ACC 4100 final chapters 9, 10, 14, 15
Uniform Partnership Act (Section 807[b])
"shall contribute to the partnership an amount equal to any excess charges over the credits in the partner's account . . ."
current rate method priorities
1st income statement 2nd Retained Earnings 3rd Balance Sheet
priorities current rate method
1st income statement 2nd statement of retained earnings 3rd balance sheet
functional currency
A company's functional currency is the primary currency of the foreign entity's operating environment.
foreign currency firm commitment
A non cancelable order that specifies the foreign currency price and date of delivery is known as a
The two most common derivatives used to hedge foreign exchange risk are:
Foreign currency forward contracts. Foreign currency options.
Subchapter S Corporation (S Corp.)
Has all legal characteristics of a corporation. Taxed in virtually the same way as a partnership. Ownership limited to 100 stockholders. Owners limited to individuals, estates, and certain tax-exempt entities, and trusts. Growth potential limited due to restriction on number and type of owners.
Two transaction perspective imports
The U.S. dollar value of the goods purchased is recorded at the date of purchase, with no subsequent adjustments to the cost of the goods. Any difference between the number of U.S. dollars that could have been paid on the purchase date and the actual number of U.S. dollars paid on the payment date due to a change in the exchange rate is treated as a foreign exchange gain or loss.
Historical Exchange Rate
The exchange rate that existed when the transaction occured
Current Exchange rate
The exchange rate that exists at balance sheet date
Disadvantages of Partnership
Unlimited liability Any partner can be held responsible for all debts Mutual agency Creditors can go after any partner they choose to reclaim debt difficulty attracting large amounts of capital
foreign currency borrowings is not
a derivative
Foreign currency payables from an import purchase create a
a liability exposure to foreign exchange risk
current rate method revenues and expenses
at average rate
COGS current rate method
average rate
Withdrawal of a partner Goodwill Method
books are first adjusted to FMV, with a proportionate increase allocated to each partner's account. Withdrawing partner is paid based on the balance in individual capital account.
Journal entry to record negative translation adjustment in foreign subsidy
cumulative translation adjustment 8 investment in subsidiary 8
define derivative financial instrument
derives its value from some "underlying." In this case, the underlying is the currency exchange rate.
The basic assumption underlying the current rate method
is that a company's net investment in a foreign operation is exposed to foreign exchange risk.
Any alteration in specific individuals composing a partnership results
legal dissolution
Foreign currency forward contracts
lock in the price for which the currency will sell at contract's maturity.
safe payments
lowest possible payouts to partners
A hedge of a net investment in a foreign operation eliminates the possibility of a .....but...
negative translation adjustment in Accumulated Other Comprehensive Income, but gains and losses realized in cash can result
benefits of a partnership as opposed to a corporation
only oral agreement is necessary, also easier/cheaper to form than a corporation partnerships avoid double taxation
The balance sheet exposure under the current rate method is equal to
operation's net assets assets- liabilities
Time Value
relates to the spot rate which can change over time and cause the option's intrinsic value to increase.
Instead of statement of retained earnings , partnerships have?
statement of partners capital
spot rate
the price at which a foreign currency can be purchased or sold today.
forward rate
the price available today at which foreign currency can be purchased or sold in the future.
mutual agency
the right for all partners to incurr liabilities in the name of the partnership
If functional currency is Forigen
use current rate method
Determination of net income for the period when liquidating a partnership
would be of little value
Withdrawal of a Partner - Bonus Method
.amount paid in excess of that partner's capital account is allocated against remaining partners' capital accounts.
Foreign currency receivables from an export sale create an
asset exposure to foreign exchange risk
Sales income tax other expenses Temporal Method
average rate
A country has a highly inflationary economy when
cumulative three year inflation exceeds 100 percent. With compounding, it equates to an average of approximately 26 percent per year for three years in a row. A country may or may not be classified as highly inflationary, depending on its most recent three-year experience with inflation.
marketable securities current rate method
current rate
receivables and liabilities temporal method
current rate
direct quotes
indicate the number of domestic currency needed to purchase one unit of foreign currency,
indirect quotes
indicate the number of foreign currency units that could be purchased with one unit of domestic currency. These rates are simply the inverse of direct quotes.
Unrealized foreign exchange gains and losses are reported in ?
net income in the period in which the exchange rate changes. Change in the exchange rate from the balance sheet date to date of payment results in a second foreign exchange gain or loss that is reported in the second accounting period.
If the foreign currency increases in value, an increase in the U.S. dollar value of the net asset occurs and will be reflected (current rate method)
through a positive (credit balance) translation adjustment
60,000 NI , 30,000 in drawings , partners record journal entry to record drawings
1 Partner A capital 10000 Partner B capital 10000 Partner C capital 10000 Partner A drawing 10000 Partner B drawing 10000 Partner C drawing 10000 2 Income Summary 60000 Partner A capital (30%) 18,000 Partner B capital (40%) 24,000 Partner C capital (30%) 18,000
A gain or loss on the hedging instrument is recognized in
Accumulated Other Comprehensive Income (AOCI) along with the translation adjustment being hedged.
Goodwill/Revaluation method 30k admission fo 20 percent ownership (partner D) PA50K 20% ownership PB30K 50% ownership PC20K 30% ownership
Goodwill 50,000 Partner A 10,000 Partner B 25,000 Partner C 15,000 **30k implies value of company is worth 150,000 30k/.20 =150k company's book value is 100k hence goodwill of 50k Partner A Capital 20%x60k (new capital bal)12k Partner B Capital 20%x55k 11k Partner C Capital20%x35k 7k Partner D capital20%x150k (total cap) 30k
Limited Liability Partnership LLP
Has most characteristics as a general partnership but it significantly reduces the partners' liability. Partners may lose investment in the business. Responsible for contractual debts of the business. The advantage is in connection with any liability resulting from damages. Partners are responsible for only their acts or omissions and those of individuals under their supervision.
4 types of foreign exchange risks
Recognized foreign currency denominated assets and liabilities. Unrecognized foreign currency firm commitments. Forecasted foreign currency denominated transactions. Net investments in foreign operations.
Reported on net Income
Temporal Method Remesurement Gain or Loss
Remeasurement
Temporal method
Definition of partnership:
an association of two or more persons to carry on a business as co-owners for profit
Under both IFRS and U.S. GAAP, the cumulative translation adjustment and cumulative net gain or loss on the net investment hedge are
are transferred from AOCI to net income when the foreign subsidiary is sold or otherwise disposed of.
export sale exposure ? FC appreciates ? depreciates?
asset exposure appreciates = gain depreciates = loss
Depreciation and Amortization current rate method
average rate for the year
Equity Section of balance sheet for a partnership is composed solely of
contributions from and distributions to partners, earnings, and equity transactions.
If forward rates are less than spot rates
currency selling at a discount
If forward rates exceed spot rates on any given date
currency selling at a premium
Marketable securities temporal method
current exchange rate
Net Assets current rate method
current exchange rate
Cash temporal method
current rate
inventory current rate method
current rate
Foreign currency options
establish a price for which the currency can be sold, but is not required to be sold at maturity
Journal entry to record positive translation adjustment in foreign subsidy
investment in subsidiary 8 Cumulative translation adjustment 8
intrinsic value
is equal to the gain that could be realized by exercising the option immediately. An option with a positive intrinsic value is said to be "in-the-money."
time value of an option decreases over time because
less time remains for the option to increase in intrinsic value.
fair value of a foreign currency option is
the sum of its intrinsic and time values on that date.
In highly inflationary economies
the temporal method for translation is required with remeasurement gains or losses reported in net income.
Any partnership cash remaining after paying liabilities and liquidation expenses is distributed to the individual partners on the basis of
their respected capital accounts
Deprecation/ Amortization temporal method
historical rate
Dividends current rate method
historical rate
contributed capital temporal method
historical rate
equipment temporal method
historical rate
inventory property temporal method
historical rate
import purchase exposure? FC appreciates? Depreciates
liability appreciates = loss depreciates = gain
Authoritative accounting literature requires foreign currency balances—foreign currency receivables or foreign currency payables—to be
revalued at the balance sheet date to account for change in exchange rates. Consistent with accrual accounting, under the two-transaction perspective, a foreign exchange gain or loss arises at the balance sheet date. U.S. GAAP requires the accrual accounting approach to be used to account for foreign exchange rate changes
Two transaction perspective exports
Account for the original sale in U.S. dollars at date of sale. No subsequent adjustments are required. Changes in the U.S. dollar value of the foreign currency are accounted for as gains/losses from exchange rate fluctuations reported separately from sales in the income statement.
Articles of partnership should include
Specific method by which profits and losses are to be allocated. Periodic withdrawal of assets by each partner. Procedure for admitting new partners. Method for arbitrating partnership disputes. Life insurance provisions enabling remaining partners to acquire the interest of any deceased partner. Method for settling a partner's share in the business upon withdrawal, retirement, or death.
Goodwill method
Based on the assumption that an implied value can be calculated mathematically and recorded for any intangible contribution made by a partner.
COGS Temporal Method
Beginning inventory @histroical rate +purchases @average rate -ending inventory @ historical rate ____________________________________________ COGS
are two options for recording contributed intangible assets:
Bonus Method Goodwill/Reevaluation Method
Two methods to account for transfer of ownership
Book value approach. Goodwill (revaluation) approach.
Initial Journal entry to record creation of partnership
Cash 7 Partner A Capital 5 Partner B Capital 2
Two major translation methods are currently used:
Current Rate Method Temporal Method
Reported in OCI
Current rate method
Translation
Current rate method
A foreign operation represents a foreign currency net asset and if the foreign currency decreases in value against the U.S. dollar, a decrease in the U.S. dollar value of the foreign currency net asset occurs (current rate method)
It will be reflected by reporting a negative (debit balance) translation adjustment in the consolidated financial statements.
Ways to be admitted into a partnership
One method of gaining admittance to a partnership is by the purchase of a current interest. One or more partners can choose to sell their portion of the business to an outside party.
Book Value method
Ownership interest is transferred from existing partners to new partner New partner's capital is paid directly to existing partners
Book Value Journal entry 30k for admission for 20 percent ownership PA 50K PB 30K PC 20K
Partner A (20%of capital bal) 10,000 Partner B (20%of capital bal) 6,000 Partner C (20%of capital bal) 4,000 New partner (20%of total capital) 20,000
journal entry to close out partnership and record cash distribution
Partner A capital 8 Partner B capital 2 Cash 10
Journal Entry to record Partner drawings
Partner A drawing 10 Partner B drawing 10 Cash 20
Functional Currency = U.S Dollar
Temporal Method
The U.S. dollar translation adjustment is realized only if
The parent sends U.S. dollars to the foreign subsidiary to pay all of its liabilities. The subsidiary converts its receivables and marketable securities into cash and then sends this amount plus the amount in its cash account to the U.S. parent, which converts it into U.S. dollars.
The statement of liquidation is prepared at periodic intervals to disclose:
Transactions to date. Assets still being held by the partnership. Liabilities remaining to be paid. Current cash and capital balances.
Liabilities translated at the current exchange rate when the foreign currency has appreciated
generate a negative (debit) translation adjustment.
Assets translated at the current exchange rate when the foreign currency has appreciated
generate a positive (credit) translation adjustment.
gains and losses current rate method use
historical exchange rate
Bonus Method
Splits only tangible assets between two partners Recognizes only tangible assets
The Uniform Partnership Act establishes standards and rules for partnerships, but a written agreement will supersede the UPA standards. Articles of partnership should always clearly describe the:
Name and address of each partner. Business location. Description of the nature of the business. Rights and responsibilities of each partner. Initial contribution to be made by each partner and method to be used for valuation.
Limited Liability Company (LLC)
-Relatively new type of organization in the United States. -Long used in Europe and other areas of the world. -Classified as a partnership for tax and court purposes. -Depending on state laws, owners risk only their own investments. -Similar to a Subchapter S, LLC provides liability protection for its owners and managers. In contrast to a Subchapter S corporation, the number of owners is not usually restricted so that growth may be easier to accomplish.
Limited Partnership LP
-Tax benefits of a partnership. -Partners do not want to work in partnership or have unlimited liability. -Number of limited partners invest money as owners but are not allowed to participate in company's management. -Partners can incur a loss on their investment, but it is restricted to what has been contributed. -To protect creditors, one or more general partners must be designated to assume responsibility for all obligations created in the name of the business