acc exam 2

balance sheet

(temporal method) to ensure remeasurement gain or loss is reported in income, which sheet is it easiest to remeasure first

transaction exposure

gives rise to foreign exchange gains and losses that are ultimately realized in cash

control premium (if there is a control premium, the controlling firm will receive a disproportionate share of goodwill)

goodwill allocation depends on whether a ________ _________ is paid or not

SCorp

has all legal characteristics of a corp;ØTaxed in virtually the same way as a partnership. ØOwnership limited to 100 stockholders. ØOwners limited to individuals, estates, certain tax-exempt entities, and trusts. ØGrowth potential limited due to restriction on number and type of owners.

the general partnership

has significant disadvantages; unlimited liability that each partner automatically incurs, ØAny partner can be held personally liable for all debts. ØPotential risk is significant when coupled with mutual agency, the right each partner has to incur liabilities in the name of partnership. Partnership interests are not marketable like publicly held corporate ownership; not popular--> alternative types limit the owners' personal liability while providing the tax benefits of one

as an equity transaction (consistent with transactions with other owners, as opposed to outsiders)

how does the parent account for additional subs shares acquired (when parent increases its ownership interest)

100

how much percent of both the parents and the subs net income does the consolidated net income include (to reflect the economic unit concept)---adjusted for excess acquisition date fv over bv amortizations

current rate method (when the sub operates relatively independent of ther parents)

if a companys functional currency is the foreign currency what translation method is used; separate component of oci (closed to AOCI)

remeasurement

if a fforeign operations functional currency is the US dollar, the currency balances are remeasured using the temporal method

eliminated (Corresponding receivable and payable and revenue and interest from the consolidated financial statements must be eliminated- Because no money is owed to or from an outside party, these reciprocal accounts must be eliminated in each subsequent consolidation)

intra-entity investments in debt securities and related debt account must be _________ in consolidation

the statement of changes in owners' equity

provides details of the ownership changes for the year for both the controlling and noncontrolling interest shareholders and provides an allocation of accumulated other comprehensive income elements across the controlling and noncontrolling interests.

sells

the US dollar translation adjustment can only be truly realized when parent _________ off the sub

historical exchange rate

the exchange rate that existed when a transaction occurred

current exchange rate

the exchange rate that exists at the balance sheet date

current method and temporal method

the two translation methods that exist; they both use different exchange rates for translation; each method is presented from the perspective of a US based multinational company translating foreign currency financial statements

true

true or false the cumulative translation adjustment rellated to excess is not carried on either the parent's or the subs books but is recognized only in the consolidation worksheet

true

true or false: A company has little influence on exchange rates, but parent companies can use several techniques to hedge the balance sheet exposures of their foreign operations

false (no remeasurement takes place)

true or false: If after obtaining control, the parent increases its ownership interest in the subsidiary, remeasurement takes place

true

true or false: This conversion and translation process is required whether the foreign operation is a branch, joint venture, majority-owned subsidiary, or affiliate accounted for under the equity method

true

true or false: To prepare worldwide consolidated financial statements, a U.S. parent company must: 1.Convert the foreign GAAP financial statements of its foreign operations into U.S. GAAP. Translate the financial statements from the foreign currency into U.S. dollars

true

true or false: To report ownership equity in consolidated financial statements, acquisition-date goodwill is apportioned across controlling and noncontrolling interests.

true (gain is carried through R/E and the sub's land acct retains the inflated transfer price)

true or false: for intra-entity transfers (of land): ØFor every subsequent consolidation until the land is eventually sold, the elimination process must be repeated.

true (noncontrolling interests' ownership pertains only to the sub's; its share of consolidated NI is limited to a share of the adjusted subs net income)

true or false: once consolidated net income is determined, it is allocated to the parent co and the noncontrolling interests

false (noncontrolling interest own interest in the sub but no ownership in the parent firm)

true or false: the noncontrolling interest own 10(or whatever %) interest in both the sub company and parent co

true

true or false: ØA hedge of a net investment in a foreign operation eliminates the possibility of a negative translation adjustment in Accumulated Other Comprehensive Income, but gains and losses realized in cash can result. Ø

average rate

under current rate method what exchange rate is used to translate COGS

the exchange rate as of that date applied

when an income account such as a gain or loss occurs at a specific point in time, what exchange rate do you use (under current rate method)

temporal method

which method does this describe: distorts all of the ratios measured in the foreign currency. The subsidiary appears to be less liquid, more highly leveraged, and more profitable than it does in foreign currency terms.

limited partnership

ØTax benefits of a partnership. ØPartners do not want to work in partnership or have unlimited liability. ØNumber of limited partners invest money as owners but are not allowed to participate in company's management. ØPartners can incur a loss on their investment, but it is restricted to what has been contributed. At least one general partner must be designated to assume responsibility for all obligations

1. change in the exchange rate, 2. balance sheet exposure

ØTranslation adjustments and remeasurement gains or losses are functions of two factors:

reporting currency

currency in which an entity prepares its financial statements; US based companies use the US dollar

no (historical price of inventory is on consolidation... the sub/noncontrolling interest records the inventory at the transfer price.,, if its higher, the profit on the sale is expensed in order to remove the unrealized gross profit from consolidated net income)

Because the transaction did not occur with an outside party, should the consolidated statements recognize a profit on the sale of inventory for the combination as a whole

derivatives(fwd contracts or foreign currency), or nonderivative instruments (foreign currency borrowings)

Balance sheet exposure can be hedged through ____________

historical exchange rates (not necessary under the current rate method)

Keeping a record of the acquisition date exchange rates is necessary when translating inventory, prepaid expenses, property, plant and equipment, and intangible assets because these assets, carried at historical cost, are translated at _________ _______ ________

d

Mittelstaedt, Inc., buys 60 percent of the outstanding stock of Sherry, Inc. Sherry owns a piece of land that cost $283,000 but had a fair value of $640,000 at the acquisition date. What value should be attributed to this land in a consolidated balance sheet at the date of takeover? a)$470,200. b)$357,000. c)$169,800. d) $640,000.

d

On January 1, 2020, Grand Haven, Inc., reports net assets of $938,850 although equipment (with a four-year remaining life) having a book value of $520,000 is worth $603,250 and an unrecorded patent is valued at $48,600. Van Buren Corporation pays $856,560 on that date to acquire an 80 percent equity ownership in Grand Haven. If the patent has a remaining life of nine years, at what amount should the patent be reported on Van Buren's consolidated balance sheet at December 31, 2021? a)$30,240. b)$43,200. c)$34,020. d)$37,800.

fair values (Subsequent to acquisition, changes in current fair values for assets and liabilities are not recognized)

The acquisition method incorporates 100 percent of the subsidiary's assets and liabilities at their acquisition-date _______ ___________ in the consolidated financial statements

outside party

The gain on the original transfer is recognized in consolidated net income only when the land is subsequently disposed of to an ________ ____________

a

The noncontrolling interest represents an outside ownership in a subsidiary that is not attributable to the parent company. Where in the consolidated balance sheet is this outside ownership interest recognized? a)In the owners' equity section. b)The noncontrolling interest is not recognized in the consolidated balance sheet. c)In a mezzanine section between liabilities and owners' equity. d)In the liability section.

functional currency

a companys primary currency of the foreign entitys operating environment

3

a country has a high inflationary economy when its cumulative ___ year inflation exceeds 100 percent (with compounding it equated to an average of approximately 26% for the three years in a row

translation adjustment

if a foreign currency is the foreign operations functional currency, the currency balances are translated using the current rate method

reduces

if the noncontrolling interest's proportionate share of sub's fair values exceeds its total fair value the excess _______ goodwill recognized by the parent

temporal method (when some subs are so closely tied to their US parents so they use a US dollar perspective)

if.a companys functional currency is the US dollar what translation method is used; so the Gain (loss) in net income is closed to retained earnings

temporal method

under which method is the gain on the sale of land directly. The cash received and the cost of the land sold must be translated into U.S. dollars separately; the difference is the U.S. dollar value of the gain. (cash exchanged is translated on date of sale, land acct is translated at historical rate)

intra-entity transfer

(from a consolidated perspective) the internal movement of inventory that creates no net change in the financial position of the business combination taken as a whole.; in producing consolidated financial statements they are eliminated; (consolidated statements reflect only transactions with outside parties; so the impact of one of these must be identified and then removed)

a

How does partnership accounting differ from corporate accounting? a)Individual capital accounts replace the contributed capital and retained earnings balances found in corporate accounting. b)Partnerships report all assets at fair value as of the latest balance sheet date. c)The matching principle is not considered appropriate for partnership accounting. d)Revenues are recognized at a different time by a partnership than is appropriate for a corporation.

noncontrolling interest

If the parent doesn't own 100 percent of the company, outside owners are referred to as a ______

consolidated net income

If the sale of subs shares by the parent results in the loss of control, where does parent recognizes any resulting gain or loss

d

James Company acquired 85 percent of Mark-Right Company on April 1. On its December 31 consolidated income statement, how should James account for Mark-Right's revenues and expenses that occurred before April 1? a)Exclude 15 percent of the preacquisition revenues and 15 percent of the preacquisition expenses from consolidated expenses. b)Deduct 15 percent of the net combined revenues and expenses relating to the preacquisition period from consolidated net income. c)Include 100 percent of Mark-Right's revenues and expenses and deduct the preacquisition portion as noncontrolling interest in net income. d)Exclude 100 percent of the preacquisition revenues and 100 percent of the preacquisition expenses from their respective consolidated totals.

reduce (meanwhile for a corp, they are viewed as legally separate from its owners so losses are not passed through to them.. corp can carry back net operating losses and carry fwd remaining losses to decrease future taxable income)

Operating losses __________ partners' personal taxable income only if they materially participate in the business

c

Which of the following is not a reason for the popularity of partnerships as a legal form for businesses? a)Partnerships avoid the double taxation of income that is found in corporations. b)Partnerships may be formed merely by an oral agreement. c)Partnerships can more easily generate significant amounts of capital. d)In some cases, losses may be used to offset gains for tax purposes.

average rate (for the year) (bc these expenses accrue evenly throughout the year)

for current rate method; what exchange rate do you use to translate depreciation and amortization expenses

weighted average exchange rate (point in time revenue and expense recognition would use a single date)

for the current rate method; what exchange rate do you use if each revenue and expense is recognized evenly throughout the year

in the equity section (parent records any differnce between proceeds of the sale and carrying amount as APIC)

if parent sells subs shares and maintains control, it recognizes no gains or losses... but where is the sale shown

individual partners

in a partnership where are the revenues and expense items assigned directly to

subtracted

is the noncontrolling interest share of consolidated net income subtracted or added from consolidated net income in order to determine the parent's interest in consolidated net income

current rate method (ØIf the foreign currency increases in value, an increase in the U.S. dollar value of the net asset occurs and will be reflected through a positive (credit balance) translation adjustment [and vice versa;)

the assumption underlying this method is that a company's net investment in a foreign operation is exposed to foreign exchange risk (like a passive/isolated investment); so shifts in the value of a currency will affect the financial statement numbers of the sub; this shift is reflected by the translation adjustment in the consolidated financial statemnts (the balance sheet in accumulated OCI)

true (any resulting gain or loss from the remeasurement should be recognized in the parents net income)

true or false: If the former parent retains any of its former subsidiary's shares, the investment should be remeasured to fair value on the date control is lost

true

true or false: If the parent previously held a noncontrolling interest in the acquired firm, the parent remeasures its interest to fair value and recognizes a gain or loss

false

true or false: The current rate method always result in higher net income and a higher amount of equity than the temporal method

true

true or false: The parent company must determine and enter each of these figures when constructing a worksheet: ØNoncontrolling interest in subsidiary at beginning of current year. (Stmt of RE) ØNet income attributable to noncontrolling interest. (I/S) ØSubsidiary dividends attributable to noncontrolling interest. (Stmt of RE) ØNoncontrolling interest as of the end of the year (three balances above combined). (Stmt of RE, BS as equity)

true (Cogs must be decomposed into beginning inv, purchases, and ending ein and each component must be translated at its appropriate historical rate)

true or false; Under the temporal method, no single exchange rate can be used to directly translate COGS in FC into COGS in dollars

highly liquid

using the temporal method; which kinds of assets and liabilities are translated into US using the current exchange rate

uniform partnership act

was passed To provide consistent application across state lines in regard to many legal aspects of a partnership; It establishes uniform standards in such areas as the nature of a partnership, the relationship of the partners to outside parties, and the dissolution of the partnership

entry s (add non controlling interest in sub equity) and entry a (add non controlling share of income and subtract non-controlling share of dividends)

what are the two noncontrolling interest figures that must be included within the consolidation process (the entries)

functional currency

what is the major criteria for determining when foreign currency financial statemnts use the current rate or temporal method

LLP

ØHas most characteristics as a general partnership but it significantly reduces the partners' liability. ØPartners may lose investment in the business. ØResponsible for contractual debts of the business. ØPartners are responsible for only their acts or omissions and those of individuals under their supervision.

nonlocal currency balances

ØIf any accounts of the foreign subsidiary are denominated in a currency other than the local currency, they would first have to be restated into the local currency. ØBoth the foreign currency balance and any related foreign exchange gain or loss would then be translated (or remeasured) into U.S. dollars.

when control of a sub is acquired at a midyear date

ØNew parent must compute the subsidiary's book value as of acquisition date to determine excess total fair value over book value allocations. ØExcess amortization expenses, any equity accrual, and dividend distributions are recognized for a period of less than a year. -Because only net income earned by the subsidiary after the acquisition date accrues to the new owners, it is appropriate to include only postacquisition revenues and expenses in consolidated totals

LLC

ØRelatively new type of organization in the United States. ØClassified as a partnership for tax and court purposes. ØDepending on state laws, owners risk only their own investments. ØSimilar to a Subchapter S, LLC provides liability protection for its owners and managers. ØIn contrast to a Subchapter S corporation, the number of owners is not usually restricted.

a step acquisition

Øoccurs when control is achieved in a series of equity acquisitions. ØThe acquisition method measures the acquired firm (including the noncontrolling interest) at fair value at the date control is obtained. -The parent utilizes a single uniform valuation basis for all subsidiary assets acquired and liabilities assumed—fair value at the date control is obtained

average exchange rate

for current rate method; what exchange rate is used for translating all operating items in the statement of cash flows

oral agreement

for formation, only this is necessary to create a legally binding partnership (one of the advatages)

partnership

an association of two or more persons to carry on a business as co-owners for profit

translation adjustments

arise from balance sheet exposure and do not directly result in cash inflows or outflows (foreign currency)

current exchange rate

assets and liabilities carried at a current or future value are translated at what rate..... to yield an equivalent current value in US dollars

double taxation (a corp's income is taxed twiced... once when earned, again when conveyed as a dividend but partnership income is taxed only at the time the business initially earns it... partners now get a business deduction for all income earned)

for a partnership, passing income balances through to partners avoids ___ _____ of profits earned and distributed to owners

temporal method

basic objective underlying this method of translation is to produce a set of US dollar translated financial statements as if the foreign sub had actually used US dollars in conducting its operations

no

can a company lend money to itself

positive (credit)

do assets translated at the current exchange rate when the foreign currency has appreciated against USD generate a postive or negative translation adjustment

negative (debit)

do liabilities translated at the current exchange rate when the foreign currency has appreciated generate a postive or negative translation adjustment

100

for a parent, with controlling interest, how much percent of its subs financial info does it consolidate as a single economic unit regardless of the parents level of ownership - parent using equity method tracks at a prorated share

the fair value of the controlling interest, the fair value of the noncontrolling interest at the acquisition date

what two components does the valuation of a deal depend on when there is controlling interest and non controlling interest

current rate method

which method does this describe: maintains the first three ratios but distorts return on equity, because income was translated at the average-for-the-period exchange rate, and total equity was translated at the current exchange rate; Use of the average rate for income and the current rate for assets and liabilities distorts any ratio combining balance sheet and income statement figures, such as turnover ratios

temporal method

which method of translation is required in high inflationary economies; with remeasurement gains or losses reported in NI

temporal method

which method uses these steps: 1.First translate the balance sheet 2.Calculate the ending R/E based on the difference between A&L 3.Back out BB R/E and dividends taken from R/E in current year to isolate what income should be 4.Compare to translated income - difference is the remeasurement gain or loss

true

true or false: If appropriate, each component of other comprehensive income is allocated to the controlling and noncontrolling interests

true (Ultimately causes separate tracking information for every single item in of property, plant, and equipment)

true or false; under temporal method Depreciation matched to historical rate used on PPE

date of declaration

under current rate method, dividends are translated at the exchange rate on the ______ ___ _________

historical rates

under temporal method, what exchange rate is used to remeasure inventory, prop, equip, patents, and contributed capital accts ; resulting in differences in total assets and liabilities plus equity which must be reconciled resulting in a remeasurement gain or loss

indirectly

under the current method is the amount of the cumulative translation adjustment determined directly or indirectly as the amount needed to keep the translated balance sheet in balance)

income statement, statement of R/E, balance sheet (to back into translation adjustment reported in the b/s)

under the current rate method what is the translation order

historical rates

under the current rate method what rate is used to translate stockholders equity items

current exchange rate

under the current rate method, what exchange rate are the assets and liabilities of the foreign operation translated using

current method

under this method treatment defers the gain or loss in stockholders equity (AOCI) until its realized in some way; as a balance sheet acct, the cumulative translation adjustment is not closed at the end of an accounting period and fluctuates in amount over time

historical exchange rate (this create somewhat of a problem in translating R/E..... R/E is an accumulation of all the net income less dividends declared by a company since its inception)

under what rate are stockholders equity items translated at using the temporal method

statement of R/E

under which statement is the translated amount of net income entered on

a bargain purchase occurs (parent recognizes entire gain in current income--no gain is allocated to noncontrolling interest)

what happens if the total fair value of the acquired firm is less than the collective sum of its identifiable net assets

historical exchange rates (in order to yield an equivalent historical cost in US dollars)

what rates are used to translate assests and liabilities carried on the foreign operations balance sheet at historical cost under the temporal method