ACCT 5312 Exam and Answers Practice Questions
with Solutions Newest | Already Graded A+
1. A parent company acquires 80% of a subsidiary's common stock for $800,000 when the
subsidiary's net assets have a book value of $600,000 and fair value of $700,000. The subsidiary
reports net income of $100,000 and pays dividends of $40,000. The parent uses the equity method.
What is the balance in the parent's 'Investment in Subsidiary' account at year-end, assuming no
impairment?
A. $848,000
B. $840,000
C. $832,000
D. $880,000
Answer: A
Rationale: Initial investment $800,000. Parent's share of net income: 80% × $100,000 = $80,000.
Parent's share of dividends: 80% × $40,000 = $32,000. Ending balance = $800,000 + $80,000 -
$32,000 = $848,000. The excess of fair value over book value ($100,000) is not amortized under the
equity method unless it relates to depreciable assets; here no allocation given.
2. A US company sells goods to a UK customer for £100,000 on March 1, when the spot rate is
$1.30/£. Payment is due on June 1. On March 31 (fiscal year-end), the spot rate is $1.25/£. On June
1, the spot rate is $1.28/£. What is the total foreign exchange gain or loss recognized over the entire
transaction?
A. $2,000 gain
B. $2,000 loss
C. $5,000 loss
D. $3,000 gain
Answer: B
Rationale: Initial measurement: £100,000 × $1.30 = $130,000. At year-end, adjust to $125,000 (loss
$5,000). At settlement, $128,000 vs $125,000 = gain $3,000. Net loss = $5,000 - $3,000 = $2,000 loss.
3. A lessee enters into a 5-year lease of equipment with annual lease payments of $50,000 at the
beginning of each year. The lessee's incremental borrowing rate is 6%. The equipment has an
estimated useful life of 6 years and no residual value. Under ASC 842, what is the initial lease
liability? (PV of annuity due factor for 5 years at 6%: 4.4651)
A. $210,605
B. $223,255
C. $250,000
D. $200,000
Page 1
,Answer: B
Rationale: Lease liability = present value of lease payments. Since payments are at beginning of year, use
annuity due factor: $50,000 × 4.4651 = $223,255. The lease term is 5 years, not the useful life, so
classification is not relevant for initial measurement.
4. A company has a defined benefit pension plan with the following data: Projected benefit
obligation (PBO) beginning of year $1,000,000; fair value of plan assets beginning $900,000;
service cost $100,000; interest cost 10%; actual return on plan assets $80,000; employer
contributions $90,000; benefits paid $70,000; actuarial loss on PBO $50,000. What is the funded
status at year-end?
A. $190,000 underfunded
B. $210,000 underfunded
C. $170,000 underfunded
D. $150,000 underfunded
Answer: A
Rationale: Ending PBO = $1,000,000 + $100,000 (service) + $100,000 (interest) + $60,000 (actuarial
loss) - $70,000 (benefits) = $1,190,000. Ending plan assets = $900,000 + $80,000 (return) + $90,000
(contributions) - $70,000 (benefits) = $1,000,000. Funded status = $1,000,000 - $1,190,000 =
-$190,000 (underfunded).
5. A company has a deferred tax liability of $30,000 at the beginning of the year. During the year, it
recognizes $100,000 of warranty expense for financial reporting but only $60,000 for tax purposes.
The tax rate is 25%. What is the year-end deferred tax liability?
A. $40,000
B. $10,000
C. $55,000
D. $25,000
Answer: A
Rationale: The temporary difference increases by $40,000 ($100,000 - $60,000). This creates an
additional deferred tax liability of $40,000 × 25% = $10,000. Total year-end deferred tax liability =
$30,000 + $10,000 = $40,000.
6. A company has net income of $500,000 and 100,000 weighted-average common shares
outstanding. It also has 10,000 options outstanding, each exercisable for one common share at $20.
The average market price during the year is $25. What is diluted earnings per share?
A. $4.55
B. $4.76
C. $5.00
D. $4.35
Answer: A
Rationale: Basic EPS = $500,,000 = $5.00. Options: incremental shares = (20-15)/20 × 20,000
= 5,000. Diluted shares = 105,000. Diluted EPS = $500,,000 = $4.76.
Page 2
,7. A company prepares its statement of cash flows using the indirect method. It reports net income
of $200,000, depreciation expense $30,000, increase in accounts receivable $10,000, decrease in
inventory $5,000, increase in accounts payable $8,000, gain on sale of equipment $12,000. What is
net cash provided by operating activities?
A. $221,000
B. $245,000
C. $215,000
D. $195,000
Answer: A
Rationale: Start with net income $200,000. Add back depreciation $30,000. Subtract gain $12,000.
Adjust for working capital: increase in AR -$10,000, decrease in inventory +$5,000, increase in AP
+$8,000. Total = 200,000 + 30,000 - 12,000 - 10,000 + 5,000 + 8,000 = $221,000.
8. A US company has a subsidiary in a foreign country whose functional currency is the local
currency. The subsidiary's net assets at the beginning of the year are 500,000 LC, and the exchange
rate is $0.50/LC. During the year, the subsidiary has net income of 100,000 LC when the average
rate is $0.55/LC. It pays dividends of 20,000 LC when the rate is $0.60/LC. The year-end rate is
$0.58/LC. What is the cumulative translation adjustment (CTA) for the year?
A. $36,000 positive
B. $24,000 negative
C. $12,000 positive
D. $48,000 negative
Answer: A
Rationale: Beginning net assets: 500,000 LC × $0.50 = $250,000. Net income: 100,000 LC × $0.55 =
$55,000. Dividends: 20,000 LC × $0.60 = $12,000. Ending net assets at ending rate: 580,000 LC ×
$0.58 = $336,400. CTA = $336,400 - ($250,000 + $55,000 - $12,000) = $43,400 positive.
9. A company issues $1,000,000 face value, 5-year bonds on January 1 at a price of $950,000. The
bonds pay 8% interest annually. What is the total bond interest expense recognized over the life of
the bonds?
A. $400,000
B. $450,000
C. $350,000
D. $500,000
Answer: B
Rationale: Total cash interest paid = $1,000,000 × 8% × 5 = $400,000. Discount on bonds = $1,000,000
- $950,000 = $50,000. Total interest expense = cash interest + discount amortization = $400,000 +
$50,000 = $450,000.
Page 3
, 10. A company has 1,000,000 shares of common stock outstanding throughout the year. It also has
100,000 shares of convertible preferred stock, each convertible into 2 shares of common. The
preferred stock pays a dividend of $5 per share. Net income is $2,000,000. No dividends were
declared on preferred stock. What is diluted EPS?
A. $1.67
B. $1.82
C. $1.90
D. $2.00
Answer: A
Rationale: Basic EPS = $2,000,,000,000 = $2.00. If preferred converted, additional shares =
100,000 × 2 = 200,000. No preferred dividend adjustment because no dividends declared. Diluted EPS
= $2,000,000 / (1,000,000 + 200,000) = $1.67.
11. A multinational corporation operates in multiple tax jurisdictions with varying corporate tax
rates. The company's tax director is evaluating a transfer pricing strategy for intellectual property
(IP) licensing between subsidiaries. Which of the following approaches would most likely be
challenged by tax authorities under the arm's length principle, even if it minimizes the global
effective tax rate?
A. Using the comparable uncontrolled price method based on third-party licensing agreements for similar IP.
B. Applying the transactional net margin method (TNMM) with the licensee as the tested party.
C. Allocating all IP income to a subsidiary in a low-tax jurisdiction where the IP was legally registered but no
substantive R&D activities occur.
D. Entering into an advance pricing agreement (APA) with relevant tax authorities to pre-approve the transfer
pricing methodology.
Answer: C
Rationale: Tax authorities scrutinize arrangements where legal ownership does not align with substantive
economic activities (e.g., R&D functions, risk assumption). Option C reflects a 'cash-box' structure that
lacks substance, often leading to reallocation of income under the arm's length principle. Options A, B,
and D are compliant or proactive methods to avoid transfer pricing adjustments.
12. A hedge fund uses a complex derivative strategy involving total return swaps on a basket of
equities. Under the new FASB ASU 2020-06 (codified in ASC 815-10), how should the fund classify
the cash flows from the swap for purposes of the statement of cash flows, assuming the swap is not
accounted for as a hedging instrument?
A. Operating activities because the swap is a derivative used for trading purposes.
B. Investing activities because the swap is a financial instrument held for investment.
C. Financing activities because the swap involves a notional amount that resembles a borrowing.
D. The swap's cash flows should be reported net in a separate category for derivative instruments.
Answer: A
Rationale: Under ASC 230 (Statement of Cash Flows), derivatives not designated as hedging instruments
are generally considered trading activities, and their cash flows are classified as operating. ASU
2020-06 did not change this classification. Option B is incorrect because investing activities typically
involve acquisition/disposal of long-term assets. Option C is incorrect because swaps are not
borrowings. Option D is incorrect because there is no separate category for derivatives.
Page 4
with Solutions Newest | Already Graded A+
1. A parent company acquires 80% of a subsidiary's common stock for $800,000 when the
subsidiary's net assets have a book value of $600,000 and fair value of $700,000. The subsidiary
reports net income of $100,000 and pays dividends of $40,000. The parent uses the equity method.
What is the balance in the parent's 'Investment in Subsidiary' account at year-end, assuming no
impairment?
A. $848,000
B. $840,000
C. $832,000
D. $880,000
Answer: A
Rationale: Initial investment $800,000. Parent's share of net income: 80% × $100,000 = $80,000.
Parent's share of dividends: 80% × $40,000 = $32,000. Ending balance = $800,000 + $80,000 -
$32,000 = $848,000. The excess of fair value over book value ($100,000) is not amortized under the
equity method unless it relates to depreciable assets; here no allocation given.
2. A US company sells goods to a UK customer for £100,000 on March 1, when the spot rate is
$1.30/£. Payment is due on June 1. On March 31 (fiscal year-end), the spot rate is $1.25/£. On June
1, the spot rate is $1.28/£. What is the total foreign exchange gain or loss recognized over the entire
transaction?
A. $2,000 gain
B. $2,000 loss
C. $5,000 loss
D. $3,000 gain
Answer: B
Rationale: Initial measurement: £100,000 × $1.30 = $130,000. At year-end, adjust to $125,000 (loss
$5,000). At settlement, $128,000 vs $125,000 = gain $3,000. Net loss = $5,000 - $3,000 = $2,000 loss.
3. A lessee enters into a 5-year lease of equipment with annual lease payments of $50,000 at the
beginning of each year. The lessee's incremental borrowing rate is 6%. The equipment has an
estimated useful life of 6 years and no residual value. Under ASC 842, what is the initial lease
liability? (PV of annuity due factor for 5 years at 6%: 4.4651)
A. $210,605
B. $223,255
C. $250,000
D. $200,000
Page 1
,Answer: B
Rationale: Lease liability = present value of lease payments. Since payments are at beginning of year, use
annuity due factor: $50,000 × 4.4651 = $223,255. The lease term is 5 years, not the useful life, so
classification is not relevant for initial measurement.
4. A company has a defined benefit pension plan with the following data: Projected benefit
obligation (PBO) beginning of year $1,000,000; fair value of plan assets beginning $900,000;
service cost $100,000; interest cost 10%; actual return on plan assets $80,000; employer
contributions $90,000; benefits paid $70,000; actuarial loss on PBO $50,000. What is the funded
status at year-end?
A. $190,000 underfunded
B. $210,000 underfunded
C. $170,000 underfunded
D. $150,000 underfunded
Answer: A
Rationale: Ending PBO = $1,000,000 + $100,000 (service) + $100,000 (interest) + $60,000 (actuarial
loss) - $70,000 (benefits) = $1,190,000. Ending plan assets = $900,000 + $80,000 (return) + $90,000
(contributions) - $70,000 (benefits) = $1,000,000. Funded status = $1,000,000 - $1,190,000 =
-$190,000 (underfunded).
5. A company has a deferred tax liability of $30,000 at the beginning of the year. During the year, it
recognizes $100,000 of warranty expense for financial reporting but only $60,000 for tax purposes.
The tax rate is 25%. What is the year-end deferred tax liability?
A. $40,000
B. $10,000
C. $55,000
D. $25,000
Answer: A
Rationale: The temporary difference increases by $40,000 ($100,000 - $60,000). This creates an
additional deferred tax liability of $40,000 × 25% = $10,000. Total year-end deferred tax liability =
$30,000 + $10,000 = $40,000.
6. A company has net income of $500,000 and 100,000 weighted-average common shares
outstanding. It also has 10,000 options outstanding, each exercisable for one common share at $20.
The average market price during the year is $25. What is diluted earnings per share?
A. $4.55
B. $4.76
C. $5.00
D. $4.35
Answer: A
Rationale: Basic EPS = $500,,000 = $5.00. Options: incremental shares = (20-15)/20 × 20,000
= 5,000. Diluted shares = 105,000. Diluted EPS = $500,,000 = $4.76.
Page 2
,7. A company prepares its statement of cash flows using the indirect method. It reports net income
of $200,000, depreciation expense $30,000, increase in accounts receivable $10,000, decrease in
inventory $5,000, increase in accounts payable $8,000, gain on sale of equipment $12,000. What is
net cash provided by operating activities?
A. $221,000
B. $245,000
C. $215,000
D. $195,000
Answer: A
Rationale: Start with net income $200,000. Add back depreciation $30,000. Subtract gain $12,000.
Adjust for working capital: increase in AR -$10,000, decrease in inventory +$5,000, increase in AP
+$8,000. Total = 200,000 + 30,000 - 12,000 - 10,000 + 5,000 + 8,000 = $221,000.
8. A US company has a subsidiary in a foreign country whose functional currency is the local
currency. The subsidiary's net assets at the beginning of the year are 500,000 LC, and the exchange
rate is $0.50/LC. During the year, the subsidiary has net income of 100,000 LC when the average
rate is $0.55/LC. It pays dividends of 20,000 LC when the rate is $0.60/LC. The year-end rate is
$0.58/LC. What is the cumulative translation adjustment (CTA) for the year?
A. $36,000 positive
B. $24,000 negative
C. $12,000 positive
D. $48,000 negative
Answer: A
Rationale: Beginning net assets: 500,000 LC × $0.50 = $250,000. Net income: 100,000 LC × $0.55 =
$55,000. Dividends: 20,000 LC × $0.60 = $12,000. Ending net assets at ending rate: 580,000 LC ×
$0.58 = $336,400. CTA = $336,400 - ($250,000 + $55,000 - $12,000) = $43,400 positive.
9. A company issues $1,000,000 face value, 5-year bonds on January 1 at a price of $950,000. The
bonds pay 8% interest annually. What is the total bond interest expense recognized over the life of
the bonds?
A. $400,000
B. $450,000
C. $350,000
D. $500,000
Answer: B
Rationale: Total cash interest paid = $1,000,000 × 8% × 5 = $400,000. Discount on bonds = $1,000,000
- $950,000 = $50,000. Total interest expense = cash interest + discount amortization = $400,000 +
$50,000 = $450,000.
Page 3
, 10. A company has 1,000,000 shares of common stock outstanding throughout the year. It also has
100,000 shares of convertible preferred stock, each convertible into 2 shares of common. The
preferred stock pays a dividend of $5 per share. Net income is $2,000,000. No dividends were
declared on preferred stock. What is diluted EPS?
A. $1.67
B. $1.82
C. $1.90
D. $2.00
Answer: A
Rationale: Basic EPS = $2,000,,000,000 = $2.00. If preferred converted, additional shares =
100,000 × 2 = 200,000. No preferred dividend adjustment because no dividends declared. Diluted EPS
= $2,000,000 / (1,000,000 + 200,000) = $1.67.
11. A multinational corporation operates in multiple tax jurisdictions with varying corporate tax
rates. The company's tax director is evaluating a transfer pricing strategy for intellectual property
(IP) licensing between subsidiaries. Which of the following approaches would most likely be
challenged by tax authorities under the arm's length principle, even if it minimizes the global
effective tax rate?
A. Using the comparable uncontrolled price method based on third-party licensing agreements for similar IP.
B. Applying the transactional net margin method (TNMM) with the licensee as the tested party.
C. Allocating all IP income to a subsidiary in a low-tax jurisdiction where the IP was legally registered but no
substantive R&D activities occur.
D. Entering into an advance pricing agreement (APA) with relevant tax authorities to pre-approve the transfer
pricing methodology.
Answer: C
Rationale: Tax authorities scrutinize arrangements where legal ownership does not align with substantive
economic activities (e.g., R&D functions, risk assumption). Option C reflects a 'cash-box' structure that
lacks substance, often leading to reallocation of income under the arm's length principle. Options A, B,
and D are compliant or proactive methods to avoid transfer pricing adjustments.
12. A hedge fund uses a complex derivative strategy involving total return swaps on a basket of
equities. Under the new FASB ASU 2020-06 (codified in ASC 815-10), how should the fund classify
the cash flows from the swap for purposes of the statement of cash flows, assuming the swap is not
accounted for as a hedging instrument?
A. Operating activities because the swap is a derivative used for trading purposes.
B. Investing activities because the swap is a financial instrument held for investment.
C. Financing activities because the swap involves a notional amount that resembles a borrowing.
D. The swap's cash flows should be reported net in a separate category for derivative instruments.
Answer: A
Rationale: Under ASC 230 (Statement of Cash Flows), derivatives not designated as hedging instruments
are generally considered trading activities, and their cash flows are classified as operating. ASU
2020-06 did not change this classification. Option B is incorrect because investing activities typically
involve acquisition/disposal of long-term assets. Option C is incorrect because swaps are not
borrowings. Option D is incorrect because there is no separate category for derivatives.
Page 4
