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advanced financial accounting

Questions and Answers of Advanced Financial Accounting

Prince Corporation acquired 100 percent of Sword Company on January 1, 20X7, for $203,000. The trial balances for the two companies on December 31, 20X7, included the following amounts:Additional
Problem Company owns 90 percent of Solution Dairy’s stock. The balance sheets of the two companies immediately after the Solution acquisition showed the following amounts:The fair value of the
Professor Corporation acquired 70 percent of Scholar Corporation’s common stock on December 31, 20X4, for $102,200. The fair value of the noncontrolling interest at that date was determined to be
Public Corporation acquired 90 percent of Station Company’s voting common stock on January 1, 20X1, for $486,000. At the time of the combination, Station reported common stock outstanding of
Pie Corporation acquired 75 percent of Slice Company’s ownership on January 1, 20X8, for $96,000. At that date, the fair value of the noncontrolling interest was $32,000. The book value of
This problem is a continuation of P5–33. Pie Corporation acquired 75 percent of Slice Company’s ownership on January 1, 20X8, for $96,000. At that date, the fair value of the noncontrolling
Pirate Corporation acquired 60 percent ownership of Ship Company on January 1, 20X8, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 40 percent of
This problem is a continuation of P5–37. Pirate Corporation acquired 60 percent ownership of Ship Company on January 1, 20X8, at underlying book value. At that date, the fair value of the
How is the amount to be reported as cost of goods sold by the consolidated entity determined when there have been intercorporate sales during the period?
Planet Corporation acquired 90 percent of Saturn Company’s voting shares of stock in 20X1. During 20X4, Planet purchased 40,000 Playday doghouses for $24 each and sold 25,000 of them to Saturn for
Plug Products owns 80 percent of the stock of Spark Filter Company, which it acquired at underlying book value on August 30, 20X6. At that date, the fair value of the noncontrolling interest was
Pam Corporation holds 70 percent ownership of Spray Enterprises. On December 31, 20X6, Spray paid Pam $40,000 for a truck that Pam had purchased for $45,000 on January 1, 20X2. The truck was
Putt Corporation acquired 70 percent of Slice Company’s voting common stock on January 1, 20X3, for $158,900. Slice reported common stock outstanding of $100,000 and retained earnings of $85,000.
Purse Corporation owns 70 percent of Scarf Company’s voting shares. On January 1, 20X3, Scarf sold bonds with a par value of $600,000 at 98. Purse purchased $400,000 par value of the bonds; the
Smart Company issued $100,000 of 10 percent bonds on January 1, 20X1, at 120. The bonds mature in 10 years and pay 10 percent interest annually on December 31. Phone Corporation holds 80 percent of
Sink Corporation prepared the following summarized balance sheet on January 1, 20X1: Plumber Company acquires 80 percent of Sink Corporation’s common stock on January 1, 20X1, for $80,000. At that
The summarized balance sheet of Separate Company on January 1, 20X3, contained the following amounts:On January 1, 20X3, Point Corporation acquired 70 percent of the common shares and 60 percent of
How does the use of interperiod tax allocation procedures affect the amount of income assigned to noncontrolling shareholders in the period in which the subsidiary records unrealized intercompany
Polly Corporation owns 80 percent of Sonny Corporation’s stock and 90 percent of Daughter Company’s stock. The companies file a consolidated tax return each year and in 20X5 paid a total tax of
Poppy Corporation owns 60 percent of Seed Company’s common shares. Balance sheet data for the companies on December 31, 20X2, are as follows:The bonds of Poppy Corporation and Seed Company pay
Pear Corporation acquired 75 percent ownership of Sugar Company on January 1, 20X1, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of
Punch Manufacturing Corporation owns 80 percent of the common shares of Short Retail Stores. The companies’ balance sheets as of December 31, 20X4, were as follows:Short Retail’s 8 percent
Plug Corporation holds 80 percent of Socket Company’s common stock. The following balance sheet data are presented for December 31, 20X7:Socket reported net income of $115,000 in 20X7 and paid
‘If markets are to function properly and capital is to be allocated efficiently, investors require transparency and must have confidence that financial information accurately reflects economic
Einstein once said that ‘Everything should be made as simple as possible, but not simpler’. This perfectly captures the view that accounting standards should be firmly governed by high-level
Convergence cannot be achieved if the basis for convergence is detailed rulesdriven standards as this will be difficult to roll out across different jurisdictions and cultures around the world. Do
History is primarily responsible for international differences in corporate financial reporting. Do you agree? Explain why.
‘Accounting is shaped by economic and political forces. It follows that increased worldwide integration of both markets and politics (driven by reductions in communications and information
Explain the purpose of accounting standards (national or international) and identify the advantages that stem from the convergence of accounting practice. Describe disadvantages, if any.
(a) Why do we need a conceptual framework when we have a comprehensive set of accounting standards such as IFRS? (b) Who are the primary users of general-purpose financial statements? (c) IASB does
(a) Illustrate the qualitative characteristics of useful financial information. Describe the factors which contribute to the achievement of each characteristic. (b) Relevance is one of the key
Under the IASB Framework, an asset is recognised ‘when it is probable that the future economic benefits will flow to the entity’. (a) Which future economic benefits does that principle refer to?
A company buys a costly item of electronic equipment that it expects will have a useful life of eight years, and it depreciates the asset over that period. By the end of the fourth year, the item of
In some countries, income tax authorities require companies to prepare accounts that conform to national laws for measuring taxable income. Are those fjnancial statements ‘general-purpose
A company’s senior financial officer says, ‘I always follow IFRSs in preparing my company’s financial statements. But the IASB Framework is a lot of conceptual theory that doesn’t affect me
An entity has incurred losses during the last four years and its current liabilities exceed its total assets. The entity was in breach of its loan covenants and has been negotiating with the related
(a) Give examples of resources that might be treated as assets in a balance sheet but normally are not. How helpful is the Framework definition of assets in making clear that they are not
Chemco Ltd. is engaged in the production of chemical products and selling them locally. The company wishes to extend its market and export some of its products. It has come to the attention of the
IAS 1 requirements (a) IAS 1 (revised) lists six ‘overall considerations’ relating to the presentation of financial statements. Explain the main requirements of IAS 1 in relation to three of
Classification of assets and liabilities (a) Distinguish between current assets and non-current assets. (b) Distinguish between current liabilities and non-current liabilities. (c) Explain why
The trial balance of Sabrina plc includes the following accounts as at 30 September 2010: Additional information: • The loss on valuation of available-for-sale investments recognised directly in
The equity section of the statement of financial position of Lorenzo pleas at 30 September 2010 is as follows (amounts in thousands of euro): Additional information: • Lorenzo plc issued 16,000
The data given below are available for ABC SpA for the year ended 31 December 2009. The following information has not yet been taken into account in the amounts shown in the trial balance: •
The following trial balance is extracted from the books of Walrus plc as at 31 March 2010: Additional information: • The company’s non-depreciable land was valued at EUR 600,000 on 31 March
(a) In what circumstances may an entity change one of its accounting policies? (b) Explain how an entity should select its accounting policy in relation to an item if there is no applicable
Harris plc began trading on 1 January 2006, preparing financial statements ended 31 December each year. During 2009, the company decided to change its accounting policy with regard to depreciation of
Whilst preparing its financial statements for the year ended 30 June 2010, Ibex plc discovers that the sales figure for the year ended 30 June 2009 had been understated by EUR 200,000 as a
(a) What is the difference between revenue and income? (b) Which criteria does IAS 18 require for recognising revenue from the sale of goods? (c) What is the basic principle for measuring revenue
(a) What is a construction contract? (b) How and why should construction contracts be combined or segmented? (c) How is the stage of completion determined? (d) What is the effect of variations and
Entity E entered into a contract in 2009 to supply video game consoles to customer G. The contract is for 50,000 game consoles at EUR 100 each. The contract contains specific instructions from
A clothing retailer sells T-shirts at a price of EUR 10 each. The T-shirts cost the retailer EUR 5 each. Customers have the right to return T-shirts within four weeks of purchase, provided that the
Entity J sells a racehorse to entity K. As part of the arrangement entity J continues to house and train the horse, determine which races the horse will enter and set stud fees for the horse. Should
Entity X distributes entity Y’s products under a distribution agreement. The terms and conditions of the contract are such that entity X: Entity Y retains product liability. Entity Y is,
A contractor is negotiating two contracts with a single customer. The customer should either accept both contracts or reject both. The first contract will be for the design of a chemical plant and
Company X is executing a gigantic project of constructing the tallest building in the country. The project is expected to take three years to complete. The company has signed a fixed price contract
Entity A is constructing a building for its customer. The construction is in the second year of a three year project.Management had originally assessed the contract to be profitable and recognised a
In 2006 entity X was invited to tender for the construction of a residential block and connected shopping arcade with common plaza and garden and play areas. Tenders were required to detail the costs
(a) Define ‘cost’ in relation to inventory. (b) What is meant by NRV? (c) Explain the rule of lower of cost and ‘NRV for inventory.
(a) In what circumstances should assumptions be made in order to assign a cost fo inventory items when they are sold? (b) What is the difference between FIFO, LIFO and AVCO cost formulas? (c)
Entity A purchases motorcycles from Italy, Germany and Japan. It sells to domestic and foreign customers. Entity A incurred the following expenses during 2010: Entity A seeks your advice on which
Entity B is a newly established international trading company. It commenced its operations in 2008. Entity B imports goods from China and sells in the local market. It uses the FIFO method to value
Entity C, a newly incorporated company, uses the latest version of a software package (EXODUS) to cost and value its inventory. The software uses the AVCO formula to value inventory. The following
The following information has been extracted from the records of entity D about one of its products. Entity D’s reporting date is 30 September 2010. Determine the cost of inventory on hand at 30
Assume that entity E’s beginning inventory on 1 March 2010 is nil. All inventory is finished goods and is of the same type. Details of the inventory received and sent out by entity E are shown
The following information relates to the inventory on hand at 30 June 2010 held by entity F. Calculate the value of inventory on hand at 30 June 2010 in accordance with IAS 2. Item no. A1458 A1965
Entity G is a retailer of Italian furniture and has five major product lines: sofas, dining tables, beds, closets, and lounge chairs. As at 30 June 2010, quantity on hand, cost per unit, and NRV per
The financial statements of entity H for 2009 and 2010 had the following errors: By what amount will the 2009 and 2010 profit before taxes be overstated or understated if these errors are not
(a) Define the term ‘property, plant and equipment’. (b) When should an item of PPE be recognised as an asset and when should it be derecognised? (c) Which of the following costs should be
(a) On 1 September 2010, an entity paid EUR 160,000 to replace the wall lining of one of its furnaces. The furnace had been acquired several years previously and its carrying amount on 1 September
On 31 July 2009, an entity which prepares financial statements to 31 March each year bought a machine for EUR 1,269,000. This amount was made up as follows: The entity is VAT-registered and reclaims
(a) Entity X prepares financial statements to 31 May each year. On 31 May 2007, the entity acquired land for EUR 800,000. This land was revalued to EUR 900,000 on 31 May 2008 and to EUR 750,000 on 31
(a) Define the terms ‘depreciation’, ‘depreciable amount’, ‘useful life and residual value’. (b) On 1 July 2008, an entity which prepares financial statements to 30 June each year
On 1 January 2010, an entity, which prepares financial statements to 31 December each year, buys a machine at a cost of EUR 92,600. The machine’s useful life is estimated at four years with a
(a) Define the term ‘borrowing costs’ and explain the accounting treatment of such costs in accordance with IAS 23. (b) During the year ended 31 December 2009, an entity started work on the
(a) Define the term ‘investment property’ and explain the two models permitted by IAS 40 for the measurement of investment property after its initial recognition. (b) How do these two models
Golden leisure is a private limited liability entity that operates a single cruise ship. The chip was acquired on 1 October 2000. Details of the cost of the ship’s components and their estimated
IAS 17 distinguishes between finance leases and operating leases and prescribes the accounting treatment for each type of lease. (a) Define terms ‘finance lease’ and ‘operating lease’. (b)
(a) Leases are classified on the basis of ‘substance over form’. What does this criterion mean and how does it relate to finance leases? (b) What are ‘minimum lease payments’? (c) What is
For the following arrangements, explain whether they are operating or finance lease transactions: (a) Entity A leases an asset to entity B, and obtains a loan from a financial institution using the
On 1 January 2010, Qalam Ltd leases a machine to Shabs plc. The lease is for a term of three years and lease payments of EUR 2,000 per month are required. The machine has a useful life of eight years
On 1 July 2008, Huge & Co Ltd entered into a finance lease to acquire a machine. The cash price of the machine would have been EUR 264,000. The lease agreement specified that the company would make
You are given the following information: Determine: (a) the interest rate implicit in the lease; (b) the finance charge to be allocated in each accounting period using the actuarial method; (c)
Sabrina Ltd prepares financial statements at 31 December each year. On 1 January 2009, the company acquired an asset by means of a finance lease. Details of the lease agreement are as
On 1 July 2009, Moose Jaw Ltd leased a plastic moulding machine from Winnipeg Ltd. The machine cost Winnipeg Ltd EUR 260,000 to manufacture and had a fair value of EUR 308,218 on 1 July 2009. The
On 1 July 2009, Haines Ltd leased a processing plant to Kitmat Ltd. The plant was purchased by Haines Ltd on 1 July 2009 at fair value of EUR 934,224. The lease agreement contained the clauses shown
On 1 July 2007, Vancouver Ltd leased a photocopier from Kamloops Ltd, a company that manufactures, retails and leases copiers. The photocopier had cost Kamloops Ltd EUR 60,000 to make but had a fair
(a) Explain the term ‘identifiable’, and list assets that would be excluded from intangible assets as a result of this criterion included in the definition of an intangible asset. (b) What is an
Entity X holds a trade mark that is well known within consumer circles and has enabled entity X to be a market leader in this area. The trade mark has been held by the entity for nine years. The
An entity that sells DVDs by sending emails to prospective customers has acquired a customer list from another entity that also markets its products in a similar fashion. The entity estimates that it
Extreme SpA is a newly established entity. It was set up by an entrepreneur who is generally interested in the business of providing engineering and operational support services to aircraft
Costs incurred by an established entity include: (a) pre-opening costs of a business facility; (b) recipes, secret formulas, models and designs, prototype; (c) training, customer loyalty, and
Soweto Ltd is unsure of how to obtain computer software. Four possibilities are: (1) Purchase computer software externally, including packages for payroll and general ledger. (2) Contract
Autocar SpA, a motor vehicle manufacturer, has a research division that worked on the following projects during 2009: Project 1 — the design of a steering mechanism that does not operate like a
An entity has acquired local broadcast rights to the 2010 World Cup. Management expect World Cup related advertising revenue to commence from 1 March 2010. Management propose that amortisation of
Entity A, acquired entity B, which operated a TV channel. Entity B negotiates the sale of air time directly with advertisers who are mostly big companies. Advertisement contracts are negotiated
Pretoria Ltd is a highly successful engineering company that manufactures filters for air-conditioning systems. Due to its dissatisfaction with the quality of the filters currently available, on 1
At 30 June 2010, entity A needs to undertake an impairment test. Having only recently adopted IFRS, the management of entity A seek your advice in relation to this test under IAS 36 — Impairment of
Entity B is a water and sewage company with a country wide water and sewage network. Although entity B is a listed company, the government is the controlling shareholder. Management have asked the
Entity C uses asset D to manufacture product X. There has been a significant reduction in demand for product X as a result of a change in consumer taste. Management have not assessed asset D for
Entity G produces mousetraps and has for some time been the market leader. Its chief competitor, Entity H has recently developed a new product that is widely acknowledged as being superior to entity

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