Advanced Financial Accounting 8th Edition By Baker – Test Bank

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Advanced Financial Accounting 8th Edition By Baker – Test Bank

 

Sample  Questions  

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

Chapter 01

Intercorporate Acquisitions and Investments in Other Entities

 

 

Multiple Choice Questions

 

 

 

 

In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the preceding information, what number of shares of $7 par value stock did Spin issue to Conservative?

 

  1. 10,000 B. 7,000 C. 8,000 D. 25,000

 

 

 

 

  1. Based on the preceding information, what was Conservative’s book value of assets transferred to Spin Company?

 

  1. $243,000 B. $263,000 C. $221,000 D. $201,000

 

 

 

 

 

 

 

1-1

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, what amount did Conservative report as its investment in Spin after the transfer of assets and liabilities?

 

  1. $181,000 B. $221,000 C. $263,000 D. $243,000

 

 

 

 

  1. Based on the preceding information, immediately after the transfer,
  2. Conservative’s total assets decreased by $23,000.
  3. Conservative’s total assets decreased by $20,000.
  4. Conservative’s total assets increased by $56,000.
  5. Conservative’s total assets remained the same.

 

 

 

 

During its inception, Devon Company purchased land for $100,000 and a building for

 

$180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan’s $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000.

 

 

 

 

  1. Based on the information provided, at the time of the transfer, Regan Company should record:

 

  1. Building at $180,000 and no accumulated depreciation. B. Building at $162,000 and no accumulated depreciation.

 

  1. Building at $200,000 and accumulated depreciation of $24,000. D. Building at $180,000 and accumulated depreciation of $18,000.

 

 

 

 

  1. Based on the information provided, what amount would be reported by Devon Company as investment in Regan Company common stock?

 

  1. $312,000 B. $180,000 C. $330,000 D. $150,000

 

 

 

 

 

 

 

 

 

 

 

1-2

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, Regan Company will report A. additional paid-in capital of $0.

 

  1. additional paid-in capital of $150,000. C. additional paid-in capital of $162,000. D. additional paid-in capital of $180,000.

 

 

 

 

  1. Burrough Corporation concluded that the fair value of Helyar Company was $80,000 and paid that amount to acquire all of its net assets. Helyar reported assets with a book value of $60,000 and fair value of $98,000 and liabilities with a book value and fair value of $23,000 on the date of combination. Burrough also paid $3,000 to a search firm for finder’s fees related to the acquisition. What amount will be recorded as goodwill by Burrough Corporation while recording its investment in Helyar?

 

  1. $0

 

  1. $5,000 C. $8,000 D. $13,000

 

 

 

 

Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet’s net assets was determined to be $510,000 on that date.

 

 

 

 

  1. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $550,000 for the acquisition?

 

  1. $0

 

  1. $50,000 C. $150,000 D. $40,000

 

 

 

 

  1. Based on the preceding information, what amount will be recorded by Zenith as its investment in Plummet, if it paid $500,000 for the acquisition?

 

  1. $610,000 B. $400,000 C. $500,000 D. $510,000

 

 

 

 

 

 

 

1-3

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $500,000 for the acquisition?

 

  1. $0

 

  1. $50,000 C. $150,000 D. $40,000

 

 

 

 

Octane Company and Bio Company have announced terms of an exchange agreement under which Octane will issue 10,000 shares of its $5 par value common stock to acquire all of Bio’s assets. Octane shares are trading at $28, and Bio’s $10 par value shares are trading at $15. Historical cost and fair value balance sheet data on January 1, 2008, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the information provided, what amount will be reported immediately following the business combination for Buildings and Equipment (net) in the combined company’s balance sheet?

 

  1. $300,000 B. $370,000 C. $330,000 D. $340,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the information provided, what amount will be reported for Common Stock in the combined company’s balance sheet immediately following the business combination? A. $200,000

 

  1. $250,000 C. $300,000 D. $210,000

 

 

 

 

  1. Based on the information provided, what amount will be reported for Additional Paid-In Capital in the combined company’s balance sheet immediately following the business combination?

 

  1. $60,000 B. $80,000 C. $310,000 D. $290,000

 

 

 

 

  1. Based on the information provided, what amount of goodwill will be reported immediately following the business combination in the combined company’s balance sheet? A. $0

 

  1. $50,000 C. $40,000 D. $105,000

 

 

 

 

  1. Based on the information provided, what amount will be reported immediately following the business combination for Retained Earnings in the combined company’s balance sheet? A. $170,000

 

  1. $225,000 C. $115,000 D. $210,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-5

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. The fair value of net identifiable assets of a reporting unit of X Company is $300,000. On X Company’s books, the carrying value of this reporting unit’s net assets is $350,000, including $60,000 goodwill. If the fair value of the reporting unit is $335,000, what amount of goodwill impairment will be recognized for this unit?

 

  1. $0

 

  1. $10,000 C. $25,000 D. $35,000

 

 

 

 

  1. The fair value of net identifiable assets of a reporting unit of Y Company is $270,000. The carrying value of the reporting unit’s net assets on Y Company’s books is $320,000, including $50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be the fair value of the reporting unit?

 

  1. $320,000 B. $310,000 C. $270,000 D. $290,000

 

 

 

 

Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-6

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, what amount of goodwill will be reported for this division if its fair value is determined to be $200,000?

 

  1. $0

 

  1. $60,000 C. $30,000 D. $10,000

 

 

 

 

  1. Based on the preceding information, what amount of goodwill impairment will be recognized for this division if its fair value is determined to be $195,000?

 

  1. $5,000 B. $30,000 C. $60,000 D. $55,000

 

 

 

 

  1. Based on the preceding information, what amount of amount of goodwill impairment will be recognized for this division if its fair value is determined to be $245,000?

 

  1. $0

 

  1. $30,000 C. $60,000 D. $55,000

 

 

 

 

Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore’s assets and liabilities were immediately transferred to Public Equity. Public’s common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-7

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, what number of shares was issued at the time of the exchange?

 

  1. 5,000 B. 17,500 C. 12,500 D. 10,000

 

 

 

 

  1. Based on the preceding information, what is the par value of Public’s common stock? A. $10

 

  1. $1 C. $5 D. $4

 

 

 

 

  1. Based on the preceding information, what is the fair value of Lenore’s net assets, if goodwill of $56,000 is recorded?

 

  1. $306,000 B. $244,000 C. $194,000 D. $300,000

 

 

 

 

Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company’s net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-8

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, what amount of goodwill will be reported for Alpha at year-end?

 

  1. $0

 

  1. $20,000 C. $30,000 D. $10,000

 

 

 

 

  1. Based on the preceding information, what amount of goodwill will be reported for Beta at year-end?

 

  1. $0

 

  1. $14,000 C. $34,000 D. $50,000

 

 

 

 

  1. Based on the preceding information, for Gamma:
  2. no goodwill should be reported at year-end.
  3. goodwill impairment of $30,000 should be recognized at year-end.
  4. goodwill impairment of $20,000 should be recognized at year-end.
  5. goodwill of $30,000 should be reported at year-end.

 

 

 

 

  1. Based on the preceding information, for Delta: A. no goodwill should be reported at year-end.

 

  1. goodwill impairment of $15,000 should be recognized at year-end. C. goodwill impairment of $20,000 should be recognized at year-end. D. goodwill of $30,000 should be reported at year-end.

 

 

 

 

  1. Based on the preceding information, what would be the total amount of goodwill that Wilson should report at year-end?

 

  1. $0

 

  1. $69,000 C. $79,000 D. $94,000

 

 

 

 

 

 

 

 

 

 

 

1-9

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

Rivendell Corporation and Foster Company merged as of January 1, 2009. To effect the merger, Rivendell paid finder’s fees of $40,000, legal fees of $13,000, audit fees related to the stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees of $4,000.

 

 

 

 

  1. Based on the preceding information, under the acquisition method, what amount relating to the business combination would be expensed?

 

  1. $72,000 B. $19,000 C. $53,000 D. $63,000

 

 

 

 

  1. Based on the preceding information, under the acquisition method:
  2. $72,000 of stock issue costs are treated as goodwill.
  3. $19,000 of stock issue costs are treated as a reduction in the issue price.
  4. $19,000 of stock issue costs are expensed.
  5. $72,000 of stock issue costs are expensed.

 

 

 

 

  1. Using the preceding information, what amount would have been expensed if the purchase method of accounting was used?

 

  1. $0

 

  1. $19,000 C. $53,000 D. $72,000

 

 

 

 

  1. Using the preceding information, what amount would have been expensed if the pooling-of-interests method of accounting was used?

 

  1. $0

 

  1. $19,000 C. $53,000 D. $72,000

 

 

 

 

 

 

 

 

 

 

 

 

1-10

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Which of the following observations is (are) consistent with the acquisition method of accounting for business combinations?

 

  1. Expenses related to the business combination are expensed.
  2. Stock issue costs are treated as a reduction in the issue price.

III. All merger and stock issue costs are expensed.

 

  1. No goodwill is ever recorded. A. III

 

  1. IV
  2. I and II
  3. I, II, and IV

 

 

 

 

  1. Which of the following situations best describes a business combination to be accounted for as a statutory merger?

 

  1. Both companies in a combination continue to operate as separate, but related, legal entities. B. Only one of the combining companies survives and the other loses its separate identity.

 

  1. Two companies combine to form a new third company, and the original two companies are dissolved.

 

  1. One company transfers assets to another company it has created.

 

 

 

 

  1. A statutory consolidation is a type of business combination in which:
  2. one of the combining companies survives and the other loses its separate identity.

 

  1. one company acquires the voting shares of the other company and the two companies continue to operate as separate legal entities.

 

  1. two publicly traded companies agree to share a board of directors.

 

  1. each of the combining companies is dissolved and the net assets of both companies are transferred to a newly created corporation.

 

 

 

 

  1. Which of the following observations refers to the term differential?
  2. Excess of consideration exchanged over fair value of net identifiable assets.
  3. Excess of fair value over book value of net identifiable assets.
  4. Excess of consideration exchanged over book value of net identifiable assets.
  5. Excess of fair value over historical cost of net identifiable assets.

 

 

 

 

 

 

 

 

 

 

 

 

1-11

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Which of the following observations concerning “goodwill” is NOT correct? A. Once written down, it may be written up for recoveries.

 

  1. It must be tested for impairment at least annually.

 

  1. Goodwill impairment losses are recognized in income from continuing operations or income before extraordinary gains and losses.

 

  1. It must be reported as a separate line item in the balance sheet.

 

 

 

 

  1. Assuming no impairment in value prior to transfer, assets transferred by a parent company to another entity it has created should be recorded by the newly created entity at the assets’: A. cost to the parent company.

 

  1. book value on the parent company’s books at the date of transfer. C. fair value at the date of transfer.

 

  1. fair value of consideration exchanged by the newly created entity.

 

 

 

 

Essay Questions

 

 

  1. On January 1, 2008, Line Corporation acquired all of the common stock of Staff Company for $300,000. On that date, Staff’s identifiable net assets had a fair value of $250,000. The assets acquired in the purchase of Staff are considered to be a separate reporting unit of Line Corporation. The carrying value of Staff’s investment at December 31, 2008, is $310,000. The fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of the reporting unit is determined to be 260,000.

 

Required:

 

  • Explain how goodwill is tested for impairment for a reporting unit.
  • Determine the amount, if any, of impairment loss to be recognized at December 31, 2008.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-12

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Haynes Corporation entered into an agreement with Diego Company to establish H&D Partnership. Haynes agreed to transfer the following assets to H&D for 80 percent ownership, and Diego agreed to transfer $120,000 cash to the partnership for 20 percent ownership.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required: 1. Give the journal entries that Haynes Corporation and Diego Company recorded for their transfer of assets and accounts payable to H&D Partnership.

 

Give the journal entries that H&D recorded for its receipt of assets and accounts payable from Haynes and Diego.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-13

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Envire Corporation acquired all the assets and liabilities of CFC Corporation by issuing shares of its common stock On January 1, 2009. Partial balance sheet data for the companies prior to the business combination and immediately following the combination is provided:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required:

What number of shares did Envire issue for this acquisition?

 

At what price was Envire stock trading when stock was issued for this acquisition?

 

What was the fair value of the net assets held by CFC at the date of combination?

 

What amount of goodwill will be reported by the combined entity immediately following the combination?

 

What balance in retained earnings will the combined entity report immediately following the combination?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-14

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. On January 1, 2008, Alaska Corporation acquired Mercantile Corporation’s net assets by paying $160,000 cash. Balance sheet data for the two companies and fair value information for Mercantile Corporation immediately before the business combination are given below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required:

Prepare a combined balance sheet immediately following the acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-15

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. SeaLine Corporation is involved in the distribution of processed marine products. The fair values of assets and liabilities held by three reporting units and other information related to the reporting units owned by SeaLine are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required: Determine the amount of goodwill that SeaLine should report in its current financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 01 Intercorporate Acquisitions and Investments in Other Entities Answer Key

 

 

 

 

 

Multiple Choice Questions


 

 

 

 

 

 

 

 

 

 

 

 

 

1-16

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

 

In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the preceding information, what number of shares of $7 par value stock did Spin issue to Conservative?

 

  1. 10,000 B. 7,000 C. 8,000 D. 25,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what was Conservative’s book value of assets transferred to Spin Company?

 

  1. $243,000 B. $263,000 C. $221,000 D. $201,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

1-17

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, what amount did Conservative report as its investment in Spin after the transfer of assets and liabilities?

 

  1. $181,000 B. $221,000 C. $263,000 D. $243,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, immediately after the transfer, Conservative’s total assets decreased by $23,000.

 

  1. Conservative’s total assets decreased by $20,000. C. Conservative’s total assets increased by $56,000. D. Conservative’s total assets remained the same.

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

During its inception, Devon Company purchased land for $100,000 and a building for

 

$180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan’s $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000.

 

 

 

 

  1. Based on the information provided, at the time of the transfer, Regan Company should record:

 

  1. Building at $180,000 and no accumulated depreciation. B. Building at $162,000 and no accumulated depreciation.

 

  1. Building at $200,000 and accumulated depreciation of $24,000. D. Building at $180,000 and accumulated depreciation of $18,000.

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

1-18

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the information provided, what amount would be reported by Devon Company as investment in Regan Company common stock?

 

  1. $312,000 B. $180,000 C. $330,000 D. $150,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, Regan Company will report additional paid-in capital of $0.

 

  1. additional paid-in capital of $150,000. C. additional paid-in capital of $162,000. D. additional paid-in capital of $180,000.

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

  1. Burrough Corporation concluded that the fair value of Helyar Company was $80,000 and paid that amount to acquire all of its net assets. Helyar reported assets with a book value of $60,000 and fair value of $98,000 and liabilities with a book value and fair value of $23,000 on the date of combination. Burrough also paid $3,000 to a search firm for finder’s fees related to the acquisition. What amount will be recorded as goodwill by Burrough Corporation while recording its investment in Helyar?

 

  1. $0

 

  1. $5,000 C. $8,000 D. $13,000

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet’s net assets was determined to be $510,000 on that date.

 

 

 

 

 

 

 

 

 

1-19

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $550,000 for the acquisition?

 

  1. $0

 

  1. $50,000 C. $150,000 D. $40,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what amount will be recorded by Zenith as its investment in Plummet, if it paid $500,000 for the acquisition?

 

  1. $610,000 B. $400,000 C. $500,000 D. $510,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $500,000 for the acquisition?

 

  1. $0

 

  1. $50,000 C. $150,000 D. $40,000

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-20

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

Octane Company and Bio Company have announced terms of an exchange agreement under which Octane will issue 10,000 shares of its $5 par value common stock to acquire all of Bio’s assets. Octane shares are trading at $28, and Bio’s $10 par value shares are trading at $15. Historical cost and fair value balance sheet data on January 1, 2008, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the information provided, what amount will be reported immediately following the business combination for Buildings and Equipment (net) in the combined company’s balance sheet?

 

  1. $300,000 B. $370,000 C. $330,000 D. $340,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the information provided, what amount will be reported for Common Stock in the combined company’s balance sheet immediately following the business combination? $200,000

 

  1. $250,000 C. $300,000 D. $210,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

1-21

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the information provided, what amount will be reported for Additional Paid-In Capital in the combined company’s balance sheet immediately following the business combination?

 

  1. $60,000 B. $80,000 C. $310,000 D. $290,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the information provided, what amount of goodwill will be reported immediately following the business combination in the combined company’s balance sheet? $0

 

  1. $50,000 C. $40,000 D. $105,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the information provided, what amount will be reported immediately following the business combination for Retained Earnings in the combined company’s balance sheet? $170,000

 

  1. $225,000 C. $115,000 D. $210,000

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-22

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. The fair value of net identifiable assets of a reporting unit of X Company is $300,000. On X Company’s books, the carrying value of this reporting unit’s net assets is $350,000, including $60,000 goodwill. If the fair value of the reporting unit is $335,000, what amount of goodwill impairment will be recognized for this unit?

 

  1. $0

 

  1. $10,000 C. $25,000 D. $35,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. The fair value of net identifiable assets of a reporting unit of Y Company is $270,000. The carrying value of the reporting unit’s net assets on Y Company’s books is $320,000, including $50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be the fair value of the reporting unit?

 

  1. $320,000 B. $310,000 C. $270,000 D. $290,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-23

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, what amount of goodwill will be reported for this division if its fair value is determined to be $200,000?

 

  1. $0

 

  1. $60,000 C. $30,000 D. $10,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what amount of goodwill impairment will be recognized for this division if its fair value is determined to be $195,000?

 

  1. $5,000 B. $30,000 C. $60,000 D. $55,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what amount of amount of goodwill impairment will be recognized for this division if its fair value is determined to be $245,000?

 

  1. $0

 

  1. $30,000 C. $60,000 D. $55,000

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-24

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore’s assets and liabilities were immediately transferred to Public Equity. Public’s common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the preceding information, what number of shares was issued at the time of the exchange?

 

  1. 5,000 B. 17,500 C. 12,500 D. 10,000

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

  1. Based on the preceding information, what is the par value of Public’s common stock? $10

 

  1. $1 C. $5 D. $4

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what is the fair value of Lenore’s net assets, if goodwill of $56,000 is recorded?

 

  1. $306,000 B. $244,000 C. $194,000 D. $300,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

1-25

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company’s net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the preceding information, what amount of goodwill will be reported for Alpha at year-end?

 

  1. $0

 

  1. $20,000 C. $30,000 D. $10,000

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

  1. Based on the preceding information, what amount of goodwill will be reported for Beta at year-end?

 

  1. $0

 

  1. $14,000 C. $34,000 D. $50,000

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

1-26

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, for Gamma: no goodwill should be reported at year-end.

 

  1. goodwill impairment of $30,000 should be recognized at year-end. C. goodwill impairment of $20,000 should be recognized at year-end. D. goodwill of $30,000 should be reported at year-end.

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, for Delta: no goodwill should be reported at year-end.

 

  1. goodwill impairment of $15,000 should be recognized at year-end. C. goodwill impairment of $20,000 should be recognized at year-end. D. goodwill of $30,000 should be reported at year-end.

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

  1. Based on the preceding information, what would be the total amount of goodwill that Wilson should report at year-end?

 

  1. $0

 

  1. $69,000 C. $79,000 D. $94,000

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

Rivendell Corporation and Foster Company merged as of January 1, 2009. To effect the merger, Rivendell paid finder’s fees of $40,000, legal fees of $13,000, audit fees related to the stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees of $4,000.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-27

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Based on the preceding information, under the acquisition method, what amount relating to the business combination would be expensed?

 

  1. $72,000 B. $19,000 C. $53,000 D. $63,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, under the acquisition method: $72,000 of stock issue costs are treated as goodwill.

 

  1. $19,000 of stock issue costs are treated as a reduction in the issue price. C. $19,000 of stock issue costs are expensed.

 

  1. $72,000 of stock issue costs are expensed.

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

  1. Using the preceding information, what amount would have been expensed if the purchase method of accounting was used?

 

  1. $0

 

  1. $19,000 C. $53,000 D. $72,000

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

  1. Using the preceding information, what amount would have been expensed if the pooling-of-interests method of accounting was used?

 

  1. $0

 

  1. $19,000 C. $53,000 D. $72,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

1-28

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Which of the following observations is (are) consistent with the acquisition method of accounting for business combinations?

 

  1. Expenses related to the business combination are expensed.
  2. Stock issue costs are treated as a reduction in the issue price.

III. All merger and stock issue costs are expensed.

 

  1. No goodwill is ever recorded. A. III

 

  1. IV
  2. I and II
  3. I, II, and IV

 

 

 

AACSB: Reflective Thinking

 

AICPA: Reporting

 

 

  1. Which of the following situations best describes a business combination to be accounted for as a statutory merger?

 

  1. Both companies in a combination continue to operate as separate, but related, legal entities. B. Only one of the combining companies survives and the other loses its separate identity.

 

  1. Two companies combine to form a new third company, and the original two companies are dissolved.

 

  1. One company transfers assets to another company it has created.

 

 

 

AACSB: Reflective Thinking

 

AICPA: Decision Making

 

 

  1. A statutory consolidation is a type of business combination in which:
  2. one of the combining companies survives and the other loses its separate identity.

 

  1. one company acquires the voting shares of the other company and the two companies continue to operate as separate legal entities.

 

  1. two publicly traded companies agree to share a board of directors.

 

  1. each of the combining companies is dissolved and the net assets of both companies are transferred to a newly created corporation.

 

 

 

AACSB: Reflective Thinking

AICPA: Decision Making


 

 

 

 

 

 

 

 

 

1-29

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Which of the following observations refers to the term differential?
  2. Excess of consideration exchanged over fair value of net identifiable assets.
  3. Excess of fair value over book value of net identifiable assets.
  4. Excess of consideration exchanged over book value of net identifiable assets.
  5. Excess of fair value over historical cost of net identifiable assets.

 

 

 

AACSB: Reflective Thinking

 

AICPA: Reporting

 

 

  1. Which of the following observations concerning “goodwill” is NOT correct? Once written down, it may be written up for recoveries.

 

  1. It must be tested for impairment at least annually.

 

  1. Goodwill impairment losses are recognized in income from continuing operations or income before extraordinary gains and losses.

 

  1. It must be reported as a separate line item in the balance sheet.

 

 

 

AACSB: Reflective Thinking

AICPA: Reporting

 

 

  1. Assuming no impairment in value prior to transfer, assets transferred by a parent company to another entity it has created should be recorded by the newly created entity at the assets’: cost to the parent company.

 

  1. book value on the parent company’s books at the date of transfer. C. fair value at the date of transfer.

 

  1. fair value of consideration exchanged by the newly created entity.

 

 

 

AACSB: Reflective Thinking

AICPA: Decision Making

 

 

 

Essay Questions


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-30

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. On January 1, 2008, Line Corporation acquired all of the common stock of Staff Company for $300,000. On that date, Staff’s identifiable net assets had a fair value of $250,000. The assets acquired in the purchase of Staff are considered to be a separate reporting unit of Line Corporation. The carrying value of Staff’s investment at December 31, 2008, is $310,000. The fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of the reporting unit is determined to be 260,000.

 

Required:

  • Explain how goodwill is tested for impairment for a reporting unit.
  • Determine the amount, if any, of impairment loss to be recognized at December 31, 2008.

 

  • To test for the impairment of goodwill, the fair value of the reporting unit is compared with its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is considered unimpaired. On the other hand, if the carrying amount of the reporting unit exceeds its fair value, an impairment of the reporting unit’s goodwill is implied. The amount of the reporting unit’s goodwill impairment is measured as the excess of the carrying amount of the unit’s goodwill over the implied value of its goodwill. The implied value of its goodwill is determined as the excess of the fair value of the reporting unit over the fair value of its net assets excluding goodwill.

 

  1. The $310,000 carrying value exceeds the $260,000 fair value, implying impairment. Implied goodwill = $260,000 – $220,000 = $40,000.

 

Impairment loss = $50,000 – $40,000 = $10,000.

 

 

 

AACSB: Analytic, Communication

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-31

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Haynes Corporation entered into an agreement with Diego Company to establish H&D Partnership. Haynes agreed to transfer the following assets to H&D for 80 percent ownership, and Diego agreed to transfer $120,000 cash to the partnership for 20 percent ownership.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required: 1. Give the journal entries that Haynes Corporation and Diego Company recorded for their transfer of assets and accounts payable to H&D Partnership.

 

Give the journal entries that H&D recorded for its receipt of assets and accounts payable from Haynes and Diego.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-32

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

  1. Journal Entry – Haynes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Journal Entry – Diego

 

 

 

 

 

 

 

  1. Journal entry recorded by H&D partnership for receipt of assets and accounts payable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

1-33

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. Envire Corporation acquired all the assets and liabilities of CFC Corporation by issuing shares of its common stock On January 1, 2009. Partial balance sheet data for the companies prior to the business combination and immediately following the combination is provided:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required:

What number of shares did Envire issue for this acquisition?

 

At what price was Envire stock trading when stock was issued for this acquisition?

 

What was the fair value of the net assets held by CFC at the date of combination?

 

What amount of goodwill will be reported by the combined entity immediately following the combination?

 

What balance in retained earnings will the combined entity report immediately following the combination?

 

  1. Number of shares = 30,000 (160,000 – 100,000 = 60,000; 60,000/$2 par)

 

  1. Stock price = $8 (Increase in par value and paid-in capital = 240,000; 240,000/30,000 shares)

 

  1. Fair value of net assets = $227,000 ($25,000 + $22,000 + $55,000 + $250,000) – ($25,000 + $100,000)

 

  1. Goodwill = $13,000 ($240,000 – $227,000)
  2. Retained earnings balance = $105,000

 

 

 

 

 

 

1-34

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-35

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

  1. On January 1, 2008, Alaska Corporation acquired Mercantile Corporation’s net assets by paying $160,000 cash. Balance sheet data for the two companies and fair value information for Mercantile Corporation immediately before the business combination are given below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required:

Prepare a combined balance sheet immediately following the acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-36

 

 

Chapter 01 – Intercorporate Acquisitions and Investments in Other Entities

 

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. SeaLine Corporation is involved in the distribution of processed marine products. The fair values of assets and liabilities held by three reporting units and other information related to the reporting units owned by SeaLine are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required: Determine the amount of goodwill that SeaLine should report in its current financial statements.

 

 

 

 

 

 

 

 

Total Goodwill reported = $70,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

Chapter 03

The Reporting Entity and Consolidated Financial Statements

 

 

Multiple Choice Questions

 

 

On January 3, 2009, Jane Company acquired 75 percent of Miller Company’s outstanding common stock for cash. The fair value of the noncontrolling interest was equal to a proportionate share of the book value of Miller Company’s net assets at the date of acquisition. Selected balance sheet data at December 31, 2009, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the preceding information, what amount should be reported as noncontrolling interest in net assets in Jane Company’s December 31, 2009, consolidated balance sheet? A. $90,000

 

  1. $54,000 C. $36,000 D. $0

 

 

 

 

  1. Based on the preceding information, what amount will Jane Company report as common stock outstanding in its consolidated balance sheet at December 31, 2009?

 

  1. $120,000 B. $180,000 C. $156,000 D. $264,000

 

 

 

 

 

 

 

 

 

 

 

 

3-1

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

Beta Company acquired 100 percent of the voting common shares of Standard Video

Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000.

Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of

$280,000, and stockholders’ equity of $220,000. At that date, Standard Video reported total

 

assets of $400,000, liabilities of $250,000, and stockholders’ equity of $150,000. Included in

Standard’s liabilities was an account payable to Beta in the amount of $20,000, which Beta

included in its accounts receivable.

 

 

 

 

  1. Based on the preceding information, what amount of total assets did Beta report in its balance sheet immediately after the acquisition?

 

  1. $500,000 B. $650,000 C. $750,000 D. $900,000

 

 

 

 

  1. Based on the preceding information, what amount of total assets was reported in the consolidated balance sheet immediately after acquisition?

 

  1. $650,000 B. $880,000 C. $920,000 D. $750,000

 

 

 

 

  1. Based on the preceding information, what amount of total liabilities was reported in the consolidated balance sheet immediately after acquisition?

 

  1. $500,000 B. $530,000 C. $280,000 D. $660,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-2

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Based on the preceding information, what amount of stockholders’ equity was reported in the consolidated balance sheet immediately after acquisition?

 

  1. $220,000 B. $150,000 C. $370,000 D. $350,000

 

 

 

 

  1. Company Pea owns 90 percent of Company Essone which in turn owns 80 percent of Company Esstwo. Company Esstwo owns 100 percent of Company Essthree. Consolidated financial statements should be prepared to report the financial status and results of operations for:

 

  1. Pea.
  2. Pea plus Essone.
  3. Pea plus Essone plus Esstwo.
  4. Pea plus Essone plus Esstwo plus Essthree.

 

 

 

 

  1. Xing Corporation owns 80 percent of the voting common shares of Adams Corporation. Noncontrolling interest was assigned $24,000 of income in the 2009 consolidated income statement. What amount of net income did Adams Corporation report for the year?

 

  1. $150,000 B. $96,000 C. $120,000 D. $30,000

 

 

 

 

  1. On December 31, 2009, Rudd Company acquired 80 percent of the common stock of Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. Using the parent company theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

 

  1. $550,000 B. $590,000 C. $700,000 D. $860,000

 

 

 

 

 

 

 

 

 

 

 

3-3

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 2009. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and fair value of $500,000. Using the entity theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

 

  1. $650,000 B. $500,000 C. $550,000 D. $375,000

 

 

 

 

  1. If Push Company owned 51 percent of the outstanding common stock of Shove Company, which reporting method would be appropriate?

 

  1. Cost method B. Consolidation C. Equity method D. Merger method

 

 

 

 

  1. Under FASB 141R, consolidation follows largely which theory approach?
  2. Proprietary
  3. Parent company
  4. Entity
  5. Variable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-4

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

On January 3, 2009, Redding Company acquired 80 percent of Frazer Corporation’s common stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer’s assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 20 percent of the total book value of Frazer. The stockholders’ equity accounts of the two companies at the acquisition date are:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest was assigned income of $11,000 in Redding’s consolidated income statement for 2009.

 

 

 

 

  1. Based on the preceding information, what amount will be assigned to the noncontrolling interest on January 3, 2009, in the consolidated balance sheet?

 

  1. $86,000 B. $44,000 C. $68,800 D. $50,000

 

 

 

 

  1. Based on the preceding information, what will be the total stockholders’ equity in the consolidated balance sheet as of January 3, 2009?

 

  1. $1,580,000 B. $1,064,000 C. $1,150,000 D. $1,236,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-5

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Based on the preceding information, what will be the amount of net income reported by Frazer Corporation in 2009?

 

  1. $44,000 B. $55,000 C. $66,000 D. $36,000

 

 

 

 

  1. Goodwill under the parent theory:
  2. exceeds goodwill under the proprietary theory.
  3. exceeds goodwill under the entity theory.
  4. is less than goodwill under the entity theory.
  5. is less than goodwill under the proprietary theory.

 

 

 

 

Small-Town Retail owns 70 percent of Supplier Corporation’s common stock. For the current financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and expenses of $290,000 and $240,000, respectively.

 

 

 

 

  1. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the parent company theory approach? A. $220,000

 

  1. $202,000 C. $160,000 D. $200,000

 

 

 

 

  1. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the proprietary theory approach?

 

  1. $210,000 B. $202,000 C. $160,000 D. $200,000

 

 

 

 

 

 

 

 

 

 

 

 

3-6

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the entity theory approach?

 

  1. $210,000 B. $202,000 C. $160,000 D. $220,000

 

 

 

 

  1. Quid Corporation acquired 75 percent of Pro Company’s common stock on December 31, 2006. Goodwill (attributable to Quid’s acquisition of Pro shares) of $300,000 was reported in the consolidated financial statements at December 31, 2006. Parent company approach was used in determining this amount. What is the amount of goodwill to be reported under proprietary theory approach?

 

  1. $300,000 B. $400,000 C. $150,000 D. $100,000

 

 

 

 

  1. Quid Corporation acquired 60 percent of Pro Company’s common stock on December 31, 2004. Goodwill (attributable to Quid’s acquisition of Pro shares) of $150,000 was reported in the consolidated financial statements at December 31, 2004. Proprietary theory approach was used in determining this amount. What is the amount of goodwill to be reported under entity theory approach?

 

  1. $150,000 B. $200,000 C. $250,000 D. $100,000

 

 

 

 

  1. Blue Company owns 80 percent of the common stock of White Corporation. During the year, Blue reported sales of $1,000,000, and White reported sales of $500,000, including sales to Blue of $80,000. The amount of sales that should be reported in the consolidated income statement for the year is:

 

  1. $500,000. B. $1,300,000. C. $1,420,000. D. $1,500,000.

 

 

 

 

 

 

 

 

3-7

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. In which of the following cases would consolidation be inappropriate? A. The subsidiary is in bankruptcy.

 

  1. Subsidiary’s operations are dissimilar from those of the parent.

 

  1. The parent owns 90 percent of the subsidiary’s common stock, but all of the subsidiary’s nonvoting preferred stock is held by a single investor.

 

  1. Subsidiary is foreign.

 

 

 

 

  1. Consolidated financial statements tend to be most useful for:
  2. Creditors of a consolidated subsidiary.
  3. Investors and long-term creditors of the parent company.
  4. Short-term creditors of the parent company.
  5. Stockholders of a consolidated subsidiary.

 

 

 

 

On January 1, 2009, Heathcliff Corporation acquired 80 percent of Garfield Corporation’s voting common stock. Garfield’s buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition.

 

 

 

 

  1. Based on the preceding information, what will be the amount at which Garfield’s buildings and equipment will be reported in consolidated statements using the parent company approach?

 

  1. $350,000 B. $340,000 C. $280,000 D. $300,000

 

 

 

 

  1. Based on the preceding information, what will be the amount at which Garfield’s buildings and equipment will be reported in consolidated statements using the current accounting practice?

 

  1. $350,000 B. $340,000 C. $280,000 D. $300,000

 

 

 

 

 

 

 

 

 

3-8

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. On January 1, 2009, Gold Rush Company acquires 80 percent ownership in California Corporation for $200,000. The fair value of the noncontrolling interest at that time is determined to be $50,000. It reports net assets with a book value of $200,000 and fair value of $230,000. Gold Rush Company reports net assets with a book value of $600,000 and a fair value of $650,000 at that time, excluding its investment in California. What will be the amount of goodwill that would be reported immediately after the combination under current accounting practice?

 

  1. $50,000 B. $30,000 C. $40,000 D. $20,000

 

 

 

 

  1. Roland Company acquired 100 percent of Garros Company’s voting shares in 2007. During 2008, Garros purchased tennis equipment for $30,000 and sold them to Roland for $55,000. Roland continues to hold the items in inventory on December 31, 2008. Sales for the two companies during 2008 totaled $655,000, and total cost of goods sold was $420,000. Which of the following observations will be true if no adjustment is made to eliminate the intercorporate sale when a consolidated income statement is prepared for 2008?

 

  1. Sales would be overstated by $30,000.

 

  1. Cost of goods sold will be understated by $25,000. C. Net income will be overstated by $25,000.
  2. Consolidated net income will be unaffected.

 

 

 

 

  1. Zeta Corporation and its subsidiary reported consolidated net income of $320,000 for the year ended December 31, 2008. Zeta owns 80 percent of the common shares of its subsidiary, acquired at book value. Noncontrolling interest was assigned income of $30,000 in the consolidated income statement for 2008. What is the amount of separate operating income reported by Zeta for the year?

 

  1. $170,000 B. $150,000 C. $120,000 D. $200,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-9

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Rohan Corporation holds assets with a fair value of $150,000 and a book value of

 

$125,000 and liabilities with a book value and fair value of $50,000. What balance will be assigned to the noncontrolling interest in the consolidated balance sheet if Helms Company pays $90,000 to acquire 75 percent ownership in Rohan and goodwill of $20,000 is reported?

 

  1. $50,000
  2. $30,000
  3. $40,000
  4. $20,000

 

 

 

 

Elbonia Corporation, a 100 percent subsidiary of Atomic Corporation, caters to its parent’s entire inventory requirements. In 2007, Elbonia produced inventory at a cost of $36,000 and sold it to Atomic for $75,000. Atomic held all the items in inventory on January 1, 2008.

 

During 2008, Atomic sold all the units for $98,000. Assume that the companies had no other transactions during 2007 and 2008.

 

 

 

 

  1. Based on the preceding information, what amount would be reported in the consolidated financial statements for inventory on January 1, 2008?

 

  1. $39,000 B. $36,000 C. $75,000 D. $0

 

 

 

 

  1. Based on the preceding information, what amount would be reported in the consolidated financial statements for cost of goods sold for 2007?

 

  1. $39,000 B. $36,000 C. $75,000 D. $0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-10

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Based on the preceding information, what amount would be reported in the consolidated financial statements for cost of goods sold for 2008?

 

  1. $0

 

  1. $39,000 C. $36,000 D. $98,000

 

 

 

 

  1. Based on the preceding information, what amount would be reported in the consolidated financial statements for sales for 2007?

 

  1. $0

 

  1. $39,000 C. $36,000 D. $75,000

 

 

 

 

  1. When a primary beneficiary’s consolidation of a variable interest entity (VIE) is appropriate, the amounts of the VIE to be consolidated are:

 

  1. Book values for assets and liabilities transferred by the primary beneficiary.

 

  1. Fair values when the primary beneficiary relationship became established. A. I

 

  1. II

 

  1. Both I and II D. Neither I nor II

 

 

 

 

  1. Which of the following usually does not represent a variable interest? A. Common stock, with no special features or provisions

 

  1. Senior debt
  2. Subordinated debt
  3. Loan or asset guarantees

 

 

 

 

Essay Questions


 

 

 

 

 

 

 

 

 

 

3-11

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Consolidated financial statements are required by GAAP in certain circumstances. This information can be very useful to stockholders and creditors. Yet, there are limitations to these financial statements for which the users must be aware. What are at least three (3) limitations of consolidated financial statements?

 

 

 

 

 

 

 

 

 

 

 

  1. In reading a set of consolidated financial statements you are surprised to see the term noncontrolling interest not reported under the Stockholders’ Equity section of the Balance Sheet.

 

  1. What is a non-controlling interest?

 

  1. Why must it be reported in the financial statements as an element of equity rather than a liability?

 

 

 

 

 

 

 

 

 

 

 

  1. FASB issued Interpretation No. 46 R related to the Consolidation of Variable Interest Entities. Why does FASB have difficulty in prescribing when these entities are consolidated?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-12

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Dish Corporation acquired 100 percent of the common stock of Toll Company by issuing 10,000 shares of $10 par common stock with a market value of $60 per share. Summarized balance sheet data for the two companies immediately preceding the acquisition are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required: Determine the dollar amounts to be presented in the consolidated balance sheet for (1) total assets, (2) total liabilities, and (3) total stockholders’ equity.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-13

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. The Hamilton Company acquired 100 percent of the stock of Hudson Company on January 1, 2010, for $308,000 cash. Summarized balance sheet data for the companies on December 31, 2009, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The book values of Hudson’s assets and liabilities are equal to their fair values, except as indicated. On January 1, 2010, Hudson owed Hamilton $14,000 on account.

 

Required: Prepare a consolidated balance sheet immediately following the acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-14

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Barnes Company acquired 80 percent of the outstanding voting stock of Dean Company on January 1, 2008. During 2008 Dean Company sold inventory costing $50,000 to Barnes Company for $80,000. Barnes Company continued to hold the inventory at December 31, 2008. Also during 2008, Barnes Company sold merchandise costing $400,000 to nonaffiliates for $600,000, and on its separate balance sheet reported total inventory at year end of $140,000. In its separate financial statements, Dean Company reported total sales and cost of goods sold of $350,000 and $220,000, respectively, for 2008 and ending inventory of $150,000.

 

Required: Based on the above information, compute the amounts that should appear in the consolidated financial statements prepared for Barnes Company and it subsidiary, Dean Company, at year end for the following items: 1) sales; 2) cost of goods sold; 3) gross profit on sales; 4) inventory.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-15

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. On January 1, 2009, Field Corporation, a retail outlet chain, acquired 100 percent of the common stock of Palouse Company by issuing 14,000 shares of Field’s $5 par value common stock. The market price of Field’s common stock was $20 per share on the eve of December 31, 2008. Summarized balance sheet data at December 31, 2008, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional Information:

 

The book values of Palouse’s assets approximated their respective fair values, except for inventory (included in current assets), which had a fair value $20,000 more than book value, and land, which had a market value of $200,000 on the date of combination. At that date, Field owed Palouse $34,000 on account.

 

Required: Prepare a consolidated balance sheet immediately following the acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-16

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

Chapter 03 The Reporting Entity and Consolidated Financial Statements Answer Key

 

 

 

 

 

Multiple Choice Questions

 

 

On January 3, 2009, Jane Company acquired 75 percent of Miller Company’s outstanding common stock for cash. The fair value of the noncontrolling interest was equal to a proportionate share of the book value of Miller Company’s net assets at the date of acquisition. Selected balance sheet data at December 31, 2009, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the preceding information, what amount should be reported as noncontrolling interest in net assets in Jane Company’s December 31, 2009, consolidated balance sheet? $90,000

 

  1. $54,000 C. $36,000 D. $0

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

3-17

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Based on the preceding information, what amount will Jane Company report as common stock outstanding in its consolidated balance sheet at December 31, 2009?

 

  1. $120,000 B. $180,000 C. $156,000 D. $264,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

Beta Company acquired 100 percent of the voting common shares of Standard Video

Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000.

Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of

$280,000, and stockholders’ equity of $220,000. At that date, Standard Video reported total

 

assets of $400,000, liabilities of $250,000, and stockholders’ equity of $150,000. Included in

Standard’s liabilities was an account payable to Beta in the amount of $20,000, which Beta

included in its accounts receivable.

 

 

 

 

  1. Based on the preceding information, what amount of total assets did Beta report in its balance sheet immediately after the acquisition?

 

  1. $500,000 B. $650,000 C. $750,000 D. $900,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what amount of total assets was reported in the consolidated balance sheet immediately after acquisition?

 

  1. $650,000 B. $880,000 C. $920,000 D. $750,000

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

3-18

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Based on the preceding information, what amount of total liabilities was reported in the consolidated balance sheet immediately after acquisition?

 

  1. $500,000 B. $530,000 C. $280,000 D. $660,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what amount of stockholders’ equity was reported in the consolidated balance sheet immediately after acquisition?

 

  1. $220,000 B. $150,000 C. $370,000 D. $350,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Company Pea owns 90 percent of Company Essone which in turn owns 80 percent of Company Esstwo. Company Esstwo owns 100 percent of Company Essthree. Consolidated financial statements should be prepared to report the financial status and results of operations for:

 

  1. Pea.
  2. Pea plus Essone.
  3. Pea plus Essone plus Esstwo.
  4. Pea plus Essone plus Esstwo plus Essthree.

 

 

 

AACSB: Analytic

AICPA: Decision Making


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-19

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Xing Corporation owns 80 percent of the voting common shares of Adams Corporation. Noncontrolling interest was assigned $24,000 of income in the 2009 consolidated income statement. What amount of net income did Adams Corporation report for the year?

 

  1. $150,000 B. $96,000 C. $120,000 D. $30,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. On December 31, 2009, Rudd Company acquired 80 percent of the common stock of Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. Using the parent company theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

 

  1. $550,000 B. $590,000 C. $700,000 D. $860,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 2009. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and fair value of $500,000. Using the entity theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

 

  1. $650,000 B. $500,000 C. $550,000 D. $375,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

3-20

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. If Push Company owned 51 percent of the outstanding common stock of Shove Company, which reporting method would be appropriate?

 

  1. Cost method B. Consolidation C. Equity method D. Merger method

 

 

 

AACSB: Reflective Thinking

 

AICPA: Reporting

 

 

  1. Under FASB 141R, consolidation follows largely which theory approach? Proprietary

 

  1. Parent company C. Entity

 

  1. Variable

 

 

 

AACSB: Reflective Thinking

 

AICPA: Reporting

 

 

On January 3, 2009, Redding Company acquired 80 percent of Frazer Corporation’s common stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer’s assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 20 percent of the total book value of Frazer. The stockholders’ equity accounts of the two companies at the acquisition date are:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interest was assigned income of $11,000 in Redding’s consolidated income statement for 2009.

 

 

 

 

 

 

 

 

3-21

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Based on the preceding information, what amount will be assigned to the noncontrolling interest on January 3, 2009, in the consolidated balance sheet?

 

  1. $86,000 B. $44,000 C. $68,800 D. $50,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what will be the total stockholders’ equity in the consolidated balance sheet as of January 3, 2009?

 

  1. $1,580,000 B. $1,064,000 C. $1,150,000 D. $1,236,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what will be the amount of net income reported by Frazer Corporation in 2009?

 

  1. $44,000 B. $55,000 C. $66,000 D. $36,000

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-22

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Goodwill under the parent theory:
  2. exceeds goodwill under the proprietary theory.
  3. exceeds goodwill under the entity theory.
  4. is less than goodwill under the entity theory.
  5. is less than goodwill under the proprietary theory.

 

 

 

AACSB: Reflective Thinking

 

AICPA: Reporting

 

 

Small-Town Retail owns 70 percent of Supplier Corporation’s common stock. For the current financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and expenses of $290,000 and $240,000, respectively.

 

 

 

 

  1. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the parent company theory approach? $220,000

 

  1. $202,000 C. $160,000 D. $200,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the proprietary theory approach?

 

  1. $210,000 B. $202,000 C. $160,000 D. $200,000

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

3-23

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the entity theory approach?

 

  1. $210,000 B. $202,000 C. $160,000 D. $220,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Quid Corporation acquired 75 percent of Pro Company’s common stock on December 31, 2006. Goodwill (attributable to Quid’s acquisition of Pro shares) of $300,000 was reported in the consolidated financial statements at December 31, 2006. Parent company approach was used in determining this amount. What is the amount of goodwill to be reported under proprietary theory approach?

 

  1. $300,000 B. $400,000 C. $150,000 D. $100,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Quid Corporation acquired 60 percent of Pro Company’s common stock on December 31, 2004. Goodwill (attributable to Quid’s acquisition of Pro shares) of $150,000 was reported in the consolidated financial statements at December 31, 2004. Proprietary theory approach was used in determining this amount. What is the amount of goodwill to be reported under entity theory approach?

 

  1. $150,000 B. $200,000 C. $250,000 D. $100,000

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

3-24

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Blue Company owns 80 percent of the common stock of White Corporation. During the year, Blue reported sales of $1,000,000, and White reported sales of $500,000, including sales to Blue of $80,000. The amount of sales that should be reported in the consolidated income statement for the year is:

 

  1. $500,000. B. $1,300,000. C. $1,420,000. D. $1,500,000.

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. In which of the following cases would consolidation be inappropriate? The subsidiary is in bankruptcy.

 

  1. Subsidiary’s operations are dissimilar from those of the parent.

 

  1. The parent owns 90 percent of the subsidiary’s common stock, but all of the subsidiary’s nonvoting preferred stock is held by a single investor.

 

  1. Subsidiary is foreign.

 

 

 

AACSB: Reflective Thinking

 

AICPA: Reporting

 

 

  1. Consolidated financial statements tend to be most useful for: Creditors of a consolidated subsidiary.

 

  1. Investors and long-term creditors of the parent company. C. Short-term creditors of the parent company.

 

  1. Stockholders of a consolidated subsidiary.

 

 

 

AACSB: Reflective Thinking

AICPA: Reporting

 

 

On January 1, 2009, Heathcliff Corporation acquired 80 percent of Garfield Corporation’s voting common stock. Garfield’s buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition.

 

 

 

 

 

 

 

 

 

 

 

3-25

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Based on the preceding information, what will be the amount at which Garfield’s buildings and equipment will be reported in consolidated statements using the parent company approach?

 

  1. $350,000 B. $340,000 C. $280,000 D. $300,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what will be the amount at which Garfield’s buildings and equipment will be reported in consolidated statements using the current accounting practice?

 

  1. $350,000 B. $340,000 C. $280,000 D. $300,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. On January 1, 2009, Gold Rush Company acquires 80 percent ownership in California Corporation for $200,000. The fair value of the noncontrolling interest at that time is determined to be $50,000. It reports net assets with a book value of $200,000 and fair value of $230,000. Gold Rush Company reports net assets with a book value of $600,000 and a fair value of $650,000 at that time, excluding its investment in California. What will be the amount of goodwill that would be reported immediately after the combination under current accounting practice?

 

  1. $50,000 B. $30,000 C. $40,000 D. $20,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

3-26

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Roland Company acquired 100 percent of Garros Company’s voting shares in 2007. During 2008, Garros purchased tennis equipment for $30,000 and sold them to Roland for $55,000. Roland continues to hold the items in inventory on December 31, 2008. Sales for the two companies during 2008 totaled $655,000, and total cost of goods sold was $420,000. Which of the following observations will be true if no adjustment is made to eliminate the intercorporate sale when a consolidated income statement is prepared for 2008?

 

  1. Sales would be overstated by $30,000.

 

  1. Cost of goods sold will be understated by $25,000. C. Net income will be overstated by $25,000.
  2. Consolidated net income will be unaffected.

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Zeta Corporation and its subsidiary reported consolidated net income of $320,000 for the year ended December 31, 2008. Zeta owns 80 percent of the common shares of its subsidiary, acquired at book value. Noncontrolling interest was assigned income of $30,000 in the consolidated income statement for 2008. What is the amount of separate operating income reported by Zeta for the year?

 

  1. $170,000 B. $150,000 C. $120,000 D. $200,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Rohan Corporation holds assets with a fair value of $150,000 and a book value of

 

$125,000 and liabilities with a book value and fair value of $50,000. What balance will be assigned to the noncontrolling interest in the consolidated balance sheet if Helms Company pays $90,000 to acquire 75 percent ownership in Rohan and goodwill of $20,000 is reported?

 

  1. $50,000
  2. $30,000
  3. $40,000
  4. $20,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

3-27

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

Elbonia Corporation, a 100 percent subsidiary of Atomic Corporation, caters to its parent’s entire inventory requirements. In 2007, Elbonia produced inventory at a cost of $36,000 and sold it to Atomic for $75,000. Atomic held all the items in inventory on January 1, 2008. During 2008, Atomic sold all the units for $98,000. Assume that the companies had no other transactions during 2007 and 2008.

 

 

 

 

  1. Based on the preceding information, what amount would be reported in the consolidated financial statements for inventory on January 1, 2008?

 

  1. $39,000 B. $36,000 C. $75,000 D. $0

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what amount would be reported in the consolidated financial statements for cost of goods sold for 2007?

 

  1. $39,000 B. $36,000 C. $75,000 D. $0

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what amount would be reported in the consolidated financial statements for cost of goods sold for 2008?

 

  1. $0

 

  1. $39,000 C. $36,000 D. $98,000

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

3-28

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Based on the preceding information, what amount would be reported in the consolidated financial statements for sales for 2007?

 

  1. $0

 

  1. $39,000 C. $36,000 D. $75,000

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. When a primary beneficiary’s consolidation of a variable interest entity (VIE) is appropriate, the amounts of the VIE to be consolidated are:

 

  1. Book values for assets and liabilities transferred by the primary beneficiary.

 

  1. Fair values when the primary beneficiary relationship became established. I

 

  1. II

 

  1. Both I and II D. Neither I nor II

 

 

 

AACSB: Analytic

 

AICPA: Reporting

 

 

  1. Which of the following usually does not represent a variable interest? Common stock, with no special features or provisions

 

  1. Senior debt
  2. Subordinated debt
  3. Loan or asset guarantees

 

 

 

AACSB: Reflective Thinking

AICPA: Reporting

 

 

 

Essay Questions


 

 

 

 

 

 

 

 

 

 

 

3-29

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Consolidated financial statements are required by GAAP in certain circumstances. This information can be very useful to stockholders and creditors. Yet, there are limitations to these financial statements for which the users must be aware. What are at least three (3) limitations of consolidated financial statements?

 

Limitations to consolidated financial statements include:

 

  • The operating results and financial position of individual companies included in the consolidation are not disclosed. Therefore, the poor performance or position of one or more companies may be hidden by the good performance and position of others.

 

  • The consolidated statements include the subsidiary’s assets, not all assets shown are available to dividend distributions of the parent company.

 

  • Financial ratios are based upon the aggregated consolidated information; therefore, these ratios may not be representative of any single company in the consolidation, including the parent.

 

  • Similar accounts of different companies that are consolidated may not be entirely comparable. For example, the length of operating cycles of different subsidiaries may vary, causing receivables of similar length to be classified differently.

 

  • Additional information about individual companies or groups of companies that have been consolidated may be necessary for fair presentation, resulting in voluminous footnote disclosures.

 

 

 

AACSB: Communication

 

AICPA: Reporting


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-30

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. In reading a set of consolidated financial statements you are surprised to see the term noncontrolling interest not reported under the Stockholders’ Equity section of the Balance Sheet.

 

  1. What is a non-controlling interest?

 

  1. Why must it be reported in the financial statements as an element of equity rather than a liability?

 

  1. Noncontrolling interest occurs when less than 100 percent equity is acquired in a subsidiary. It represents the fact that the parent may control but not own the entire subsidiary. The noncontrolling shareholders have a claim on the subsidiary’s assets and earnings through their percentage ownership of the stock.

 

  1. Noncontrolling interest clearly does not meet the definition of a liability. FASB 160 makes clear that the noncontrolling interest’s claim on net assets is an element of equity, not a liability. It requires reporting the noncontrolling interest in equity.

 

 

 

AACSB: Communication

 

AICPA: Reporting

 

 

  1. FASB issued Interpretation No. 46 R related to the Consolidation of Variable Interest Entities. Why does FASB have difficulty in prescribing when these entities are consolidated?

 

A Variable Interest Entity (VIE) is a legal structure used for business purposes that either:

 

  1. Does not have equity investors that: a. have voting rights or

 

  1. doesn’t share in all of the entity’s profits or losses.

 

  1. Has equity investors that do not provide sufficient financial resources to support the entity’s activities.

 

Therefore, FASB has been trying to define the Primary Beneficiary and from this lead to consolidation not just control as presumed under FASB 141.

 

 

 

AACSB: Communication

 

AICPA: Reporting


 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-31

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Dish Corporation acquired 100 percent of the common stock of Toll Company by issuing 10,000 shares of $10 par common stock with a market value of $60 per share. Summarized balance sheet data for the two companies immediately preceding the acquisition are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required: Determine the dollar amounts to be presented in the consolidated balance sheet for (1) total assets, (2) total liabilities, and (3) total stockholders’ equity.

 

Total assets = $2,550,000 ($1,200,000 + $1,300,000 + $50,000 GW)

Total liabilities = $1,550,000 ($800,000 + $750,000)

Total stockholders’ equity = $1,000,000 [$400,000 + ($60 x 10,000 shares)]

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-32

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. The Hamilton Company acquired 100 percent of the stock of Hudson Company on January 1, 2010, for $308,000 cash. Summarized balance sheet data for the companies on December 31, 2009, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The book values of Hudson’s assets and liabilities are equal to their fair values, except as indicated. On January 1, 2010, Hudson owed Hamilton $14,000 on account.

 

Required: Prepare a consolidated balance sheet immediately following the acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-33

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-34

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. Barnes Company acquired 80 percent of the outstanding voting stock of Dean Company on January 1, 2008. During 2008 Dean Company sold inventory costing $50,000 to Barnes Company for $80,000. Barnes Company continued to hold the inventory at December 31, 2008. Also during 2008, Barnes Company sold merchandise costing $400,000 to nonaffiliates for $600,000, and on its separate balance sheet reported total inventory at year end of $140,000. In its separate financial statements, Dean Company reported total sales and cost of goods sold of $350,000 and $220,000, respectively, for 2008 and ending inventory of $150,000.

 

Required: Based on the above information, compute the amounts that should appear in the consolidated financial statements prepared for Barnes Company and it subsidiary, Dean Company, at year end for the following items: 1) sales; 2) cost of goods sold; 3) gross profit on sales; 4) inventory.

 

  • Sales = $870,000 ($600,000 + $350,000 – $80,000)
  • Cost of Goods Sold = $570,000 ($400,000 + $220,000 – $50,000)
  • Gross Profit on Sales = $300,000 ($870,000 – $570,000)
  • Inventory = $260,000 ($140,000 + $150,000 – $30,000)

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-35

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

  1. On January 1, 2009, Field Corporation, a retail outlet chain, acquired 100 percent of the common stock of Palouse Company by issuing 14,000 shares of Field’s $5 par value common stock. The market price of Field’s common stock was $20 per share on the eve of December 31, 2008. Summarized balance sheet data at December 31, 2008, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional Information:

 

The book values of Palouse’s assets approximated their respective fair values, except for inventory (included in current assets), which had a fair value $20,000 more than book value, and land, which had a market value of $200,000 on the date of combination. At that date, Field owed Palouse $34,000 on account.

 

Required: Prepare a consolidated balance sheet immediately following the acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-36

 

 

 

 

Chapter 03 – The Reporting Entity and Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

Chapter 11

Multinational Accounting: Foreign Currency Transactions and Financial

Instruments

 

 

Multiple Choice Questions

 

 

  1. If 1 British pound can be exchanged for 180 cents of U.S. currency, what fraction should be used to compute the indirect quotation of the exchange rate expressed in British pounds?

 

  1. 1/180 B. 1/.56 C. 1.8/1 D. 1/1.8

 

 

 

 

Suppose the direct foreign exchange rates in U.S. dollars are:

 

1 Singapore dollar = $.7025

 

1 Cyprus pound = $2.5132

 

 

 

 

  1. Based on the information given above, the indirect exchange rates for the Singapore dollar and the Cyprus Pound are:

 

  1. 1.7655 Singapore dollars and 1.4235 Cyprus pounds respectively. B. 0.2975 Singapore dollars and 1.5132 Cyprus pounds respectively. C. 2.1622 Singapore dollars and 0.4625 Cyprus pounds respectively. D. 1.4235 Singapore dollars and 0.3979 Cyprus pounds respectively.

 

 

 

 

  1. Based on the information given above, how many U.S. dollars must be paid for a purchase of citrus fruits costing 10,000 Cyprus pounds?

 

  1. $25,132 B. $15,132 C. $3,979 D. $35,775

 

 

 

 

 

 

 

 

 

 

 

 

11-1

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the information given above, how many Singapore dollars are required to purchase goods costing 10,000 US dollars?

 

  1. 7,025 B. 14,235 C. 17,655 D. 2,975

 

 

 

 

  1. Upon arrival in Chile, Karen exchanged $1,000 of U.S. currency into 4,80,000 Chilean Pesos. While returning after her two month visit, she exchanged her remaining 50,000 Pesos into $100 of U.S. currency. What amount of gain or a loss did Karen experience on the 50,000 pesos she held during her visit and converted to U.S. dollars at the departure date?

 

  1. Loss of $4. B. Gain of $4. C. Loss of $6.

 

  1. No gain or loss.

 

 

 

 

  1. Chicago based Corporation X has a number of importing transactions with companies based in UK. Importing activities result in payables. If the settlement currency is the British Pound, which of the following will happen by changes in the direct or indirect exchange rates?

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-2

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Chicago based Corporation X has a number of exporting transactions with companies based in Sweden. Exporting activities result in receivables. If the settlement currency is the Swedish Krona, which of the following will happen by changes in the direct or indirect exchange rates?

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

  1. Corporation X has a number of exporting transactions with companies based in Vietnam. Exporting activities result in receivables. If the settlement currency is the US dollar, which of the following will happen by changes in the direct or indirect exchange rates?

 

 

 

 

 

 

 

 

 

 

  1. Option A

 

  1. Option B
  2. Option C
  3. Option D

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-3

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On October 1, 2008, Mint purchased confectionary items from a foreign company at a price of LCU 5,000 when the direct exchange rate was 1 LCU = $1.20. The account has not been settled as of December 31, 2008, when the exchange rate has decreased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint’s records at year-end for this transaction will be: A. $500 loss

 

  1. $500 gain C. $378 gain D. $5,500 loss

 

 

 

 

  1. Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On November 2, 2008, Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as of December 31, 2008, when the exchange rate has increased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint’s records at year-end for this transaction will be:

 

  1. $460 loss B. $387 loss C. $387 gain D. $460 gain

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-4

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On September 3, 2008, Jackson Corporation purchases goods for a U.S. dollar equivalent of $17,000 from a Swiss company. The transaction is denominated in Swiss francs (SFr). The payment is made on October 10. The exchange rates were:

 

 

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on October 10?

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-5

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On March 1, 2008, Wilson Corporation sold goods for a U.S. dollar equivalent of $31,000 to a Thai company. The transaction is denominated in Thai bahts. The payment is received on May 10. The exchange rates were:

 

 

 

 

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on May 10?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

On December 5, 2008, Texas based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 2009. The transaction is denominated in Saudi riyals. Imperial’s fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-6

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, what journal entry would Imperial make on December 31, 2008, to revalue foreign currency payable to equivalent U.S. dollar value?

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

  1. Based on the preceding information, what journal entry would Imperial make on January 10, 2009, to revalue foreign currency payable to equivalent U.S. dollar value?

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-7

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, what was the overall foreign currency gain or loss on the accounts payable transaction?

 

  1. $300 loss B. $200 loss C. $100 gain D. $200 gain

 

 

 

 

Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 2008, with payment due on December 2, 2008. Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge. The spot rates were:

 

 

 

 

 

 

 

 

  1. Based on the preceding information, in the entry made on December 2nd to revalue foreign currency receivable to current equivalent U.S. dollar value,

 

  1. Accounts Payable will be debited for $18,350.
  2. Foreign Currency Units will be debited for $18,500.

 

  1. Foreign Currency Transaction Gain will be credited for $150. D. Other Comprehensive Income will be credited for $300.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-8

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, what is the entry required to settle foreign currency payable on December 2?

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

  1. Detroit based Auto Corporation, purchased ancillaries from a Japanese firm on December 1, 2008, for 1,000,000 Yen, when the spot rate for Yen was $.0095. On December 31, 2008, the spot rate stood at $.0096. On January 10, 2009 Auto paid 1,000,000 Yen acquired at a rate of $.0094. Auto’s income statements should report a foreign exchange gain or loss for the years ended December 31, 2008 and 2009 of:

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-9

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On November 1, 2008, Denver Company borrowed 500,000 local currency units (LCU) from a foreign lender evidenced by an interest-bearing note due on November 1, 2009, which is denominated in the currency of the lender. The U.S. dollar equivalent of the note principal was as follows:

 

 

 

 

 

In its income statement for 2009, what amount should Denver include as a foreign exchange

 

gain or loss on the note principal?

  1. 15,000 gain
  2. 25,000 gain
  3. 15,000 loss
  4. 40,000 loss

 

 

 

 

  1. Company X denominated a December 1, 2009, purchase of goods in a currency other than its functional currency. The transaction resulted in a payable fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 10, 2010. Exchange rates moved unfavourably at December 31, 2009, resulting in a loss that should:

 

  1. be included as a separate component of stockholders’ equity at Dec. 31, 2009. B. be included as a component of income from continuing operations for 2009. C. be included as a deferred charge at December 31, 2009.

 

  1. not be reported until January 10, 2010, the settlement date.

 

 

 

 

Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reals on

December 1, 2008, with payment due on January 20, 2009. The exchange rates were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-10

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, which of the following is true of dollar’s movement vis-à-vis Brazilian real during the period?

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

  1. Based on the preceding information, what is the Heavy’s overall net gain or net loss from its foreign currency exposure related to this transaction?

 

  1. $4,860 loss B. $2,600 loss C. $7,120 gain D. $2,260 gain

 

 

 

 

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 2009 with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-11

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, the entry to revalue foreign currency payable to current U.S. dollar value on March 1 will have:

 

  1. a credit to Foreign Currency Transaction Gain for $1,500. B. a debit to Foreign Currency Transaction Loss for $2,500. C. a debit to Foreign Currency Transaction Loss for $1,500. D. a credit to Foreign Currency Transaction Gain for $1,000.

 

 

 

 

  1. Based on the preceding information, what is the overall effect on net income of Myway’s use of the forward exchange contract?

 

  1. Net loss of $1,000 B. Net gain of $1,500 C. Net loss of $500 D. No effect

 

 

 

 

  1. Based on the preceding information, had Myway not used the forward exchange contract, net income for the year would have:

 

  1. increased by $1,000. B. increased by $500. C. decreased by $1,000. D. decreased by $1,500.

 

 

 

 

  1. Levin company entered into a forward contract to speculate in the foreign currency. It sold 100,000 foreign currency units under a contract dated November 1, 2008, for delivery on January 31, 2009:

 

 

 

 

 

 

In its income statement for the year ended December 31, 2008, what amount of loss should Levin report from this forward contract?

 

  1. $0
  2. $300
  3. $200
  4. $100

 

 

 

 

 

 

 

 

 

11-12

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 2008. Payment is due on January 30, 2009. On December 1, 2008, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the preceding information, the entries on December 31, 2008, include a: A. Credit to Foreign Currency Payable to Exchange Broker, $4,000.

 

  1. Debit to Foreign Currency Receivable from Exchange Broker, $6,000. C. Debit to Foreign Currency Receivable from Exchange Broker, $186,000. D. Debit to Foreign Currency Transaction Gain, $4,000.

 

 

 

 

  1. Based on the preceding information, the entries on January 30, 2009, include a: A. Debit to Dollars Payable to Exchange Broker, $180,000.

 

  1. Credit to Cash, $184,000.
  2. Credit to Premium on Forward Contract, $4,000.
  3. Credit to Foreign Currency Receivable from Exchange Broker, $180,000.

 

 

 

 

  1. Based on the preceding information, the entries on January 30, 2009, include a: A. Credit to Foreign Currency Units (SFr), $184,000.

 

  1. Credit to Cash, $180,000.
  2. Debit to Foreign Currency Transaction Loss, $4,000.
  3. Debit to Dollars Payable to Exchange Broker, $184,000.

 

 

 

 

  1. Based on the preceding information, the entries on January 30, 2009, include a: A. Debit to Dollars Payable to Exchange Broker, $184,000.

 

  1. Credit to Foreign Currency Transaction Gain, $4,000.

 

  1. Credit to Foreign Currency Receivable from Exchange Broker, $180,000. D. Debit to Foreign Currency Units (SFr), $184,000.

 

 

 

 

 

 

 

11-13

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

On December 1, 2008, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42.

 

The rates are as follows:

 

 

 

 

 

 

 

 

 

 

Hedge had no other speculation transactions in 2008 and 2009. Ignore taxes.

 

 

 

 

  1. Based on the preceding information, what is the effect of the British pound speculative contract on 2008 net income?

 

  1. $10,000 gain B. $6,000 gain C. $8,000 gain D. $2,000 loss

 

 

 

 

  1. Based on the preceding information, what is the overall effect of speculation on 2008 net income?

 

  1. $4,000 gain B. $6,000 gain C. $8,000 loss D. $8,000 gain

 

 

 

 

  1. Based on the preceding information, what is the effect of the euro speculative contract on 2009 net income?

 

  1. $4,000 loss B. $1,000 gain C. $8,000 gain D. $2,000 loss

 

 

 

 

 

 

 

11-14

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, what is the overall effect of speculation on 2009 net income?

 

  1. $1,000 loss B. $6,000 gain C. $3,000 loss D. $8,000 gain

 

 

 

 

  1. Based on the preceding information, what is the net gain or loss on the British pound speculative contract?

 

  1. $8,000 gain B. $6,000 gain C. $3,000 loss D. $10,000 gain

 

 

 

 

  1. Based on the preceding information, what is the net gain or loss on the euro speculative contract?

 

  1. $8,000 gain B. $6,000 gain C. $3,000 loss D. $1,000 loss

 

 

 

 

The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-15

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, which of the following is true of the intrinsic and time values associated with this option.

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

  1. Based on the preceding information, the call option: A. has no intrinsic value currently.

 

  1. is at the money.

 

  1. is out of the money. D. is in the money.

 

 

 

 

  1. An investor purchases a put option with a strike price of $100 for $3. This option is considered “in the money” if the underlying is trading:

 

  1. below $100. B. at $100.

 

  1. above $100. D. above $103.

 

 

 

 

  1. Which of the following observations is true of futures contracts?
  2. Contracted through a dealer, usually a bank.
  3. Customized to meet contracting company’s terms and needs.
  4. Typically no margin deposit required.
  5. Traded on an exchange and acquired through an exchange broker

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-16

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Which of the following observations is true of forwards contracts? A. Substantial margin is required to initiate a contract.

 

  1. Must be completed either with the underlying’s future delivery or net C. cash settlement.

 

  1. Cannot be customized; for a specific amount at a specific date. E. Usually settled with a net cash amount prior to maturity date.

 

 

 

 

  1. Company X issues variable-rate debt but wishes to fix its interest rates because it believes the variable rate may increase. Company Y has a fixed-rate bond but is looking for a variable-rate interest because it assumes the interest rates may decrease. The two companies agree to exchange cash flows. Such an arrangement is called:

 

  1. a futures contract. B. a forward contract. C. a swap.

 

  1. an option.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-17

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 2008, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 2009, call date. The following is the pricing information for the term of the call:

 

 

 

 

 

 

 

 

 

 

 

 

 

The information for the change in the fair value of the options follows:

 

 

 

 

 

 

 

 

 

On February 1, 2009, AMAR sells the options at their value on that date and acquires 20,000 barrels of oil at the spot price. On April 1, 2009, AMAR sells the oil for $112 per barrel.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-18

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, which of the following adjusting entries would be required on December 31, 2008?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

  1. Based on the preceding information, in the entry to record the increase in the intrinsic value of the options on December 31, 2008,

 

  1. Purchased Call Options will be credited for $100,000. B. Purchased Call Options will be debited for $130,000. C. Retained Earnings will be credited for $100,000.

 

  1. Other Comprehensive Income will be credited for $100,000.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-19

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, which of the following entries will be required on February 1, 2009?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

  1. Based on the preceding information, the entries made on April 1, 2009 will include: A. a debit to Other Comprehensive Income for $200,000.

 

  1. a debit to Cost of Goods Sold for $2,240,000. C. a credit to Oil Inventory for $2,240,000.
  2. a credit to Cost of Goods Sold for $100,000.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-20

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

On December 1, 2008, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 2009. Selected information concerning the fair values of the investment and the options follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assume that Winston exercises the put option and sells Linked shares on February 20, 2009.

 

 

 

 

  1. Based on the preceding information, what is the market price of Linked Corporation stock on December 31, 2008?

 

  1. $40 B. $37 C. $36 D. $38

 

 

 

 

  1. Based on the preceding information, what is the market price of Linked Corporation stock on February 20, 2009?

 

  1. $35 B. $37 C. $36 D. $40

 

 

 

 

 

 

 

 

11-21

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, the journal entry made on December 31, 2008 to record decrease in the time value of the options will include:

 

  1. a debit to Loss on Hedge Activity for $150. B. a credit to Put Option for $300.

 

  1. a debit to Loss on Hedge Activity for $300. D. a credit to Put Option for $100.

 

 

 

 

  1. Based on the preceding information, which of the following journal entries will be made on February 20, 2009?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

 

Essay Questions


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-22

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Quantum Company imports goods from different countries. Some transactions are denominated in U.S. dollars and others in foreign currencies. A summary of accounts receivable and accounts payable on December 31, 2008, before adjustments for the effects of changes in exchange rates during 2008, follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The spot rates on December 31, 2008, were:

 

 

The average exchange rates during the collection and payment period in 2009 are:

 

 

 

 

Required:

  • Prepare the adjusting entries on December 31, 2008.

 

  • Record the collection of the accounts receivable and the payment of the accounts payable in 2009.

 

  • What was the foreign currency gain or loss on the accounts receivable transaction denominated in SFr for the year ended December 31, 2008? For the year ended December 31, 2009? Overall for this transaction?

 

  • What was the foreign currency gain or loss on the accounts receivable transaction denominated in ¥? For the year ended December 31, 2008? For the year ended December 31, 2009? Overall for this transaction?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-23

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On December 1, 2008, Secure Company bought a 90-day forward contract to purchase

 

200,000 euros (€) at a forward rate of €1 = $1.35 when the spot rate was $1.33. Other exchange rates were as follows:

 

 

 

 

 

 

 

 

 

 

Required

 

  • Prepare all journal entries related to Secure Company’s foreign currency speculation from December 1, 2008, through March 1, 2009, assuming the fiscal year ends on December 31, 2008.

 

  • Did the company gain or lose on its purchase of the forward contract?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-24

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On December 1, 2008, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen’s fiscal year ends on December 31. The forward contract was to hedge a firm commitment agreement made on December 1, 2008, to purchase electronic goods on January 30, with payment due on March 31, 2008. The derivative is designated as a fair value hedge. The direct exchange rates follow:

 

 

 

 

 

 

 

 

 

Required:

Prepare all journal entries for Denizen Corporation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-25

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On December 1, 2008, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen’s fiscal year ends on December 31. The forward contract was to hedge an anticipated purchase of electronic goods on January 30, 2009. The purchase took place on January 30, with payment due on March 31, 2009. The derivative is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness. The direct exchange rates follow:

 

 

 

 

 

 

 

 

 

Required:

Prepare all journal entries for Denizen Corporation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-26

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On December 1, 2008, Merry Corporation acquired 100 shares of Venus Corporation at a cost of $60 per share. Merry classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $400, an at-the-money put option to sell the 100 shares at $60 per share. The option expires on February 20, 2009. Selected information concerning the fair values of the investment and the options follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assume that Merry exercises the put option and sells Venus shares on February 20, 2009.

 

Required:

 

  • Prepare the entries required on December 1, 2008, to record the purchase of the Venus stock and the put options.

 

  • Prepare the entries required on December 31, 2008, to record the change in intrinsic value and time value of the options, as well as the revaluation of the available-for-sale securities.

 

  • Prepare the entries required on February 20, 2008, to record the exercise of the put option and the sale of the securities at that date.

 

 

 

 

 

 

 

 

 

 

 

 

 

Chapter 11 Multinational Accounting: Foreign Currency Transactions and Financial Instruments Answer Key

 

 

 

 

 

 

 

 

11-27

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

Multiple Choice Questions

 

 

  1. If 1 British pound can be exchanged for 180 cents of U.S. currency, what fraction should be used to compute the indirect quotation of the exchange rate expressed in British pounds?

 

  1. 1/180 B. 1/.56 C. 1.8/1 D. 1/1.8

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

Suppose the direct foreign exchange rates in U.S. dollars are:

 

1 Singapore dollar = $.7025

 

1 Cyprus pound = $2.5132

 

 

 

 

  1. Based on the information given above, the indirect exchange rates for the Singapore dollar and the Cyprus Pound are:

 

  1. 1.7655 Singapore dollars and 1.4235 Cyprus pounds respectively. B. 0.2975 Singapore dollars and 1.5132 Cyprus pounds respectively. C. 2.1622 Singapore dollars and 0.4625 Cyprus pounds respectively. D. 1.4235 Singapore dollars and 0.3979 Cyprus pounds respectively.

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the information given above, how many U.S. dollars must be paid for a purchase of citrus fruits costing 10,000 Cyprus pounds?

 

  1. $25,132 B. $15,132 C. $3,979 D. $35,775

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

11-28

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the information given above, how many Singapore dollars are required to purchase goods costing 10,000 US dollars?

 

  1. 7,025 B. 14,235 C. 17,655 D. 2,975

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Upon arrival in Chile, Karen exchanged $1,000 of U.S. currency into 4,80,000 Chilean Pesos. While returning after her two month visit, she exchanged her remaining 50,000 Pesos into $100 of U.S. currency. What amount of gain or a loss did Karen experience on the 50,000 pesos she held during her visit and converted to U.S. dollars at the departure date?

 

  1. Loss of $4. B. Gain of $4. C. Loss of $6.

 

  1. No gain or loss.

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-29

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Chicago based Corporation X has a number of importing transactions with companies based in UK. Importing activities result in payables. If the settlement currency is the British Pound, which of the following will happen by changes in the direct or indirect exchange rates?

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Reflective Thinking

AICPA: Decision Making

 

 

  1. Chicago based Corporation X has a number of exporting transactions with companies based in Sweden. Exporting activities result in receivables. If the settlement currency is the Swedish Krona, which of the following will happen by changes in the direct or indirect exchange rates?

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Reflective Thinking

 

AICPA: Decision Making


 

 

 

 

 

 

 

 

 

11-30

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Corporation X has a number of exporting transactions with companies based in Vietnam. Exporting activities result in receivables. If the settlement currency is the US dollar, which of the following will happen by changes in the direct or indirect exchange rates?

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Reflective Thinking

AICPA: Decision Making

 

 

  1. Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On October 1, 2008, Mint purchased confectionary items from a foreign company at a price of LCU 5,000 when the direct exchange rate was 1 LCU = $1.20. The account has not been settled as of December 31, 2008, when the exchange rate has decreased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint’s records at year-end for this transaction will be: $500 loss

 

  1. $500 gain C. $378 gain D. $5,500 loss

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-31

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On November 2, 2008, Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as of December 31, 2008, when the exchange rate has increased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint’s records at year-end for this transaction will be:

 

  1. $460 loss B. $387 loss C. $387 gain D. $460 gain

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. On September 3, 2008, Jackson Corporation purchases goods for a U.S. dollar equivalent of $17,000 from a Swiss company. The transaction is denominated in Swiss francs (SFr). The payment is made on October 10. The exchange rates were:

 

 

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on October 10?

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

11-32

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On March 1, 2008, Wilson Corporation sold goods for a U.S. dollar equivalent of $31,000 to a Thai company. The transaction is denominated in Thai bahts. The payment is received on May 10. The exchange rates were:

 

 

 

 

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on May 10?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

On December 5, 2008, Texas based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 2009. The transaction is denominated in Saudi riyals. Imperial’s fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-33

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, what journal entry would Imperial make on December 31, 2008, to revalue foreign currency payable to equivalent U.S. dollar value?

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what journal entry would Imperial make on January 10, 2009, to revalue foreign currency payable to equivalent U.S. dollar value?

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

11-34

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, what was the overall foreign currency gain or loss on the accounts payable transaction?

 

  1. $300 loss B. $200 loss C. $100 gain D. $200 gain

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 2008, with payment due on December 2, 2008. Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge. The spot rates were:

 

 

 

 

 

 

 

 

  1. Based on the preceding information, in the entry made on December 2nd to revalue foreign currency receivable to current equivalent U.S. dollar value,

 

  1. Accounts Payable will be debited for $18,350.
  2. Foreign Currency Units will be debited for $18,500.

 

  1. Foreign Currency Transaction Gain will be credited for $150. D. Other Comprehensive Income will be credited for $300.

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-35

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, what is the entry required to settle foreign currency payable on December 2?

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

  1. Detroit based Auto Corporation, purchased ancillaries from a Japanese firm on December 1, 2008, for 1,000,000 Yen, when the spot rate for Yen was $.0095. On December 31, 2008, the spot rate stood at $.0096. On January 10, 2009 Auto paid 1,000,000 Yen acquired at a rate of $.0094. Auto’s income statements should report a foreign exchange gain or loss for the years ended December 31, 2008 and 2009 of:

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

11-36

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On November 1, 2008, Denver Company borrowed 500,000 local currency units (LCU) from a foreign lender evidenced by an interest-bearing note due on November 1, 2009, which is denominated in the currency of the lender. The U.S. dollar equivalent of the note principal was as follows:

 

 

 

 

 

In its income statement for 2009, what amount should Denver include as a foreign exchange gain or loss on the note principal?

 

  1. 15,000 gain
  2. 25,000 gain
  3. 15,000 loss
  4. 40,000 loss

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Company X denominated a December 1, 2009, purchase of goods in a currency other than its functional currency. The transaction resulted in a payable fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 10, 2010. Exchange rates moved unfavourably at December 31, 2009, resulting in a loss that should:

 

  1. be included as a separate component of stockholders’ equity at Dec. 31, 2009. B. be included as a component of income from continuing operations for 2009. C. be included as a deferred charge at December 31, 2009.

 

  1. not be reported until January 10, 2010, the settlement date.

 

 

 

AACSB: Reflective Thinking

AICPA: Reporting

 

 

Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reals on

December 1, 2008, with payment due on January 20, 2009. The exchange rates were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-37

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, which of the following is true of dollar’s movement vis-à-vis Brazilian real during the period?

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Reflective Thinking

AICPA: Decision Making

 

 

  1. Based on the preceding information, what is the Heavy’s overall net gain or net loss from its foreign currency exposure related to this transaction?

 

  1. $4,860 loss B. $2,600 loss C. $7,120 gain D. $2,260 gain

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 2009 with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-38

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, the entry to revalue foreign currency payable to current U.S. dollar value on March 1 will have:

 

  1. a credit to Foreign Currency Transaction Gain for $1,500. B. a debit to Foreign Currency Transaction Loss for $2,500. C. a debit to Foreign Currency Transaction Loss for $1,500. D. a credit to Foreign Currency Transaction Gain for $1,000.

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what is the overall effect on net income of Myway’s use of the forward exchange contract?

 

  1. Net loss of $1,000 B. Net gain of $1,500 C. Net loss of $500 D. No effect

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, had Myway not used the forward exchange contract, net income for the year would have:

 

  1. increased by $1,000. B. increased by $500. C. decreased by $1,000. D. decreased by $1,500.

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-39

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Levin company entered into a forward contract to speculate in the foreign currency. It sold 100,000 foreign currency units under a contract dated November 1, 2008, for delivery on January 31, 2009:

 

 

 

 

 

 

In its income statement for the year ended December 31, 2008, what amount of loss should Levin report from this forward contract?

 

  1. $0
  2. $300
  3. $200
  4. $100

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 2008. Payment is due on January 30, 2009. On December 1, 2008, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the preceding information, the entries on December 31, 2008, include a: Credit to Foreign Currency Payable to Exchange Broker, $4,000.

 

  1. Debit to Foreign Currency Receivable from Exchange Broker, $6,000. C. Debit to Foreign Currency Receivable from Exchange Broker, $186,000. D. Debit to Foreign Currency Transaction Gain, $4,000.

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

11-40

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, the entries on January 30, 2009, include a: Debit to Dollars Payable to Exchange Broker, $180,000.

 

  1. Credit to Cash, $184,000.
  2. Credit to Premium on Forward Contract, $4,000.
  3. Credit to Foreign Currency Receivable from Exchange Broker, $180,000.

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, the entries on January 30, 2009, include a: Credit to Foreign Currency Units (SFr), $184,000.

 

  1. Credit to Cash, $180,000.
  2. Debit to Foreign Currency Transaction Loss, $4,000.
  3. Debit to Dollars Payable to Exchange Broker, $184,000.

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, the entries on January 30, 2009, include a: Debit to Dollars Payable to Exchange Broker, $184,000.

 

  1. Credit to Foreign Currency Transaction Gain, $4,000.

 

  1. Credit to Foreign Currency Receivable from Exchange Broker, $180,000. D. Debit to Foreign Currency Units (SFr), $184,000.

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-41

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

On December 1, 2008, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42.

 

The rates are as follows:

 

 

 

 

 

 

 

 

 

 

Hedge had no other speculation transactions in 2008 and 2009. Ignore taxes.

 

 

 

 

  1. Based on the preceding information, what is the effect of the British pound speculative contract on 2008 net income?

 

  1. $10,000 gain B. $6,000 gain C. $8,000 gain D. $2,000 loss

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

  1. Based on the preceding information, what is the overall effect of speculation on 2008 net income?

 

  1. $4,000 gain B. $6,000 gain C. $8,000 loss D. $8,000 gain

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

11-42

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, what is the effect of the euro speculative contract on 2009 net income?

 

  1. $4,000 loss B. $1,000 gain C. $8,000 gain D. $2,000 loss

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what is the overall effect of speculation on 2009 net income?

 

  1. $1,000 loss B. $6,000 gain C. $3,000 loss D. $8,000 gain

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, what is the net gain or loss on the British pound speculative contract?

 

  1. $8,000 gain B. $6,000 gain C. $3,000 loss D. $10,000 gain

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-43

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, what is the net gain or loss on the euro speculative contract?

 

  1. $8,000 gain B. $6,000 gain C. $3,000 loss D. $1,000 loss

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48.

 

 

 

 

  1. Based on the preceding information, which of the following is true of the intrinsic and time values associated with this option.

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

  1. Based on the preceding information, the call option: has no intrinsic value currently.

 

  1. is at the money.

 

  1. is out of the money. D. is in the money.

 

 

 

AACSB: Reflective Thinking

 

AICPA: Decision Making


 

 

 

 

11-44

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. An investor purchases a put option with a strike price of $100 for $3. This option is considered “in the money” if the underlying is trading:

 

  1. below $100. B. at $100.

 

  1. above $100. D. above $103.

 

 

 

AACSB: Reflective Thinking

 

AICPA: Decision Making

 

 

  1. Which of the following observations is true of futures contracts? Contracted through a dealer, usually a bank.

 

  1. Customized to meet contracting company’s terms and needs. C. Typically no margin deposit required.

 

  1. Traded on an exchange and acquired through an exchange broker

 

 

 

AACSB: Reflective Thinking

 

AICPA: Decision Making

 

 

  1. Which of the following observations is true of forwards contracts? Substantial margin is required to initiate a contract.

 

  1. Must be completed either with the underlying’s future delivery or net C. cash settlement.

 

  1. Cannot be customized; for a specific amount at a specific date. E. Usually settled with a net cash amount prior to maturity date.

 

 

 

AACSB: Reflective Thinking

AICPA: Decision Making


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-45

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Company X issues variable-rate debt but wishes to fix its interest rates because it believes the variable rate may increase. Company Y has a fixed-rate bond but is looking for a variable-rate interest because it assumes the interest rates may decrease. The two companies agree to exchange cash flows. Such an arrangement is called:

 

  1. a futures contract. B. a forward contract. C. a swap.

 

  1. an option.

 

 

 

AACSB: Reflective Thinking

 

AICPA: Decision Making

 

 

Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 2008, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 2009, call date. The following is the pricing information for the term of the call:

 

 

 

 

 

 

 

 

 

 

 

 

 

The information for the change in the fair value of the options follows:

 

 

 

 

 

 

 

 

 

On February 1, 2009, AMAR sells the options at their value on that date and acquires 20,000 barrels of oil at the spot price. On April 1, 2009, AMAR sells the oil for $112 per barrel.

 

 

 

 

 

 

 

 

 

 

 

11-46

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, which of the following adjusting entries would be required on December 31, 2008?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Analytic

AICPA: Measurement

 

 

  1. Based on the preceding information, in the entry to record the increase in the intrinsic value of the options on December 31, 2008,

 

  1. Purchased Call Options will be credited for $100,000. B. Purchased Call Options will be debited for $130,000. C. Retained Earnings will be credited for $100,000.

 

  1. Other Comprehensive Income will be credited for $100,000.

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-47

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, which of the following entries will be required on February 1, 2009?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, the entries made on April 1, 2009 will include: a debit to Other Comprehensive Income for $200,000.

 

  1. a debit to Cost of Goods Sold for $2,240,000. C. a credit to Oil Inventory for $2,240,000.
  2. a credit to Cost of Goods Sold for $100,000.

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-48

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

On December 1, 2008, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 2009. Selected information concerning the fair values of the investment and the options follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assume that Winston exercises the put option and sells Linked shares on February 20, 2009.

 

 

 

 

  1. Based on the preceding information, what is the market price of Linked Corporation stock on December 31, 2008?

 

  1. $40 B. $37 C. $36 D. $38

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-49

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, what is the market price of Linked Corporation stock on February 20, 2009?

 

  1. $35 B. $37 C. $36 D. $40

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

  1. Based on the preceding information, the journal entry made on December 31, 2008 to record decrease in the time value of the options will include:

 

  1. a debit to Loss on Hedge Activity for $150. B. a credit to Put Option for $300.

 

  1. a debit to Loss on Hedge Activity for $300. D. a credit to Put Option for $100.

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-50

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Based on the preceding information, which of the following journal entries will be made on February 20, 2009?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Option A
  2. Option B
  3. Option C
  4. Option D

 

 

 

AACSB: Analytic

 

AICPA: Measurement

 

 

 

Essay Questions


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-51

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. Quantum Company imports goods from different countries. Some transactions are denominated in U.S. dollars and others in foreign currencies. A summary of accounts receivable and accounts payable on December 31, 2008, before adjustments for the effects of changes in exchange rates during 2008, follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The spot rates on December 31, 2008, were:

 

 

The average exchange rates during the collection and payment period in 2009 are:

 

 

 

 

Required:

  • Prepare the adjusting entries on December 31, 2008.

 

  • Record the collection of the accounts receivable and the payment of the accounts payable in 2009.

 

  • What was the foreign currency gain or loss on the accounts receivable transaction denominated in SFr for the year ended December 31, 2008? For the year ended December 31, 2009? Overall for this transaction?

 

  • What was the foreign currency gain or loss on the accounts receivable transaction denominated in ¥? For the year ended December 31, 2008? For the year ended December 31, 2009? Overall for this transaction?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-52

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-53

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-54

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On December 1, 2008, Secure Company bought a 90-day forward contract to purchase

 

200,000 euros (€) at a forward rate of €1 = $1.35 when the spot rate was $1.33. Other exchange rates were as follows:

 

 

 

 

 

 

 

 

 

 

Required

 

  • Prepare all journal entries related to Secure Company’s foreign currency speculation from December 1, 2008, through March 1, 2009, assuming the fiscal year ends on December 31, 2008.

 

  • Did the company gain or lose on its purchase of the forward contract?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-55

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  • Secure Company experienced a net loss of $4,000 ($2,000 gain in 2008 less a $6,000 loss in 2009).

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

11-56

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On December 1, 2008, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen’s fiscal year ends on December 31. The forward contract was to hedge a firm commitment agreement made on December 1, 2008, to purchase electronic goods on January 30, with payment due on March 31, 2008. The derivative is designated as a fair value hedge. The direct exchange rates follow:

 

 

 

 

 

 

 

 

 

Required:

Prepare all journal entries for Denizen Corporation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-57

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-58

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-59

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB: Analytic

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-60

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On December 1, 2008, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen’s fiscal year ends on December 31. The forward contract was to hedge an anticipated purchase of electronic goods on January 30, 2009. The purchase took place on January 30, with payment due on March 31, 2009. The derivative is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness. The direct exchange rates follow:

 

 

 

 

 

 

 

 

 

Required:

Prepare all journal entries for Denizen Corporation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-61

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-62

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-63

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-64

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

  1. On December 1, 2008, Merry Corporation acquired 100 shares of Venus Corporation at a cost of $60 per share. Merry classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $400, an at-the-money put option to sell the 100 shares at $60 per share. The option expires on February 20, 2009. Selected information concerning the fair values of the investment and the options follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assume that Merry exercises the put option and sells Venus shares on February 20, 2009.

 

Required:

 

  • Prepare the entries required on December 1, 2008, to record the purchase of the Venus stock and the put options.

 

  • Prepare the entries required on December 31, 2008, to record the change in intrinsic value and time value of the options, as well as the revaluation of the available-for-sale securities.

 

  • Prepare the entries required on February 20, 2008, to record the exercise of the put option and the sale of the securities at that date.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-65

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-66

 

 

 

 

Chapter 11 – Multinational Accounting: Foreign Currency Transactions and Financial Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AACSB: Analytic

 

AICPA: Measurement


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11-67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3-37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-37

 

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