Advanced Accounting Exam 3
Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: DateSpot RateForward Rate to Jan.15December 16, 2021$0.00082 $0.00089 December 31, 2021 0.00080 0.00083 January 15, 2022 0.00086 0.00086 Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2021 at a:
$0.00089 − $0.00082 = $0.00007 × FC 20,000,000 = $1,400 Premium
On December 1, 2021, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2022, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply: DateSpot RateForward Rate(Mar. 1, 2022)December 1, 2021$0.092 $0.105 December 31, 2021 0.090 0.095 March 1, 2022 0.089 N/A Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent is 0.9803. Which of the following is included in Joseph's December 31, 2021 balance
$0.105 − $0.095 = ($0.010) × MP 50,000 = ($500.00) × 0.9803 = ($490.15) Liability
Brandon Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2021. Brandon received payment of 40,000 British pounds on May 8, 2021. The exchange rate was £1 = $1.56 on April 8 and £1 = 1.45 on May 8. What amount of foreign exchange gain or loss should be recognized?
$1.45 − $1.56 = ($0.11) × £40,000 = ($4,400) Loss
Winston Corp., a U.S. company, had the following foreign currency transactions during 2021: (1.) Purchased merchandise from a foreign supplier on July 16, 2021 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2021 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2022. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2021, and $299,000 on October 15, 2022. What amount should be included as a foreign exchange gain or loss from the two transactions for 2022?
$295,000 − $299,000 = ($4,000) Loss
Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2021, when the exchange rate for the Canadian dollar (CAD) was U.S. $0.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2021, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2021 was U.S. $0.68, and the 2021 year-end exchange rate was U.S. $0.65. Calculate the U.S. dollar amount allocated to the patent at January 1, 2021.
$350,000 − FV of Assets (CAD 450,000 × $0.70) $315,000 = $35,000 Patent Value
The average exchange rate during 2020 was $1.00 = LCU 1. The beginning inventory was acquired when the exchange rate was $0.80 = LCU 1. Ending inventory was acquired when the exchange rate was $1.10 = LCU 1. The exchange rate at December 31, 2020, was $1.15 = LCU 1. Assuming that the foreign country is highly inflationary, at what amount should the foreign subsidiary's cost of goods sold be reflected in the U.S. dollar income statement?
$4,840,000 Beginning inventoryLCU500,000 ×$0.80=$400,000 Purchases 5,100,000 ×$1.00= 5,100,000 Ending inventory (600,000)×$1.10= (660,000)Cost of goods soldLCU5,000,000 $4,840,000
On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows: DateAmountApril 1, 2020$97,000 December 31, 2020 103,000 April 1, 2021 105,000 How much foreign exchange gain or loss should be included in Shannon's 2020 income statement?
$97,000 − $103,000 = ($6,000) Loss
Carpenter, Inc., a wholly owned subsidiary of the U.S.-based company, Buildings Ltd., was notified of a loss contingency with an estimated cost ranging between $100,000 and $220,000. Carpenter, Inc. hired an expert appraiser who assessed that all possible dollar amounts of liability in this range are equally likely. Management of Carpenter, Inc. has estimated that there is a 65 percent chance that this contingency will result in an actual loss. In the conversion from U.S. GAAP financial statements to IFRS financial statements, what is the amount of adjustment needed to adjust for the difference in accounting for a provision for loss contingency?
($100,000 + $220,000) ÷ 2 = $160,000
A foreign subsidiary of a U.S.-based company has been notified of a loss contingency with an estimated cost ranging between $250,000 and $275,000 which is probable of resulting in an actual loss. Each dollar amount within this range of cost is equally likely of being the actual outcome. According to IFRS, what is the amount recognized as a provision for loss contingency?
($250,000 + $275,000) ÷ 2 = $262,500
According to the IFRS Foundation, approximately how many countries either require or permit the use of IFRS by publicly traded companies?
130 countries.
When preparing a consolidated statement of cash flows, which of the following statements is false?
A change in accounts receivable is translated using the current rate.
A foreign subsidiary of Thun Corporation has one asset (inventory) and no liabilities. The functional currency for this subsidiary is the yuan. The inventory was acquired for 100,000 yuan when the exchange rate was $0.16 = 1 yuan. Consolidated statements are to be produced, and the current exchange rate is $0.12 = 1 yuan. Which of the following statements is true for the consolidated financial statements?
A negative translation adjustment must be reported. Because the yuan is the functional currency, the financial statements must be translated using the current rate method. Therefore, answers "A remeasurement gain must be reported" and "A remeasurement loss must be reported" can be eliminated. Because the subsidiary has a net asset position and the yuan has depreciated from $0.16 to $0.12, a negative translation adjustment will result.
On December 1, 2020, Venice Company (a U.S.-based company) entered into a three-month forward contract to purchase 1,000,000 pesos on March 1, 2021. The following U.S. dollar per peso exchange rates apply: DateSpot RateForward Rate(to March 1, 2021)December 1, 2020$0.088 $0.094 December 31, 2020 0.095 0.098 March 1, 2021 0.105 N/A Ignoring present values, which of the following correctly describes the manner in which Venice Company will report the forward contract on its December 31, 2020, balance sheet?
As an asset in the amount of $4,000
On June 1, Cagle Co. received a signed agreement to sell inventory for ¥650,000. The sale would take place in 90 days. Cagle immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was ¥1 = $0.003986, and the 90-day forward rate was ¥1 = $0.004021. At what amount would Cagle record the Forward Contract on June 1?
Cagle will make no formal entry for the forward contract because it is an executory contract (no cash changes hands) and has a fair value of zero.
Which of the following statements is false regarding a country's legal system?
Common law originated in the Roman jus civile.
Under the temporal method, retained earnings would be remeasured at what rate?
Composite amount.
Oscar reported sales of £1,200,000 during 2021. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales?
Current rate method: £1,200,000 × $1.56 (Average Rate) = $1,872,000
ASU, Inc., a U.S. company, was acquired by an international company and ASU has a transition date of January 1, 2021 for first-time adoption of IFRS. ASU has a new cookie brand that is ready to be marketed but the company has not yet received copyright approval for the brand's logo. All costs for development of the copyright were expensed prior to IFRS January 1, 2021. ASU and its new international parent both have December 31 year-end accounting years. What should ASU do to prepare financial statements for the first time in accordance with IFRS? Multiple Choice
Debit copyright and credit stockholders' equity at January 1, 2021.
Which of the following historical reasons for accounting diversity could explain why accounting standards would be more detailed in some countries than in others?
Different legal systems across countries.
Which of the following is not true about IFRS?
FRS includes only pronouncements issued by the IASB.
Which of the following is not a potential problem caused by differences in financial reporting practices across countries?
Firms face double taxation on income earned by foreign operations.
Which companies are required to provide a U.S. GAAP reconciliation in their annual report filed with the SEC?
Foreign companies listed on a U.S. securities exchange that use financial reporting standards other than U.S. GAAP or IFRS in preparing financial statements.
A U.S. exporter has a Thai baht account receivable resulting from an export sale on June 1 to a customer in Thailand. The exporter signed a forward contract on June 1 to sell Thai baht and designated it as a cash flow hedge of a recognized Thai baht receivable. The spot rate was $0.022 on that date, and the forward rate was $0.021. Forward points are excluded from the assessment of hedge effectiveness. Which of the following is true with respect to the forward points on this contract? The forward points are a
Forward contract discount that is recognized in net income as a foreign exchange loss.
All of the following hedges are used for future purchase/sale transactions except
Forward contracts used to hedge a foreign currency denominated liability.
Which of the following statements is true concerning hedge accounting?
Hedges of foreign currency firm commitments are used for future sales or purchases.
Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2021, have been restated into U.S. dollars as follows: Restated at Current Rates Historical RatesCash$47,500 $45,000 Accounts receivable 95,000 90,000 Marketable securities, at fair value 76,000 72,000 Land 57,000 54,000 Equipment (net) 142,500 135,000 Total$418,000 $396,000 Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included in Parker's consolidated balance sheet at December 31, 2021, for the above items?
If the Dollar is the Functional Currency, Current Rates Used for All Items except PP&E at their Historical Values ($47,500 + $95,000 + $76,000 + $54,000 + $135,000) = $407,500
A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true?
If the foreign currency appreciates, a foreign exchange loss will result.
According to the IASB, IFRS comprise interpretations issued by the SIC and IFRIC, and
International financial reporting standards issued by the IASB and international accounting standards issued by the IASC.
A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2021 in local currency units (LCU): Inventory at cost320,000LCUInventory at net realizable value420,000LCU The following exchange rates are given for 2021: 4th quarter average, 2021$1.43=1LCUDecember 31, 2021 1.42=1LCU Compute the December 31, 2021, inventory balance using the current rate method.
Inventory at Cost 320,000 LCU × $1.42 = $454,400
A company is preparing financial statements using IFRS for the first time for the year ended December 31, 2021. The "transition date" for reporting is
January 1, 2020.
A company must prepare IFRS financial statements for the first time on December 31, 2022. According to IFRS 1, what is the date of transition to IFRS for this company?
January 1, 2021.
Which of the following is not a problem caused by diverse accounting practices across countries?
Lack of comparability of financial statements between companies in the same country.
The FASB-IASB convergence project on leases resulted in the following:
Lease accounting will differ for lessees in that, under IFRS, all leases will be treated as finance leases both on the balance sheet and in the measurement of net income, and under U.S. GAAP lessees will capitalize operating leases on the balance sheet similar to finance leases but will treat them as traditional operating leases in the measurement of income.
Monument Company (a U.S.-based company) ordered a machine costing €100,000 from a foreign supplier on January 15, when the spot rate was $1.20 per €. A one-month forward contract was signed on that date to purchase €100,000 at a forward rate of $1.23. The forward contract is properly designated as a fair value hedge of the €100,000 firm commitment. On February 15, when the company receives the machine, the spot rate is $1.22. At what amount should Monument Company capitalize the machine on its books?
Machinery should be capitalized at the forward rate on the date of receipt (FC100,000 × $1.23 = $123,000), which is equal to the actual amount of cash paid for its purchase.
Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. Which one of the following statements would justify this conclusion?
Most of the subsidiary's sales and purchases were with companies in the U.S.
Carpenter, Inc., a wholly owned subsidiary of the U.S.-based company, Buildings Ltd., was notified of a loss contingency with an estimated cost ranging between $100,000 and $220,000. Carpenter, Inc. hired an expert appraiser who assessed that all possible dollar amounts of liability in this range are equally likely. Management of Carpenter, Inc. has estimated that there is a 65 percent chance that this contingency will result in an actual loss. According to U.S. GAAP, what is the amount recognized by Carpenter, Inc. as a provision for loss contingency?
No amount will be recorded but an amount will be disclosed in the notes to the financial statements.
Grace Co. had a Chinese yuan payable resulting from imports from China and a Mexican peso receivable resulting from exports to Mexico. Grace recorded foreign exchange losses related to both its yuan payable and peso receivable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date? Yuan Peso a. Increase Increase b. Increase Decrease c. Decrease Increase d. Decrease Decrease
Option B
Which of the following combinations correctly describes the relationship between foreign currency transactions, exchange rate changes, and foreign exchange gains and losses? Type of Transaction ForeignCurrency Foreign Exchange Gain or Loss a.Export sale Appreciates Loss b.Import purchase Appreciates Gain c.Import purchase Depreciates Gain d.Export sale Depreciates Gain
Option C
Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $0.0094, and the forward rate was $0.0095. Which of the following did the U.S. exporter report in net income?
Premium revenue.
For which of the following types of companies is IFRS for SMEs intended?
Private companies.
Which of the following is not a way for a country to use IFRS?
Prohibit the use of a country's national GAAP.
In which of the following areas does the IASB not allow firms to choose between two acceptable treatments?
Recognizing development costs that meet criteria for capitalization as an asset.
Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. What must Dilty do to ready the subsidiary's financial statements for consolidation?
Remeasure them.
The functional currency of Bertrand, Inc.'s Irish subsidiary is the euro. Bertrand borrowed euros as a partial hedge of its investment in the subsidiary. Since then, the euro has decreased in value. Bertrand's negative translation adjustment on its investment in the subsidiary exceeded its foreign exchange gain on its euro borrowing. How should Bertrand report the effects of the negative translation adjustment and foreign exchange gain in its consolidated financial statements?
Report the translation adjustment less the foreign exchange gain in accumulated other comprehensive income on the balance sheet.
Which of the following is a correct statement with regard to differences between IFRS and U.S. GAAP?
Reporting past service cost for defined benefit pension plans is a measurement difference.
IFRS for SMEs differ from full IFRS in all of the following ways except:
Segment reporting must be provided when following IFRS for SMEs.
When consolidating a foreign subsidiary, which of the following statements is true?
Subsidiary's cumulative translation adjustment is carried forward to the consolidated balance sheet.
For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is required to ready the financial statements for consolidation?
Temporal Method.
In the translated financial statements, which method of translation maintains the underlying valuation methods used in preparing the foreign currency financial statements?
Temporal method By translating items carried at historical cost by the historical exchange rate, the temporal method maintains the underlying valuation method used by the foreign subsidiary in preparing its financial statements.
Certain balance sheet accounts of a foreign subsidiary of the Crater Co. had been stated in U.S. dollars as follows: Stated at Current Rates Historical RatesAccounts receivable−current$310,000 $324,000 Accounts receivable−long term 150,000 167,000 Prepaid insurance 90,000 98,000 Goodwill 115,000 121,000 Totals$665,000 $710,000 If the U.S. dollar is the functional currency of this subsidiary, what total amount should be included in Crater's balance sheet in U.S. dollars?
Temporal method: If the dollar is the functional currency, current rates are used for receivables and historical rates for the remaining assets ($310,000 + $150,000 + $98,000 + $121,000) = $679,000
What is a subsidiary's functional currency?
The currency in which the entity primarily generates and expends cash
Which of the following is not a condition of accounting for hedge derivatives?
The derivative is minimally effective in offsetting changes in the cash flows or fair value related to the hedged item.
Brandt Corp. (a U.S.-based company) sold parts to a South Korean customer on December 1, 2020, with payment of 10 million South Korean won to be received on March 31, 2021. The following exchange rates apply: DateSpot RateForward Rate(to March 31, 2021)December 1, 2020$0.0035 $0.0034 December 31, 2020 0.0033 0.0032 March 31, 2021 0.0038 N/A Assuming that Brandt entered into a forward contract to sell 10 million South Korean won on December 1, 2020, as a fair value hedge of a foreign currency receivable, what is the net impact on its net income in 2020 resulting from a fluctuation in the value of the won? Brandt amortizes forward points on a monthly basis using a straight-line method. Ignore present values. Multiple Choice
The discount on forward contract is $1,000 [($0.0035 − $0.0034) × 10 million, which will be amortized at the rate of $250 per month [$1,000 / 4 months]. A foreign exchange loss of $250 will be recognized on December 31, 2020.The net impact on 2020 net income is a decrease of $250.
All of the following data may be needed to determine the fair value of a forward contract at any point in time except
The future spot rate.
The most relevant factor in determining the purpose of financial reporting is:
The nature of the country's financing system.
Matthias Corp. had the following foreign currency transactions during 2020: Purchased merchandise from a foreign supplier on January 20 for the U.S. dollar equivalent of $60,000 and paid the invoice on April 20 at the U.S. dollar equivalent of $50,000. On September 1, borrowed the U.S. dollar equivalent of $300,000 evidenced by a note that is payable in the lender's local currency in one year. On December 31, the U.S. dollar equivalent of the principal amount was $320,000. In Matthias's 2020 income statement, what amount should be included as a net foreign exchange gain or loss?
The net foreign exchange loss is $10,000 ($10,000 gain − $20,000 loss).
An historical exchange rate for common stock of a foreign subsidiary is best described as
The rate when the common stock was originally issued for the acquisition transaction.
When a U.S. company purchases parts from a foreign company, which of the following will result in zero foreign exchange gain or loss?
The transaction is denominated in U.S. dollars.
Which of the following is not an example of IFRS simplified for SMEs?
There is a choice between using the cost model and the revaluation model for property, plant, and equipment.
A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true?
There is a positive translation adjustment.
Which statement is correct as it relates to diverse accounting practices across countries?
Translating financial statements of various currencies into one common currency for consolidation purposes does not resolve the problem of diversity of accounting practices across countries.
Under IFRS, when an entity chooses the revaluation model as its accounting policy for measuring property, plant, and equipment, which of the following statements is correct?
When an asset is revalued, the entire class of property, plant, and equipment (such as Land) to which that asset belongs must be revalued.
Winston Corp., a U.S. company, had the following foreign currency transactions during 2021: (1.) Purchased merchandise from a foreign supplier on July 16, 2021 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2021 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2022. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2021, and $299,000 on October 15, 2022. What amount should be included as a foreign exchange gain or loss from the two transactions for 2021?
[$47,000 − $54,000 = ($7,000) Loss] + [$315,000 − $295,000 = $20,000 Gain] = $13,000 Gain
Marshall Co. was formed on January 1, 2021 as a wholly owned foreign subsidiary of a U.S. corporation. Marshall's functional currency was the stickle (§). The following transactions and events occurred during 2021: Jan. 1Marshall issued common stock for §2,000,000.June 30Marshall paid dividends of §50,000.Dec. 31Marshall reported net income of §120,000 for the year. Exchange rates for 2021 were: Jan. 1$1=§0.44June 30$1=§0.48Dec. 31$1=§0.50Weighted average rate for the year$1=§0.46 What was the amount of the translation adjustment for 2021?
§2,000,000 × ($0.50 − $0.44) $0.06 = $120,000] + [§50,000 × ($0.50 − $0.48) $0.02 = $1,000] = $121,000 increase in Relative Asset Value
