ACCT 4000 Exam 3 (Ch. 9, 10, 11)

Executory contract

a contract that has not yet been fully performed or fully executed. It is a contract in which both sides still have important performance remaining.

Temporal method

a method of foreign currency translation that uses exchange rates based on the time assets and liabilities are acquired or incurred to convert values on the books of an integrated foreign entity into the parent company's currency.

According to the IFRS Foundation, approximately how many countries either require or permit the use of IFRS by publicly traded companies? a) 130 countries. b) 195 countries. c) 80 countries. d) 40 countries.

a) 130 countries.

Which of the following historical reasons for accounting diversity could explain why accounting standards would be more detailed in some countries than in others? a) Different legal systems across countries. b) Political and economic ties between countries. c) Differences across countries in the extent to which financial statements are the basis for taxation. d) Different rates of inflation across countries.

a) Different legal systems across countries.

According to the IASB, IFRS comprise interpretations issued by the SIC and IFRIC, and a) International financial reporting standards issued by the IASB and international accounting standards issued by the IASC. b) International financial reporting standards issued by the IASB only. c) International financial reporting standards issued by the IASB and statements of financial accounting standards issued by the FASB. d) International accounting standards issued by the IASC only.

a) International financial reporting standards issued by the IASB and international accounting standards issued by the IASC.

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? a) Most of the subsidiary's sales and purchases were with companies in the U.S. b) Dilty's functional currency is the dollar and Dilty is the parent. c) Dilty's other subsidiaries all had the dollar as their functional currency. d) Generally accepted accounting principles require that the subsidiary's functional currency must be the dollar if consolidated financial statements are to be prepared. e) Dilty is located in the U.S.

a) Most of the subsidiary's sales and purchases were with companies in the U.S.

In the translated financial statements, which method of translation maintains the underlying valuation methods used in preparing the foreign currency financial statements? a) Current rate method; income statement translated at average exchange rate for the year b) Temporal method c) Monetary/nonmonetary method d) Current rate method; income statement translated at exchange rate at the balance sheet date

b) Temporal method

An historical exchange rate for common stock of a foreign subsidiary is best described as a) The rate at date of the acquisition business combination. b) The rate when the common stock was originally issued for the acquisition transaction. c) The average rate from date of acquisition to the date of the balance sheet. d) The rate from the prior year's balances. e) The January 1 exchange rate.

b) The rate when the common stock was originally issued for the acquisition transaction.

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

b. Increase, Decrease

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? a) $30,000 loss b) $20,000 gain c) $10,000 loss d) $10,000 gain

c) $10,000 loss 320,000 - 300,000 = 20,000 60,000-50,000 = 10,000 10,000-20,000 = 10,000 loss

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) A remeasurement gain must be reported. b) A positive translation adjustment must be reported. c) A negative translation adjustment must be reported. d) A remeasurement loss must be reported.

c) A negative translation adjustment must be reported.

Which of the following is not a potential problem caused by differences in financial reporting practices across countries? a) Consolidation of financial statements by firms with foreign operations is more difficult. b) Comparisons of financial ratios across firms in different countries may not be meaningful. c) Firms face double taxation on income earned by foreign operations. d) Firms incur additional costs when attempting to obtain financing in foreign countries.

c) Firms face double taxation on income earned by foreign operations.

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 a) December 31, 2021. b) December 31, 2020. c) January 1, 2020. d) January 1, 2021. e) January 1, 2022.

c) January 1, 2020.

Which of the following is not a problem caused by diverse accounting practices across countries? a) Preparation of consolidated financial statements. b) Gaining access to foreign capital markets. c) Lack of comparability of financial statements between companies in the same country. d) Cost and expertise required of accounting staff who prepare consolidated financial statements. e) Need for a company to maintain multiple sets of accounting records.

c) Lack of comparability of financial statements between companies in the same country.

For which of the following types of companies is IFRS for SMEs intended? a) Foreign companies. b) Multinational corporations. c) Private companies. d) Publicly traded companies.

c) Private companies.

In which of the following areas does the IASB not allow firms to choose between two acceptable treatments? a) Measuring noncontrolling interest in a business combination. b) Classifying interest paid in the statement of cash flows. c) Recognizing development costs that meet criteria for capitalization as an asset. d) Measuring property, plant, and equipment subsequent to acquisition.

c) Recognizing development costs that meet criteria for capitalization as an asset.

Which of the following is a correct statement with regard to differences between IFRS and U.S. GAAP? a) Reporting a bank overdraft that is an integral part of a cash management policy is a recognition difference. b) Reporting LIFO inventory is a presentation difference. c) Reporting past service cost for defined benefit pension plans is a measurement difference. d) Reporting convertible debt is a recognition difference. e) Reporting development costs is a classification difference.

c) Reporting past service cost for defined benefit pension plans is a measurement difference.

When consolidating a foreign subsidiary, which of the following statements is true? a) Parent reports a cumulative translation adjustment from adjusting its investment account under the equity method. b) Parent reports a gain or loss in net income from adjusting its investment account under the equity method. c) Subsidiary's cumulative translation adjustment is carried forward to the consolidated balance sheet. d) Subsidiary's income/loss is carried forward to the consolidated balance sheet. e) All foreign currency gains/losses are eliminated in the consolidated income statement and balance sheet.

c) Subsidiary's cumulative translation adjustment is carried forward to the consolidated balance sheet.

What is a subsidiary's functional currency? a) The currency used by the parent to acquire the subsidiary b) The parent's reporting currency c) The currency in which the entity primarily generates and expends cash d) Always the currency of the country in which the company has its headquarters

c) The currency in which the entity primarily generates and expends cash

All of the following data may be needed to determine the fair value of a forward contract at any point in time except a) The forward rate when the forward contract was entered into. b) The current forward rate for a contract that matures on the same date as the forward contract entered into. c) The future spot rate. d) A discount rate. e) The company's incremental borrowing rate.

c) The future spot rate.

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 Foreign Currency 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

c. Import purchase Depreciates Gain

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? (Round to the nearest dollar.) a) $10,200 loss b) $10,200 gain c) $4,400 gain d) $4,400 loss e) No gain or loss should be recognized.

d) $4,400 loss $1.45 − $1.56 = ($0.11) × £40,000 = ($4,400) Loss

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? a) Debit development expense and credit copyright for the year ended December 31, 2021. b) Debit copyright and credit copyright expense at January 1, 2021. c) Debit copyright and credit research and development expense for the year ended December 31, 2020. d) Debit copyright and credit stockholders' equity at January 1, 2021. e) Debit stockholders' equity and credit research and development expense at January 1, 2021.

d) Debit copyright and credit stockholders' equity at January 1, 2021.

Which companies are required to provide a U.S. GAAP reconciliation in their annual report filed with the SEC? a) Domestic U.S. companies listed on a U.S. securities exchange that use IFRS in preparing financial statements. b) All foreign companies listed on a U.S. securities exchange. c) Foreign companies listed on a U.S. securities exchange that use IFRS in preparing financial statements. d) 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.

d) 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.

Which of the following statements is true concerning hedge accounting? a) Hedges of foreign currency firm commitments are used for future sales only. b) Hedges of foreign currency firm commitments are used for future purchases only. c) Hedges of foreign currency firm commitments are used for current sales or purchases. d) Hedges of foreign currency firm commitments are used for future sales or purchases. e) Hedges of foreign currency firm commitments are entered into for speculative purposes.

d) Hedges of foreign currency firm commitments are used for future sales or purchases.

Which of the following is not true about IFRS? a) The IASB does not have the ability to enforce proper usage of IFRS. b) IFRS is available to any organization or nation that wishes to use those standards. c) IFRS is a comprehensive set of financial reporting standards. d) IFRS includes only pronouncements issued by the IASB. e) IFRS are considered as generally accepted accounting principles.

d) IFRS includes only pronouncements issued by the IASB.

A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true? a) If the foreign currency appreciates, a foreign exchange gain will result. b) If the foreign currency depreciates, a foreign exchange loss will result. c) No foreign exchange gain or loss will result. d) If the foreign currency appreciates, a foreign exchange loss will result. e) Any gain or loss will be included in comprehensive income.

d) If the foreign currency appreciates, a foreign exchange loss will result.

IFRS for SMEs differ from full IFRS in all of the following ways except: a) IFRS for SMEs require significantly fewer disclosures. b) Interim period reports need not be prepared when following IFRS for SMEs. c) Recognizing and measuring assets are simplified when following IFRS for SMEs. d) Segment reporting must be provided when following IFRS for SMEs. e) IFRS for SMEs do not require earnings per share to be reported.

d) Segment reporting must be provided when following IFRS for SMEs.

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? a) Current/Noncurrent Method. b) Monetary/Nonmonetary Method. c) Current Rate Method. d) Temporal Method. e) Indirect Method.

d) Temporal Method.

Which of the following is not an example of IFRS simplified for SMEs? a) All borrowing costs are expensed as incurred. b) All development costs are expensed as incurred. c) Goodwill is amortized over its useful life. d) There is a choice between using the cost model and the revaluation model for property, plant, and equipment. e) Actuarial gains and losses for defined benefit plans are recognized immediately.

d) There is a choice between using the cost model and the revaluation model for property, plant, and equipment.

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? a) When an asset is revalued, it is reported on the balance sheet at its current replacement cost. b) The revalued assets must be reported in a special section of the balance sheet separate from those assets measured using the cost model. c) Revaluations of property, plant, and equipment must be made at least every three years. d) When an asset is revalued, the entire class of property, plant, and equipment (such as Land) to which that asset belongs must be revalued.

d) When an asset is revalued, the entire class of property, plant, and equipment (such as Land) to which that asset belongs must be revalued.

Under the temporal method, retained earnings would be remeasured at what rate? a) Beginning of the year rate. b) Average rate. c) Current rate. d) Historical rate. e) Composite amount.

e) Composite amount.

All of the following hedges are used for future purchase/sale transactions except a) Forward contracts used as a fair value hedge of a firm commitment. b) Options used as a fair value hedge of a firm commitment. c) Option contract cash flow hedge of a forecasted transaction. d) Forward contract cash flow hedges of a forecasted transaction. e) Forward contracts used to hedge a foreign currency denominated liability.

e) Forward contracts used to hedge a foreign currency denominated liability.

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? a) Report the translation adjustment less the foreign exchange gain in accumulated other comprehensive income on the balance sheet. b) Report the translation adjustment in the income statement and defer the foreign exchange gain in accumulated other comprehensive income on the balance sheet. c) Report the translation adjustment in accumulated other comprehensive income on the balance sheet and the foreign exchange gain as a gain on the income statement. d) Report the translation adjustment less the foreign exchange gain in the income statement.

a) Report the translation adjustment less the foreign exchange gain in accumulated other comprehensive income on the balance sheet.

Which of the following is not a condition of accounting for hedge derivatives? a) The derivative is minimally effective in offsetting changes in the cash flows or fair value related to the hedged item. b) The derivative is properly documented as a hedge. c) The derivative is used to hedge a cash flow exposure to foreign exchange risk. d) The derivative is highly effective in offsetting changes in the cash flows or fair value related to the hedged item. e) The derivative is used to hedge a fair value exposure to foreign exchange risk.

a) The derivative is minimally effective in offsetting changes in the cash flows or fair value related to the hedged item.

The most relevant factor in determining the purpose of financial reporting is: a) The nature of the country's financing system. b) The country's current economic conditions. c) The ability to control inflation. d) A strong equity financing system which is more conservative, minimal disclosures, and tight tax laws. e) A weak equity financing system which is less conservative, extensive disclosures and loose tax laws.

a) The nature of the country's financing system.

When a U.S. company purchases parts from a foreign company, which of the following will result in zero foreign exchange gain or loss? a) The transaction is denominated in U.S. dollars. b) The option strike price to sell foreign currency is less than the spot rate of the currency. c) The option strike price to buy foreign currency is less than the spot rate of the currency. d) The foreign currency appreciated in value relative to the U.S. dollar. e) The foreign currency depreciated in value relative to the U.S. dollar.

a) The transaction is denominated in U.S. dollars.

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? a) $2,613.65. b) $0. c) $2,590.90. d) $2,275.00. e) $1,993.00.

b) $0. 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.

When preparing a consolidated statement of cash flows, which of the following statements is false? a) All operating activity items are translated at an average exchange rate for the period. b) A change in accounts receivable is translated using the current rate. c) A change in long-term debt is translated using the historical rate at the date of the change. d) Dividends paid are translated using the historical rate at the date of the payment. e) All items follow translation rates used for the balance sheet and the income statement.

b) A change in accounts receivable is translated using the current rate.

Which of the following statements is false regarding a country's legal system? a) The two major types of legal systems are common law and codified Roman law. b) Common law originated in the Roman jus civile. c) Code law countries tend to have more statutes governing a wider range of human activity. d) Accounting law is rather general in code law countries. e) A nongovernmental organization is more likely to develop in a common law country than in a code law country.

b) Common law originated in the Roman jus civile.

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 a) Forward contract premium that is recognized in net income as a foreign exchange loss. b) Forward contract discount that is recognized in net income as a foreign exchange loss. c) Forward contract discount that is recognized in net income as a foreign exchange gain. d) Forward contract premium that is recognized in net income as a foreign exchange gain.

b) Forward contract discount that is recognized in net income as a foreign exchange loss.

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? a) December 31, 2022. b) January 1, 2021. c) December 31, 2021. d) January 1, 2020.

b) January 1, 2021.

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? a) Discount revenue. b) Premium revenue. c) Discount expense. d) Premium expense. e) Both discount revenue and premium expense.

b) Premium revenue.

The FASB-IASB convergence project on leases resulted in the following: a) Lease accounting will be the same under IFRS and under U.S. GAAP in that lessors and lessees will capitalize all leases as finance leases and treat them as such in the measurement of income. b) Lessor and lessee accounting will be the same under IFRS and under U.S. GAAP in that lessors will capitalize all leases and lessees will capitalize some leases as finance leases but treat others as operating leases. c) Lease accounting will differ in that under IFRS lessees will capitalize some leases as finance leases and others as operating leases, while under U.S. GAAP lessees will capitalize all leases as finance leases but treat them as traditional operating leases in the measurement of net income. d) Lease accounting will be similar under IFRS and U.S. GAAP for lessees but will differ for lessors in their treatment of the measurement of net income. e) 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.

e) 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.

Which of the following is not a way for a country to use IFRS? a) Require foreign companies listed on that country's stock exchange to use IFRS for consolidated financial statements. b) Allow foreign companies listed on that country's stock exchange to use IFRS. c) Permit its domestic companies listed on that country's stock exchange to use IFRS. d) Adopt IFRS as that country's national GAAP. e) Prohibit the use of a country's national GAAP.

e) Prohibit the use of a country's national GAAP.

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? a) First translate, then remeasure them. b) First remeasure, then translate them. c) State all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the balance sheet date. d) Translate them. e) Remeasure them.

e) Remeasure them.

A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true? a) There is no translation adjustment. b) There is a transaction loss. c) There is a transaction gain. d) There is a negative translation adjustment. e) There is a positive translation adjustment.

e) There is a positive translation adjustment.

Which statement is correct as it relates to diverse accounting practices across countries? a) Gaining access to foreign capital markets is relatively easy and inexpensive once the financial statements are converted to the local currency of the country where the financing is desired. b) U.S. GAAP is acceptable worldwide wherever IFRS has not been adopted. c) To have stock listed on a U.S. stock exchange, all financial statements submitted to the SEC must be prepared either using U.S. GAAP or using IFRS. d) Stock analysts specializing in industry coverage can compare financial statements regardless of various national or international accounting standards used by companies being compared. e) 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.

e) 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.