Chapter 9 Additional Financial Reporting Issues

Question 1

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

Answer 1

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.

Question 2

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?

Answer 2

B. 12%

Question 3

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

Answer 3

A. Asset understatement
B. Overpayment of income taxes
C. Overstated income

Question 4

Holding monetary assets during a period of inflation results in:

Answer 4

B. purchasing power losses.

Question 5

Holding monetary liabilities during a period of inflation results in:

Answer 5

A. purchasing power gains.

Question 6

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

Answer 6

D. General purchasing power method

Question 7

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

Answer 7

A. Current replacement cost method

Question 8

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

Answer 8

C. As an element of income in the current year

Question 9

What is a “holding gain?”

Answer 9

C. The increase in owners’ equity resulting from holding nonmonetary assets during a period of inflation

Question 10

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

Answer 10

D. Inflation accounting is not required under U.S. GAAP.

Question 11

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

Answer 11

B. Inflation is insignificant in the U.S. and the U.K. since late 1980’s.

Question 12

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

Answer 12

D. None of the above

Question 13

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

Answer 13

C. General purchasing power

Question 14

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

Answer 14

A. No rule is currently in place that generally requires inflation-adjusted financial statements

Question 15

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

Answer 15

D. Mandating inflation adjustment for primary financial statements of companies in hyperinflationary economies

Question 16

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

Answer 16

B. General purchasing power.

Question 17

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

Answer 17

A. The cumulative inflation rate over a three-year period is 75% or higher.

Question 18

How do multinational corporations combine operations?

Answer 18

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.

Question 19

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

Answer 19

A. A parent corporation and all of its subsidiary corporations

Question 20

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

Answer 20

A. Representation on the company’s board of directors
B. Being the primary entity exercising voting rights
C. Through a contract between the entities

Question 21

Under IAS 27, how is “control” defined?

Answer 21

C. The power to govern financial and operating policies of an entity so as to obtain the benefits from its activities

Question 22

Under ARB 51, “controlling financial interest” is:

Answer 22

A. criterion for consolidation purposes.

Question 23

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

Answer 23

B. expanded U.S. GAAP to consider effective control rather than legal control for consolidated financial statements.

Question 24

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

Answer 24

C. Consolidation

Question 25

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

Answer 25

B. One-line consolidation

Question 26

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

Answer 26

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.

Question 27

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?

Answer 27

A. Purchase method

Question 28

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?

Answer 28

B. As Goodwill on the consolidated balance sheet

Question 29

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

Answer 29

C. Entity concept

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?

Answer 30

A. Parent company concept

Question 31

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

Answer 31

C. It must be written down when its fair value is less than its carrying value.

Question 32

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

Answer 32

B. It is allowed to be expensed in the year the subsidiary is acquired.

Question 33

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

Answer 33

C. It is required to be tested for impairment every year.

Question 34

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

Answer 34

C. It should be recognized immediately as a gain in the income statement.

Question 35

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

Answer 35

D. It is treated as an extraordinary gain on the consolidated income statement.

Question 36

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?

Answer 36

D. Entry D

Question 37

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?

Answer 37

B. Entry B

Question 38

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

Answer 38

A. The pooling of interests method is no longer acceptable under IFRS.

Question 39

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

Answer 39

B. Purchase method

Question 40

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

Answer 40

C. IASB standards and U.S. GAAP are essentially the same for accounting for joint ventures

Question 41

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

Answer 41

C. 20% ownership of voting shares.

Question 42

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?

Answer 42

B. Fair value

Question 43

IFRS 8 adopts which approach to report segmented financial information?

Answer 43

C. Management approach

Question 44

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

Answer 44

C. The segment must have revenue that is more than half from external sources.

Question 45

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

Answer 45

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.

Question 46

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

Answer 46

C. U.S. GAAP does not require reporting of segment liabilities.

Question 47

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

Answer 47

B. Information about intersegmental transfer pricing

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?

Answer 48

A. The factors used to identify operating segments

Question 49

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

Answer 49

B. Additions to long-lived assets where such assets are hard to be readily removed

Question 50

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

Answer 50

B. use of acquisition method for business combination.

Question 51

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

Answer 51

A. either at fair value or at noncontrolling interests’ proportionate share of the acquiree’s net identifiable assets.

Question 52

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

Answer 52

D. A joint arrangement is either a joint operation or a joint venture.

Question 53

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

Answer 53

B. Asset test