ACC 401 Week 8 Quiz - Strayer
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Quiz 7 Chapter 11 and 12
Chapter 11
International Financial Reporting Standards
Multiple ChoiceConceptual
1.The goals of the International Accounting Standards Committee
include all of the following excepta.To improve international
accounting.b.To formulate a single set of auditing standards to be
applied in all countries.c.To promote global acceptance of its
standards.d.To harmonize accounting practices between
countries.
2.Which of the following is true about the FASB after the
mandatory adoption of IFRS by US companies?a.The FASB will serve in
an advisory capacity to the IASB.b.The FASB will remain the
designated standard-setter for US companies, but incorporate IFRS
into US GAAP.c.The role of the FASB post-IFRS adoption has not been
determined.d.The FASB will cease to exist.
3.Milestones in the transition plan for mandatory adoption of
IFRS by US companies include all of the following
except:a.Improvements in accounting standards.b.Limited early
adoption of IFRS in an effort to enhance comparability for US
investorsc.Mandatory use of IFRS by US entities.d.All of the above
are milestones in the transition plan for mandatory adoption of
IFRS by US companies.
4.The roles of the IASC Foundation includea.establishing global
standards for financial reporting.b.coordinating the filing
requirements of stock exchange regulatory agencies.c.financing IASB
operations.d.all of the above are roles of the IASC Foundation.
5.Which of the following statements is true regarding the
IASC?a.The IASC is a public-sector, not-for-profit
organization.b.The IASC is accountable to an international
securities regulator.c.The IASC is a stand-alone, private-sector
organization.d.The IASC funds the operations of the IASB through
filing fees paid to national securities regulators.
6..Concerns of the SEC with regard to the mandatory adoption of
IFRS by US entities include all of the following except:a.the
extent to which the standard-setting process addresses emerging
issues in a timely manner.b.the security and stability of IASC
funding.c.the enhancement of IASB independence through a system of
voluntary contributions from firms in the accounting
profession.d.the degree to which due process is integrated into the
standard-setting process .
7..Under the staged transition to mandatory adoption of IFRS
being considered by the SEC,a.large, accelerated filers would begin
IFRS filings for fiscal years beginning on or after December 31,
2011.b.non-accelerated filers would begin IFRS filings for fiscal
years beginning on or after December 31, 2015.c.large
non-accelerated filers would have until fiscal years beginning on
or after December 15, 2017 to adopt IFRS.d. smaller reporting
companies would begin IFRS filings for fiscal years beginning on or
after December 15, 2016..8.In order to complete its first IFRS
filing, including three years of audited financial statements,
according to the staged transition to mandatory adoption of IFRS
considered by the SEC, a large accelerated filer would need to
adopt IFRS beginning in fiscal yeara.2011.b.2012.c.2013.d.2014.
9.Benefits of the FASB Accounting Standards Codification (ASC)
include all of the following excepta.increases the independence of
the FASB.b.aids in the convergence of US GAAP with IFRS.c.reduces
time and effort required to research accounting issues.d.clearly
distinguishes between authoritative and non-authoritative
guidance.
10.SFAS No.162, the Accounting Standards Codification, is
directed toa.auditors.b.Boards of Directors.c.securities
regulators.d.entities.
11.IFRS and US GAAP differ with regard to financial statement
presentation in all of the following excepta.IFRS generally
requires that assets be listed in order of increasing liquidity
while US GAAP requires that assets be listed in order of decreasing
liquidity.b.US GAAP requires expenses to be listed by function
while IFRS requires expenses to be listed by nature.c.IFRS
prohibits extraordinary items which are allowed by US GAAP.d.IFRS
requires two years of comparative income statements while under US
GAAP, three years of income statements are required.
12.The major difference between IFRS and US GAAP in accounting
for inventories is thata.US GAAP prohibits the use of specific
identification.b.IFRS requires the use of the LIFO cost flow
assumption.c.US GAAP prohibits the use of the LIFO cost flow
assumptiond.US GAAP allows the use of the LIFO cost flow
assumption.
13.One difference between IFRS and GAAP in valuing inventories
is thata.IFRS, but not GAAP, allows reversals so that inventories
written down under lower-of-cost-or-market can be written back up
to the original cost .b.GAAP defines market value as replacement
cost where IFRS defines market as the selling price.c.GAAP strictly
adheres to the historical cost concept and does not allow for
write-downs of inventory values while IFRS embraces fair
value.d.IFRS, but not GAAP, requires that inventories be valued at
the lower of cost or market.
14.In accounting for research and development costs.a.the
general rule under both US GAAP and IFRS is that research and
development costs should be expensed as incurred .b.IFRS generally
expenses all research and development costs while US GAAP expenses
research costs as incurred but capitalizes development costs once
technological and economic feasibility has been demonstrated.c.US
GAAP generally expenses all research and development costs while
IFRS expenses research costs as incurred but capitalizes
development costs once technological and economic feasibility has
been demonstrated.d.both US GAAP and IFRS expense research costs as
incurred but capitalize development costs once technological and
economic feasibility has been demonstrated..15.Property, plant and
equipment are valued ata.historical cost under both IFRS and US
GAAP.b.historical cost or revalued amounts under both IFRS and US
GAAP.c.revalued amounts under IFRS.d.historical cost under US GAAP
while IFRS allows the assets to be valued at either historical cost
or revalued amounts.
16.The amount of a long-lived asset impairment loss is generally
determined by comparinga.the assets carrying amount and its fair
value under US GAAP.b.the assets carrying amount and its discounted
future cash flows less cost to sell under IFRS.c.the assets
carrying amount and its undiscounted future cash flows under US
GAAP.d.the assets carrying amount and its undiscounted future cash
flows less disposal cost under IFRS.
17.In accounting for liabilities, IFRS interprets probable
asa.likely.b.more likely than not.c.somewhat possible.d.possible
and not remote.
18.Accounting under IFRS and US GAAP is similar for all of the
following topics excepta.changes in estimates.b.related party
transactions.c.research and development costs.d.changes in
methods.
Use the following information to answer the next three
questions.
On January 1, 2010, AirFrance purchases an airplane for
14,400,000. The components of the airplane and their useful lives
are as follows:
ComponentCostUseful life
Frame7,200,00024 years
Engine4,800,00020 years
Other2,400,00010 years
AirFrance uses the straight-line method of depreciation. The
asset is assumed to have no salvage value.
19.Under IFRS, the entry to record the acquisition of the
airplane would includea.a debit to Asset/ Airplane of
14,400,000.b.a debit to Asset/ Airplane frame of 14,400,000.c.a
debit to Asset/ Airplane engine of 4,800,000.d.cannot be determined
from the information given.
20.Under US GAAP, the entry to record depreciation expense on
the asset at December 31, 2011 will includea.a credit to
accumulated depreciation of 1,200,000.b.a debit to depreciation
expense of 1,440,000c.a debit to depreciation expense of
800,000.d.a credit to accumulated depreciation of 600,000.
21.Under IFRS, the entry to record depreciation expense on the
asset at December 31, 2011 will include a credit to accumulated
depreciation ofa.1,440,000.b.1,200,000c.800,000.d.600,000.
22.Accounting terminology that differs between IFRS and US GAAP
include all of the following excepta.the use by IFRS of turnover
for revenue.b.the use by IFRS of share premium for additional
paid-in-capital.c.the use by IFRS of other capital reserves for
retained earnings.d.the use by IFRS of issued capital for common
stock.
23.New terminology introduced under the joint IFRS- US GAAP
Customer Consideration (Allocation) Model includes all of the
following excepta.revenue recognition voids.b.contract rights.c.net
contract asset/ liability.d.performance obligations.
24.Under IFRS, the criteria to determine whether a lease should
be capitalized includea.the present value of the minimum lease
payments is 90% or more of the fair value of the asset at the
inception of the lease.b.the term of the lease is 75% or more of
the economic life of the asset.c.the term of the lease is equal to
substantially all of the economic life of the asset.d.the present
value of the minimum lease payments is equal to substantially all
of the fair value of the asset at the inception of the lease.
Use the following information to answer the next three
questions.
Bellingham Electronics Inc. offers one model of laptop computer
for 1000 and a two-year warranty for 250. The retailer, as part of
a Boxing Day promotion, offers a limited-time offer for the laptop,
including delivery and the two-year warranty for 1,180. The cost of
the computer to Bellingham is 700. Any warranty repairs are assumed
to be done ratably over time. Bellingham accounts for transactions
using the customer consideration model.
In the first twelve months following the sale, Bellingham
incurred 980 of costs servicing the computers under warranty.
25.Bellingham sells ten laptops to Bertram Inc. under the
limited-time promotion. Upon delivery of the laptops to Bertram,
Bellingham will recognize revenue of
a.9,300.b.9,440c.10,000.d.11,800.
26.In the first twelve months following the sale, Bellingham
would reduce the Contract liability warranty account
bya.784.b.980c.1,180.d.1,380.
27.In the first twelve months, Bellingham would record warranty
expense of a.784.b.980c.1,180.d.1,380.
28.Significant differences between IFRS and Chinese GAAP include
all of the following excepta.Chinese GAAP allows the use of LIFO
while IFRS prohibits it.b.Chinese GAAP has different related party
disclosure requirements.c.Chinese GAAP follows the cost principle
while IFRS allows for revaluations and recoveries of impairment
losses.d.Chinese GAAP uses the equity method of accounting for
jointly controlled entities while IFRS also allows proportionate
consolidation.
29.All of the following are options for non-US companies who
wish to list securities on a US exchange excepta.The company can
use either IFRS or their local GAAP.b.If a company uses their local
GAAP they must reconcile net income and shareholders equity or
fully disclose all financial information required of US
companies.c.If a company uses their local GAAP they must reconcile
net income and shareholders equity and fully disclose all financial
information required of US companiesd.The company must file a form
20-F with the SEC.
30.All of the following are true regarding American Depository
Receipts (ADRs) except a.Most ADRs are unsponsored, meaning that
the DR bank creates a DR program without a formal agreement with
the issuing non-US company.b.An ADR is a derivative instrument
traded in the US that usually represents a fixed number of publicly
traded shares of a non-US company.c.ADRs are denominated in US
dollars.d.A Level 1 sponsored ADR is the easiest way for a non-US
company to access US markets.
Exercise from the Textbook
Exercise 11-1
Component Depreciation SMC Company purchases a building for
$100,000. Included in this cost are $12,000 for electrical systems
and $15,000 for the roof. The building is expected to have a 40
year useful life, but the electrical system will last for 20 years
and the roof will last 15 years.
Required: Part A: Assuming that straight-line depreciation is
used, compute depreciation expense assuming that U.S. GAAP is
used.
Part B: Assuming that straight line depreciation is used,
compute depreciation expense for year one assuming IFRS is used
(assume component depreciation).
Problem from the Textbook
Problem 11-4
Prepare a statement of financial position using the proposed new
format as described in the chapter.
Questions from the Textbook
1. As mentioned in Chapter 1, the project on business
combinations was the first of several joint projects undertaken by
the FASB and the IASB in their move to converge standards globally.
Nonetheless, complete convergence has not yet occurred, and there
are those who believe it to be a poor idea. Discuss the reasons for
and against global convergence. 2. In recent months, virtually
every topic that has come to the attention of the standard setters
has been undertaken as a joint effort of the FASB and the IASB
rather than as an individual effort by one of the two boards. List
and discuss some of the joint projects that fall into this
category. 3. What is the rationale for the harmonization of
international accounting standards?
4. Why is the SEC, once so reluctant to accept IAS, now very
willing to allow firms using IFRS to is-sue securities in the U.S.
stock market without reconciling to U.S. GAAP?
5. Discuss the types of ADRs that non-U.S. companies might use
to access the U.S. markets.
6. Describe the attitude of the FASB toward the IASB
(International Accounting Standards Board).
7. How does the FASB view its role in the development of an
international accounting system? Currently, two members of the IASB
board were affiliated with the FASB. Comment on what effect this
might have on the likelihood that the U.S. standard setters will
accept the new IASB statements, if any?
8. List some of the major differences in accounting between IFRS
and U.S. GAAP.
Business Ethics Question from the Textbook
A vice president of marketing for your company has been charged
with embezzling nearly $100,000 from the company. The vice
president allegedly submitted fraudulent vendor invoices in order
to receive payments. As the vice president of marketing for the
company, the vice president is authorized to approve the payment of
invoices submitted by third-party vendors who did work for the
company. After the activities were uncovered, the company responded
by stating: All employees are accountable to our ethics guidelines
and procedures. We do not tolerate violations of our ethics policy
and will consistently enforce these policies and procedures.
1. How would you evaluate the internal controls of the
company?
2. Do you think there are companies that develop comprehensive
ethics and compliance pro-grams for mid- and lower-level employees
and ignore upper-level executives and managers?
3. Is it an ethical issue if companies are not forth-coming
concerning fraudulent activities of top executives in an effort to
minimize negative publicity?
Chapter 12
Accounting for Foreign Currency Transactions And Hedging Foreign
Exchange Risk
Multiple Choice
1.A discount or premium on a forward contract is deferred and
included in the measurement of the related foreign currency
transaction if the contract is classified as a:a.hedge of a net
investment in a foreign entity.b.hedge of an exposed asset or
liability position.c.hedge of an identifiable foreign currency
commitment.d.contract acquired to speculate in the movement of
exchange rates.
2.The discount or premium on a forward contract entered into as
a hedge of an exposed asset or liability position should
be:a.included as a separate component of stockholders
equity.b.amortized over the life of the forward contract.c.deferred
and included in the measurement of related foreign currency
transaction.d.none of these.
3.An indirect exchange rate quotation is one in which the
exchange rate is quoted:a.in terms of how many units of the
domestic currency can be converted into one unit of foreign
currency.b.for the immediate delivery of currencies exchanged.c.in
terms of how many units of the foreign currency can be converted
into one unit of domestic currency.d.for the future delivery of
currencies exchanged.
4.A transaction gain is recorded when there is an:a.importing
transaction and the exchange rate increases.b.exporting transaction
and the exchange rate increases.c.exporting transaction and the
exchange rate decreases.d.none of these.
5.During 2011, a U.S. company purchased inventory from a foreign
supplier. The transaction was denominated in the local currency of
the seller. The direct exchange rate increased from the date of the
transaction to the balance sheet date. The exchange rate decreased
from the balance sheet date to the settlement date in 2012. For the
years 2011 and 2012, transaction gains or losses should be
recognized as:20112012a.gaingainb.gainlossc.losslossd.lossgain
6.A transaction gain or loss is reported currently in the
determination of income if the purpose of the forward contract is
to:a.hedge a net investment in a foreign entity.b.hedge an
identifiable foreign currency commitment.c.speculate in foreign
currency.d.none of these.
7.On November 1, 2011, American Company sold inventory to a
foreign customer. The account will be settled on March 1 with the
receipt of $500,000 foreign currency units (FCU). On November 1,
American also entered into a forward contract to hedge the exposed
asset. The forward rate is $0.70 per unit of foreign currency.
American has a December 31 fiscal year-end. Spot rates on relevant
dates were:
Per Unit ofDateForeign CurrencyNovember 1$0.73December
310.71March 10.74
The entry to record the forward contract isa.FCU
Receivable350,000Premium on Forward Contract15,000Dollars
Payable365,000
b.Dollars Receivable365,000Discount on Forward Contract15,000FCU
Payable350,000
c.FCU Receivable365,000Discount on Forward Contract15,000Dollars
Payable350,000
d.Dollars Receivable350,000Discount on Forward Contract15,000FCU
Payable365,000
8.On November 1, 2011, American Company sold inventory to a
foreign customer. The account will be settled on March 1 with the
receipt of $450,000 foreign currency units (FCU). On November 1,
American also entered into a forward contract to hedge the exposed
asset. The forward rate is $0.70 per unit of foreign currency.
American has a December 31 fiscal year-end. Spot rates on relevant
dates were:
Per Unit ofDateForeign CurrencyNovember 1$0.73December
310.71March 10.74
What will be the adjusted balance in the Accounts Receivable
account on December 31, and how much gain or loss was recorded as a
result of the adjustment?Receivable BalanceGain/Loss
Recordeda.$319,500$9,000 gainb.$319,500$9,000 lossc.$333,000$4,500
gaind.$333,000$18,000 gain
9.A transaction gain or loss at the settlement date is:a.a
change in the exchange rate quoted by a foreign exchange
trader.b.synonymous with the translation of foreign currency
financial statements into dollars.c.the difference between the
recorded dollar amount of an account receivable denominated in a
foreign currency and the amount of dollars received.d.the
difference between the buying and selling rate quoted by a foreign
exchange trader at the settlement date.
10.From the viewpoint of a U.S. company, a foreign currency
transaction is a transaction:a.measured in a foreign
currency.b.denominated in a foreign currency.c.measured in U.S.
currency.d.denominated in U.S. currency.
11.The exchange rate quoted for future delivery of foreign
currency is the definition of a(n):a.direct exchange
rate.b.indirect exchange rate.c.spot rate.d.forward exchange
rate.
12.A transaction loss would result from:a.an increase in the
exchange rate applicable to an asset denominated in a foreign
currency.b.a decrease in the exchange rate applicable to a
liability denominated in a foreign currency.c.the import of
merchandise when the transaction is denominated in a foreign
currency.d.a decrease in the exchange rate applicable to an asset
denominated in a foreign currency.
13.The forward exchange rate quoted for the remaining term of a
forward contract is used to account for the contract when the
forward contract:a.extends beyond one year or the current operating
cycle.b.is a hedge of an identifiable foreign currency
commitment.c.is a hedge of an exposed net liability position.d.was
acquired to speculate in foreign currency.
14.A transaction gain or loss on a forward contract entered into
as a hedge of an identifiable foreign currency commitment may
be:a.included as a separate item in the stockholders equity section
of the balance sheet.b.recognized currently in the determination of
net income.c.deferred and included in the measurement of the
related foreign currency transaction.d.none of these.
15.Craiger, Inc. a U.S. corporation, bought machine parts from
Reinsch Company of Germany on March 1, 2011, for 70,000 marks, when
the spot rate for marks was $0.5395. Craigers year-end was March
31, 2011, when the spot rate for marks was $0.5445. Craiger bought
70,000 marks and paid the invoice on April 20, 2011, when the spot
rate was $0.5495. How much should be shown in Craigers income
statements as foreign exchange (transaction) gain or loss for the
years ended March 31, 2011 and 2012?
20112012a.$0$0b.$0$350 lossc.$350 loss$0d.$350 loss$350 loss
16.A forward exchange contract is transacted at a discount if
the current forward rate is:a.less than the expected spot
rate.b.more than the expected spot rate.c.less than the current
spot rate.d.more than the current spot rate.
17.Stuart Corporation a U.S. company, contracted to purchase
foreign goods. Payment in foreign currency was due one month after
delivery. Between the delivery date and the time of payment, the
exchange rate changed in Stuarts favor. The resulting gain should
be reported in the financial statements as a(n):a.component of
other comprehensive income.b.component of income from continuing
operations.c.extraordinary income.d.deferred income.
18.Jackson Paving Company purchased equipment for 350,000
British pounds from a supplier in London on July 7, 2011. Payment
in British pounds is due on Sept. 7, 2011. The exchange rates to
purchase one pound is as follows:July 7August 31, (year
end)September 7Spot-rate2.082.052.0430-day rate2.072.03 --60-day
rate2.061.99 --
On its August 31, 2011 income statement, what amount should
Jackson Paving report as a foreign exchange transaction
gain:a.$14,000.b.$7,000.c.$10,500.d.$0.
19.On September 1, 2011, Swash Plating Company entered into two
forward exchange contracts to purchase 250,000 euros each in 90
days. The relevant exchange rates are as follows:
Forward RateSpot rateFor Dec. 1, 2011September 1,
20111.461.47September 30, 2011 (year-end)1.501.48
The first forward contract was to hedge a purchase of inventory
on September 1, payable on December 1. On September 30, what amount
of foreign currency transaction loss should Swash Plating report in
income?a.$0.b.$2,500.c.$5,000.d.$10,000.
20.On September 1, 2011, Swash Plating Company entered into two
forward exchange contracts to purchase 250,000 euros each in 90
days. The relevant exchange rates are as follows:
Forward RateSpot rateFor Dec. 1, 2011September 1,
20111.461.47September 30, 2011 (year-end)1.501.48
The second forward contract was strictly for speculation. On
September 30, 2011, what amount of foreign currency transaction
gain should Swash Plating report in
income?a.$0.b.$2,500.c.$5,000.d.$10,000.
21.On November 1, 2011, Prism Company sold inventory to a
foreign customer. The account will be settled on March 1 with the
receipt of 250,000 foreign currency units (FCU). On November 1,
Prism also entered into a forward contract to hedge the exposed
asset. The forward rate is $0.90 per unit of foreign currency.
Prism has a December 31 fiscal year-end. Spot rates on relevant
dates were:
Per Unit ofDateForeign CurrencyNovember 1$0.93December
310.91March 10.94
The entry to record the forward contract isa.FCU
Receivable225,000Premium on Forward Contract7,500Dollars
Payable232,500
b.Dollars Receivable232,500Discount on Forward Contract7,500FCU
Payable225,000
c. FCU Receivable232,500Discount on Forward Contract7,500Dollars
Payable225,000
d.Dollars Receivable225,000Discount on Forward Contract7,500FCU
Payable232,500
22.On November 1, 2011, National Company sold inventory to a
foreign customer. The account will be settled on March 1 with the
receipt of 200,000 foreign currency units (FCU). On November 1,
National also entered into a forward contract to hedge the exposed
asset. The forward rate is $0.80 per unit of foreign currency.
National has a December 31 fiscal year-end. Spot rates on relevant
dates were:
Per Unit ofDateForeign CurrencyNovember 1$0.83December
310.81March 10.84
What will be the adjusted balance in the Accounts Receivable
account on December 31, and how much gain or loss was recorded as a
result of the adjustment?
Receivable BalanceGain/Loss Recordeda.$170,000$4,000
gainb.$162,000$4,000 lossc.$168,000$2,000 gaind.$164,000$2,000
loss
23.Caldron Company purchased equipment for 375,000 British
pounds from a supplier in London on July 3, 2011. Payment in
British pounds is due on Sept. 3, 2011. The exchange rates to
purchase one pound is as follows:July 3August 31, (year
end)September 3Spot-rate1.581.551.5430-day rate1.571.53--60-day
rate1.561.49--
On its August 31, 2011, income statement, what amount should
Caldron report as a foreign exchange transaction
gain:a.$18,750.b.$3,750.c.$11,250.d.$0.
24.On April 1, 2011, Trent Company entered into two forward
exchange contracts to purchase 300,000 euros each in 90 days. The
relevant exchange rates are as follows:
Forward RateSpot rateFor Aug. 1, 2011April 1, 20111.161.17April
30, 2011 (year-end)1.201.18
The first forward contract was to hedge a purchase of inventory
on April 1, payable on December 1. On April 30, what amount of
foreign currency transaction loss should Trent report in income?a.
$0.b. $3,000.c. $9,000.d. $12,000.
25.On April 1, 2011, Trent Company entered into two forward
exchange contracts to purchase 300,000 euros each in 90 days. The
relevant exchange rates are as follows:
Forward RateSpot rateFor Aug. 1, 2011April 1, 20111.161.17April
30, 2011 (year-end)1.201.18
The second forward contract was strictly for speculation. On
April 30, 2011, what amount of foreign currency transaction gain
should Trent report in income.a. $0.b. $3,000.c. $9,000.d.
$12,000.
Problems
12-1On November 1, 2010, Dorsey Company sold inventory to a
company in England. The sale was for 600,000 British pounds and
payment will be received on February 1, 2011. On November 1, Dorsey
entered into a forward contract to sell 600,000 British pounds on
February 1 at the forward rate of $1.65. Spot rates for the British
pound are as follows:November 1$1.61December 311.67February
11.62
Dorsey has a December 31 fiscal year-end.
Required:Compute each of the following:
1.The dollars to be received on February 1, 2011, from selling
the 600,000 pounds to the exchange dealer.
2.The dollars that would have been received from the account
receivable if Dorsey had not hedged the sale contract with the
forward contract.
3.The discount or premium on the forward contract.
4.The transaction gain or loss on the exposed asset related to
the sale in 2010 and 2011.
5.The transaction gain or loss on the forward contract in 2010
and 2011.
6.The amount of the discount or premium on the forward contract
amortized in 2010 and 2011.
12-2On December 1, 2010, Derrick Corporation agreed to purchase
a machine to be manufactured by a company in Brazil. The purchase
price is 1,150,000 Brazilian reals. To hedge against fluctuations
in the exchange rate, Derrick entered into a forward contract on
December 1 to buy 1,150,000 reals on April 1, the agreed date of
machine delivery, for $0.375 per real. The following exchange rates
were quoted:Forward RateDateSpot Rate(Delivery on 4/1)December
10.3900.375December 310.3700.373April 10.385--
Required:Prepare journal entries necessary for Derrick during
2010 and 2011 to account for the transactions described above.
12-3Colony Corp., a U.S. corporation, entered into a contract on
November 1, 2010, to sell two machines to Crown Company, for 95,000
foreign currency units (FCU). The machines were to be delivered and
the amount collected on March 1, 2011.In order to hedge its
commitment, Colony entered into a forward contract for 95,000 FCU
delivery on March 1, 2011. The forward contract met all conditions
for hedging an identifiable foreign currency commitment.
Selected exchange rates for FCU at various dates were as
follows:
November 1, 2010 Spot rate$1.3076 Forward rate for delivery on
March 1, 20111.2980December 31, 2010 Spot rate1.3060 Forward rate
for delivery on March 1, 20111.3150March 1, 2011 Spot
rate1.2972
Required:Prepare all journal entries relative to the above on
the books of Colony Corp. on the following dates:1.November 1,
2010.2.Year-end adjustments on December 31, 2010.3.March 1, 2011.
(Include all adjustments related to the forward contract.)
12-4 On October 1, 2010, Nance Company purchased inventory from
a foreign customer for 750,000 units of foreign currency (FCU) due
on January 31, 2011. Simultaneously, Nance entered into a forward
contract for 750,000 units of FC for delivery on January 31, 2011,
at the forward rate of $0.75. Payment was made to the foreign
customer on January 31, 2011. Spot rates on October 1, December 31,
and January 31, were $0.72, $0.73, and $0.76, respectively. Nance
amortizes all premiums and discounts on forward contracts and
closes its books on December 31.
Required:
A.Prepare all journal entries relative to the above to be made
by Nance on October 1, 2010.B.Prepare all journal entries relative
to the above to be made by Nance on December 31, 2010.C.Compute the
transaction gain or loss on the forward contract that would be
recorded in 2011. Indicate clearly whether the amount is a gain or
loss.
12-5 On October 1, 2010, Kline Company shipped equipment to a
foreign customer for a foreign currency (FC) price of FC 3,000,000
due on January 31, 2011. All revenue realization criteria were
satisfied and accordingly the sale was recorded by Kline Company on
October 1. Simultaneously, Kline entered into a forward contract to
sell 3,000,000 FCU on January 31, 2011 for $1,200,000. Payment was
received from the foreign customer on January 31, 2011. Spot rates
on October 1, December 31, and January 31 were $0.42, $0.425, and
$0.435, respectively. Kline amortizes all premiums and discounts on
forward contracts and closes its books on December 31.
Required:Prepare all journal entries relative to the above to be
made by Kline during 2010 and 2011.
12-6On July 15, Worth, Inc. purchased 88,500,000 yen worth of
parts from a Tokyo company paying 20% down, and the balance is due
in 90 days. Interest is payable at a rate of 8% on the unpaid
balance. The exchange rate on July 15, was $1.00 = 118 Japanese
yen. On October 13, the exchange rate was $1.00 = 114 Japanese
yen.
Required:Prepare journal entries to record the purchase and
payment of this foreign currency transaction in U.S. dollars.
12-7On November 1, 2010, Bisk Corporation, a calendar-year U.S.
Corporation, invested in a speculative contract to purchase 700,000
euros on January 31, 2011, from a German brokerage firm. Bisk
agreed to buy 700,000 euros at a fixed price of $1.46 per euro. The
brokerage firm agreed to send 700,000 euros to Bisk on January 31,
2011. The spot rates for euros are:
November 1, 20101 euro = 1.45December 31, 20101 euro =
1.43January 31, 20111 euro = 1.44Required:Prepare the journal
entries that Bisk would record on November 1, December 31, and
January 31.
12-8 Consider the following information:
1.On November 1, 2011, a U.S. firm contracts to sell equipment
(with an asking price of 500,000 pesos) in Mexico. The firm will
take delivery and will pay for the equipment on February 1,
2012.
2.On November 1, 2011, the company enters into a forward
contract to sell 500,000 pesos for $0.0948 on February 1, 2012.
3.Spot rates and the forward rates for February 1, 2012,
settlement were as follows (dollars per peso):
Forward RateSpot Ratefor 2/1/12November 1,
2011$0.0954$0.0948Balance sheet date (12/31/11)0.09490.0944February
1, 20120.09474.On February 1, the equipment was sold for 500,000
pesos. The cost of the equipment was $20,000.Required:Prepare all
journal entries needed on November 1, December 31, and February 1
to account for the forward contract, the firm commitment, and the
transaction to sell the equipment.
Short Answer
1.Accounting for a foreign currency transaction involves the
terms measured and denominated. Describe a foreign currency
transaction and distinguish between the terms measured and
denominated.2.There are a number of business situations in which a
firm may acquire a forward exchange contract. Identify three common
situations in which a forward exchange contract can be used as a
hedge.
Short Answer Questions from the Textbook
1. Define currency exchange rates and distinguish between direct
and indirect quotations.
2. Explain why a firm is exposed to an added risk when it enters
into a transaction that is to be settled in a foreign currency.
3. Name the three stages of concern to the accountant in
accounting for importexport transactions. Briefly explain the
accounting for each stage.
4. How should a transaction gain or loss be reported that is
related to an unsettled receivable recorded when the firms
inventory was exported?
5. A U.S. firm carried a receivable for 100,000 yen. Assuming
that the direct exchange rate declined from $.009 at the date of
the transaction to $.006at the balance sheet date, compute the
transaction gain or loss. What balance would be reported for the
receivable in the firms balance sheet?
6. Explain what is meant by the two-transaction method in
recording exporting or importing trans-actions. What support is
given for this method?
7. Describe a forward exchange contract.
8. Explain the effects on income from hedging a foreign currency
exposed net asset position or net liability position.
9. What criteria must be satisfied for a foreign currency
transaction to be considered a hedge of an identifiable foreign
currency commitment?
10. The FASB classifies forward contracts as those acquired for
the purpose of hedging and those acquired for the purpose of
speculation. What main differences are there in accounting for
these two classifications?
11. How are foreign currency exchange gains and losses from
hedging a forecasted transaction handled?
12. What is a put option, and how might it be used to hedge a
forecasted transaction?
13. Define a derivative instrument, and describe the keystones
identified by the FASB for the ac-counting for such
instruments.
14. Differentiate between forward-based derivatives and
option-based derivatives.
15. List some of the criteria laid out by the FASB that are
required for a gain or loss on forecasted trans-actions (a cash
flow hedge) to be excluded from the income statement. If these
criteria are satisfied, where are the gains or losses reported, and
when (if ever) are they shown in the income statement? What is the
rationale for this treatment?
Business Ethics Question from Textbook
Executive stock options (ESOs) are used to provide incentives
for executives to improve company performance. ESOs are usually
granted at-the-money, meaning that the exercise price of the
options is set to equal the market price of the underlying stock on
the grant date. Clearly, executives would prefer to be granted
options when the stock price (and thus the exercise price) is at
its lowest. Backdating options is the practice of choosing a past
date when the market price was particularly low. Backdating has
not, in the past, been illegal if no documents are forged, if
communicated to the shareholders, and if properly reflected in
earnings and in taxes.
1. Since backdating gives the executive an instant profit, why
wouldnt the firm simply grant an option with the exercise price
lower than the cur-rent market price?
2. Suppose the executive was not involved in back-dating the
ESOs. Does the executive face any ethical issues?