Advanced Accounting Test 3
Subchapter S corporation
legal characteristics of a corporation, ownership limited to 100 stockholders, owners limited to individuals, estates, and certain tax exempt entities and trusts, no corporate owners, profit passes to owners as partnership, growth potential limited because of the restriction on number and types of owners
Any alteration in specific individuals composing a partnership results in
legal dissolution
A net liability balance sheet exposure exists when
liabilities translated at the current exchange rate are higher in amount that assets translated at the current exchange rate
Limited Liability Partnership
many characteristics of general partnership, owners risk their own investment, owners responsible for contractual debts of business, owners only liable for their own acts and omissions and of the individuals they directly supervise, popular with professional service organizations with multiple offices
Limited Partnership
number of limited partners who aren't allowed to participate in management, losses are restricted for limited partners amount invested, must have one or more general partners who assume responsibility for all obligations, designed for individuals who want tax benefits of partnership without working in partnership, originally formed as tax shelters to create immediate losses (reduce taxable income of partners) with profits spread into future, tax laws limit the deduction of passive activity losses which significantly reduced formation of these
Bonus method
recognizes only assets that are physically transferred to business
Under the current rate method the weighted average exchange rate is used when
revenues and expenses have been recognized evenly throughout the year
A written agreement by partners will
take the place of UPA standards
The basic assumption underlying the current rate method is
that a company's net investment in a foreign operation is exposed to foreign exchange risk
When an income account, such as gain or loss. occurs at a specific point in time then
the exchange rate as of that date is applied
Under the current rate method all revenues and expenses are translated at
the exchange rate in effect at the date of accounting recognition
If cash flow directly impacts parents cash flows on a current basis then
the parents currency is the functional currency
If costs are primarily for components obtained from the parents country then
the parents currency is the functional currency
A company's functional currency is
the primary currency of the foreign entity's operating environment
Current rate method
translation adjustment appears in the equity section in accumulated other comprehensive income
Temporal method
translation adjustment included as a remeasurement gain or loss in the income statement
Under the temporal method the translation adjustment measures
"net foreign exchange gain or loss" on the foreign operations cash, marketable securities, receivables and payables, as is those items were actually carried on the parents books
What are advantages of partnerships?
Flexibility in defining relationships, profit/losses and management operating decisions may be shared independent of ownership percentage, ease of formation and dissolution, taxes flow through the partnership to the partners (no double-taxation)
Items to determine allocation of income
Interest on beginning capital balances, allocated compensation, bonuses, and remaining income
The weighted average rates are generally used for
Sales, CoGS, and other recurring expenses
What method is required in highly inflationary economies?
Temporal method
What are disadvantages of partnerships?
Unlimited liability incurred by each partner, each partner has the right to incur liabilities in the name of the partnership, inability to participate in various corporate tax benefits
When does a country have a highly inflationary economy?
When its cumulative 3 year inflation exceeds 100%. With compounding it equates to an average of approximately 26% per year for 3 years in a row.
An increase in liabilities must be offset by
a decrease in owners equity (negative translation adjustment)
Liabilities translated at the current exchange rate when the foreign currency has appreciated generate
a negative translation adjustment (debit)
Assets translated at the current exchange rate when the foreign currency has appreciated generate
a positive translation adjustment (credit)
Partnerships can exist even in the absence of
a written partnership agreement
An increase in assets must be offset by
an increase in owners equity (positive translation adjustment)
When using the bonus method to account for the withdrawal of a partner
any amount paid in excess of that partner's capital account is allocated against remaining partners capital accounts
A net asset balance sheet exposure exists when
assets translated at the current exchange rate are higher in amount than liabilities translated at the current exchange rate
Under the temporal method increases in accounts receivable and accounts payable related to sales and purchases are remeasured
at the average rate
Under the current method all assets and liabilities are translated
at the current rate on the balance sheet date
Under the current method common stock is translated
at the historical rate at the time the stock was issued
Depreciation and amortization expenses are translated at what rate under the current method
average rate for the year
Most expenses
average under both methods
Revenues
average under both methods
Goodwill method
based on the assumption that an implied value can be calculated mathematically and recorded for any intangible contributions made by a partner
The right to co-ownership and the right to share in profits and losses
can be sold unless restricted by the articles of partnership
The right to participate in the management of the business
can't be sold without the other partners' approval
The equity section of a partnership consists of
capital balances for each partner
When partners wish to terminate the business they must
convert all assets to cash, allocate all gains/losses to partner capital balances, pay all liabilities and expenses, and distribute remaining cash to partners
To prepare worldwide consolidated financial statements a US parent company must
convert the foreign GAAP financial statements of its foreign operations into US GAAP and translate the financial statements from forein currency into US dollars
Accounting for capital contribution with noncash assets
debit cash and assets at fair value and credit partners for capital
Accounting for capital contributions with only cash
debit cash and credit each partners for capital
Under the temporal method in remeasuring the statement of cash flows the US dollar value for net income is taken from the remeasured income statement and
depreciation and amortization are remeasured at rates used in the income statement and the remeasurement loss a noncash item is added back to net income
Profits and losses for each period are allocated to
each partners capital account
The uniform partnership act
establishes standards and rules for partnerships
If any accounts of the foreign subsidiary are denominated in a currency other than the foreign currency or US dollar they would
first have to be restated into the local currency then the foreign currency balance and any related foreign exchange gain or loss would be translated or remeasured into US dollars
Net asset balance sheet exposure is a positive translation adjustment when
foreign currency appreciates
Net liability balance sheet exposure is a negative translation adjustment when
foreign currency appreciates
When a partner withdraws from the partnership
he is paid out in accordance with the partnership agreement
The temporal method remeasures inventory, pp&e, patents, and contributed capital accounts using the
historical rates resulting in differences in total assets and total liabilities plus equity which must be reconciled in a remeasurement gain or loss
Additional paid in capital
historical under both methods
Capital stock
historical under both methods
Dividends
historical under both methods
Amortization of Intangibles
historical under temporal average under current
Prepaid expenses
historical under temporal current under current
Legal dissolution frequently leads to
immediate formation of a new partnership as business continues but can lead to termination and liquidation
The articles of partnership may contain a number of provisions, but an explicit understanding should always be reached in regard to
name and address of each partner, business location, description of the nature of the business, rights and responsibilities of each partner, initial contribution made by each partner and the method of valuation, specific method by which profits and losses are allocated, periodic withdrawal of assets by each partner, procedure for admitting new partners, method for arbitrating disputes, life insurance provisions enabling remaining partners to acquire interest of any deceased partner, and method for settling a partner's share in business upon withdrawal, retirement, or death
Limited Liability Company
new type of organization in the US but long used in Europe and other areas, classified as a partnership for tax purposes, in contrast to S corporations the number of owners is not usually limited, owners only risk their own investments
New partners acquire partnership interest by
purchasing it from other partners or making a contribution to the partnership
Why do people form partnerships?
reduce expenses, increase expertise, expand services, tax benefits, easily created by families and friends, and some professions have historically not permitted incorporation
Withdrawals by partners
reduce their capital account
A net liability exposure generally exists when the (blank) method is used
temporal
When using the goodwill method to account for the withdrawal of a partner
the books are first adjusted to FMV, with a proportion of the increase allocated to each partners account. the withdrawing partner is then paid based on the balance in the individual capital account
Current exchange rate is
the exchange rate that exists at the balance sheet date
Historical exchange rate is
the exchange rate that exists when a transaction occurs
If cash flow is primarily in foreign currency and doesn't affect parents cash flow then
the foreign currency is the functional currency
If cost are primarily local then
the foreign currency is the functional currency
If financing is primarily denominated in the foreign currency and foreign currency cash flows are adequate to service obligations then
the foreign currency is the functional currency
If sales price is not affected on a short term basis by changes in exchange rate then
the foreign currency is the functional currency
If there is a low volume of intra-entity transactions and there isn't an extensive interrelationship with parent's operations then
the foreign currency is the functional currency
If there is an active local sales market then
the foreign currency is the functional currency
If financing is primarily from the parent, denominated in the parents currency, or foreign currency cash flows are not adequate to service obligations then
the parents currency is the functional currency
If sales price is affected on a short term basis by changes in exchange rate then
the parents currency is the functional currency
If the sales market is mostly in the parents country or sales denominated in parents currency then
the parents currency is the functional currency
If there is a high volume of intra-entity transactions and extensive interrelationship with parent's operations then
the parents currency is the functional currency
Under the temporal method the increase in inventory is determined by
the remeasurement of CoGS
The rights of a partners
the right to co-ownership in the business property, the right to share in profits and losses as specified in the partnership agreement, and the right to participate in the management of the business
The major difference between the translation adjustment and a foreign exchange gain or loss is
the translation adjustment is not realized through inflows and outflows of cash
The basic assumption underlying the temporal method is
to produce a set of US dollar translated financial statements as if the foreign subsidiary had actually used US dollars in conducting operations
If the functional currency is the foreign currency
use current rate method and translation adjustment is a separate component of other comprehensive income (stockholders equity)
If the functional currency is the US dollar
use temporal method and translation adjustment is a gain or loss in net income
Net asset balance sheet exposure is a negative translation adjustment when
foreign currency depreciates
Net liability balance sheet exposure is a positive translation adjustment when
foreign currency depreciates
CoGS
historical under temporal average under current
Depreciation of PP&E
historical under temporal average under current
Deferred income
historical under temporal current under current
Intangible assets
historical under temporal current under current
Inventory at cost
historical under temporal current under current
Plant property and equipment
historical under temporal current under current
Termination of business activities followed by liquidation of a partnership property occurs for a variety of reasons
personality disputes between partners, retirement, death, changed business environment, other opportunities, low profits, and bankruptcy
A translation adjustment becomes a realized gain or loss only if
the foreign operation is sold for its book value and the foreign currency proceeds from the sale are converted to US dollars
The temporal method remeasures cash, receivable, and liabilities in US dollars using the
current exchange rate
Cash and receivable
current under both methods
Current liabilities
current under both methods
Inventory at market
current under both methods
Long-term debt
current under both methods
Marketable Securities
current under both methods
Retained earnings
composite under both methods