Question 1

Larmer Corp. purchased 80% of Martin Inc., an integrated foreign subsidiary, on January 1, Year 5. If Martin’s functional currency is the same as Larmer’s, which translation method should be used to translate Martin’s financial statements into Canadian dollars?

Accepted Answer

Temporal method

Question 2

On January 1, Year 5, Martin Inc. had plant and equipment with a book value of $$25,000 US and a fair value of 30$$,000 US. The remaining life was 5 years. What is the annual excess depreciation (in US dollars) that should be recognized due to the fair value adjustment?

Accepted Answer

$2,000

Question 3

When translating Martin’s inventory purchased during Year 5, which exchange rate should be used under the temporal method?

Accepted Answer

The rate on the date the inventory was purchased

Question 4

Prancer Limited purchased 70% of Star Inc. for $$1,500,000. Star’s equity at acquisition was 1$$,200,000. If the only fair value adjustments are a $$30,000 decrease in inventory and a 100$$,000 increase in equipment, what is the total acquisition differential?

Accepted Answer

$300,000

Question 5

Star Inc. sold a machine to Prancer for $$180,000 on January 1, Year 5. The machine originally cost 200$$,000 and was being depreciated over 10 years. What is the annual unrealized profit in the machine that must be eliminated in consolidation for Year 5?

Accepted Answer

$16,000

Question 6

During Year 6, Prancer sold inventory to Star for $320,000 at a 60% markup on cost. At year-end, 25% of this inventory remained unsold. What is the unrealized profit in Star’s ending inventory that must be eliminated on consolidation?

Accepted Answer

$48,000

Question 7

A not-for-profit organization (NFPO) using the restricted fund method receives pledges of $$400,000, of which 80$$,000 applies to the following year. If 2% of pledges are estimated uncollectible, what is the amount of revenue recognized in the current year?

Accepted Answer

$313,600

Question 8

YourKidz, an NFPO, receives a donation of equipment valued at $100,000 with a 10-year useful life and no residual value. Using the deferral method, what is the annual amortization expense recognized?

Accepted Answer

$10,000

Question 9

GNR Corp. purchases equipment from IM Corp. for 800,000 AGs on October 31, Year 8, and enters into a 120-day forward contract as a fair value hedge. If the spot rate on October 31 is $$0.420 and the forward rate is 0.452$$, what is the initial value of the equipment recorded in Canadian dollars?

Accepted Answer

$336,000

Question 10

On December 31, Year 8, the spot rate is $$0.446 and the 60-day forward rate is 0.462. $$What is the unrealized foreign exchange gain or loss on the payable (in Canadian dollars) that GNR Corp. should recognize at year-end, compared to the initial recognition?

Accepted Answer

$20,800 gain

Question 11

ABC Company’s equipment has a book value of $$400,000, a tax basis of 320$$,000, and a fair value of $430,000 at acquisition. If the tax rate is 30%, what is the increase in deferred tax liability due to the fair value adjustment?

Accepted Answer

$9,000

Question 12

Mistral Inc. owns 50% of Chinook Inc., a joint venture. Chinook purchased $$10,000 of merchandise from Mistral, with 2$$,000 gross profit. At year-end, 40% of this merchandise remains in inventory. What is the unrealized profit in ending inventory that must be eliminated from Mistral’s equity method income?

Accepted Answer

$800

Question 13

Which of the following best describes the purpose of fund accounting in not-for-profit organizations?

Accepted Answer

To segregate resources according to their intended purpose and ensure accountability for restricted funds

Question 14

If Prancer uses the cost method to account for its investment in Star, which of the following is true regarding the recognition of Star’s income in Prancer’s financial statements?

Accepted Answer

Prancer recognizes only dividends received from Star as income

Question 15

A Canadian parent company has a foreign subsidiary whose functional currency is the local currency of the subsidiary. Which translation method should be used for consolidation?

Accepted Answer

Current rate method

Question 16

In a business combination, if the fair value of net identifiable assets acquired is greater than the purchase price, what is the resulting accounting treatment?

Accepted Answer

Recognize a gain on acquisition

Question 17

If a parent company sells inventory to its subsidiary at a profit and some of that inventory remains unsold at year-end, what adjustment is required in the consolidated financial statements?

Accepted Answer

Eliminate the unrealized profit from consolidated net income and inventory

Question 18

A Canadian company enters into a forward contract to hedge a foreign currency payable. At year-end, the forward rate is higher than the spot rate. What is the effect on the fair value of the forward contract?

Accepted Answer

The forward contract has a loss

Question 19

Which of the following is NOT a reason for using the equity method to account for an investment in another company?

Accepted Answer

The investor controls the investee

Advanced Financial Accounting Practice Exam – Step-by-Step Study Guidance

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