FAR Practice Questions

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Selected financial information for Kristina Company for the year just ended is shown below. Net income $2,000,000 Increase in net accounts receivable 300,000 Decrease in inventory 100,000 Increase in accounts payable 200,000 Depreciation expense 400,000 Gain on the sale of available-for-sale securities 700,000 Cash receivable from the issue of common stock 800,000 Cash paid for dividends 80,000 Cash paid for the acquisition of land 1,500,000 Cash received from the sale of available-for-sale securities 2,800,000 Kristina's cash flow from financing activities for the year is $(80,000) $720,000 $3,520,000 $800,000

$(80,000) This answer is correct.Cash flows from financing activities for the year consist of the $80,000 outflow for dividends paid. The issue of common stock is a financing activity, but the $800,000 of proceeds have not yet been received.

Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available: Mortgage repayment: $20,000 Available-for-sale securities purchased: 10,000 increase Bonds payable-issued: 50,000 increase Inventory: 40,000 increase Accounts payable: 30,000 decrease What amount should Paper report as net cash provided by operating activities in its statement of cash flows for the year? $20,000 $30,000 $10,000 $0

$0 This answer is correct.The payment of dividends, the repayment of debt (the mortgage), and the issuance of debt (the bonds) are financing activities. The purchase of debt or equity instruments the (available-for-sale securities) is an investing activity. Operating cash flows exclude these financing and investing cash flows. Moreover, these items do not affect net income. Consequently, net cash provided by operating activities can be determined by adjusting net income for the changes in inventory and accounts payable. To account for the difference between cost of goods sold (a deduction from income) and cash paid to suppliers, a two-step adjustment is necessary. The difference between cost of goods sold and purchases is the change in inventory. The difference between purchases and the amount paid to suppliers is the change in accounts payable. Accordingly, the conversion of cost of goods sold to cash paid to suppliers requires subtracting the inventory increase and the accounts payable decrease. The net cash provided by operating activities is therefore $0 ($70,000 net income - $40,000 inventory increase - $30,000 accounts payable decrease).

Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following information is available: Mortgage repayment $20,000 Available-for-sale securities purchased 10,000 increase Bonds payable-issued 50,000 increase Inventory 40,000 increase Accounts payable 30,000 decrease What amount should Paper report as net cash provided by operating activities in its statement of cash flows for the year? $30,000 $0 $10,000 $20,000

On October 1 of the current year, a U.S. company sold merchandise on account to a British company for 2,000 pounds (exchange rate, 1 pound = $1.43). At the company's December 31 fiscal year end, the exchange rate was 1 pound = $1.45. The exchange rate was 1 pound = $1.50 on collection in January of the subsequent year. What amount would the company recognize as a gain (loss) from the foreign currency transaction when the receivable is collected? $(140) $0 $100 $140

$100 This answer is correct.Gains and losses from foreign currency transactions are recognized in current earnings. Because the exchange rate (dollars per pound) increased, the U.S. entity's receivable, which is denominated in pounds, increased in value. Thus, the result is a gain. At the time of collection in January, the gain is $100 [($1.50 - $1.45) × 2,000 pounds]. At December 31, the gain was $40 [($1.45 - $1.43) × 2,000 pounds].

Larry Mitchell, Bailey Company's controller, is gathering data for the statement of cash flows for the most recent year end. Mitchell is planning to use the direct method to prepare this statement and has made the following list of cash inflows for the period: Collections of $100,000 for goods sold to customers Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000 Proceeds from the issuance of additional company stock totaling $10,000 The correct amount to be shown as cash inflows from operating activities is $225,000 $100,000 $235,000 $135,000

$100,000 This answer is correct.Cash flows from operating activities are those generated by the firm's major and ongoing activities. They include cash flows from all activities not classified as investing or financing. Only the $100,000 of collections on sales to customers qualifies.

Inge Co. determined that the net value of its accounts receivable at December 31, based on an aging of the receivables, was $325,000. Additional information is as follows: Allowance for credit losses at 1/1 $ 30,000 Uncollectible accounts written off during the year 18,000 Collection of accounts previously written off that were not expected to be recovered 2,000 Gross amount of accounts receivable at 12/31: 350,000 For the year, what would be Inge's credit loss expense? $21,000 $15,000 $11,000 $5,000

$11,000 This answer is correct.The allowance for credit losses before year-end adjustment is $14,000 ($30,000 beginning balance - $18,000 write-offs + $2,000 collection of written off accounts). The balance should be $25,000 ($350,000 year-end gross A/R - $325,000 net value based on aging). Thus, the allowance account should be credited and credit loss expense debited for $11,000 ($25,000 desired balance - $14,000).

Three years ago, Jameson Company purchased stock in Zebra, Inc., at a cost of $100,000. This stock was sold for $150,000 during the current fiscal year. The result of this transaction should be shown in the investing activities section of Jameson's statement of cash flows as $150,000 Zero. $50,000 $100,000

$150,000 This answer is correct.The statement of cash flows reports the cash effects of transactions. The accrual-basis gain on the stock is not relevant.

Bard Co. owned several subsidiaries at December 31. The following table shows each subsidiary's total liabilities, excluding intercompany transactions, and percentage of stock owned by Bard: Brock: $4,000,000, 70% Harison: $2,000,000, 48% Porter: $7,000,000, 80% Nortin: $5,000,000, 100% What amount should Bard include as liabilities in its consolidated balance sheet at December 31? $12,000,000 $16,000,000 $5,000,000 $18,000,000

$16,000,000 This answer is correct.When one entity controls another, consolidated financial statements must be issued. Control of an entity is defined as the direct or indirect ability to determine the direction of management and policies of the investee. This usually means one entity's direct or indirect ownership of more than 50% of the outstanding voting interest of another entity. As Bard owns more than 50% of Brock, Porter, and Nortin, it must consolidate their respective liabilities in its consolidated balance sheet. This results in a total liabilities balance of $16,000,000 ($4,000,000 + $7,000,000 + $5,000,000).

King Corp. owns 80% of Lee Corp.'s common stock. During October, Lee sold merchandise to King for $100,000. At December 31, one-half of the merchandise remained in King's inventory. For the year, gross profit percentages were 30% for King and 40% for Lee. The amount of unrealized intraentity profit in ending inventory at December 31 that should be eliminated in consolidation is $16,000 $20,000 $15,000 $40,000

$20,000 This answer is correct.Profit from the sale of inventory between consolidating entities is included in the net income of the entity that sold the inventory. However, the consolidated entity can only recognize profit on this exchange proportional to the inventory that is sold to outside parties. Thus, the gross profit embedded in the inventory remaining on the purchasing entity's books must be eliminated from consolidated net income. The amount of intraentity gross profit eliminated during the consolidation of King and Lee is calculated as follows:Unsold inventory on purchaser's books ($100,000 × 1/2)$50,000Seller's gross profit percentage× 40%Unrealized intraentity gross profit$20,000

Birk Co. purchased 30% of Sled Co.'s outstanding common stock on December 31 for $200,000. On that date, Sled's equity was $500,000, and the fair value of its net assets was $600,000. On December 31, what amount of equity method goodwill results from this acquisition? $50,000 $0 $20,000 $30,000

$20,000 This answer is correct.The equity method of accounting is used when the investor has significant influence over the investee (investment is at least 20% but not more than 50% of the voting interests) and the FVO was not elected. Equity method goodwill is the difference between the cost of the $200,000 investment and the investor's equity in the fair value of the investee's net assets of $180,000 (30% × $600,000). Accordingly, equity method goodwill equals $20,000 ($200,000 - $180,000).

During the year, Verity Co. purchased $200,000 of Otra Co. bonds at par and $50,000 of U.S. Treasury bills. Verity classified the Otra bonds as available-for-sale securities and the Treasury bills as cash equivalents. In Verity's statement of cash flows, what amount should it report as net cash used in investing activities? $0 $200,000 $150,000 $250,000

$200,000 This answer is correct.Cash flows from purchases, sales, and maturities of available-for-sale debt securities and held-to-maturity debt securities are from investing activities. No specific classification is necessary for cash and cash equivalents in the statement of cash flows. Thus, only the $200,000 relating to the available-for-sale securities is reported as net cash used in investing activities.

At December 31, Grey, Inc., owned 90% of Winn Corp., a consolidated subsidiary, and 20% of Carr Corp., an investee over which Grey cannot exercise significant influence. On the same date, Grey had receivables of $300,000 from Winn and $200,000 from Carr. In its December 31 consolidated balance sheet, Grey should report accounts receivable from affiliates of $500,000 $200,000 $340,000 $230,000

$200,000 This answer is correct.In a consolidated balance sheet, reciprocal balances, such as receivables and payables, between a parent and a consolidated subsidiary are eliminated in their entirety, regardless of the portion of the subsidiary's stock held by the parent. Accordingly, the $300,000 receivable from Winn is eliminated. Because Grey cannot exercise significant influence over Carr, this investment should be accounted for on the fair-value basis. Receivables from an investee over which significant influence cannot be exercised are reported on the consolidated balance sheet. Grey should therefore report $200,000 in accounts receivable from affiliates.

Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years and has the ability to exercise significant influence over Devon. The following information relates to Larkin's investment in Devon during the most recent year: Carrying amount of Larkin's investment in Devon at the beginning of the year $200,000 Net income of Devon for the year 600,000 Total dividends paid to Devon's stockholders during the year 400,000 What is the carrying amount of Larkin's investment in Devon at year end? $350,000 $200,000 $100,000 $250,000

$250,000 This answer is correct.If an investor with significant influence over an investee has not elected to account for the investment using the fair value option, it must apply the equity method. Thus, the carrying amount of the investment is increased (decreased) by the investor's share of the investee's net income (dividends paid). The year-end carrying amount is $250,000 [$200,000 + ($600,000 × 25%) - ($400,000 × 25%)].

On January 2, Year 1, Kean Co. purchased a 30% interest in Pod Co. for $250,000. On this date, Pod's equity was $500,000. The carrying amounts of Pod's identifiable net assets approximated their fair values, except for land whose fair value exceeded its carrying amount by $200,000. Pod reported net income of $100,000 for Year 1, and paid no dividends. Kean accounts for this investment using the equity method. In its December 31, Year 1, balance sheet, what amount should Kean report as investment in Pod Co.? $276,000 $280,000 $210,000 $220,000

$280,000 This answer is correct.The purchase price is allocated to the fair value of the net assets acquired, with the remainder allocated to goodwill. The fair value of Kean's 30% interest in Pod's net assets is $210,000 [($500,000 + $200,000) × 30%]. Goodwill is $40,000 ($250,000 - $210,000). The equity method requires the investor's share of subsequent net income reported by the investee to be adjusted for the difference at acquisition between the fair value and the carrying amount of the investee's net assets when the net assets are sold or consumed in operations. The land is assumed not to be sold, and the equity method goodwill is not amortized or separately reviewed for impairment. Thus, Kean's share of Pod's net income is $30,000 ($100,000 declared income × 30%), and the investment account at year-end is $280,000 ($250,000 acquisition balance + $30,000 investment income).

On August 31 of the current year, Pine Corp. issued 100,000 shares of its $20 par value common stock for all of the net assets of Sap, Inc., in a business combination. The fair value of Pine's common stock on the acquisition date was $36 per share. Pine paid a fee of $160,000 to the consultant who arranged this acquisition. Costs of registering and issuing the equity securities amounted to $80,000. No goodwill or gain on a bargain purchase was involved. What amount should Pine record for the net assets acquired? $3,680,000 $3,840,000 $3,760,000 $3,600,000

$3,600,000 This answer is correct.Acquisition-related costs ($160,000) are normally expensed as incurred. But costs of registering and issuing equity securities ($80,000) are a charge to additional paid-in capital. The fair value of the consideration transferred in this 100% acquisition equals the fair value of the net assets acquired, given no goodwill or bargain purchase. This amount (a net debit) is $3,600,000 (100,000 shares × $36).

The following accounts were abstracted from Roxy Co.'s unadjusted trial balance at December 31: Accounts receivable $1,000,000 Allowance for credit losses 8,000 Net credit sales ($3,000,000) Roxy estimates that 3% of the gross accounts receivable will become uncollectible. After adjustment at December 31, the allowance for credit losses should have a credit balance of $82,000 $90,000 $38,000 $30,000

$30,000 This answer is correct.The allowance for credit losses at year end should have a credit balance of $30,000. This amount is equal to the $1 million of accounts receivable multiplied by the 3% that are estimated to become uncollectible.

The following information pertains to Ash Co., which prepares its statement of cash flows using the indirect method: Interest payable at beginning of year $15,000 Interest expense during the year 20,000 Interest payable at end of year 5,000 What amount of interest should Ash report as a supplemental disclosure of cash flow information? $20,000 $10,000 $30,000 $35,000

$30,000 This answer is correct.Under the indirect method, an entity must provide a supplemental disclosure of the amount of interest paid during the period. The amount of interest paid during the period can be calculated from the following equation that reconciles the beginning and ending balance of interest payable:Beginning interest payable$15,000Interest expense recognized during the period20,000Interest paid during the period(30,000)Ending interest payable$ 5,000

Atwater Company has recorded the following payments for the current period: Purchase Trillium stock $300,000 Dividends paid to Atwater shareholders 200,000 Repurchase of Atwater Company stock 400,000 The amount to be shown in the investing activities section of Atwater's statement of cash flows should be $500,000 $900,000 $700,000 $300,000

$300,000 This answer is correct.Financing activities include paying dividends and treasury stock transactions. Investing activities include acquiring and disposing of debt and equity instruments. Thus, the amount to be shown in the investing activities section of Atwater's statement of cash flows is $300,000.

Abbott Co. is preparing its statement of cash flows for the year. Abbott's cash disbursements during the year included the following: Payment of interest on bonds payable $500,000 Payment of dividends to stockholders 300,000 Payment to acquire 1,000 shares of Marks Co. common stock 100,000 What should Abbott report as total cash outflows for financing activities in its statement of cash flows under U.S. GAAP? $900,000 $300,000 $0 $800,000

$300,000 This answer is correct.The $300,000 dividend should be classified as a financing cash outflow. The payment of interest is an operating cash outflow, and the payment to acquire the common stock of Marks is an investing cash outflow.

At the end of Year 1, Boller Co. had an ending balance in allowance for credit losses of $30,000. During Year 2, Boller wrote off $40,000 of accounts receivable. At the end of Year 2, Boller had $300,000 in accounts receivable and determined that 8% of these would be uncollectible. What amount should be reported as credit loss expense on Boller's Year 2 income statement? $34,000 $24,000 $14,000 $64,000

$34,000 This answer is correct.The Year 2 ending balance for allowance for credit losses is $24,000 ($300,000 × 8%). The write-off of a particular bad debt has no effect on credit loss expense. It is recognized as a decrease in the balance of allowance for credit losses. Therefore, the credit loss expense in Year 2 of $34,000 can be calculated as follows:1/1/Year 2 allowance for credit losses$30,000Accounts written off(40,000)Credit loss expense34,00012/31/Year 2 allowance for credit losses$24,000

Dannon Co. mistakenly reported its expenses of $35,200 on the cash basis. Corporate records revealed the following information: Beginning prepaid expense $1,300 Beginning accrued expense $1,650 Ending prepaid expense $1,800 Ending accrued expense $1,200 What amount of expense should the Dannon report on its books under the accrual basis? $34,250 $35,150 $36,150 $35,300

$34,250 This answer is correct.The beginning balance of net expense payable is $350 ($1,650 accrued expense - $1,300 prepaid expense). The ending balance of net expense payable is -$600 ($1,200 accrued expense - $1,800 prepaid expense). The $35,200 cash expense paid during the period decreases the expense payable account. The expense recognized under the accrual method increases the expense payable account. Thus, the expense that should be reported by Dannon in its books under the accrual method can be derived from the following equation:Beginning expense payable$ 350(Expense paid during the period)(35,200)Expense recognized under accrual method 34,250Ending expense payable$ (600)

Green Co. had the following transactions at December 31: Cash proceeds from sale of investment in bonds of Blue Co. classified as available-for-sale (carrying amount = $60,000): $75,000 Dividends received on Grey Co. stock: 10,500 Common stock purchased from Brown Co.: 38,000 What amount should Green recognize as net cash from investing activities in its statement of cash flows at December 31? $37,000 $85,500 $75,000 $47,500

$37,000 This answer is correct.The sale proceeds of available-for-sale debt securities ($75,000) are a cash inflow from an investing activity. Cash outflows from acquiring equity instruments ($38,000) also are from an investing activity. But cash inflows from operating activities include cash receipts in the form of dividends ($10,500). Thus, the net cash flow from investing activities is $37,000 ($75,000 - $38,000).

On March 31, Vale Co. had an unadjusted credit balance of $1,000 in its allowance for credit losses. An analysis of Vale's trade accounts receivable at that date revealed the following: 0-30 Days: $60,000, ~5% uncollectible 31-60 Days: $4,000, ~10% uncollectible Over 60 Days: $2,000, ~70% uncollectible What amount should Vale report as allowance for credit losses in its March 31 balance sheet? $3,000 $4,800 $3,800 $4,000

$4,800 This answer is correct.The aging schedule determines the balance in the allowance for credit losses. Of the accounts that are no more than 30 days old, the amount uncollectible is $3,000 ($60,000 × 5%). Accounts that are 31-60 days old and over 60 days old have estimated uncollectible balances of $400 ($4,000 × 10%) and $1,400 ($2,000 × 70%), respectively. Hence, the amount recorded in the allowance for credit losses is $4,800 ($3,000 + $400 + $1,400). The $1,000 balance already in the account is disregarded because the aging schedule determines the balance that should be in the account.

Marr Co. had the following sales and accounts receivable balances, prior to any adjustments at year end: Credit sales $10,000,000 Accounts receivable 3,000,000 Allowance for credit losses 50,000 Marr uses 3% of accounts receivable to determine its allowance for credit losses at year end. By what amount should Marr adjust its allowance for credit losses at year end? $140,000 $0 $90,000 $40,000

$40,000 This answer is correct.The entity uses the percentage of accounts receivable method to estimate the allowance. The year-end balance should be $90,000 ($3,000,000 A/R × 3%). Hence, the year-end adjustment is $40,000 ($90,000 - $50,000) unadjusted balance.

Martin Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available: Accounts receivable increase $20,000 Equipment gain on sale increase 10,000 Nontrade notes payable increase 50,000 Prepaid insurance increase 40,000 Accounts payable increase 30,000 What amount should Martin report as net cash provided by operating activities in its statement of cash flows for the year? $40,000 $50,000 $100,000 $0

$40,000 This answer is correct.Under the indirect method, the net cash flow from operating activities is determined by adjusting the net income for the effect of (1) noncash revenue and expenses that were included in net income, (2) items included in net income whose cash effects relate to investing or financing cash flows, (3) all deferrals of past operating cash flows, and (4) all accruals of expected future operating cash flows. Accordingly, the net cash flows provided by operating activities can be calculated as follows:Net income for the period$70,000Add noncash losses and expenses included in net income (add depreciation expense)10,000Subtract gains and revenues whose cash effects are related to investing or financing cash flows (subtract gain on sale of equipment)(10,000)Add increase in current operating liabilities (add increase in accounts payable)30,000Subtract increase in current operating assets (subtract increase in accounts receivable of $20,000 and increase in prepaid insurance of $40,000)(60,000)Net cash provided by operating activities$40,000Nontrade notes payable is not an operating item. Thus, the increase in nontrade notes payable has no effect on operating cash flows.

Park, Inc., acquired 100% of Gravel Co.'s net assets. On the acquisition date, Gravel's accounting records reflected $50,000 of costs associated with in-process research and development activities. The fair value of the in-process research and development activities was $400,000. Park's consolidated intangible assets will increase by what amount, if any, as a result of the acquisition of the in-process research and development activities? $0 $50,000 $350,000 $400,000

$400,000 This answer is correct.On the business combination date, identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree must be measured at acquisition-date fair value. Even though Gravel Co. expensed the R&D costs in its separate financial statements, on the business combination date, the in-process R&D is an identifiable asset. Thus, it must be measured and reported in the consolidated financial statements at its acquisition-date fair value.

Alp, Inc., had the following activities during the current year: Acquired 2,000 shares of stock in Maybel, Inc., for $26,000 Sold an investment in bonds classified as available for sale for $35,000 when the carrying amount was $33,000 Acquired a $50,000, 4-year certificate of deposit from a bank that was classified as held to maturity. (During the year, interest of $3,750 was paid to Alp.) Collected dividends of $1,200 on stock investments In Alp's current-year statement of cash flows, net cash used in investing activities should be $39,800 $38,050 $41,000 $37,250

$41,000 This answer is correct.Investing activities include the lending of money; the collection of those loans; and the acquisition, sale, or other disposal of (1) loans and other securities that are not cash equivalents and that have not been acquired specifically for resale and (2) property, plant, equipment, and other productive assets. Thus, the purchase of debt and equity securities, sale of debt and equity securities, and acquisition of a long-term certificate of deposit (not a cash equivalent) are investing activities assuming the debt securities are not trading securities. The receipts of interest and dividends are cash flows from operating activities. The net cash used in investing activities therefore equals $41,000 ($26,000 - $35,000 + $50,000).

Sage, Inc., bought 40% of Adams Corp.'s outstanding voting common stock on January 2 for $400,000, which equaled a proportionate share of the fair value of the net assets. The carrying amount of the net assets at the purchase date was $900,000. Fair values and carrying amounts were the same for all items except for plant and inventory, for which fair values exceeded their carrying amounts by $90,000 and $10,000, respectively. The plant has an 18-year life. All inventory was sold during the year. During the year, Adams reported net income of $120,000 and paid a $20,000 cash dividend. What amount should Sage report in its income statement from its investment in Adams for the year ended December 31? $36,000 $48,000 $42,000 $34,000

$42,000 This answer is correct.Sage holds 40% of the investee's voting common stock and is assumed to exercise significant influence. It should therefore account for the investment on the equity basis by recognizing its proportionate share of the investee's net income. For this purpose, the investee's net income of $120,000 should be adjusted for the $10,000 excess of fair value over the carrying amount of the inventory sold and for the portion of the difference between the fair value and carrying amount of the plant that has been consumed (depreciated). This adjustment equals $5,000 ($90,000 difference ÷ 18 years). Thus, Sage should report investment income of $42,000 [($120,000 - $10,000 - $5,000) × 40%].

Parker Corp. owns 80% of Smith, Inc.'s common stock. During the year, Parker sold Smith $250,000 of inventory on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker during the year. The following information pertains to Smith's and Parker's sales for the year: Parker: Sales (1,000,000), COGS (400,000), Gross Profit (600,000) Smith: Sales (700,000), COGS (350,000), Gross Profit (350,000) What amount should Parker report as cost of sales in its consolidated income statement? $500,000 $680,000 $750,000 $430,000

$500,000 This answer is correct.In the consolidated income statement, the cost of sales must be reported at the amount as if the intraentity transaction had never occurred. Given that Smith purchased inventory from Parker for $250,000 and sold all of it during the year, $250,000 must be eliminated from consolidated cost of goods sold. Hence, the cost of sales in the consolidated income statement can be calculated as follows:Cost of sales of Parker$400,000Cost of sales of Smith350,000Cost of sales on intraentity sales(250,000)Consolidated cost of sales$500,000

Scroll, Inc., a wholly owned subsidiary of Pirn, Inc., began operations on January 1, Year 4. The following information is from the condensed Year 4 income statements: Sales to Scroll $100,000 (P) $ --m (S) Sales to others 400,000(P) 300,000 (S) Total Sales $500,000(P) $300,000 (S) Cost of goods sold: Acquired from Pirn --(P) 80,000 (S) Acquired from others 350,000(P) 190,000 (S) Gross profit $150,000(P) $ 30,000 (S) Depreciation 40,000(P) 10,000 (S) Other expenses 60,000(P) 15,000 (S) Income from operations $ 50,000(P) $ 5,000 (S) Gain on sale of equipment to Scroll 12,000(P) -- (S) Income before income taxes $ 62,000(P) $ 5,000 (S) Additional Information Sales by Pirn to Scroll are made on the same terms as those made to third parties. Equipment purchased by Scroll from Pirn for $36,000 on January 1, Year 4, is depreciated using the straight-line method over 4 years. In Pirn's December 31, Year 4, consolidating worksheet, how much intraentity profit should be eliminated from Scroll's inventory? $30,000 $20,000 $6,000 $10,000

$6,000 This answer is correct.Intraentity profit to be eliminated can be calculated as follows:Sales by Pirn to Scroll$100,000Related cost of goods sold (80,000)Inventory remaining $ 20,000Pirn's gross profit rate ($150,000 ÷ $500,000)× 30%Intraentity gross profit eliminated$ 6,000

Mill Co.'s allowance for credit losses was $100,000 at the end of Year 2 and $90,000 at the end of Year 1. For the year ended December 31, Year 2, Mill reported credit loss expense of $16,000 in its income statement. What amount did Mill debit to the appropriate account in Year 2 to write off actual bad debts? $6,000 $16,000 $10,000 $26,000

$6,000 This answer is correct.When uncollectible accounts are written off, a debit is made to the allowance and a credit to accounts receivable. The beginning balance in the allowance account is $90,000, the ending balance is $100,000, and the credit loss expense is $16,000. Because write-offs equal the beginning balance, plus the credit loss expense, minus the ending balance, $6,000 of accounts must have been written off.AllowanceWrite-offs$6,000$ 90,00012/31/Yr 1 16,000Credit loss expense$100,00012/31/Yr 2

Selected information from the separate and consolidated balance sheets and income statements of Pard, Inc., and its subsidiary, Spin Co., as of December 31, Year 4, and for the year then ended is as follows: Pard (P) Spin (S) Consolidated (C) Balance Sheet Accounts Accounts receivable $ 26,000 (P) $ 19,000 (S) $ 39,000 (C) Inventory 30,000 (P) 25,000 (S) 52,000 (C) Investment in Spin 67,000 (P) -- (S) -- (C) Goodwill -- (P) -- (S) 30,000 (C) Noncontrolling interest -- (P) -- (S) 10,000 (C) Equity accounts 154,000 (P) 50,000 (S) 154,000 (C) Income Statement Accounts Revenues $200,000 (P) $140,000 (S) $308,000 (C) Cost of goods sold 150,000 (P) 110,000 (S) 231,000 (C) Gross profit $ 50,000 (P) $ 30,000 (S) $ 77,000 (C) Equity in earnings of Spin 11,000 (P) -- (S) -- (C) Net income 36,000 (P) 20,000 (S) 40,000 (C) Additional Information During Year 4, Pard sold goods to Spin at the same markup on cost that Pard uses for all sales. At December 31, Year 4, Spin had not paid for all of these goods and still held 37.5% of them in inventory. Pard acquired its interest in Spin on January 2, Year 1. Pard's policy is to amortize intangible assets by the straight-line method. At December 31, Year 4, what was the amount of Spin's payable to Pard for intraentity sales? $6,000 $32,000 $3,000 $29,000

$6,000 This answer is correct.In a consolidated balance sheet, reciprocal balances, such as receivables and payables, between a parent and a consolidated subsidiary are eliminated in their entirety. Given that $6,000 [($26,000 Pard A/R + $19,000 Spin A/R) - $39,000 consolidated A/R] of accounts receivable was eliminated, $6,000 of accounts payable on Spin's books must also have been eliminated.

Glass Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available: Accounts receivable increase $20,000 Equipment gain on sale (sale price $100,000) 10,000 increase Nontrade notes payable increase 50,000 Equipment purchases 40,000 increase Accounts payable increase30,000 What amount should Glass report as net cash provided by investing activities in its statement of cash flows for the year? $(40,000) $50,000 $60,000 $10,000

$60,000 This answer is correct.Cash flows from investing activities represent the extent to which expenditures have been made for resources intended to generate future income and cash flows. They include (1) cash payments to acquire (cash receipts from sale of) long-lived assets, (2) cash payments to acquire (cash receipts from sale and maturity of) equity and debt instruments of other entities for investing purposes, and (3) cash advances and loans made to other parties (cash receipts from repayment of advances and loans made to other parties). Glass's investing activities cash flows include the proceeds from selling the equipment for $100,000 and the payment to purchase the equipment for $40,000. Thus, net cash provided by investing activities is $60,000 ($100,000 - $40,000).

Glass Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following information is available: Accounts receivable increase $20,000 Equipment gain on sale (sale price $100,000) 10,000 increase Nontrade notes payable increase 50,000 Equipment purchases 40,000 increase Accounts payable increase 30,000 What amount should Glass report as net cash provided by investing activities in its statement of cash flows for the year? $50,000 $60,000 $10,000 $(40,000)

Rolan Corporation issued 10,000 shares of common stock in exchange for all of Sandin Corporation's outstanding stock on September 1. Rolan's common stock had a market price of $60 per share on September 1. The market price of Sandin's stock was not readily ascertainable. Condensed balance sheets of Rolan and Sandin immediately prior to the combination are indicated below. Rolan (R) Sandin (S) Total assets $1,000,000 (R) $500,000 (S) Liabilities $ 300,000 (R) $150,000 (S) Common stock ($10 par) 200,000 (R) 100,000 (S) Retained earnings 500,000 (R) 250,000 (S) Total liabilities and shareholders' equities $1,000,000 (R) $500,000 (S) Rolan's investment in Sandin's stock will be stated in Rolan's parent-only balance sheet immediately after the combination in the amount of $100,000 $500,000 $600,000 $350,000

$600,000 This answer is correct.In a parent-only balance sheet, the acquirer recognizes only an investment in subsidiary and the issuance of equity. The fair value of the consideration transferred (10,000 shares × $60 = $600,000) is the measure of the investment immediately after the combination. (In a consolidated balance sheet, no investment in the subsidiary would be recognized.)

An internal auditor is deriving cash flow data based on an incomplete set of facts. Credit loss expense was $2,000. Additional data for this period follows: Credit sales $100,000 Gross accounts receivable -- beginning balance 5,000 Allowance for credit losses -- beginning balance (500) Accounts receivable written off 1,000 Increase in net accounts receivable (after subtraction of allowance for credit losses) 30,000 How much cash was collected this period on credit sales? $68,000 $70,000 $68,500 $64,000

$68,000 This answer is correct.The beginning balance of gross accounts receivable (A/R) was $5,000 (debit). Thus, net beginning A/R was $4,500 ($5,000 - $500 credit in the allowance for credit losses). The allowance was credited for the $2,000 credit loss expense. Accordingly, the ending allowance (credit) was $1,500 ($500 - $1,000 write-off + $2,000). Given a $30,000 increase in net A/R, ending net A/R must have been $34,500 ($4,500 beginning net A/R + $30,000), with ending gross A/R of $36,000 ($34,500 + $1,500). Collections were therefore $68,000 ($5,000 beginning gross A/R - $1,000 write-off + $100,000 credit sales - $36,000 ending gross A/R).Gross A/R$ 5,000Beg. Bal. $ 1,000Write-off100,000Cr. Sales68,000Collections$ 36,000End. Bal.

Tulip Co. owns 100% of Daisy Co.'s outstanding common stock. Tulip's cost of goods sold for the year totals $600,000, and Daisy's cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income? $940,000 $960,000 $900,000 $1,000,000

$900,000 This answer is correct.Consolidated financial statements report the financial position, results of operations, and cash flows as if the consolidated entities were a single economic entity. Thus, all line items in the consolidated financial statements must be presented at the amounts that would have been reported if the intraentity transactions had never occurred. Since no inventory from an intraentity transaction remains on the purchaser's books at the end of the reporting period, the only adjustment for the intraentity sale is to eliminate (1) the sale recognized by the seller and (2) the cost of goods sold (COGS) recognized by the purchaser. Because Daisy (i.e., the purchaser) sold all the inventory it purchased from Tulip by the end of the reporting period, Tulip's only adjustment under these facts is to eliminate the COGS recognized by Daisy. Daisy's COGS attributed to its purchase from Tulip is $100,000. Therefore, the eliminating entry is to reduce consolidated COGS and sales by $100,000. Accordingly, Tulip will report $900,000 (Tulip's $600,000 COGS + Daisy's $400,000 COGS - $100,000 intraentity elimination) as cost of goods sold in the consolidated statement of income.

Ala Company acquired Mish Company on January 1, Year 1. A goodwill of $480,000 was recognized on this acquisition. Ala is a private company, and it applies the accounting alternative to account for goodwill recognized in this business combination. The synergies expected from combining the operations of the two businesses are estimated to last over the next 20 years. However, due to Ala expecting to discontinue some of the activities of Mish in the future, Ala estimates that the useful life of goodwill is 14 years. Over how many years, if at all, should the goodwill recognized be amortized by Ala? 0 16 14 10

10 This answer is correct.A private company may elect the accounting alternative for accounting for goodwill. Under the goodwill accounting alternative, goodwill recognized must be amortized on a straight-line basis over 10 years. A private company may amortize goodwill over a period shorter than 10 years if it can demonstrate that this useful life is more appropriate. However, the amortization period of goodwill cannot exceed 10 years.

Johnstone Company owns 10,000 shares of Breva Corporation's stock; Breva currently has 40,000 shares outstanding. During the year, Breva had net income of $200,000 and paid $160,000 in dividends. At the beginning of the year, there was a balance of $150,000 in Johnstone's equity method investment in Breva Corporation account. At the end of the year, the balance in this account should be $150,000 $110,000 $160,000 $240,000

160,000 This answer is correct. Johnstone holds 25% (10,000 ÷ 40,000) of Breva's voting common stock. Under the equity method, (1) an investor recognizes its share of the investee's net income as an increase in the investment account:Investment in Breva ($200,000 × 25%)$50,000 Income -- equity-method investee $50,000 (2) a dividend from the investee is treated as a return of an investment:Cash ($160,000 × 25%)$40,000Investment in Breva$40,000Thus, at the end of the year, the balance in the investment in Breva account is $160,000 ($150,000 + $50,000 - $40,000).

Port, Inc., owns 100% of Salem, Inc. On January 1, Port sold Salem delivery equipment at a gain. Port had owned the equipment for 2 years and used a 5-year straight-line depreciation rate with no residual value. Salem is using a 3-year straight-line depreciation rate with no residual value for the equipment. In the consolidated income statement, Salem's recorded depreciation expense on the equipment for the year will be decreased by 100% of the gain on sale. 20% of the gain on sale. 33 1/3% of the gain on sale. 50% of the gain on sale.

33 1/3% of the gain on sale. This answer is correct.The effects of intraentity transactions are eliminated. If the original useful life and depreciation method remain the same, the depreciation expense eliminated is equal to the amount of gain on sale of equipment divided by the years of useful life remaining. Thus, depreciation expense on the equipment for the year will be decreased by 33 1/3% of the gain on sale (gain on sale ÷ useful life remaining).

On January 1, Point, Inc., purchased 10% of Iona Co.'s common stock. Point purchased additional shares bringing its ownership up to 40% of Iona's common stock outstanding on August 1. During October, Iona declared and paid a cash dividend on all of its outstanding common stock. How much income from the Iona investment should Point's income statement report? 10% of Iona's income for January 1 to July 31 plus 40% of Iona's income for August 1 to December 31. 40% of Iona's full-year income. Amount equal to dividends received from Iona. 40% of Iona's income for August 1 to December 31.

40% of Iona's income for August 1 to December 31. This answer is correct.Once the ownership percentage increased from 10% to 40%, Point was presumed to exercise significant influence over Iona. Thus, Point applies the equity method prospectively from the moment significant influence is achieved (August 1). Given that Point held 40% of Iona's common stock beginning August 1, it should recognize its share (40%) of Iona's income for the period August 1 to December 31.

A wholly owned foreign subsidiary of Union Corporation has certain expense accounts for the year ended December 31, Year 10, stated in local currency units (LCUs) as follows: LCU Amortization of patent (related patent acquired January 1, Year 8) 40,000 Allowance for credit losses 60,000 Rent 100,000 The exchange rates at various dates are as follows: Dollar Equivalent of 1 LCU December 31, Year 10 $.20 Average for year ended 12/31/Year 10 .22 January 1, Year 8: .25 The subsidiary's operations were an extension of the parent company's operations. What total dollar amount should be included in Union's income statement to reflect the above expenses for the year ended December 31, Year 10? $45,200 $44,000 $40,000 $42,000

45,200 This answer is correct. Given that the foreign subsidiary's operations are an extension of the parent's, the functional currency of the subsidiary is considered to be the U.S. dollar. Thus, remeasurement from the local currency to the U.S. dollar is required for financial statement purposes. Nonmonetary balance sheet items and related revenues and expenses (e.g., cost of sales, depreciation, and amortization) should be remeasured using historical rates to produce the same results as if those items had been initially recorded in the functional currency (U.S. dollar). Accordingly, the amortization of patent expense (LCUs = 40,000) should be remeasured at the rate of exchange in effect at the date the patent was acquired, $.25. Monetary and current value items should be remeasured at a current rate. Thus, allowance for credit losses and rent should be remeasured at the average Year 10 exchange rate of $.22, which is the customary approximation of the current rate used to remeasure expenses not related to nonmonetary items. Patent amortization 40,000 × $.25 = $10,000 Allowance for credit losses 60,000 × $.22 = 13,200 Rent 100,000 × $.22 = 22,000 Total remeasured expenses $45,200

A derivative financial instrument is best described as A contract that conveys to a second entity a right to receive cash from a first entity. Evidence of an ownership interest in an entity such as shares of common stock. A contract that has its settlement value tied to an underlying notional amount. A contract that conveys to a second entity a right to future collections on accounts receivable from a first entity.

A contract that has its settlement value tied to an underlying notional amount. This answer is correct.A derivative is a bet on whether the value of something (underlying notional amount) will go up or down. A derivative has at least one underlying (interest rate, currency exchange rate, price of a specific financial instrument, etc.) and at least one notional amount (number of units specified in the contract) or payment provision, or both. No initial net investment, or one smaller than that necessary for contracts with similar responses to the market, is required. Furthermore, a derivative's terms require or permit net settlement or provide for the equivalent. Net settlement means that the derivative can be readily settled with only a net delivery of assets. Thus, neither party must deliver (1) an asset associated with its underlying or (2) an asset that has a principal, stated amount, etc., equal to the notional amount.

Which one of the following should be classified as a cash flow from an operating activity on the statement of cash flows? A decrease in accounts payable during the year. The payment of cash for the purchase of additional equipment needed for current production. An increase in cash resulting from the issuance of previously authorized common stock. The payment of a cash dividend from money arising from current operations.

A decrease in accounts payable during the year. This answer is correct.Operating activities are all transactions and other events that are not financing or investing activities. In general, operating activities involve the production and delivery of goods and the provision of services. Their effects normally are reported in earnings. A decrease in accounts payable indicates a cash outflow to the entity's suppliers in payment for goods or services.

On June 1, Year 1, ABC Co. issued a 200,000 euro purchase order for equipment to be supplied by a German company. ABC's functional currency is the U.S. dollar. The equipment was delivered to ABC on November 1, Year 1, and ABC recorded a payable due to the German company. ABC paid for the equipment on January 31, Year 2. The following are the exchange rates in effect :June 1, Year 11 euro = 1.40 U.S. dollars November 1, Year 11 euro = 1.50 U.S. dollars December 31, Year 11 euro = 1.35 U.S. dollars January 31, Year 21 euro = 1.30 U.S. dollars What is the foreign currency gain or loss that ABC should record for the year ended December 31, Year 1? A loss of $20,000. A loss of $30,000. A gain of $30,000. A gain of $10,000.

A gain of $30,000. This answer is correct.The terms of a foreign currency transaction are stated in a currency different from the entity's functional currency. The initial measurement of the transaction must be in ABC's functional currency (U.S. dollar). The exchange rate used is the rate in effect on the date the transaction was initially recognized. On 11/1/Year 1, ABC initially recognized a payable to a German company of $300,000 (200,000 euros × 1.5 exchange rate on 11/1/Year 1) because the equipment was delivered on that date. A foreign currency transaction gain or loss is recognized in the period when the exchange rate changes, e.g., at a balance sheet date and at the settlement date. On 12/31/Year 1, a payable is reported at $270,000 (200,000 euros × 1.35 exchange rate on 12/31/Year 1). The decrease in the payable of $30,000 ($270,000 - $300,000) is recognized as a gain in the Year 1 income statement.

Which collection is reported as an investing activity in statement of cash flows? A note receivable from a related party. Proceeds from a note payable. An overdue account receivable from a customer. A tax refund.

A note receivable from a related party. This answer is correct.Investing activities include making and collecting loans. Whether the debtor is a related party affects disclosure requirements, not the classification of the cash inflow.

Which collection is reported as an investing activity in statement of cash flows? An overdue account receivable from a customer. Proceeds from a note payable. A tax refund. A note receivable from a related party.

A significant noncash transaction that need not be reported in disclosures related to the statement of cash flows is Obtaining a building by donation. A stock dividend declared during the year. The acquisition of assets by assuming directly related liabilities. An issuance of equity securities to retire debt.

A stock dividend declared during the year. This answer is correct.A stock dividend is the issuance of an entity's own common stock to its common shareholders for no consideration. Because it does not affect recognized assets or liabilities, it need not be reported among the noncash investing and financing activities disclosures.

Compared with the accrual basis of accounting, the cash basis of accounting understates income by the net decrease during the accounting period of Accounts Receivable: No Accrued Expenses: No Accounts Receivable: Yes Accrued Expenses: Yes Accounts Receivable: No Accrued Expenses: Yes Accounts Receivable: Yes Accrued Expenses: No

Accounts Receivable: No Accrued Expenses: Yes This answer is correct.A net decrease in accounts receivable indicates that cash collected exceeded accrual-basis revenue from receivables in the current period. A net decrease in accrued expenses indicates that cash paid for expenses exceeded the current period's accrual-basis expenses. Thus, a net decrease in receivables results in an overstatement of cash-basis income compared with accrual-basis income, and a net decrease in accrued expenses results in an understatement.

When a business is acquired, the acquirer may recognize goodwill. This amount is the excess of the sum of the acquisition-date fair values (with some exceptions) of (1) the consideration transferred, (2) any noncontrolling interest in the acquiree, and (3) a previously held equity interest in the acquiree over the Acquisition-date fair value of the net assets acquired. Fair value of the net tangible assets acquired. Carrying amount of the net tangible assets acquired. Carrying amount of the net assets acquired.

Acquisition-date fair value of the net assets acquired. This answer is correct.Goodwill is an asset reflecting the future economic benefits arising from other assets acquired in a business combination. The other assets are not individually identified and separately recognized. The acquirer may recognize goodwill at the acquisition date. Goodwill is the excess of 1. over 2.:The sum ofThe consideration transferred (normally measured at acquisition-date fair value)The fair value of any noncontrolling interestThe acquisition-date fair value of a previously held equity interest in the acquireeThe net of acquisition-date amounts ofIdentifiable assets acquiredLiabilities assumed

When using the indirect method to prepare a statement of cash flows, which one of the following should be subtracted from net income when determining net cash flows from operating activities? An increase in accrued liabilities. Amortization of premiums on bonds payable. Depreciation expense. A loss on the sale of plant assets.

Amortization of premiums on bonds payable. This answer is correct.The indirect method reconciles the net income of a business with the net operating cash flow. The indirect method removes the effects of (1) all deferrals of past operating cash receipts and payments, (2) all accruals of estimated future operating cash receipts and payments, and (3) all items not affecting operating cash flows to arrive at the net cash flow from operating activities. Thus, the amortization of the premium on bonds payable is subtracted from net income in the reconciliation because it represents a noncash decrease in interest expense (an increase in net income).

For a public business entity, the goodwill impairment test is required to be performed Only at the beginning of the fiscal year. Any time during the last quarter of the fiscal year. Only at the end of the fiscal year. Any time during the fiscal year, provided that it is performed at the same time every year.

Any time during the fiscal year, provided that it is performed at the same time every year. This answer is correct. Public business entities test goodwill for impairment at the reporting unit level. All goodwill is assigned to the reporting units that will benefit from the business combination. It is tested for impairment each year at the same time. Private companies may elect the goodwill accounting alternative, which provides for amortization over 10 years unless a shorter period is demonstrably more appropriate.

According to GAAP, a business must Have goodwill. Generate a return. Have inputs, outputs, and processes. Be capable of being managed to provide economic benefits.

Be capable of being managed to provide economic benefits. This answer is correct.The activities and assets of a business are capable of being managed to provide economic benefits (returns such as dividends, and lower costs). Processes are applied to inputs to generate outputs. Outputs are direct returns to investors and other participants.

Which of the following risks, if any, are inherent in an interest-rate swap agreement? I. The risk of exchanging a lower interest rate for a higher interest rate II. The risk of nonperformance by the counterparty to the agreement Both I and II. I only. II only. Neither I nor II.

Both I and II. This answer is correct.An interest-rate swap is an exchange of fixed interest payments for payments based on a floating rate. The risks inherent in an interest-rate swap include both credit risk and market risk. Credit risk is the risk of accounting loss from a financial instrument because of the possibility that a loss may occur from the failure of another party to perform according to the terms of a contract. Market risk arises from the possibility that future changes in market prices may make a financial instrument less valuable or more onerous. Market risk therefore includes the risk that changes in interest rates will make the swap agreement less valuable or more onerous.

Which of the following items is included in the financing activities section of the statement of cash flows? Cash effects of transactions obtaining resources from owners and providing them with a return on their investment. Cash effects of transactions involving making and collecting loans. Cash effects of acquiring and disposing of investments and property, plant, and equipment. Cash effects of transactions that enter into the determination of net income.

Cash effects of transactions obtaining resources from owners and providing them with a return on their investment. This answer is correct.Financing activities include (1) issuance of stock, (2) payment of dividends, (3) treasury stock transactions, (4) issuance of debt, (5) obtaining cash from creditors and repayment or other settlement of debt obligations, (6) the exercise of share options resulting in excess tax benefits, and (7) receiving resources that are donor-restricted to long-term use.

A company acquired a building, paying a portion of the purchase price in cash and issuing a mortgage note payable to the seller for the remaining balance. In a statement of cash flows, what amount is included in investing activities for this transaction? Zero. Mortgage amount. Acquisition price of the building. Cash payment.

Cash payment. This answer is correct.Investing activities include the lending of money; the collection of those loans; and the acquisition, sale, or other disposal of (1) loans and other securities that are not cash equivalents and that have not been acquired specifically for resale and (2) property, plant, equipment, and other productive assets. Thus, the portion of the purchase price paid in cash to acquire a building (a productive asset) should be classified as a cash flow from an investing activity. To provide the necessary information about all investing and financing activities, those not involving cash receipts or cash payments during the accounting period should be reported in a separate schedule and not in the statement of cash flows. The issuance of a mortgage as part of the acquisition price of a building does not involve cash. It is therefore classified as a noncash financing activity and is included in a separate schedule.

Fogg Co., a U.S. company, contracted to purchase foreign goods. Payment in foreign currency was due 1 month after the goods were received at Fogg's warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Fogg's favor. The resulting gain should be included in Fogg's financial statements as a(n) Item of other comprehensive income. Deferred credit. Decrease in the carrying amount of the goods. Component of income from continuing operations

Component of income from continuing operations. This answer is correct.This foreign currency transaction resulted in a payable stated in a foreign currency. The favorable change in the exchange rate between the functional currency and the currency in which the transaction was stated should be included in determining net income for the period in which the exchange rate changed. It should be classified as a component of income from continuing operations.

In the consolidated financial statements of a parent and its 90%-owned subsidiary, Consolidated equity is the amount attributable to the parent. Revenues and expenses are reported at the separate amounts attributable to the parent and the noncontrolling interest. Consolidated net income or loss is the amount attributable to the parent. Comprehensive income or loss attributable to the parent and the noncontrolling interest is reported at separate amounts.

Comprehensive income or loss attributable to the parent and the noncontrolling interest is reported at separate amounts. This answer is correct.In whichever presentation of consolidated comprehensive income or loss is chosen, the noncontrolling interest's adjusted share of the subsidiary's comprehensive income or loss is subtracted from the consolidated amount to determine the amount attributable to the parent. Thus, three amounts are displayed on the face of the consolidated statements: (1) a total, (2) the noncontrolling interest's share, and (3) the parent's share.

Consolidated financial statements are typically prepared when one entity has a majority voting interest in another unless The two entities are in unrelated industries, such as manufacturing and real estate. The subsidiary is a finance entity. The fiscal year ends of the two entities are more than 3 months apart. Control does not rest with the majority owner(s).

Control does not rest with the majority owner(s). This answer is correct.Consolidated financial reporting is required when one entity owns, directly or indirectly, more than 50% of the outstanding voting interests of another entity. However, a majority-owned subsidiary is not consolidated if control does not rest with the majority owner.

Ionia Company reports operating activities in its statement of cash flows using the indirect method. Which of the following items, if any, should Ionia add back to net income to arrive at net operating cash flow? Cost method: No Bond Discount Amortization: Yes Cost method: Yes Bond Discount Amortization: No Cost method: Yes Bond Discount Amortization: Yes Cost method: No Bond Discount Amortization: No

Cost method: No Bond Discount Amortization: Yes This answer is correct. Bond discount amortization is a noncash component of interest expense. Because the amortization decreases net income, it is added back in the reconciliation of net income to net operating cash flow. Treasury stock transactions involve cash flows that do not affect net income. They are also classified as financing activities, not operating activities.

Which of the following is debited to other comprehensive income (OCI)? Discount on convertible bonds that are dilutive potential common stock. Cumulative foreign currency translation loss. Premium on convertible bonds that are dilutive potential common stock. Organizational costs.

Cumulative foreign currency translation loss. This answer is correct.When the currency used to prepare a foreign entity's financial statements is its functional currency, the current rate method is used to translate the foreign entity's financial statements into the reporting currency. The translation gains and losses arising from applying this method are reported in OCI in the consolidated statements and are not reflected in income. Accumulated OCI is a component of equity displayed separately from retained earnings and additional paid-in capital in the statement of financial position. Because a cumulative foreign currency translation loss reduces the balance, it is a debit item.

When the functional currency of a foreign operation is the U.S. dollar, transaction gains and losses resulting from remeasuring foreign currency financial statements into U.S. dollars should be recognized in A deferred item in the balance sheet. The income statement for losses but a deferred item in the balance sheet for gains. Current earnings in the income statement. Other comprehensive income.

Current earnings in the income statement. This answer is correct.When an entity's functional currency is the U.S. dollar, a foreign operation's financial statements are remeasured in terms of the U.S. dollar. The resulting transaction gains and losses from remeasurement of assets and liabilities should be recognized in current earnings as part of continuing operations.

When the allowance method of recognizing credit losses on accounts receivable is used, the entry to record the write-off of a specific account Decreases both accounts receivable and the allowance for credit losses. Decreases both accounts receivable and net income. Increases the allowance for credit losses and decreases net income. Decreases accounts receivable and increases the allowance for credit losses.

Decreases both accounts receivable and the allowance for credit losses. This answer is correct.When an account receivable is written off, both accounts receivable and the allowance for credit losses are decreased. The journal entry is to debit the allowance and credit accounts receivable.

In a statement of cash flows prepared using the indirect method, a gain on the sale of a long-term investment should be Added to income from continuing operations. Deducted from income from continuing operations. Reported as an outflow of cash. Reported as an inflow and outflow of cash.

Deducted from income from continuing operations. This answer is correct.Cash received from the sale of an investment is classified in a statement of cash flows as a cash inflow from an investing activity unless the investment was classified as a trading security. The cash inflow is equal to the carrying amount of the investment plus any gain or minus any loss realized. Because the gain will be included in the determination of income from continuing operations, it must be subtracted from the net income figure presented in the statement of cash flows (indirect method) in the reconciliation of net income to net cash flow from operating activities. The purpose of the adjustment is to remove the effect of the gain from both net income and the cash inflows from operating activities. In the cash flows from investing activities section, the amount reported is the sum of the gain and the carrying amount of the investment.

The statement of cash flows may be presented in either a direct or an indirect (reconciliation) format. In which of these formats would cash collected from customers be presented as a gross amount? Direct: Yes Indirect: Yes Direct: No Indirect: No Direct: Yes Indirect: No Direct: No Indirect: Yes

Direct: Yes Indirect: No This answer is correct. The statement of cash flows may report cash flows from operating activities in either an indirect (reconciliation) or a direct format. The direct format reports the major classes of operating cash receipts and cash payments as gross amounts. The indirect presentation reconciles net income to the same amount of net cash flow from operations that would be determined in accordance with the direct method. To arrive at net operating cash flow, the indirect method adjusts net income by removing the effects of (1) all deferrals of past operating cash receipts and payments, (2) all accruals of expected future operating cash receipts and payments, (3) all financing and investing activities, and (4) all noncash operating transactions.

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The net assets acquired constitute a business. The $100,000 should be Expensed as incurred in the current period. Allocated on a pro rata basis to the nonmonetary assets acquired. Capitalized as an other asset and amortized over 5 years. Capitalized as part of goodwill and tested annually for impairment.

Expensed as incurred in the current period. This answer is correct.In a business combination, acquisition-related costs, such as finder's fees, professional and consulting fees, and general administrative costs, are expensed as incurred. If this transaction were an acquisition of a group of assets (and not a business combination), the direct acquisition costs would be allocated on a pro rata basis to the assets acquired.

A business combination must be accounted for as an acquisition. Which of the following expenses related to the business combination should be included, in total, in the determination of net income of the combined entity for the period in which the expenses are incurred? Fees of finders and consultants: Yes Registration fees for equity securities issued: Yes Fees of finders and consultants: Yes Registration fees for equity securities issued: No Fees of finders and consultants: No Registration fees for equity securities issued: No Fees of finders and consultants: No Registration fees for equity securities issued: Yes

Fees of finders and consultants: Yes Registration fees for equity securities issued: No This answer is correct. Acquisition-related costs, such as finder's fees, professional and consulting fees, and general administrative costs, are expensed as incurred. However, direct issuance costs of equity (underwriting, legal, accounting, tax, registration, etc.) are debited to additional paid-in capital.

Which one of the following would be excluded from other comprehensive income (OCI) reported for the current year? Unamortized prior service cost. Foreign currency remeasurement gains or losses on monetary assets and liabilities. Foreign currency translation adjustments. Unrealized holding gains or losses on available-for-sale debt securities.

Foreign currency remeasurement gains or losses on monetary assets and liabilities. This answer is correct.Foreign currency remeasurement gains or losses on monetary assets and liabilities are reported in current earnings as part of continuing operations. If the books of a foreign entity are not maintained in the functional currency, foreign currency amounts are remeasured into that currency. They are then translated into the reporting currency (if different).

Which of the following is included in other comprehensive income? Foreign currency translation adjustments. Unrealized holding gains and losses on trading debt securities. The difference between the accumulated benefit obligation and the fair value of pension plan assets. Unrealized holding gains and losses that result from a debt security being transferred into the held-to-maturity category from the available-for-sale category.

Foreign currency translation adjustments. This answer is correct.Other comprehensive income (OCI) includes all items of comprehensive income not included in net income. Foreign currency translation adjustments for a foreign operation that is relatively self-contained and integrated within its environment do not affect cash flows of the reporting entity. Thus, they are excluded from earnings and reported in OCI.

Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method? Sale of property, plant, and equipment. Issuance of common stock to the shareholders. Payment of cash dividend to the shareholders. Gain on sale of plant asset.

Gain on sale of plant asset. This answer is correct.The indirect method reconciles net income to net operating cash flow. It removes the effects of (1) all deferrals of past operating cash flows, (2) all accruals of estimated future operating cash flows, and (3) items included in net income that do not affect net operating cash flow (including items with cash effects that are investing or financing cash flows). The gain on the sale of plant assets is an investing cash flow. Thus, its effect must be subtracted from net income in the operating section of the cash flow statement.

When the allowance method of recognizing credit losses on accounts receivable is used, how would the collection of an account previously written off affect gross accounts receivable and the allowance for credit losses? Gross AR: Increase Allowance for Credit Losses: Decrease Gross AR: No effect Allowance for Credit Losses: Increase Gross AR: No effect Allowance for Credit Losses: Decrease Gross AR: Increase Allowance for Credit Losses: No Effect

Gross AR: No effect Allowance for Credit Losses: Increase This answer is correct.When an account that was previously written off that was not expected to be recovered is subsequently collected, the journal entry is to debit (increase) cash and credit (increase) allowance for credit losses. Thus, gross accounts receivable is not affected.

Under the allowance method of recognizing credit losses on accounts receivable, the entry to write-off an uncollectible account Has no effect on the allowance for credit losses. Decreases net income. Has no effect on net income. Increases the allowance for credit losses.

Has no effect on net income. This answer is correct.The entry to record credit loss expense under the allowance method is to debit credit loss expense and credit the allowance account. When a specific account is then written off, the allowance is debited and accounts receivable credited. Net income is affected when credit loss expense is recognized, not at the time of the write-off. Because accounts receivable and the allowance account are decreased by the same amount, a write-off of an account also has no effect on the net amount of accounts receivable.

Under the allowance method of recognizing credit losses on accounts receivable, the entry to write-off an uncollectible account Has no effect on the allowance for credit losses. Increases the allowance for credit losses. Decreases net income. Has no effect on net income.

A company's foreign subsidiary operation maintains its financial statements in the local currency. The foreign operation's capital accounts would be translated to the functional currency of the reporting entity using which of the following rates? Weighted-average exchange rate. Historical exchange rate. Functional exchange rate. Current exchange rate at the balance sheet date.

Historical exchange rate. This answer is correct.If the books of a foreign entity are maintained in a currency not the functional currency, foreign currency amounts must be remeasured into the functional currency using the temporal method. Under this method, nonmonetary balance sheet items such as capital accounts are remeasured at the historical exchange rate. Monetary items such as receivables are remeasured at the current exchange rate.

How should the amortization of bond discount on long-term debt be reported in a statement of cash flows prepared using the indirect method? As a financing activities inflow. As a financing activities outflow. In operating activities as a deduction from income. In operating activities as an addition to income.

In operating activities as an addition to income. This answer is correct.Amortization of bond discount on long-term debt is presented in the operating activities section as an addition to net income. It is a noncash expense.

P Co. purchased term bonds at a premium on the open market. These bonds represented 20% of the outstanding class of bonds issued at a discount by S Co., P's wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts of the two companies is Included as a decrease in retained earnings. Reported as a deferred credit to be amortized over the remaining life of the bonds. Reported as a deferred debit to be amortized over the remaining life of the bonds. Included as an increase in retained earnings.

Included as a decrease in retained earnings. This answer is correct.Because a consolidated financial statement should include both P and S as a single (consolidated) reporting entity, the purchase of the outstanding bonds of S by P at a premium was in substance a retirement of debt for more than the debt's carrying amount. This transaction should be reflected in the consolidated income statement for the year of the purchase as a constructive loss from the retirement of debt. Consequently, the effect on the balance sheet is to decrease retained earnings by an amount equal to the premium plus the unamortized discount before the tax effect.

Dee's inventory and accounts payable balances at December 31, Year 2, increased over their December 31, Year 1, balances. Should these increases be added to or deducted from cash payments to suppliers to arrive at Year 2 cost of goods sold? Increase in Inventory: Added to Increase in AP: Added to Increase in Inventory: Deducted from Increase in AP: Added to Increase in Inventory: Deducted from Increase in AP: Deducted from Increase in Inventory: Added to Increase in AP: Deducted from

Increase in Inventory: Deducted from Increase in AP: Added to This answer is correct.A two-step adjustment is needed. The first step is to adjust for the difference between cash paid to suppliers and purchases. Because accounts payable increased, purchases must have been greater than cash paid to suppliers. Thus, the increase in accounts payable is an addition. The second step adjusts for the difference between purchases and cost of goods sold. Given that inventory increased, purchases must have exceeded cost of goods sold. Hence, the increase in inventories is a subtraction.

Park Co. uses the equity method to account for its January 1 purchase of Tun, Inc.'s common stock. On January 1, the fair values of Tun's FIFO inventory and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park's reported equity in Tun's earnings for the year? Inventory Excess: Decrease Land Excess: Decrease Inventory Excess: Increase Land Excess: No effect Inventory Excess: Increase Land Excess: Increase Inventory Excess: Decrease Land Excess: No effect

Inventory Excess: Decrease Land Excess: No effect This answer is correct. The equity method of accounting requires the investor's proportionate share of the investee's reported net income to be adjusted for acquisition differentials. Thus, the difference at the date of acquisition of the investee's stock between the fair value and carrying amount of inventory is such an adjustment when the inventory is sold. A similar adjustment for items of property, plant, and equipment is required when the assets are depreciated or sold. Assuming that the FIFO inventory was sold during the year and the land was not, Park's proportionate share of Tun's reported net income is decreased by the inventory differential allocated at the date of acquisition.

In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents and debt instruments acquired specifically for resale) should be classified as cash outflows for Investing activities. Lending activities. Financing activities. Operating activities.

Investing activities. This answer is correct.Investing activities include the lending of money; the collection of those loans; and the acquisition, sale, or other disposal of (1) loans and other securities that are not cash equivalents and that have not been acquired specifically for resale and (2) property, plant, equipment, and other productive assets.

In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents and debt instruments acquired specifically for resale) should be classified as cash outflows for Investing activities. Operating activities. Financing activities. Lending activities.

A business combination occurred on December 31, Year 1, the end of the acquirer's fiscal year. Which of the following should be subtracted in determining consolidated net income for Year 1? Issue Costs of Debt: Yes Direct Issue Costs of Equity: No Issue Costs of Debt: No Direct Issue Costs of Equity: Yes Issue Costs of Debt: No Direct Issue Costs of Equity: No Issue Costs of Debt: Yes Direct Issue Costs of Equity: Yes

Issue Costs of Debt No Direct Issue Costs of Equity No This answer is correct.Acquisition-related costs, such as finders' and consultants' fees and general administrative costs, are expensed as incurred. Direct issue costs of equity (underwriting, legal fees, etc.) are debited to additional paid-in capital. Issue costs of debt are reported as a direct deduction from the carrying amount of the debt and amortized. Thus, the amortization of debt issue costs will not affect consolidated net income until Year 2.

Kelli Company acquired land by assuming a mortgage for the full acquisition cost. This transaction should be disclosed on Kelli's statement of cash flows as a(n) Noncash financing and investing activity. Financing activity. Operating activity. Investing activity.

Noncash financing and investing activity. This answer is correct.The exchange of debt for a long-lived asset does not involve a cash flow. It is therefore classified as a noncash financing and investing activity.

In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary's functional currency is the currency In which the subsidiary maintains its accounting records. Of the country in which the subsidiary is located. Of the environment in which the subsidiary primarily generates and expends cash. Of the country in which the parent is located.

Of the environment in which the subsidiary primarily generates and expends cash. This answer is correct.The method used to convert foreign currency amounts into units of the reporting currency is the functional currency translation approach. It is appropriate for use in accounting for and reporting the financial results and relationships of foreign subsidiaries in consolidated statements. This method (1) identifies the functional currency of the entity (the currency of the primary economic environment in which the foreign entity operates), (2) measures all elements of the financial statements in the functional currency, and (3) uses a current exchange rate for translation from the functional currency to the reporting currency. The currency indicated by the relevant economic indicators, such as cash flows, sales prices, sales markets, expenses, financing, and intraentity transactions, may not be (1) the currency in which the subsidiary maintains its accounting records, (2) the currency of the country in which the subsidiary is located, or (3) the currency of the country in which the parent is located.

Bear Co. prepares its statement of cash flows using the indirect method. Bear sold equipment with a carrying value of $500,000 for cash of $400,000. How should Bear report the transaction in the operating and investing activities sections of its statement of cash flows? Operating Activities: 100,000 subtraction from net income Investing Activities: $400,000 cash inflow Operating Activities: 100,000 subtraction from net income Investing Activities: $500,000 cash inflow Operating Activities: 100,000 addition to net income Investing Activities: $500,000 cash inflow Operating Activities: 100,000 addition to net income Investing Activities: $400,000 cash inflow

Operating Activities $100,000 addition to net income Investing Activities $400,000 cash inflow This answer is correct.Cash receipts from the sale of property, plant, and equipment of $400,000 are reported as a cash inflow from investing activities. Under the indirect method, the net cash flow from operating activities is determined by adjusting net income for the effect of items included in net income whose cash effects relate to investing or financing cash flows. Losses and expenses whose cash effects are related to investing or financing cash flows are added to net income. Bear recognized a loss on disposal of equipment of $100,000 ($500,000 carrying value - $400,000 cash receipts). Accordingly, $100,000 is reported as an addition to net income in the operating activities section of the statement of cash flows.

Bear Co. prepares its statement of cash flows using the indirect method. Bear sold equipment with a carrying value of $500,000 for cash of $400,000. How should Bear report the transaction in the operating and investing activities sections of its statement of cash flows? Operating Activities: $100,000 subtraction from NI Investing Activities: $500,000 cash inflow Operating Activities: $100,000 subtraction from NI Investing Activities: $400,000 cash inflow Operating Activities: $100,000 addiction from NI Investing Activities: $500,000 cash inflow Operating Activities: $100,000 addition from NI Investing Activities: $400,000 cash inflow

Operating Activities: $100,000 addition from NI Investing Activities: $400,000 cash inflow This answer is correct. Cash receipts from the sale of property, plant, and equipment of $400,000 are reported as a cash inflow from investing activities. Under the indirect method, the net cash flow from operating activities is determined by adjusting net income for the effect of items included in net income whose cash effects relate to investing or financing cash flows. Losses and expenses whose cash effects are related to investing or financing cash flows are added to net income. Bear recognized a loss on disposal of equipment of $100,000 ($500,000 carrying value - $400,000 cash receipts). Accordingly, $100,000 is reported as an addition to net income in the operating activities section of the statement of cash flows.

Royce Company had the following transactions during the fiscal year ended December 31, Year 2: Accounts receivable decreased from $115,000 on December 31, Year 1, to $100,000 on December 31, Year 2. Royce's board of directors declared dividends on December 31, Year 2, of $.05 per share on the 2.8 million shares outstanding, payable to shareholders of record on January 31, Year 3. The company did not declare or pay dividends for fiscal Year 1. Sold a truck with a net carrying amount of $7,000 for $5,000 cash, reporting a loss of $2,000. Paid interest to bondholders of $780,000. The cash balance was $106,000 on December 31, Year 1, and $284,000 on December 31, Year 2. Royce Company uses the direct method to prepare its statement of cash flows at December 31, Year 2. The interest paid to bondholders is reported in the Operating section, as a use or outflow of cash. Investing section, as a use or outflow of cash. Debt section, as a use or outflow of cash. Financing section, as a use or outflow of cash.

Operating section, as a use or outflow of cash. This answer is correct.Payment of interest on debt is considered an operating activity, although repayment of debt principal is a financing activity.

A statement of cash flows prepared using the indirect method would have cash activities listed in which one of the following orders? Financing, investing, operating. Operating, investing, financing. Operating, financing, investing. Investing, financing, operating.

Operating, investing, financing. This answer is correct.A statement of cash flows prepared using either the direct or the indirect method lists the categories of cash flows in the following order: operating, investing, and financing.

Which of the following financial instruments may be considered a derivative financial instrument? Money market fund. Municipal bond. Bank certificate of deposit. Option contract.

Option contract. This answer is correct.A derivative is a financial instrument that has at least one underlying and at least one notional amount or payment provision, or both. A derivative is also characterized by zero or low initial net investment and the ability of net settlement. Examples of derivatives are option contracts, forward contracts, futures contracts, and swap contracts.

Company J acquired all of the outstanding common stock of Company K in exchange for cash. The consideration transferred exceeds the acquisition-date fair value of the net assets acquired. How should Company J determine the amounts to be reported for the plant and equipment and long-term debt acquired from Company K? Plant and Equipment: Fair Value Long-Term Debt: K's carrying value Plant and Equipment: Fair Value Long-Term Debt: Fair value Plant and Equipment: K's carrying value Long-Term Debt: Fair Value Plant and Equipment: K's carrying value Long-Term Debt: K's carrying value

Plant and Equipment: Fair Value Long-Term Debt: Fair value This answer is correct. A business combination is accounted for as an acquisition. Under the acquisition method, the entry recording the transaction is based on the fair values exchanged.

Wagner, a holder of a $1 million Palmer, Inc., bond, collected the interest due on March 31, and then sold the bond to Seal, Inc., for $975,000. On that date, Palmer, a 75% owner of Seal, had a $1,075,000 carrying amount for this bond. What was the effect of Seal's purchase of Palmer's bond on the retained earnings and noncontrolling interest amounts reported in Palmer's March 31 consolidated balance sheet? Retained Earnings: $0 Noncontrolling Interest: $25,000 increase Retained Earnings: $0 Noncontrolling Interest: $100,000 increase Retained Earnings: $75,000 increase Noncontrolling Interest: $25,000 increase Retained Earnings: $100,000 increase Noncontrolling Interest: $0

Retained Earnings $100,000 increase Noncontrolling Interest $0 This answer is correct.The purchase was in substance a retirement of debt by the consolidated entity for less than its carrying amount. The transaction resulted in a constructive gain of $100,000 ($1,075,000 carrying amount - $975,000 price) and therefore a $100,000 increase in consolidated retained earnings. The noncontrolling interest was unaffected. The noncontrolling interest is based on the subsidiary's carrying amounts adjusted for subsidiary income and dividends. This transaction did not result in gain or loss for Seal.

Which of the following transactions should be classified as investing activities on an entity's statement of cash flows? Issuance of common stock to the shareholders. Increase in accounts receivable. Sale of property, plant, and equipment. Payment of cash dividend to the shareholders.

Sale of property, plant, and equipment. This answer is correct.Investing activities include (1) making and collecting loans; (2) acquiring and disposing of debt or equity instruments; and (3) acquiring and disposing of property, plant, and equipment and other productive assets (but not materials in inventory) held for or used in the production of goods and services.

With respect to the content and form of the statement of cash flows, The pronouncements covering the cash flow statement encourage the use of the indirect method. The direct method of reporting cash flows from operating activities includes disclosing the major classes of gross cash receipts and gross cash payments. The indirect method adjusts ending retained earnings to reconcile it to net cash flows from operations. The reconciliation of the net income to net operating cash flow need not be presented when using the direct method.

The direct method of reporting cash flows from operating activities includes disclosing the major classes of gross cash receipts and gross cash payments. This answer is correct.Use of the direct method of reporting major classes of operating cash receipts and payments is encouraged, but the indirect method may be used. The minimum disclosures of operating cash flows under the direct method are (1) cash collected from customers, (2) interest and dividends received (unless donor-restricted to long-term purposes), (3) other operating cash receipts, (4) cash paid to employees and other suppliers of goods or services, (5) interest paid, (6) income taxes paid (and the amount that would have been paid if excess tax benefits from share-based payment arrangements had not been available), and (7) other operating cash payments.

A foreign subsidiary of a U.S. parent company should measure its assets, liabilities, and operations using The U.S. dollar. The subsidiary's functional currency. The subsidiary's local currency. The best available spot rate.

The subsidiary's functional currency. This answer is correct.The functional currency is the currency of the primary economic environment in which the entity operates. Normally, that environment is the one in which it primarily generates and expends cash. The subsidiary's functional currency is the currency that is used to measure its liabilities, assets, and operations. At the date a foreign currency transaction is recognized, each asset, liability, revenue, expense, gain, or loss resulting from the transaction must be measured in the functional currency of the recording entity. If an entity's books of record are not maintained in its functional currency, remeasurement into the functional currency is required before translation into the reporting currency.

If all assets and liabilities of a firm's foreign subsidiary are translated into the parent's currency at the current exchange rate (the rate in effect at the date of the balance sheet), the extent of the parent firm's translation gain or loss is based on the subsidiary's Current assets minus current liabilities. Total assets minus total liabilities. Operating cash flows. Monetary assets minus monetary liabilities.

Total assets minus total liabilities. This answer is correct.When the functional currency of a foreign subsidiary is the local (foreign) currency, translation of all assets and liabilities is required at the current rate as of the balance sheet date.

Cash flows from transactions in which of the following securities are most likely to be considered cash flows from operating activities? Noncurrent debt securities. Trading debt securities. Available-for-sale debt securities. Held-to-maturity securities.

Trading debt securities. This answer is correct.Cash flows from purchases, sales, and maturities of trading debt securities are cash flows from operating activities.

Shore Co. records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in euros. Shore recorded a foreign currency transaction gain on collection of the receivable and an exchange loss on settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates? Yen Exchangeable for $1: Decrease Euros Exchangeable for $1: Decrease Yen Exchangeable for $1: Decrease Euros Exchangeable for $1: Increase Yen Exchangeable for $1: Increase Euros Exchangeable for $1: Decrease Yen Exchangeable for $1: Increase Euros Exchangeable for $1: Increase

Yen Exchangeable for $1: Decrease Euros Exchangeable for $1: Decrease This answer is correct. When a foreign currency transaction results in a receivable or a payable, fixed in terms of the amount of foreign currency, a change in the exchange rate between the functional currency and the currency in which the transaction is denominated is a gain or loss that ordinarily should be included as a component of income from continuing operations in the period in which the exchange rate changes. A gain on a receivable denominated in a foreign currency results when the fixed amount of the foreign currency can be exchanged for a greater number of dollars at the date of collection, that is, when the number of foreign currency units exchangeable for a dollar decreases. A loss on a payable denominated in a foreign currency results when the number of dollars needed to purchase the fixed amount of the foreign currency increases, that is, when the number of foreign currency units exchangeable for a dollar decreases.

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