Advanced Accounting Final Exam Part 2
Which of the following best describes the effects of foreign currency fluctuations on the financial statements of companies with foreign currency-denominated assets and liabilities? A. Fluctuations in the $US value of foreign currency-denominated assets and liabilities affect both the balance sheet and the income statement. B. Fluctuations in the $US value of foreign currency-denominated assets and liabilities affect only the balance sheet and have no effect in net income. C. Fluctuations in the $US value of foreign currency-denominated assets and liabilities affect only stockholders' equity and do not affect the income statement directly. D. None of the above
A. Fluctuations in the $US value of foreign currency-denominated assets and liabilities affect both the balance sheet and the income statement.
Which of the following statements is false regarding the formation of a partnership? A. Partners may only contribute cash to the partnership which, then, purchases all of its assets. B. Capital Accounts are credited to represent the claim of the partners to the net assets of the partnership. C. The Capital Account for an individual partner does not need to be equal to the amount that the partner has contributed to the partnership. D. All of the above are true.
A. Partners may only contribute cash to the partnership which, then, purchases all of its assets.
Which of the following does not accurately describe the process relating to the dissolution of a partnership? A. The assets of the partnership must be converted to cash used to pay the obligations to creditors, including partners who are creditors, and any remaining cash must be distributed to the partners in accordance with the relative proportions of their Capital Accounts. B. Profits (losses) that result from the liquidation of the partnership assets must be credited (charged) to the partners' Capital Accounts. C. If a partner's Capital Account becomes negative as a result of the sales of assets, the partner must make a cash contribution to the partnership in an amount sufficient to bring the Capital Account to a zero balance. D. If a partner fails to contribute the full amount required, all of the other partners shall contribute (in their profit-sharing ratios) the additional amount necessary to satisfy the partnership obligations. In the event of such contribution, the partners shall have the right to sue the partner with the unfunded negative Capital Account for the amount owed to the partnership
A. The assets of the partnership must be converted to cash used to pay the obligations to creditors, including partners who are creditors, and any remaining cash must be distributed to the partners in accordance with the relative proportions of their Capital Accounts.
A forward contract : A. is a commitment to buy or sell a specified quantity of an asset or commodity at a specified price and future date. B. is an option to buy or sell a specified quantity of an asset or commodity at a specified price and future date. C. is traded on organized exchanges. D. allows for the quantity or price of the transaction to fluctuate over time.
A. is a commitment to buy or sell a specified quantity of an asset or commodity at a specified price and future date.
If our company borrows money with a foreign currency-denominated loan A. it must record the loan and the accrued interest at the current $US value on each statement date. B. it must record the loan, but not the accrued interest, at the current $US value on each statement date. C. it must record the accrued interest, but not the loan, at the current $US value on each statement date. D. No adjusting entries to reflect currency fluctuations need to be made.
A. it must record the loan and the accrued interest at the current $US value on each statement date.
If our company borrows money with a foreign currency-denominated loan A. it must record the loan and the accrued interest at the current $US value on each statement date. B. it must record the loan, but not the accrued interest, at the current $US value on each statement date. C. it must record the accrued interest, but not the loan, at the current $US value on each statement date. D. No adjusting entries to reflect currency fluctuations need to be made.
A. it must record the loan and the accrued interest at the current $US value on each statement date.
Companies invest in financial derivatives A. to reduce exposure to currency-related risks. B. in order to realize capital gains as their value increases. C. as a means in which to enter desirable markets. D. None of the above.
A. to reduce exposure to currency-related risks.
Which of the following statements is false? A. The partner Capital Account is updated in a manner that is similar to the way in which we update Retained Earnings for a corporation. B. Cash paid to partners is called a dividend. C. Profit and loss can be allocated to individual partners in a ratio that is different form the relative proportion of their capital accounts. D. Cash paid to a partner for services performed for the partnership is not recognized as an expense.
B. Cash paid to partners is called a dividend.
Current US GAAP requires the following accounting for financial derivatives: A. Financial derivatives are reported at historical cost. B. Financial derivatives are reported at fair value at each statement date with unrealized gains (losses) reflected in Accumulated Other Comprehensive Income. C. Financial derivatives are reported at fair value at each statement date with unrealized gains (losses) reflected in Net Income. D. Financial derivatives are only written down to reflect losses that are other than temporary.
B. Financial derivatives are reported at fair value at each statement date with unrealized gains (losses) reflected in Accumulated Other Comprehensive Income.
Which of the following statements is true about options? A. Options generally require a large up-front payment. B. The time value of an option reflects the probability that the underlying asset's price will rise. C. An option's value generally decreases with time to maturity to reflect the time value of money. D. A company might purchase a call option to limit potential price declines in the value of a financial asset or commodity.
B. The time value of an option reflects the probability that the underlying asset's price will rise.
Fair value risks generally relate to which of the following? A. Risks relating to forecasted transactions B. Unrecognized firm commitments C. Risks relating to fluctuations in the market price of the company's own stock D. None of the above Feedback
B. Unrecognized firm commitments
An option contract A. requires a relatively large up-front payment and are, therefore, rarely used in practice. B. has an intrinsic value that is never less than zero. C. has an intrinsic value that decreases with time to maturity. D. gives a party the obligation to execute a transaction.
B. has an intrinsic value that is never less than zero.
Assume that our US-based company purchases 2,000 units of inventories from a UK supplier at £6/unit. To record the purchase, Select one: A. our company will debit inventories and credit accounts payable for £12,000. B. our company will debit inventories and credit accounts payable for the $US equivalent of £12,000. C. our company will not record the purchase of inventory until the payable is paid. D. Either A or B is correct.
B. our company will debit inventories and credit accounts payable for the $US equivalent of £12,000.
If a forward or futures contract is to be an effective hedge of a net asset or future cash flow A. then the net settlement value of the forward or futures will increase and decrease in value in the same direction to the fair value of the asset (or to the future cash flows) to which they relate. B. then the net settlement value of the forward or futures will increase and decrease in value in the opposite direction to the fair value of the asset (or to the future cash flows) to which they relate. C. then the net settlement value of the forward or futures remains unchanged, thus reducing price fluctuation risk. D. None of the above are true.
B. then the net settlement value of the forward or futures will increase and decrease in value in the opposite direction to the fair value of the asset (or to the future cash flows) to which they relate.
Which of the following is not a characteristic of a derivative? A. A contract that has one or more underlyings B. A contract that permits net settlement C. A contract that does not permit net settlement D. It is a financial instrument.
C. A contract that does not permit net settlement
Which of the following best describes the accounting for changes in partnership ownership? A. A common practice when admitting a new partner to a partnership is to revalue the partnership net assets to fair value. B. The purchase of a partnership interest in a transaction between old and new partners requires a journal entry in the partnership records. C. Both A and B. D. Neither A nor B.
C. Both A and B.
The loss associated with a change in fair value of a derivative instrument should be reported as a component of other comprehensive income only if the derivative is appropriately designated as a A. Fair value hedge of the foreign currency exposure of an unrecognized firm commitment B. Fair value hedge of the foreign currency exposure of a recognized asset or liability for which a foreign currency transaction gain or loss is recognized in earnings C. Cash flow hedge of the foreign currency exposure of a forecasted transaction D. Speculation in a foreign currency
C. Cash flow hedge of the foreign currency exposure of a forecasted transaction
Which of the following does not describe the partnership form of organization? A. Partnerships allow numerous individuals to combine their efforts for a variety of business purposes in an organization that can last indefinitely. B. Partnerships can survive the admission of new partners and the disassociation of existing partners as they retire. C. From a tax standpoint, the taxing authorities view the partnership as a taxable entity and tax its profit like other forms of organization. D. Partnerships pass through liabilities to the partners.
C. From a tax standpoint, the taxing authorities view the partnership as a taxable entity and tax its profit like other forms of organization.
Which of the following statements is not correct about the accounting for partnerships? A. Partnerships are a legal entity and, as such, they must issue financial statements. B. Partnerships are not necessarily required to issue financial statements that are prepared in conformity with GAAP. C. Partnerships are required to issue financial statements that are prepared in conformity with GAAP. D. Partnerships don't have stockholders' equity like corporations do.
C. Partnerships are required to issue financial statements that are prepared in conformity with GAAP.
If a company reports a payable denominated in Euros (€) and the $US weakens vis-à-vis the Euro A. the company will not report the change in the relative value of the payable until the payable is paid. B. the company will accrue the gain in its financial statements as of the statement date, even before the payable is paid. C. the company will accrue the loss in its financial statements as of the statement date, even before the payable is paid. D. the company will recognize the increase in the $US value of the payable on its balance sheet as of the statement date, but the unrealized loss will not be recognized in its income statement until the payable is paid
C. the company will accrue the loss in its financial statements as of the statement date, even before the payable is paid.
Hedge accounting means that A. the financial derivative is reported on the balance at fair value, but no gains and losses are recognized, thus reducing income volatility. B. the financial derivative is marked to market together with the asset (liability) to which it relates and unrealized gains and losses are always reflected in net income. C. the financial derivative is marked to market together with the asset (liability) to which it relates and unrealized gains and losses on fair value hedges are immediately reflected in net income. D. the financial derivative is marked to market together with the asset (liability) to which it relates and unrealized gains and losses on cash flow hedges are immediately reflected in net income.
C. the financial derivative is marked to market together with the asset (liability) to which it relates and unrealized gains and losses on fair value hedges are immediately reflected in net income.
Which of the following statements is false regarding the allocation of profit to partners? Select one: A. The allocation of remaining profit to the partners is based on a sharing ratio that is described in the Partnership Agreement. B. The Partnership Agreement can provide for different sharing ratios in the event of a profit or a loss. C. The profit sharing ratio does not have to conform to the partners' respective Capital Account balances. D. All of the above are true.
D. All of the above are true.
Which of the following statements is not true about limited liability partnerships (LLPs)? A. In an LLP, all partners have a form of limited liability, similar to that of the shareholders of a corporation. B. Unlike corporate shareholders, the partners have the right to manage the business directly rather than through a board of directors C. In addition to structuring the partnership as an LLP, professional service organizations also typically maintain a significant amount of malpractice insurance as additional protection. D. All of the above are true.
D. All of the above are true.
A call option A. is a right to buy a specified quantity of an asset at a specified price. B. is a right to sell a specified quantity of an asset at a specified price. C. can be used to limit the price a company will have to pay for a commodity. D. Both A and C are true.
D. Both A and C are true.
Cash flow risks A. can relate to forecasted purchases or sales of a commodity. B. can relate to the risks associated with fixed rates of interest. C. can relate to the risks associated with variable rates of interest. D. Both A and C are true.
D. Both A and C are true.
Financial derivatives A. are only used by foreign currency traders to speculate on currency fluctuations. B. are generally legal contracts or exchange traded securities that are designed to transfer risk for a price. C. generally involve three parties. D. Both B and C are true.
D. Both B and C are true.
An exchange rate of $1.25:¥1 A. means that each $US is worth 1.25¥ B. implies that the $US has strengthened vis-à-vis the ¥ C. implies that the ¥ has strengthened vis-à-vis the $US D. Can also be expressed as $1: ¥0.80
D. Can also be expressed as $1: ¥0.80
Which of the following best describes the accounting for foreign currency-denominated receivables and payables? Select one: A. No gains or losses are recorded until the receivable is collected or the payable is paid. B. No gains or losses are recorded because there has been no cash effect. C. Companies are required to report the foreign-currency denominated receivables and payables at their current market value on the statement date, but no gain or loss is recognized in the income statement. D. Companies are required to accrue gains and losses on foreign currency-denominated receivables and payments as of the statement date.
D. Companies are required to accrue gains and losses on foreign currency-denominated receivables and payments as of the statement date.
Assume that the $US has weakened with respect to the Euro and that we have a Euro-denominated payable: A. Our company will report the loss only on the payment date. B. Our company will report the gain only on the payment date. C. Our company will not report a gain or loss because there has been no cash effect. D. Our company will accrue a loss on the statement date.
D. Our company will accrue a loss on the statement date.
Assume that our company incurs a Euro-denominated payable when the exchange rate is $1.20 : €1 and that the $US weakens to $1.27 : €1 before the payable is paid: A. Our company will not recognize the gain until the payable is paid. B. Our company will not recognize the loss until the payable is paid. C. Our company will recognize the gain on its next statement date. D. Our company will recognize the loss on its next statement date.
D. Our company will recognize the loss on its next statement date.
Which of the following best describes the accounting for partnership formation when partners are assigned balances that do not equal their capital contributions? A. This scenario is not possible since all capital accounts must be proportional to the relative contributions of the partners. B. The partnership can apply either the "bonus method" or the "goodwill method" to account for the contribution without restriction. C. The "bonus method" relates to the recognition of an intangible asset upon formation of the partnership. D. The "bonus method" can be used even in the presence of an intangible asset if the partners agree.
D. The "bonus method" can be used even in the presence of an intangible asset if the partners agree.
Which of the following is not true about the accounting for changes in partnership ownership involving revaluation of net assets? A. If net assets are measured at fair value, the partners have the best possible chance of allocating partner Capital Accounts in a fair and unbiased manner. B. When partnership net assets are revalued in anticipation of a realignment transaction, the resulting gains and losses accrue only to the partners who have an ownership interest in the entity during the period in which the net assets changed in value. C. The gains and losses that result from pre-realignment revaluation are allocated to the existing partners' Capital Accounts in the revaluation profit-and-loss-sharing ratio designated in the Partnership Agreement. D. The differential in value resulting from the revaluation of assets is recognized as a gain or loss in the partnership income statement.
D. The differential in value resulting from the revaluation of assets is recognized as a gain or loss in the partnership income statement.
Assume our U.S.-based company's functional currency is the $US dollar and it enters into a forecasted transaction with an England-based retailer on December 1, 2018. The forecasted transaction requires our company to sell 75,000 units of an inventory item costing £12 each to the English company. Our company is contractually committed to ship the inventory (i.e., title transfers) on March 1, 2019, with payment in British pounds on the same date. Our company does recurring business with the English company, but this arrangement does not qualify as a firm commitment. Also assume, on December 1, 2018, our company enters into a contract with a foreign currency exchange broker to sell British pounds (for settlement on March 1, 2019) to mitigate the risk of exchange rate fluctuation. This derivative qualifies as a cash flow hedge. The relevant exchange rates and related balances for the period from December 1, 2018, to March 1, 2019, are as follows: Date Spot Rate Forward Rate FV Change in FV ($US=€1) ($US=€1) November 15, 2018 1.32 1.37 December 31, 2018 1.41 1.44 $(63,000) $(63,000) February 15, 2019 1.46 1.46 (81,000) (18,000) *For settlement on March 1, 2019 *Ignore discounting in the computation of fair values. For the quarter ended December 31, 2018, what net amount will our company recognize as sales? : a. $0 b. $1,188,000 c. $1,269,000 d. $1,296,000
a. $0 Because there is no ineffective portion of the cash flow hedge derivative, there will be no adjustments to sales until the March 1, 2019 delivery of the merchandise and settlement of the derivative.
Assume our U.S.-based company's functional currency is the $US and it enters into a "firm commitment" with a Portugal-based retailer on November 15, 2018. The firm commitment requires our company to sell 40,000 units of an inventory item costing €20 each to the Portuguese company. Our company is contractually committed to ship the inventory (i.e., title transfers) on February 15, 2019, with payment in Euros on the same date. Our company does recurring business with the Portuguese company, and the firm commitment includes significant monetary penalties for nonperformance. Also assume, on November 15, 2018, our company enters into a contract with a foreign currency exchange broker to sell Euros (for settlement on February 15, 2019) to mitigate the risk of exchange rate fluctuation. This derivative qualifies as a fair value hedge. The relevant exchange rates and related balances for the period from November 15, 2018, to February 15, 2019, are as follows: Date Spot Rate Forward Rate FV Change in FV ($US=€1) ($US=€1) November 15, 2018 1.45 1.40 December 31, 2018 1.40 1.38 $16,000 $16,000 February 15, 2019 1.30 1.30 80,000 64,000 *For settlement on February 15, 2019 *Ignore discounting in the computation of fair values. On November 15, 2018, what amount should be recognized in "Sales?" a. $0 b. $1,040,000 c. $1,120,000 d. $1,160,000
a. $0 The firm commitment allows the company to apply fair value hedge treatment to the foreign-currency forward-contract derivative. However, it does not allow the company to record sales before they occur. The sales transaction will take place on February 15, 2019. To the extent the derivative is ineffective in hedging the foreign currency exposure of the firm commitment, some small adjustments to sales might occur at future financial statement dates when the derivative and firm commitment are marked to fair value.
Partners A and B are partners with capital balances of $117,000 and $65,000, respectively. They agree to admit Partner C as a partner with a 25% interest upon payment of $78,000. Assume that the partners do not wish to recognize an intangible asset. What total amount should be recorded as a bonus to Partners A and B? a. $13,000 b. $19,500 c. $52,000 d. $78,000
a. $13,000 The total capital after the contribution is $117,000 + $65,000 + $78,000 = $260,000 and a 25% interest is $65,000. Since Partner C is investing $78,000. The bonus to Partners A and B is $78,000 - $65,000 = $13,000.
Partners A and B report average capital balances of $256,000 and $160,000, respectively, for the year. The partnership agreement provides for interest at the rate of 10% on the average capital balance and an equal division of the remaining profit of $6,400 for the year. By what amount should B's capital account change for the year? a. $19,200 increase b. $19,200 decrease c. $3,200 increase d. $3,200 decrease
a. $19,200 increase Capital$256,000$160,000 Interest@10%25,60016,000 Allocation of profit3,2003,200 Total allocation$28,800$19,200 Partner B's capital increases by $19,200
The capital balances of the FGH Partnership are as follows: Fortier $120,000Gauthier75,000Houle225,000 The partners' income sharing ratio is: Fortier, 35%; Gauthier, 45%; Houle, 20%. Escoffier joins the partnership by contributing $150,000 to the partnership for a 25% interest in the partnership. Assume the partnership's identifiable net assets are carried at amounts approximating fair value. If the goodwill method is used to record the admission of Escoffier, goodwill will be recorded on the books of partnership in the amount of: a. 30000 b. 75000 c. 150000 d. 50000
a. 30000 Total value implied by Escoffier's investment = $150,000/0.25 = $600,000 Goodwill = $600,000 - ($420,000 + $150,000) = $30,000 The correct answer is: 30000
At what amount should noncash property that is contributed to a partnership be credited to the contributing partner's capital account? a. Fair value of the contributing partner assets b. Assessed valuation of the contributing partner's assets for property tax purposes c. Original cost of the assets to the contributing partner d. Tax basis of the contributing partner assets
a. Fair value of the contributing partner asset
Which of the following is true with respect to the recognition of partnership profit or loss? a. Salary paid to a partner is not treated as an expense b. The net of revenues less expenses is always allocated to the partners in proportion to their relative Partner Capital accounts c. Withdrawals of capital from the partnership are treated as expenses d. Capital contributions are treated as income to the partnership
a. Salary paid to a partner is not treated as an expense
Assume that there are three partners in a partnership, A, B, and C. Partner C provides services to the partnership and is entitled to a salary of $90,000. Assume that the partnership revenues less expenses (other than salary to Partner C) amount is $480,000. Finally, assume that the Partnership Agreement provides for a sharing ratio of 40:40:20 for Partners A, B, and C, respectively. How much profit should be allocated to each partner? a.Partner APartner BPartner C$156,000$156,000$168,000 b.Partner APartner BPartner C$160,000$160,000$160,000 c.Partner APartner BPartner C$190,000$190,000$190,000 d.Partner APartner BPartner C$192,000$192,000$96,000
a.Partner APartner BPartner C$156,000$156,000$168,000 The salary paid to Partner C is deducted from the $480,000 excess of revenues over expenses, leaving $390,000 to be allocated to the partners in the sharing ratio of 40:40:20.
Assume our U.S.-based company's functional currency is the $US dollar and it enters into a forecasted transaction with an England-based retailer on December 1, 2018. The forecasted transaction requires our company to sell 75,000 units of an inventory item costing £12 each to the English company. Our company is contractually committed to ship the inventory (i.e., title transfers) on March 1, 2019, with payment in British pounds on the same date. Our company does recurring business with the English company, but this arrangement does not qualify as a firm commitment. Also assume, on December 1, 2018, our company enters into a contract with a foreign currency exchange broker to sell British pounds (for settlement on March 1, 2019) to mitigate the risk of exchange rate fluctuation. This derivative qualifies as a cash flow hedge. The relevant exchange rates and related balances for the period from December 1, 2018, to March 1, 2019, are as follows: Date Spot Rate Forward Rate FV Change in FV ($US=€1) ($US=€1) November 15, 2018 1.32 1.37 December 31, 2018 1.41 1.44 $(63,000) $(63,000) February 15, 2019 1.46 1.46 (81,000) (18,000) *For settlement on March 1, 2019 *Ignore discounting in the computation of fair values. For the quarter ended March 31, 2019, what net amount will our company recognize as sales? a. $0 b. $1,233,000 c. $1,314,000 d. $1,395,000
b. $1,233,000 Our company will recognize $1,314,000 of sales for the original transaction, include in sales $18,000 of losses on the derivative contract from December 31, 2018 to March 1, 2019, and reclassify into sales $63,000 of losses from accumulated other comprehensive income (i.e., the fair value of the derivative at December 31, 2018). This nets to $1,233,000.
Which of the following business forms are distinct legal entities separate from their owners? Corporations Partnerships Sole Proprietorships Select one: a. 1, 2, and 3 b. 1 and 2 c. 2 and 3 d. 1 and 3
b. 1 and 2
Which of the following is not true with respect to the dissolution of a partnership? a. The assets of the partnership must be converted to cash used to pay the obligations to creditors, including partners who are creditors, and any remaining cash must be distributed to the partners for the remaining amount reported in their capital accounts. b. If a partner's Capital Account becomes negative as a result of the sales of assets, the partner is relieved of all liability with respect to the partnership c. If a partner's Capital Account becomes negative as a result of the sales of assets, the partner must make a cash contribution to the partnership in an amount sufficient to bring the Capital Account to a zero balance d. Profits (losses) that result from the liquidation of the partnership assets must be credited (charged) to the partners' Capital Accounts
b. If a partner's Capital Account becomes negative as a result of the sales of assets, the partner is relieved of all liability with respect to the partnership
Assume that two individuals agree to form a partnership. Partner A is contributing an operating business that reports net assets of $35,000. Partner B is contributing cash of $45,000. The partners agree that the initial capital of the partnership should be shared equally. what will be the initial balance of the Capital Accounts of the partners assuming that the partners wish to employ the Bonus Method? a.Partner APartner B$35,000$45,000 b.Partner APartner B$40,000$40,000 c.Partner APartner B$45,000$45,000 d.Partner APartner B$80,000$80,000
b.Partner APartner B$40,000$40,000 Under the bonus method, since the partners are agreeing to an equal division of partner capital upon formation of the partnership, Partner B is effectively paying a bonus to Partner A in the amount of $5,000.
On November 1, 2018, our company sells to a retailer located in Spain 10,000 units of a product at a sales price of €18 per unit, and we require payment in Euros (€). The exchange rate on the date of sale is $1.22:€1.The due date for payment is February 1, 2019. To mitigate the risk of exchange rate fluctuations between the sale date and the collection date, on November 1, 2018, our company enters into a forward contract with an exchange broker. The contract obligates our company to deliver €180,000 on February 1, 2019, while we lock in the $US we will receive on that date at the forward rate of $1.26:€1 (i.e., the forward rate on November 1, 2018 for settlement on February 1, 2019). Assume this derivative qualifies as a fair value hedge. The following table includes the spot rates and forward rates on November 1, 2018, December 31, 2018, and February 1, 2019: Our company's functional currency and reporting currency is the $US. When computing fair values, ignore discounting. Date Spot Rate ForwardRate ($US = €1) ($US = €1) November 1, 2018 1.22 1.26 December 31, 2018 1.33 1.34 February 1, 2019 1.37 1.37 *For a settlement on February 1, 2019 The adjustment of the Euro-denominated accounts receivable at December 31, 2018, will include which of the following debit or credit amounts? a. $239,400 debit to "Accounts receivable (€180,000)" b. $241,200 credit to "Sales" c. $19,800 debit to "Accounts receivable (€180,000)" d. $14,400 debit to "Sales"
c. $19,800 debit to "Accounts receivable (€180,000)" The spot rate of the dollar weakened from $1.22:€1 on November 1 to $1.33:€1 on December 31. This will result in an increase in the euro-denominated accounts receivable of $19,800 (i.e., ($1.33 - $1.22) x 180,000).
Partners A and B are partners with capital balances of $117,000 and $65,000, respectively. They agree to admit Partner C as a partner with a 25% interest upon payment of $78,000. Assuming that the partners wish to recognize an intangible asset, what amount of goodwill should be reported? a. $13,000 b. $19,500 c. $52,000 d. $78,000
c. $52,000 The $78,000 capital contribution with an ownership interest of 25% implies a value for the partnership of $78,000/25% = $312.000. The total capital after the contribution is $117,000 + $65,000 + $78,000 = $260,000, thus implying a goodwill asset of $52,000.
Assume our U.S.-based company's functional currency is the $US dollar and it enters into a forecasted transaction with an England-based retailer on December 1, 2018. The forecasted transaction requires our company to sell 75,000 units of an inventory item costing £12 each to the English company. Our company is contractually committed to ship the inventory (i.e., title transfers) on March 1, 2019, with payment in British pounds on the same date. Our company does recurring business with the English company, but this arrangement does not qualify as a firm commitment. Also assume, on December 1, 2018, our company enters into a contract with a foreign currency exchange broker to sell British pounds (for settlement on March 1, 2019) to mitigate the risk of exchange rate fluctuation. This derivative qualifies as a cash flow hedge. The relevant exchange rates and related balances for the period from December 1, 2018, to March 1, 2019, are as follows: Date Spot Rate Forward Rate FV Change in FV ($US=€1) ($US=€1) November 15, 2018 1.32 1.37 December 31, 2018 1.41 1.44 $(63,000) $(63,000) February 15, 2019 1.46 1.46 (81,000) (18,000) *For settlement on March 1, 2019 *Ignore discounting in the computation of fair values. For the quarter ended December 31, 2018, what amount will our company recognize in other comprehensive income? a. The gains and losses will net to $0 in other comprehensive income b. $63,000 of gains in other comprehensive income c. $63,000 of losses in other comprehensive income d. $81,000 of gains in other comprehensive income
c. $63,000 of losses in other comprehensive income The fair value of the derivative is a $63,000 liability at December 31, 2018. Thus the change of $63,000 will be recognized as a loss in other comprehensive income
Which of the following is true with respect to the liquidation of a partnership? a. Liquidation expenses will not limit the amount of cash that can be safely distributed b. It is uncommon to assume that no cash will be realized from the sale of assets c. There may be unreported liabilities that were not properly accrued as of the balance sheet date. The liquidation administrator must, therefore, be conservative in estimating the amount of cash that can be safely disbursed. d. All of the these are true
c. There may be unreported liabilities that were not properly accrued as of the balance sheet date. The liquidation administrator must, therefore, be conservative in estimating the amount of cash that can be safely disbursed
Which of the following is true with respect to the revaluation of net assets prior to partnership realignment? a. Partnership net assets can only be written down to net realizable value and cannot be increased if market value exceeds their book value b. Partnership net assets cannot be revalued as a result of partnership realignment c. When partnership net assets are revalued in anticipation of a realignment transactions, the resulting gains and losses accrue only to the partners who have an ownership interest in the entity during the period in which the net assets changed in value d. When partnership net assets are revalued in anticipation of a realignment transaction, only the resulting gains accrue to the partners who have an ownership interest in the entity during the period in which the net assets changed in value. Losses are allocated in proportion to the retaliative balances of the Capital Accounts.
c. When partnership net assets are revalued in anticipation of a realignment transactions, the resulting gains and losses accrue only to the partners who have an ownership interest in the entity during the period in which the net assets changed in value
Assume our U.S.-based company's functional currency is the $US and it enters into a "firm commitment" with a Portugal-based retailer on November 15, 2018. The firm commitment requires our company to sell 40,000 units of an inventory item costing €20 each to the Portuguese company. Our company is contractually committed to ship the inventory (i.e., title transfers) on February 15, 2019, with payment in Euros on the same date. Our company does recurring business with the Portuguese company, and the firm commitment includes significant monetary penalties for nonperformance. Also assume, on November 15, 2018, our company enters into a contract with a foreign currency exchange broker to sell Euros (for settlement on February 15, 2019) to mitigate the risk of exchange rate fluctuation. This derivative qualifies as a fair value hedge. The relevant exchange rates and related balances for the period from November 15, 2018, to February 15, 2019, are as follows: Date Spot Rate Forward Rate FV Change in FV ($US=€1) ($US=€1) November 15, 2018 1.45 1.40 December 31, 2018 1.40 1.38 $16,000 $16,000 February 15, 2019 1.30 1.30 80,000 64,000 *For settlement on February 15, 2019 *Ignore discounting in the computation of fair values. On February 15, 2019, what is the net amount of cash received by our company for the delivery of inventory and the settlement of the forward contract? a. $0 b. $960,000 c. $1,040,000 d. $1,120,000
d. $1,120,000 Our company received cash worth $1,040,000 for the sales transaction (i.e., €800,000 x $1.30), and we received $80,000 for the settlement of our derivative contract (i.e., fair value provided in the facts). Thus, the net cash is $1,120,000, which is also equal to the forward rate of $1.40:€1 times the €800,000 nominal amount of the derivative contract.
On November 1, 2018, our company sells to a retailer located in Spain 10,000 units of a product at a sales price of €18 per unit, and we require payment in Euros (€). The exchange rate on the date of sale is $1.22:€1.The due date for payment is February 1, 2019. To mitigate the risk of exchange rate fluctuations between the sale date and the collection date, on November 1, 2018, our company enters into a forward contract with an exchange broker. The contract obligates our company to deliver €180,000 on February 1, 2019, while we lock in the $US we will receive on that date at the forward rate of $1.26:€1 (i.e., the forward rate on November 1, 2018 for settlement on February 1, 2019). Assume this derivative qualifies as a fair value hedge. The following table includes the spot rates and forward rates on November 1, 2018, December 31, 2018, and February 1, 2019: Our company's functional currency and reporting currency is the $US. When computing fair values, ignore discounting. Date Spot Rate ForwardRate ($US = €1) ($US = €1) November 1, 2018 1.22 1.26 December 31, 2018 1.33 1.34 February 1, 2019 1.37 1.37 *For a settlement on February 1, 2019 The adjustment of the foreign currency forward contract at December 31, 2018, will include which of the following debit or credit amounts? a. $241,200 credit to "Forward contract (asset or liability)" b. $19,800 credit to "Forward contract (asset or liability)" c. $14,400 debit to "Forward contract (asset or liability)" d. $14,400 debit to "Sales"
d. $14,400 debit to "Sales" The foreign-currency forward contract is a derivative and must be marked to fair value at each balance sheet date. This derivative qualifies as a fair value hedge of a foreign-currency-denominated accounts receivable, which was initiated as part of the sale to a customer. Pursuant to FASB ASC 815-25-35-1, each of these gains/losses is "presented in the same income statement line item as the earnings effect of the hedged item" Therefore, the fair value gain and the partially offsetting change in spot rate for the accounts receivable will be recorded in sales. The amount for the foreign currency forward is a debit of $14,400 to sales (i.e., ($1.34 - $1.26) x 180,000)
The partnership agreement does not include one of the following: a. Language relating to the formation, ongoing operation, and ultimate dissolution of the partnership. b. Language relating to whether the partners wish to recognized the intangible asset on the books of the partnership upon formation of the partnership c. Language relating to the way in which profit and loss is to be allocated to the partners' Capital Accounts d. A requirement that all financial statements will be prepared in the accordance with GAAP
d. A requirement that all financial statements will be prepared in the accordance with GAAP
Assume that two individuals agree to form a partnership. Partner A is contributing an operating business that reports net assets of $30,000. Partner B is contributing cash of $45,000. The partners agree that the initial capital of the partnership should be shared equally. What will be the initial balance of the Capital Accounts of the partners assuming that the partners wish to employ the Goodwill Method? a.Partner APartner B$90,000$90,000 b.Partner APartner B$30,000$45,000 c.Partner APartner B$37,500$37,500 d.Partner APartner B$45,000$45,000
d.Partner APartner B$45,000$45,000 Since the partners are agreeing to an equal division of partner capital, Partner B is receiving a 50% interest for a contribution of $45,000, implying a value of the partnership of $90,000 and the recognition of $15,000 of goodwill. Total partnership capital, therefore, equals $90,000 with an equal split agreed to by the partners.
