAS 29 for reporting financial statements of companies in hyperinflationary economies?

A)Current replacement cost.
B)General purchasing power.
C)Historical cost for non-monetary assets and current replacement cost for monetary assets.
D)Companies have a choice between current replacement cost and general purchasing power methods.

Question 20

For the purpose of financial reporting under IASB standards, what is a "group?"

A)A parent corporation and all of its subsidiary corporations
B)Any multinational corporation under the jurisdiction of the IASB
C)All countries that have adopted IASB standards
D)A company that is comprised of foreign corporations dissolved into one entity

Question 21

Mega Corporation acquired 65% of the voting shares of Forko Ltd for €10 billion and used the purchase method of accounting for the merger.Mega Corporation's interest in Forko Ltd.had a restated value of €950 million.How should the difference be accounted for by Mega Corporation?

A)As Gain from Acquisition on the current period income statement
B)As Goodwill on the consolidated balance sheet
C)As a Loss from Merger on the current period income statement
D)As Additional Paid-in Capital on the consolidated balance sheet

Question 22

Which of the following terms is often used to describe the equity method of accounting?

A)The 20% rule
B)One-line consolidation
C)Significant influence
D)Disaggregated consolidation

Question 23

How is Goodwill resulting from business combinations treated under Japanese GAAP?

A)It is capitalized and amortized over a period of no more than 40 years.
B)It is allowed to be expensed in the year the subsidiary is acquired.
C)It is capitalized and written down when its fair value becomes less than its carrying value.
D)It is amortized over between 5 and 40 years.

Question 24

Under IFRS 3, which concept must be used to report the assets and liabilities of an acquired company on the parent company financial statements?

A)Parent company concept
B)Equity concept
C)Entity concept
D)Historical cost concept

Question 25

Canto Ltd, a Spanish corporation, acquired 100% interest in Bevo, Inc., a U.S.corporation for $50,000,000.The net assets of Bevo had a book value of $35,000,000 and a fair value of $46,000,000.How should Canto record the business combination? A.
$\begin{array}{ll}\text { Net Assets (Bevo) } & 35,000,000 \\\text { Goodwill } & 15,000,000 \\\text { Cash } &&50,000,000\end{array}$

B.
$\begin{array}{ll}\text { Net Assets (Bevo) } &46,000,000 \\\text { Goodwill } & 4,000,000 \\\text { Cash } &&50,000,000\end{array}$

C.
$\begin{array}{ll}\text { Net Assets (Bevo) } &50,000,000 \\\text { Cash } &&50,000,000\end{array}$

D.
$\begin{array}{ll}\text { Net Assets (Bevo) } &46,000,000 \\\text { Goodwill } & 4,000,000 \\\text { Cash } &&50,000,000\end{array}$

A)Entry A
B)Entry B
C)Entry C
D)Entry D

Question 26

What term is used to refer to presenting the financial statements for a group of enterprises as if it was a single entity?

A)Harmonization
B)Translation
C)Consolidation
D)Transformation

Question 27

How is negative goodwill accounted for under U.S.GAAP?

A)There is no rule for negative goodwill, because there is no such thing.
B)It is capitalized and amortized over a period of no more than 40 years.
C)It is treated as an extraordinary loss on the consolidated income statement.
D)It is treated as an extraordinary gain on the consolidated income statement.

Question 28

How must Goodwill resulting from business combinations be treated under U.S.GAAP?

A)It must be amortized over a period of no more than 40 years.
B)It must be expensed when it is acquired.
C)It must be written down when its fair value is less than its carrying value.
D)It must be written down in no less than 5 years and no more than 40 years.

Question 29

What term does IAS 11 use for "a contractual arrangement whereby two or more parties having joint control have right to the net assets of the arrangement"?

A)Merger
B)Consolidation
C)Joint venture
D)Business combination

Question 30

IFRS 3, issued in 2004, eliminated the use of which concept for reporting assets and liabilities of an acquired company on the parent company's consolidated financial statements?

A)Parent company concept
B)Economic concept
C)Entity concept
D)All of the above

Question 31

Under ARB 51, "controlling financial interest" is:

A)criterion for consolidation purposes.
B)defined as 50% ownership of another entity's voting shares.
C)the ability to make decisions about another entity's activities indirectly.
D)the right to contribute to the expected residual returns of another entity as they occur.

Question 32

Canto Ltd, a Spanish corporation, acquired 100% interest in Bevo, Inc., a U.S.corporation for $50,000,000.The net assets of Bevo had a book value of $35,000,000 and a fair value of $56,000,000.How should Canto record the business combination? A.
$\begin{array}{ll}\text { Net Assets (Bevo) } & 35,000,000 \\\text { Goodwill } & 15,000,000 \\\text { Cash } &&50,000,000\end{array}$

B.
$\begin{array}{ll}\text { Net Assets (Bevo) } &56,000,000 \\\text { Goodwill } & &6,000,000 \\\text { Cash } &&50,000,000\end{array}$

C.
$\begin{array}{ll}\text { Net Assets (Bevo) } &50,000,000 \\\text { Cash } &&50,000,000\end{array}$

D.
$\begin{array}{ll}\text { Net Assets (Bevo) } &56,000,000 \\\text { Goodwill } & &6,000,000 \\\text { Cash } &&50,000,000\end{array}$

A)Entry A
B)Entry B
C)Entry C
D)Entry D

Question 33

Since 2001, which method of accounting for a business combination is required under U.S.GAAP?

A)Pooling of interest method
B)Purchase method
C)Both purchase and pooling of interest methods are allowed
D)Purchase is required for transnational combinations, but pooling is allowed for domestic combinations.

Question 34

Which of the following statements is true about pooling of interests method of accounting for business combinations?

A)The pooling of interests method is no longer acceptable under IFRS.
B)Goodwill arises only when the pooling of interests method is used for business combinations.
C)Pooling of interests is used for international consolidations but never for domestic consolidations.
D)The purchase method is used only when less than 100% of an entity's voting shares are acquired.

Question 35

According to IFRS 3, how should companies account for negative goodwill arising from business combinations?

A)It should be capitalized and amortized over a period of no more than 40 years.
B)It should be treated as a loss on the consolidated income statement.
C)It should be recognized immediately as a gain in the income statement.
D)There is no rule for negative goodwill, because there is no such thing.

Question 36

According to IFRS 3, which of the following statements is true about the treatment of Goodwill arising from business combinations?

A)It is capitalized and amortized over a period of no more than 40 years.
B)It is expensed in the year the subsidiary is acquired.
C)It is required to be tested for impairment every year.
D)It is amortized over between 5 and 40 years.

Question 37

Mega Corporation acquired 65% of the voting shares of Forko Ltd.Mega consolidated its accounts by restating assets and liabilities of the subsidiary at fair value on the date the shares were acquired.Which of the following methods for accounting for the business combination is being used by Mega Corporation?

A)Purchase method
B)Fair value method
C)Pooling method
D)Current replacement cost method

Question 38

Under IAS 27, how is "control" defined?

A)Ownership of 50% of more of the voting shares of another entity
B)Representation on another entity's board of directors
C)The power to govern financial and operating policies of an entity so as to obtain the benefits from its activities
D)Ownership of 30% or more of the voting shares of another entity

Question 39

In January 2003, the FASB released Interpretation 46, "Consolidation of Variable Interest Entities," which:

A)re-emphasized the need for 50% stock ownership to exert effective control.
B)expanded U.S.GAAP to consider effective control rather than legal control for consolidated financial statements.
C)took a "form-over-substance" approach to define control in determining requirements for consolidated financial statements.
D)defined effective control as ownership of 30% or more of another entity's voting shares.

Question 40

How does U.S.GAAP differ from IFRS with respect to presenting consolidated financial statements?

A)U.S.GAAP requires all controlled subsidiaries to be consolidated, whereas IFRS allows for optional consolidated financial statements.
B)IFRS excludes subsidiaries acquired for disposal within one year from the consolidation requirement, whereas U.S.GAAP requires all controlled subsidiaries to be consolidated.
C)U.S.GAAP allows a company to exclude subsidiaries it is holding for sale from the consolidation process.
D)IFRS requires the parent company to own 50% of the voting shares of the subsidiary before consolidation is allowed.

Question 41

Which of the following is a reason to report segmented accounting information for multinational enterprises?

A)There are different risks in different parts of the world that a reader may need to know about.
B)Different lines of business have different levels of risk that may affect business success.
C)Growth opportunities differ from one nation to another that could affect share value.
D)All of the above are reasons for segmented reporting.

Question 42

How are IASB requirements to account for joint ventures different from U.S.GAAP?

A)International standards require the equity method, but U.S.GAAP allows for flexibility in accounting for joint ventures.
B)U.S.GAAP requires the equity method, whereas the international standards require proportionate consolidation.
C)IASB standards and U.S.GAAP are essentially the same for accounting for joint ventures.
D)IASB standards do not specify which methods are allowed to account for joint ventures, whereas U.S.GAAP requires proportional consolidation.

Question 43

Which of the following disclosures is required by U.S.GAAP in addition to separate reporting for operating segments?

A)Operating income for each country in which a material amount of revenue is derived
B)Additions to long-lived assets where such assets are hard to be readily removed
C)Revenues and long-lived assets for each country that constitutes 10% of more of the combined revenues or assets
D)Operating income adjusted for inflation for each country where it has significant operations

Question 44

Which of the following entity-wide disclosures is NOT required under both IFRS 8 and U.S.GAAP?

A)Information about products and services
B)Information about intersegmental transfer pricing
C)Information about major customers
D)Information about geographic areas

Question 45

As per IFRS 11, which of the following statements is true of the joint arrangement?

A)IFRS 11 is silent about joint arrangements.
B)In regard to joint venture accounting, IFRS 11 is quite different from U.S.GAAP.
C)IFRS 11 does not allow revaluation of assets.
D)A joint arrangement is either a joint operation or a joint venture.

Question 46

Why do financial analysts and other readers of financial statements want segmented information?

A)Consolidation obscures facts that may be important for evaluating financial statements.
B)More information is always preferred to less information.
C)To ensure that illegal business combinations are not taking place.
D)Models for economic forecasting have not been developed using consolidated financial statement information.

Question 47

With regard to convergence of accounting for business combinations between IFRS and U.S.GAAP, the major changes to U.S.GAAP include:

A)classifying noncontrolling interests as assets.
B)use of acquisition method for business combination.
C)recognizing in-process research and development costs as expense.
D)recognizing incurred research costs as liabilities.

Question 48

According to both IFRS 8 and U.S.GAAP, which of the following information should be disclosed for each separate reportable operating segment?

A)The factors used to identify operating segments
B)Total liabilities for each operating segment
C)Total compensation expense for each operating segment
D)Total rent expense for each operating segment

Question 49

Under IFRS 8, which of the following criteria is NOT considered by all segments that are considered reportable business segments?

A)The segment must have revenue that is one-tenth or more of combined revenue.
B)The segment must have profit that is 10% or more of combined profit of all segments with profit.
C)The segment must have revenue that is more than half from external sources.
D)The segment must have assets that are 10% or more of combined segment assets.

Question 50

Which of the following is a difference that exists between IFRS 8 and U.S.GAAP?

A)There are no differences as the two pronouncements represent total convergence in segment reporting.
B)U.S.GAAP says that segment assets must be 5% or greater of the total combined assets to be separately disclosed.
C)U.S.GAAP does not require reporting of segment liabilities.
D)U.S.GAAP explicitly includes intangibles in the definition of long-lived assets for geographic disclosures.

Question 51

Under both IFRS and U.S.GAAP, which of the following methods should be used by an investing entity to report accounting for investment in nonconsolidated subsidiaries?

A)Equity method
B)Fair value
C)Proportionate consolidation
D)Parent concept

Question 52

Under U.S.GAAP and IASB standards, the threshold for determining "significant influence" in an associate enterprise is:

A)50% ownership of voting shares.
B)5% ownership of voting shares.
C)20% ownership of voting shares.
D)10% ownership of voting shares.

Question 53

IFRS 8 adopts which approach to report segmented financial information?

A)Geographic approach
B)Business lines approach
C)Management approach
D)Asset test approach

Question 54

Which of the following tests is performed to determine if an operating segment should be reported separately?

A)Liability test
B)Asset test
C)Impairment test
D)Expense test

Question 55

For a business combination in which the acquirer achieves control without acquiring all the equity of the acquiree, the noncontrolling equity interest is measured:

A)either at fair value or at noncontrolling interests' proportionate share of the acquiree's net identifiable assets.
B)either at historic cost or at noncontrolling interests' proportionate share of the acquiree's net identifiable assets.
C)only at fair value.
D)either at historic cost or at controlling interests' proportionate share of the acquiree's net identifiable assets.