ACCT ADVANCED

The disadvantages of the partnership form of business organization, compared to corporations, include A. the legal requirements for formation. B. unlimited liability for the partners. C. the requirement for the partnership to pay income taxes. D. the extent of governmental regulation. E. the complexity of operations.

B. unlimited liability for the partners.

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: What is the amount of option expense for 2014 from these transactions?

B. $1,600 Option expense is the balance sheet fair value of the option for 2014= $1,600

Where is the remeasurement gain or loss reported in the parent company's financial statements? A) Net income/loss in the income statement. B) Cumulative translation adjustment as a deferred asset. C) Cumulative translation adjustment as a deferred liability. D) Other comprehensive income. E) Retained earnings.

A) Net income/loss in the income statement.

The advantages of the partnership form of business organization, compared to corporations, include A. single taxation. B. ease of raising capital. C. mutual agency. D. limited liability. E. difficulty of formation.

A. single taxation.

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2014 from these transactions?

A. $1,000 $2.01 - $2.00 = $.01 × ≤100,000 = $1,000 Adjustment to AOCI for 2014

On May 1, 2013, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply: Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the impact on Mosby's 2013 net income as a result of this fair value hedge of a firm commitment?

A. $1,760.60 decrease $.094 - $.095 = ($.001) × MP2,000,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm Commitment $3,200 - $3,000 = $200 Option Value Increase ($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction in 2013 Net Income

When preparing a consolidating 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 accounts are translated using current exchange rates? A. All revenues and expenses. B. All assets and liabilities. C. Cash, receivables, and most liabilities. D. All current assets and liabilities. E. All noncurrent assets and liabilities.

B. All assets and liabilities.

Under the current rate method, depreciation expense would be translated at what rate? A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount

B. Average rate.

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows: Angela Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England. Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

B. Option B Euro- Increase Pound- Decrease

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 $.0094, and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income?

B. Premium Revenue

According to U.S. GAAP for a local currency perspective, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency? A. The temporal method. B. The current rate method. C. The current/noncurrent method. D. The monetary/nonmonetary method. E. The noncurrent rate method.

B. The current rate method.

A 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.

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2013 at a

B. forward contract premium $600 $.00098 - $.00092 = $.00006 × $10,000,000 = $600 Premium

Under the temporal method, which accounts are remeasured using current exchange rates? A) All revenues and expenses. B) All assets and liabilities. C) Cash, receivables, and most liabilities. D) All current assets and deferred income. E) All stockholders' equity.

C

When using the current rate method, the translation adjustment from translating a foreign subsidiary's financial statements should be shown as A) An asset or liability (depending on the balance) in the consolidated balance sheet. B) A revenue or expense (depending on the balance) in the consolidated income statement. C) A component of stockholders' equity in the consolidated balance sheet. D) A component of cash flows from financing activities in the consolidated statement of cash flows. E) An element of the notes which accompany the consolidated financial statements.

C) A component of stockholders' equity in the consolidated balance sheet.

Under the current rate method, inventory at net realizable value would be translated for the balance sheet at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

C) Current rate.

Under the temporal method, inventory at net realizable value would be remeasured for the balance sheet at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

C) Current rate.

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.

Cherryhill and Hace had been partners for several years, and they decided to admit Quincy to the partnership. The accountant for the partnership believed that the dissolved partnership and the newly formed partnership were two separate entities. What method would the accountant have used for recording the admission of Quincy to the partnership? A. the bonus method. B. the equity method. C. the goodwill method. D. the proportionate method. E. the cost method.

C. the goodwill method.

Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October. The following exchange rates apply: What amount will Woolsey include as Adjustment to Net Income for the period ended October 31?

C. $10,000 positive $2.17 - $2.13 = $.04 × ≤250,000 = $10,000 Positive Adjustment

A basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Thurman's Capital account at the end of the first year?

C. $126,100 Beginning $143,000 + Interest $14,300 + Salary $13,000 + Remainder (30%) ($31,200) - Withdrawals $13,000 = Ending Balance $126,100

On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Compute the U.S. dollars received on February 1, 2014.

C. $145,500 Strike Price $.97 × C$150,000 = $145,500

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: What is the amount of Cost of Goods Sold for 2014 as a result of these transactions?

C. $201,000 ≤100,000 × $2.00 Strike Price = $200,000 + $1,000 AOCI Adjustment = $201,000 COGS

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: Assuming a forward contract was entered into, at what amount should the forward contract be recorded at December 31, 2013? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.

C. $495 $.00098 - $.00093 = $.00005 × .9901 × $10,000,000 = $495

Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Nolan's total share of net income for 2012? A. $63,000. B. $53,000. C. $58,000. D. $29,000. E. $51,000.

C. $58,000 Interest $20,000 + Salary $0 + Remainder (40%) $38,000 = $58,000

On May 1, 2013, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply: Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the overall result of having entered into this hedge of exposure to foreign exchange risk?

C. $9,000 net gain on the option $.095 - $.089 = $.006 × MP2,000,000 = $12,000 Gain from Hedge - $3,000 Cost of Option = $9,000 Net Gain on Option

Which accounts are remeasured using current exchange rates? A. All revenues and expenses. B. All assets and liabilities. C. Cash, receivables, and most liabilities. D. All current assets and liabilities. E. All noncurrent assets and liabilities.

C. Cash, receivables, and most liabilities.

Which method of translating a foreign subsidiary's financial statements is correct? A. Historical rate method. B. Working capital method. C. Current rate method. D. Remeasurement. E. Temporal method.

C. Current rate method.

Under the current rate method, inventory at market would be translated at what rate? A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

C. Current rate.

Under the current rate method, property, plant & equipment would be translated at what rate? A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

C. Current rate.

Under the temporal method, inventory at market would be remeasured at what rate? A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

C. Current rate.

Larson Company, a U.S. company, has an India rupee account receivable resulting from an export sale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023, and the forward rate was $.021. Which of the following did the U.S. exporter report in net income?

C. Discount expense

Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a euro payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss related to both its ruble receivable and euro payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

C. Option C Ruble- Decrease Euro- Increase

The translation adjustment from translating a foreign subsidiary's financial statements should be shown as A. an asset or liability (depending on the balance) in the consolidated balance sheet. B. a revenue or expense (depending on the balance) in the consolidated income statement. C. a component of stockholders' equity in the consolidated balance sheet. D. a component of cash flows from financing activities in the consolidated statement of cash flows. E. an element of the notes which accompany the consolidated financial statements.

C. a component of stockholders' equity in 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? A) Current/Noncurrent Method. B) Monetary/Nonmonetary Method. C) Current Rate Method. D) Temporal Method. E) Indirect Method.

D

Where is the translation adjustment reported in the parent company's financial statements? A) Net loss in the income statement. B) Cumulative translation adjustment as a deferred asset. C) Cumulative translation adjustment as a deferred liability. D) Accumulated other comprehensive income. E) Retained earnings.

D) Accumulated other comprehensive income

Under the current rate method, common stock would be translated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

D) Historical rate.

The partnership of Clapton, Seidel, and Thomas was insolvent and will be unable to pay $30,000 in liabilities currently due. What recourse was available to the partnership's creditors? A. they must present equal claims to the three partners as individuals. B. they must try obtain a payment from the partner with the largest capital account balance. C. they cannot seek remuneration from the partners as individuals. D. they may seek remuneration from any partner they choose. E. they must present their claims to the three partners in the order of the partners' capital account balances.

D. they may seek remuneration from any partner they choose.

Winston Corp., a U.S. company, had the following foreign currency transactions during 2013: (1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2013?

D. $13,000 gain [$47,000 - $54,000 = ($7,000) Loss] + [$315,000 - $295,000 = $20,000 Gain] = $13,000 Gain

On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a French customer in three months, denominating the transaction in euros. On April 1, the spot rate is $1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro, and Quality delivers the merchandise, collecting 400,000 euros. What are the effects on net income from these transactions?

D. $16,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when the merchandise is delivered. [$1.41 - $1.37 = $.04 × €400,000 = $16,000 Discount] & [$1.41 - $1.36 = $.05 × €400,000 = $20,000 Adjustment at Delivery]

Under the temporal method, depreciation expense would be remeasured at what rate? A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount

D. Historical rate.

Under the temporal method, property, plant & equipment would be remeasured at what rate? A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

D. Historical rate.

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: What journal entry should Eagle prepare on December 31, 2013?

D. Option D Debit: Option Expense- 200 Credit: Foreign currency option- 200

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.

When preparing a consolidation worksheet for a parent and its foreign subsidiary accounted for under the equity method, which of the following statements is false? A.The cumulative translation adjustment included in the Investment in Subsidiary account is eliminated. B.The excess of fair value over book value since the date of acquisition is revalued for the change in exchange rate. C. The amount of equity income recognized by the parent in the current year is eliminated . D. The allocations of excess of fair value over book value at the date of acquisition are eliminated. E. The subsidiary's stockholders' equity accounts as of the beginning of the year are eliminated.

D. The allocations of excess of fair value over book value at the date of acquisition are eliminated.

In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities? A. The exchange rate in effect when each asset or liability was acquired. B. The average exchange rate for the current year. C. A calculated exchange rate based on market value. D. The exchange rate in effect as of the balance sheet date. E. The exchange rate in effect at the start of the current year.

D. The exchange rate in effect as of the balance sheet date.

When the hybrid method is used to record the withdrawal of a partner, the partnership A. revalues assets and liabilities and records goodwill to the continuing partner but not to the withdrawing partner. B. revalues liabilities but not assets, and no goodwill is recorded. C. can recognize goodwill but does not revalue assets and liabilities. D. revalues assets but not liabilities, and records goodwill to the continuing partner but not to the withdrawing partner. E. revalues assets and liabilities but does not record goodwill.

E. revalues assets and liabilities but does not record goodwill.

The dissolution of a partnership occurs A. only when the partnership sells its assets and permanently closes its books. B. only when a partner leaves the partnership. C. at the end of each year, when income is allocated to the partners. D. only when a new partner is admitted to the partnership. E. when there is any change in the individuals who make up the partnership.

E. when there is any change in the individuals who make up the partnership.

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: What journal entry should Eagle prepare on October 1, 2013?

E. Option E Debit: Foreign Currency Option -1,800 Credit: Cash- 1,800

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 them, then remeasure them. B. First remeasure them, 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.

Which method of remeasuring a foreign subsidiary's financial statements is correct? A. Historical rate method. B. Working capital method. C. Current rate method. D. Translation. E. Temporal method.

E. Temporal method.

In accounting, the term translation refers to A. the calculation of gains or losses from hedging transactions. B. the calculation of exchange rate gains or losses on individual transactions in foreign currencies. C. the procedure required to identify a company's functional currency. D. the calculation of gains or losses from all transactions for the year. E. a procedure to prepare a foreign subsidiary's financial statements for consolidation.

E. a procedure to prepare a foreign subsidiary's financial statements for consolidation.

At what rates should the following balance sheet accounts in foreign statements be translated (rather than remeasured) into U.S. dollars for Accumulated Depreciation & Equipment respectively? a. Current Current b. Historical Historical c. Current Average for year d. Historical Current

a. Current Current All asset accounts are translated at current rates.

A subsidiary of Byner Corporation has one asset (inventory) and no liabilities. The functional currency for this subsidiary is the peso. The inventory was acquired for 100,000 pesos when the exchange rate was $0.16 = 1 peso. Consolidated statements are to be produced, and the current exchange rate is $0.19 = 1 peso. 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.

b. A positive translation adjustment must be reported. Because the peso is the functional currency, the financial statements must be translated using the current rate method. Therefore, answers a and d can be eliminated. Because the subsidiary has a net asset position and the peso has appreciated from $0.16 to $0.19, a positive translation adjustment will result.

Which of the following statements is true for the translation process (as opposed to remeasurement)? a. Equipment is translated at the historical exchange rate in effect at the date of its purchase. b. A translation adjustment is created by the change in the relative value of a subsidiary's net assets caused by exchange rate fluctuations. c. A translation adjustment is created by the change in the relative value of a subsidiary's monetary assets and monetary liabilities caused by exchange rate fluctuations. d. A translation adjustment can affect consolidated net income.

b. A translation adjustment is created by the change in the relative value of a subsidiary's net assets caused by exchange rate fluctuations.

What is a subsidiary's functional currency? a. The parent's reporting currency. b. The currency in which the entity primarily generates and expends cash. c. Always the currency of the country in which the company has its headquarters. d. The currency in which transactions are denominated.

b. The currency in which the entity primarily generates and expends cash.

Gains from remeasuring a foreign subsidiary's financial statements from the local currency, which is not the functional currency, into the parent's currency should be reported as a(n) a. Translation adjustment in Other Comprehensive Income. b. Deferred foreign exchange gain. c. Part of continuing operations. d. Extraordinary item, net of income taxes.

c. Part of continuing operations. Remeasurement gains are reported in the income statement as a part of income from continuing operations

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

c. 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 comparing the translation and the remeasurement process, which of the following is true? a. The reported balance of equipment is normally the same under both methods. b. The reported balance of inventory is normally the same under both methods. c. The reported balance of sales is normally the same under both methods. d. The reported balance of depreciation expense is normally the same under both methods.

c. The reported balance of sales is normally the same under both methods.

Which of the following items is not remeasured using historical exchange rates under the temporal method? a. Retained earnings. b. Accumulated depreciation on equipment. c. Cost of goods sold. d. Marketable equity securities.

d. Marketable equity securities. Marketable equity securities are carried at market value and therefore translated at the current exchange rate under the temporal method.

All of the following hedges are used for future purchase/sale transactions except

E. Forward contracts used to hedge a foreign currency denominated liability

Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October. The following exchange rates apply: What amount will Woolsey include as an option expense in net income for the period July 24 to October 24?

A. $4,000 Cost of the option contract $4,000

On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Compute the fair value of the foreign currency option at December 31, 2013.

A. $6,000 $.04 × C$150,000 = $6,000

Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Wasser's total share of net income for 2012? A. $63,000. B. $53,000. C. $58,000. D. $29,000. E. $51,000.

A. $63,000 Interest $15,000 + Salary $10,000 + Remainder (40%) $38,000 = $63,000

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: Assuming a forward contract was entered into, how would the forward contract be reflected on Car's December 31, 2013 balance sheet?

A. Forward contract (Asset)

Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. 15. 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.

Where is the disposition of a remeasurement gain or loss reported in the parent company's financial statements? A. Net income/loss in the income statement. B. Cumulative translation adjustment as a deferred asset. C. Cumulative translation adjustment as a deferred liability. D. Other comprehensive income. E. Retained earnings.

A. Net income/loss in the income statement.

What is a company's functional currency? A. The currency of the primary economic environment in which it operates. B. The currency of the country where it has its headquarters. C. The currency in which it prepares its financial statements. D. The reporting currency of its parent for a subsidiary. E. The currency it chooses to designate as such.

A. The currency of the primary economic environment in which it operates.

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

Under the current rate method, which accounts are translated using current exchange rates? A) All revenues and expenses. B) All assets and liabilities. C) Cash, receivables, and most liabilities. D) All current assets and deferred income. E) All stockholders' equity.

B) All assets and liabilities.

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.

On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the net impact on Mattie's 2013 income as a result of this fair value hedge of a firm commitment?

B. $1,760.60 decrease $1.89 - $1.90 = ($.001) × ≤200,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm Commitment $2,200 - $2,000 = $200 Option Value Increase ($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction in 2013 Net Income

On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?

B. $10,000 increase $1.90 - $1.84 = $.06 × ≤200,000 = $12,000 Cash Flow from Hedge - $2,000 Cost of Option = $10,000 Increase in Cash Flow

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply: What is the 2014 effect on net income as a result of these transactions?

B. $201,600 [≤100,000 × $2.00 Strike Price = $200,000] + [$1,600 Fair Value of the Option in 2014] = $201,600

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2014 income statement related to this transaction?

B. $303 (gain) ($.00090 - $.00095 = $.00005) - ($.00093 - $.00095 = $.00002) = $.00003/.9901 × $10,000,000 = $303 Gain

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Eaton's total share of net income for the second year?

B. $4,160 Net Income $52,000 - Interest $32,500 - Salaries $39,000 = ($19,500) × 20% = Eaton's Portion ($3,900) + Interest $8,060 + Salary $0 = Eaton's Share of Income $4,160

On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Compute the fair value of the foreign currency option at February 1, 2014.

B. $4,500 $.03 × C$150,000 = $4,500

On May 1, 2013, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply: Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the impact on Mosby's 2014 net income as a result of this fair value hedge of a firm commitment?

D. $188,760.60 increase [$190,000 Sales Revenue] - [$3,000 Cost of Option] + [$1,760.60 Adjustment from 2013 Net Income] = $188,760.60 Increase to 2014 Net Income

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows: How much foreign exchange gain or loss should be included in Shannon's 2013 income statement?

D. $2,000 loss $103,000 - $105,000 = ($2,000) LOSS

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2013 income statement related to this transaction?

D. $200 loss $.00090 - $.00092 = ($.00002) × $10,000,000 = ($200) Loss

Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Cleary's total share of net income for 2012? A. $63,000. B. $53,000. C. $58,000. D. $29,000. E. $51,000.

D. $29,000 Interest $10,000 + Salary $0 + Remainder (20%) $19,000 = $29,000

Pigskin Co., a U.S. corporation, sold inventory on credit to a British Company on April 8, 2013. Pigskin received payment of 35,000 British pounds on May 8, 2013. The exchange rate was ≤1 = $1.54 on April 8 and ≤1 = 1.43 on May 8. What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)

D. $3,850 loss $1.43-$1.54= ($.11) x ≤35,000 = ($3,850) Loss

Atherton Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply: What amount will Atherton include as an option expense in net income for the period January 17 to April 17?

D. $5,000 Cost of the option contract $5,000

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows: How much foreign exchange gain or loss should be included in Shannon's 2012 income statement? A. $3,000 loss. B. $6,000 loss. C. $6,000 gain. D. $7,000 gain. E. $3,000 gain.

D. $6,000 loss $97,000 - $103,000 = ($6,000) loss

Where is the disposition of a translation loss reported in the parent company's financial statements? A. Net loss in the income statement. B. Cumulative translation adjustment as a deferred asset. C. Cumulative translation adjustment as a deferred liability. D. Accumulated other comprehensive income. E. Retained earnings.

D. Accumulated other comprehensive income.

A company has a discount on a forward contract for a foreign currency denominated asset. How is the discount recognized over the life of the contract under fair value hedge accounting?

D. As a debit impact on net income, as a result of the hedge

Under the current rate method, common stock would be translated at what rate? A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

D. Historical rate.

Under the temporal method, common stock would be remeasured at what rate? A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

D. Historical rate.

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied: Assuming a forward contract was entered into, what would be the net impact on Car Corp.'s 2013 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.

E. $297 (gain) $.00098 - $.00095 = $.00003 × .9901 × $10,000,000 = $297 Gain

On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply: Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the net impact on Mattie's 2014 income as a result of this fair value hedge of a firm commitment?

E. $379,760.60 increase [$380,000 Sales Revenue] - [$2,000 Cost of Option] + [$1,760.60 Adjustment from 2013 Net Income] = $379,760.60 Increase to 2014 Net Income

Winston Corp., a U.S. company, had the following foreign currency transactions during 2013: (1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2014?

E. $4,000 loss $295,000 - $299,000 = ($4,000) Loss

On December 1, 2013, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2014, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply: Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent is .9803. Which of the following is included in Joseph's December 31, 2013 balance sheet for the forward contract?

E. $490.15 liability $0.105 - $0.095 = ($0.01) × MP50,000 = ($500.00) × .9803 = ($490.15) Liability

Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreign supplier on July 7 when the spot rate was $.025 per baht. A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are received, the spot rate is $.028. What is the amount of accounts payable that will be paid at this date?

E. 28,000 $.028 × ฿1,000,000 = $28,000

Under the current rate method, retained earnings would be translated at what rate? A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

E. Composite amount.

Under the temporal method, how would cost of goods sold be remeasured? A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

E. Composite amount.

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.

U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except

E. Deferred foreign currency gains and losses

The functional currency of DeZoort, Inc.'s British subsidiary is the British pound. DeZoort borrowed pounds as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, DeZoort's negative translation adjustment on its investment in the subsidiary exceeded its foreign exchange gain on its borrowing. How should DeZoort 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 the income statement. b. Report the translation adjustment in the income statement and defer the foreign exchange gain in Other Comprehensive Income on the balance sheet. c. Report the translation adjustment in Other Comprehensive Income on the balance sheet and the foreign exchange gain in the income statement. d. Report the translation adjustment less the foreign exchange gain in Other Comprehensive Income on the balance sheet.

d. Report the translation adjustment less the foreign exchange gain in Other Comprehensive Income on the balance sheet. Gains and losses on hedges of net investments (whether through a forward contract, borrowing, or other technique) are offset against the translation adjustment being hedged.

.A foreign subsidiary's functional currency is its local currency, which has not experienced significant inflation. The weighted average exchange rate for the current year is the appropriate exchange rate for translating Wages Expense & Wages Payable a. No No b. Yes Yes c. No Yes d. Yes No

d. Yes No Wages expense is translated at the average exchange rate; wages payable are translated at the current exchange rate