Q&A Hero

Q: An enterprise has eight reporting segments. Five segments show an operating profit and three segments show an operating loss. In determining which segments are classified as reporting segments under the operating profits test, which of the following statements is correct?A) The test value for all segments is 10% of consolidated net profit.B) The test value for profitable segments is 10% or more of those segments reporting a profit, and the test value for loss segments is 10% or more of those segments reporting a loss.C) The test value for loss segments is 10% of the greater of (a) the absolute value of the sum of those segments reporting losses, or (b) 10% of consolidated net profit.D) The test value for all segments is 10% of the greater of (a) the absolute value of the sum of those segments reporting profits, or (b) the absolute value of the sum of those segments reporting losses.

Q: For an operating segment to be considered a reporting segment under the revenue threshold, its reported revenue must be 10% or more ofA) the combined enterprise revenues, eliminating all relevant intracompany transfers and balances.B) the combined revenues, excluding intersegment revenues, of all operating segments.C) the combined revenues, including intersegment revenues, of all operating segments.D) the consolidated revenue of all operating segments.

Q: Which of the following is not a quantitative threshold for determining a reportable segment?A) Segment assets are 10% or more of the combined assets of all operating segments.B) The absolute value of a segment's profit or loss is 10% or more of the greater of (1) the combined reported profit of all operating segments that reported a profit or (2) the absolute value of the combined reported loss of all operating segments that reported a loss.C) Segment reported revenue, including intersegment revenues, is 10% or more of the combined revenue (both internal and external) of all operating segments.D) Segment residual profit after the cost of equity is 10% or more of the combined residual profit of all operating segments.

Q: Cole Company has the following 2011 financial data:Consolidated revenue per income statement $800,000Intersegment sales 200,000Intersegment transfers 100,000Combined revenues of all segments $1,100,000Cole Company should add segments ifA) the sum of its segments' external revenue does not exceed $600,000.B) the sum of its segments' external revenue does not exceed $825,000.C) the sum of its segments' revenue including intersegment revenue does not exceed $600,000.D) the sum of its segments' revenue including intersegment revenue does not exceed $825,000.

Q: What is the threshold for reporting a major customer?A) 5 percent of revenuesB) 5 percent of profitsC) 10 percent of revenuesD) 10 percent of profits

Q: GAAP requires disclosures for each reportable operating segment for each of the following, except forA) Revenues.B) Depreciation expense.C) R&D expenditures.D) Extraordinary items.

Q: GAAP requires that segment information be reportedA) by geographics, without regard to size of the segment.B) by geographics, without regard to industry or product-line.C) however management organizes the enterprise into units for internal decision-making and performance-evaluation purposes.D) by industry or product-line, without regard to geographics.

Q: Which of the following conditions would not indicate that two business segments should be classified as a single operating segment?A) They have similar amounts of intersegment revenues or expenses.B) They have a similar distribution method for products.C) They have similar production processes.D) They have similar products or services.

Q: 1) Similar operating segments may be combined if the segments have similar economic characteristics. Which one of the following is a similar economic characteristic under GAAP?A) The segments' management teamsB) The tax reporting law sectionsC) The distribution method for products or servicesD) The expected rates of return and risk for the segments' productive assets

Q: Each of the following accounts has been converted to U.S. dollars from a foreign subsidiary's financial statements. Based on the information given, determine if the U.S. dollar or a foreign currency is the functional currency of the subsidiary.F = Foreign CurrencyD = U.S. DollarN/A = Cannot be determinedCost of goods sold was converted at a historical rate ___________Marketable debt securities carried at cost were converted at the year-end spot rate ___________Depreciation Expense was converted at the historical rate at the date of acquisition of the subsidiary ___________Inventories carried at their historical cost were converted at the spot rate from year-end ___________Intangible assets were converted at the historical exchange rate at the date of acquisition of the subsidiary ___________Deferred income tax liability was converted at the year-end spot rate ___________Property, Plant and Equipment was converted at the year-end spot rate ___________Accounts Payable was converted at the year-end spot rate ___________Patents were converted at the exchange rate in place at the date of acquisition of the subsidiary ___________Accumulated depreciation on buildings was converted at the year-end spot rate ___________

Q: Pritt Company purchased all the outstanding stock of Standy Company (a manufacturing company in Argentina) when the book value of Standy's net assets equaled their fair value. Standy's summarized balance sheet is shown below on January 1, 2011, the date of acquisition, and on December 31, 2011, when the exchange rates were $.25 and $.20, respectively. The average exchange rate for 2011 was $.23, and Standy paid dividends in 2011 amounting to 300,000 pesos when the exchange rate was $.21. January 1, 2011 (Peso)December 31, 2011 (Peso)BALANCE SHEET Cash1,400,0001,100,000Accounts Receivable400,0001,400,000Inventory1,200,0001,200,000Building & Equipment1,000,0001,000,000Accumulated Depreciation(200,000)(300,000)Total Assets3,800,0004,400,000 Accounts Payable300,000360,000Debt Payable1,000,0001,000,000Common Stock2,000,0002,000,000Retained Earnings500,0001,040,000Total Liab. & Equity3,800,0004,400,000 Required: If Standy's functional currency and reporting currency are the Argentine peso, compute the change to other comprehensive income that would result from the translation of these financial statements at December 31, 2011.

Q: On January 1, 2011, Paste Unlimited, a U.S. company, acquired 100% of Sticky Corporation of Italy, paying an excess of 112,500 euros over the book value of Sticky's net assets. The excess was allocated to undervalued equipment with a five year remaining useful life. Sticky's functional currency is the euro, and the books are kept in euros. Exchange rates for the euro for 2011 are:January 1, 2011 $1.44Average rate for 2011 1.48December 31, 2011 1.52Required:1. Determine the depreciation expense on the excess allocated to equipment for 2011 in U.S. dollars.2. Determine the unamortized excess allocated to equipment on December 31, 2011 in U.S. dollars.3. If Sticky's functional currency was the U.S. dollar, what would be the depreciation expense on the excess allocated to the equipment for 2011?

Q: On January 1, 2011, Placid Corporation acquired a 40% interest in Superior Industries, a Canadian Corporation, for $811,900 when Superior's stockholders' equity consisted of 1,000,000 Canadian dollars (C$) capital stock and C$500,000 retained earnings. Superior's functional currency is the Canadian dollar and the books are kept in the same currency. The exchange rate at the time of the purchase was $1.15 per Canadian dollar. Any excess allocated to patents is to be amortized over 10 years. A summary of changes in the stockholders' equity of Superior during 2011 and related exchange rates follows: Canadian $Exchange RateU.S. $Stockholders' equity - 1/1/111,500,000$1.15 C$1,725,000Net income300,000$1.14 A342,000Dividends(200,000)$1.14 C(228,000)Equity adjustment (31,000)Stockholders' equity - 12/31/111,600,000$1.13 C$1,808,000Required: Determine the following:1. Fair value of the patent from Placid's investment in Superior on January 1, 2011 in U.S. dollars2. Patent amortization for 2011 in U.S. dollars3. Unamortized patent at December 31, 2011 in U.S. dollars4. Equity adjustment from the patent in U.S. dollars5. Income from Superior for 2011 in U.S. dollars6. Investment in Superior balance at December 31, 2011 in U.S. dollars

Q: Par Industries, a U.S. Corporation, purchased Slice Company of New Zealand for $1,411,800 on January 1, 2011. Slice's functional currency is the New Zealand dollar (NZ$). Slice's books are kept in NZ$. The book values of Slice's assets and liabilities were equal to fair values, with the exception of land which was valued at NZ$1,300,000. Slice's balance sheet appears below:Current AssetsNZ$ 1,510,000Land645,000Buildings - net825,000Equipment - net220,000Total AssetsNZ$ 3,200,000 Current LiabilitiesNZ$ 1,200,000Long-Term Debt845,000Common Stock800,000Retained Earnings355,000 NZ$ 3,200,000Relevant exchange rates are shown below:January 1, 2011 1 NZ$ = $0.78Average rate 2011 1 NZ$ = $0.79December 31, 2011 1 NZ$ = $0.80Required:Determine the unrealized translation gain or loss at December 31, 2011 relating to the excess allocated to the undervalued land.

Q: On January 1, 2011, Psalm Corporation purchased all the stock of Solomon Corporation for $481,400 when Solomon had capital stock of 180,000 pounds () and retained earnings of 90,000. The book value of Solomon's assets and liabilities represented the fair value, except for equipment with a 5-year life that was undervalued by 15,000. Any remaining excess is due to a patent with a useful life of 6 years. Solomon's functional currency is the pound. Solomon's books are kept in pounds. Relevant exchange rates for a pound follow:January 1, 2011 $1.66Average for 2011 1.65December 31, 2011 1.64Required:1. Determine the equity adjustment on translation of the excess differential assigned to equipment at December 31, 2011.2. Determine the equity adjustment on translation of the excess differential assigned to patent at December 31, 2011.

Q: Plato Corporation, a U.S. company, purchases all of the outstanding stock of Socrates Company, which operates outside the U.S. on January 1, 2011. Socrates' net assets have fair values that equal their book values with the exception of land that has a fair value of 200,000 foreign currency units and equipment with a fair value of 100,000 foreign currency units. Plato paid $180,000 for this acquisition. The balance sheets for Plato and Socrates are shown below just before the business combination. Socrates' functional currency is the foreign currency unit (fcu) and the exchange rate at the date of acquisition was $.40 per fcu. Socrates uses the fcu for record-keeping purposes. Plato ($)Socrates (fcu)Current Assets2,800,000200,000Land600,000150,000Buildings - net1,300,000200,000Equipment - net2,300,00050,000 Total Assets7,000,000600,000 Current Liabilities1,300,000150,000Notes Payable1,500,000100,000Capital Stock2,000,000200,000Retained Earnings2,200,000150,000 Total Liabilities7,000,000600,000 Required:Prepare a consolidated balance sheet for Plato and subsidiary at January 1, 2011 immediately following the business combination.

Q: Pew Corporation (a U.S. corporation) acquired all of the stock of Skunk Company (a Brazilian company) on January 1, 2011 for $9,300,000 when Skunk had 10,000,000 Brazilian real (BR) capital stock and 5,000,000 BR retained earnings. The book value of Skunk's net assets equaled the fair value on this date, and any cost/book value differential is due to a patent with a 5-year remaining useful life. Skunk's functional currency is the BR. Skunk's books are maintained in the functional currency. The exchange rates for BR's for 2011 are shown below:January 1, 2011 $0.60Average for 2011 $0.64December 31, 2011 $0.68Required:1. Calculate the patent value from the business combination on January 1, 2011 in U.S. dollars.2. Calculate the patent amortization in U.S. dollars for 2011.3. Prepare the journal entry (in U.S. dollars) required on Pew's books to record the patent amortization for 2011, assuming that Pew accounts for Skunk using the equity method.

Q: Puddle Incorporated purchased an 80% interest in Soake Company, located in England. Puddle paid $1,560,000 on January 1, 2011, at a time when the book values of Soake equaled the fair values. Any excess cost/book value differential was attributed to a patent with a five-year remaining useful life. Soake's books are kept in the functional currency, pounds. A summary of Soake's equity is shown below for the first year that Puddle had ownership interest. In PoundsExchange RatesIn DollarsStockholders' Equity - 12/31/101,200,000$1.60H$1,920,000Net Income400,000$1.62A648,000Dividends - 11/1/11(200,000)$1.64H(328,000)Translation Adjustment 70,000Stockholders' Equity - 12/31/111,400,000$1.65C$2,310,000Required:Determine Puddle's income from Soake for 2011, and the balance of Puddle's Investment in Soake account at December 31, 2011.

Q: Phim Inc., a U.S. company, owns 100% of Sera Corporation, a New Zealand company. Sera's equipment was acquired on the following dates (amounts are stated in New Zealand dollars as NZ$):Jan. 01, 2011 Purchased equipment for NZ$40,000Jul. 01, 2011 Purchased equipment for NZ$80,000Jan. 01, 2012 Purchased equipment for NZ$50,000Jul. 01, 2012 Sold equipment purchased on Jan. 01, 2011 for NZ$35,000Exchange rates for the New Zealand dollar on various dates are:Jan. 01, 2011 1NZ$ = $.800 Jan. 01, 2012 1NZ$ = $.830Jul. 01, 2011 1NZ$ = $.820 Jul. 01, 2012 1NZ$ = $.805Dec. 31, 2011 1NZ$ = $.830 Dec. 31, 2012 1NZ$ = $.7902011 avg. rate 1NZ$ = $.815 2012 avg. rate 1NZ$ = $.810Sera's equipment has an estimated 5-year life with no salvage value and is depreciated using the straight-line method. Sera's functional currency and reporting currency are the New Zealand dollar.Required:1. Determine the value of Sera's equipment account on December 31, 2012 in U.S. dollars.2. Determine Sera's depreciation expense for 2012 in U.S. dollars.3. Determine the gain or loss from the sale of equipment on July 1, 2012 in U.S. dollars.

Q: Plane Corporation, a U.S. company, owns 100% of Shipp Corporation, a Libyan company. Shipp's equipment was acquired on the following dates (amounts are stated in Libyan dinars):Jan. 01, 2011 Purchased equipment for 40,000 dinarsJul. 01, 2011 Purchased equipment for 80,000 dinarsJan. 01, 2012 Purchased equipment for 50,000 dinarsJul. 01, 2012 Sold equipment purchased on Jan. 01, 2011 for 35,000 dinarsExchange rates for the Libyan dinars on various dates are:Jan. 01, 2011 1 dinar = $.500 Jan. 01, 2012 1 dinar = $.530Jul. 01, 2011 1 dinar = $.520 Jul. 01, 2012 1 dinar = $.505Dec. 31, 2011 1 dinar = $.530 Dec. 31, 2012 1 dinar = $.4902011 avg. rate 1 dinar = $.515 2012 avg. rate 1 dinar = $.510Shipp's equipment has an estimated 5-year life with no salvage value and is depreciated using the straight-line method, calculating depreciation expense on a monthly basis. Shipp's functional currency is the U.S. dollar, but the company uses the Libyan dinar as its reporting currency.Required:1. Determine the value of Shipp's equipment account on December 31, 2012 in U.S. dollars.2. Determine Shipp's depreciation expense for 2012 in U.S. dollars.3. Determine the gain or loss from the sale of equipment on July 1, 2012 in U.S. dollars.

Q: Plate Corporation, a US company, acquired ownership of Saucer Corporation of Switzerland on January 1, 2011 for $1,500,000 when Saucer's stockholders' equity in Swiss francs (SF) consisted of 700,000 SF Capital Stock and 300,000 SF Retained Earnings. The exchange rate for Swiss francs was $1.20 on January 1. All excess purchase cost was attributed to a Trademark that did not have a recorded book value. The trademark is to be amortized over 20 years.Saucer's functional currency is Swiss francs and the records are kept in the same currency. A summary of changes in Saucer's stockholders' equity during 2011 and relevant exchange rates are as follows:In Exchange InFrancs Rates DollarsStockholders' equity1/1/11 1,000,000 $1.20H $1,200,000Net income 250,000 1.15A 287,500Dividends 11/1/11 (100,000) 1.10H (110,000)Equity adjustment (170,000)Stockholders' equity _________ _________12/31/11 1,150,000 1.05C $1,207,500Required: Determine the following:1. Fair value of the Trademark from Plate's investment in Saucer on January 1, 2011 in U.S. dollars.2. Trademark amortization for 2011 in U.S. dollars.3. Unamortized Trademark at December 31, 2011 in U.S. dollars.4. Equity adjustment from the Trademark in U.S. dollars.5. Income from Saucer for 2011 in U.S. dollars.6. Investment in Saucer balance at December 31, 2011 in U.S. dollars.

Q: On January 1, 2011, Pilgrim Corporation, a U.S. firm, acquired ownership of Settlement Corporation, a foreign company, for $168,000, when Settlement's stockholders' equity consisted of 300,000 local currency units (LCU) and retained earnings of 100,000 LCU. At the time of the acquisition, Settlement's assets and liabilities were fairly valued except for a patent that did not have any recorded book value. All excess purchase cost was attributed to the patent, which had an estimated economic life of 10 years at the date of acquisition. The exchange rate for LCUs on January 1, 2011 was $.40. The functional currency for Settlement is LCU. Settlement's books are maintained in LCU.A summary of changes in Settlement's stockholders' equity during 2011 and the exchange rates for LCUs is as follows:LCU Rates DollarsStockholders' equity1/1/11 400,000 $.40H $160,000Net income 100,000 .42A 42,000Dividends 12/1/11 (50,000) .43H (21,500)Equity adjustment 17,500Stockholders' equity _______ ________12/31/11 450,000 .44C $198,000Required: Determine the following:1. Fair value of the patent from Pilgrim's investment in Settlement on January 1, 2011 in U.S. dollars.2. Patent amortization for 2011 in U.S. dollars.3. Unamortized patent at December 31, 2011 in U.S. dollars.4. Equity adjustment from the patent in U.S. dollars.5. Income from Settlement for 2011 in U.S. dollars.6. Investment in Settlement balance at December 31, 2011 in U.S. dollars.

Q: Note to Instructor: This exam item is a continuation of Exercise 5 and proceeds forward with Stripe's second year of operations.Stripe Corporation, a British subsidiary of Polka Corporation (a U.S. company) was formed by Polka on January 1, 2011 in exchange for all of the subsidiary's common stock. Stripe has now ended its second year of operations on December 31, 2012. Relevant exchange rates are:January 01, 2011 = 1 = $1.60April 01, 2011 = 1 = $1.62December 31, 2012 = 1 = $1.572012 average rate = 1 = $1.56Stripe's adjusted trial balance is presented below for the calendar year 2012.In PoundsDebits:Cash 172,000Accounts receivable 308,000Notes receivable 98,000Building 400,000Land 100,000Depreciation expense 10,000Other expenses 117,000Salary expense 376,000Total debits 1,581,000CreditsAccumulated depreciation 17,500Accounts payable 200,000Common stock 550,000Retained earnings 213,500Sales revenue 600,000Total credits 1,581,000Required: Prepare Stripe's:1. Remeasurement working papers;2. Remeasured income statement; and3. Remeasured balance sheet.

Q: Note to Instructor: This exam item is similar to Exercise 3 except that the exchange rates have been changed and the temporal method is used instead of the current rate method.The Polka Corporation, a U.S. corporation, formed a British subsidiary on January 1, 2011 by investing 550,000 British pounds () in exchange for all of the subsidiary's no-par common stock. The British subsidiary, Stripe Corporation, purchased real property on April 1, 2011 at a cost of 500,000, with 100,000 allocated to land and 400,000 allocated to the building. The building is depreciated over a 40-year estimated useful life on a straight-line basis with no salvage value. The U.S. dollar is Stripe's functional currency, but it keeps its records in pounds. The British economy does not experience high rates of inflation. Exchange rates for the pound on various dates are:January 01, 2011 = 1 = $1.60April 01, 2011 = 1 = $1.62December 31, 2011 = 1 = $1.652011 average rate = 1 = $1.64Stripe's adjusted trial balance is presented below for the year ended December 31, 2011.In PoundsDebits:Cash 200,000Accounts receivable 72,000Notes receivable 99,000Building 400,000Land 100,000Depreciation expense 7,500Other expenses 115,000Salary expense 208,000Total debits 1,201,500CreditsAccumulated depreciation 7,500Accounts payable 100,000Common stock 550,000Retained earnings 0Equity adjustment 0Sales revenue 544,000Total credits 1,201,500Required: Prepare Stripe's:1. Remeasurement working papers;2. Remeasured income statement; and3. Remeasured balance sheet.

Q: Pan Corporation, a U.S. company, formed a British subsidiary on January 1, 2012 by investing 450,000 British pounds () in exchange for all of the subsidiary's no-par common stock. The British subsidiary, Skillet Corporation, purchased real property on April 1, 2012 at a cost of 500,000, with 100,000 allocated to land and 400,000 allocated to a building. The building is depreciated over a 40-year estimated useful life on a straight-line basis with no salvage value. The British pound is Skillet's functional currency and its reporting currency. The British economy does not have high rates of inflation. Exchange rates for the pound on various dates were:January 01, 2012 = 1 = $1.60April 01, 2012 = 1 = $1.61December 31, 2012 = 1 = $1.682012 average rate = 1 = $1.66Skillet's adjusted trial balance is presented below for the year ended December 31, 2012.In PoundsDebits:Cash 220,000Accounts receivable 52,000Inventory 59,000Building 400,000Land 100,000Depreciation expense 7,500Other expenses 110,000Cost of goods sold 220,000Total debits 1,168,500CreditsAccumulated depreciation 7,500Accounts payable 111,000Common stock 450,000Retained earnings 0Equity adjustment 0Sales revenue 600,000Total credits 1,168,500Required: Prepare Skillet's:1. Translation working papers;2. Translated income statement; and3. Translated balance sheet.

Q: On January 1, 2012, Planet Corporation, a U.S. company, acquired 100% of Star Corporation of Bulgaria, paying an excess of 90,000 Bulgarian lev over the book value of Star's net assets. The excess was allocated to undervalued equipment with a three-year remaining useful life. Star's functional currency is the Bulgarian lev. Star's books are maintained in the functional currency. Exchange rates for Bulgarian lev for 2012 are:January 1, 2012 $.77Average rate for 2012 .75December 31, 2012 .73Required:1. Determine the depreciation expense stated in U.S. dollars on the excess allocated to equipment for 2012.2. Determine the unamortized excess allocated to equipment on December 31, 2012 in U.S. dollars.3. If Star's functional currency was the U.S. dollar, what would be the depreciation expense on the excess allocated to the equipment for 2012?

Q: For each of the 12 accounts listed in the table below, select the correct exchange rate to use when either remeasuring or translating a foreign subsidiary for its U.S. parent company.CodesC = Current exchange rateH = Historical exchange rateA = Average exchange rateU.S. dollar is The foreignthe functional currency is thecurrency functional currencyAccounts receivable ________ ________Marketable debt securities carried at cost ________ ________Inventories carried at cost ________ ________Deferred income ________ ________Goodwill ________ ________Other paid-in capital ________ ________Depreciation expense ________ ________Refundable deposits ________ ________Common stock ________ ________Accumulated depreciation on buildings ________ ________Deferred income tax liabilities ________ ________Accounts payable ________ ________

Q: If a U.S. company wants to hedge a prospective loss on its investment in a foreign entity that may result from a foreign currency fluctuation, the U.S. company shouldA) purchase a forward to swap currency of the foreign entity's local country for U.S. currency.B) purchase a call option to buy currency of the foreign entity's local country.C) issue a loan in the foreign entity's local country.D) borrow money in the foreign entity's local country.

Q: A foreign subsidiary's accounts receivable balance should be translated for the consolidated financial statements atA) the appropriate historical rate.B) the prior year's forecast rate.C) the future rate for the next year.D) the spot rate at year-end.

Q: A U.S. parent corporation loans funds to a foreign subsidiary to be used to purchase equipment. The loan is denominated in U.S. dollars and the functional currency of the subsidiary is the euro. This intercompany transaction is a foreign currency transaction ofA) neither the subsidiary nor the parent, as it is eliminated as part of the consolidation procedure.B) the subsidiary but not the parent.C) both the subsidiary and the parent.D) the parent but not the subsidiary.

Q: Exchange gains or losses from remeasurement appearA) in the continuing operations section of the consolidated income statement.B) as an extraordinary item on the consolidated income statement.C) as other comprehensive income typically reported in a statement of stockholders' equity.D) as an adjustment to the beginning balance of retained earnings on the consolidated Statement of retained earnings.

Q: Which of the following foreign subsidiary accounts will have the same value on consolidated financial statements, regardless of whether the statements are remeasured or translated?A) TrademarkB) Deferred IncomeC) Accounts ReceivableD) Goodwill

Q: The following assets of Poole Corporation's Romanian subsidiary have been converted into U.S. dollars at the following exchange rates:Current HistoricalRates RatesAccounts receivable $850,000 $875,000Trademark 600,000 575,000Property plant and equipment 1,200,000 900,000Totals $2,650,000 $2,350,000Assume the functional currency of the subsidiary is the U.S. dollar and the books are kept in a different currency. The assets should be reported in the consolidated financial statements of Poole Corporation and Subsidiary in the total amount ofA) $2,325,000.B) $2,350,000.C) $2,375,000.D) $2,650,000.

Q: When translating foreign subsidiary income statements using the current rate method, why are some accounts translated at an average rate?A) This approach improves matching.B) This approach accentuates the conservatism principle.C) This approach smoothes out highly volatile exchange rate fluctuations.D) This approach approximates the effect of transactions which occur continuously during the period.

Q: At the time of a business acquisition,A) identifiable assets and liabilities are allocated the portion of the translation or remeasurement adjustment that existed on the date of acquisition.B) a foreign entity's assets and liabilities are translated into U.S. dollars using the current exchange rate in effect on that date.C) the difference between investment fair value and translated net assets acquired is treated as a remeasurement gain or loss on the income statement.D) the difference between investment fair value and translated net assets acquired is recorded as a cumulative translation adjustment on the balance sheet.

Q: Palk Corporation has a foreign subsidiary located in a country experiencing high rates of inflation. Information concerning this country's inflation rate experience is given below.Change Annual rateDate Index in index of InflationJanuary 1, 2009 90January 1, 2010 120 30 30/100 = 30.00%January 1, 2011 150 30 30/130 = 23.08%January 1, 2012 210 60 60/160 = 37.50%The inflation rate that is used in determining if the subsidiary is operating in a highly inflationary economy isA) 37.50%.B) 90.58%.C) 133.33%.D) 350.00%.

Q: Accounts representing an allowance for uncollectible accounts are converted into U.S. dollars atA) historical rates when the U.S. dollar is the functional currency.B) current rates only when the U.S. dollar is the functional currency.C) historical rates regardless of the functional currency.D) current rates regardless of the functional currency.

Q: Which of the following statements about the Current Rate method is false?A) Translation involves restating the functional currency amounts into the reporting currency.B) All assets and liabilities are translated at the current rate.C) If the subsidiary maintains their books in their functional currency, the current rate method is used.D) The effect of exchange rate changes are reported on the income statement as a foreign exchange gain or loss.

Q: Which of the following assets and/or liabilities are considered monetary?A) Intangible Assets and Plant, Property, and EquipmentB) Bonds Payable and Common StockC) Cash and Accounts PayableD) Notes Receivable and Inventories carried at cost

Q: Assume the functional currency of a foreign entity is the U.S. dollar, but the books are kept in euros. The objective of remeasurement of a foreign entity's accounts is toA) produce the same results as if the foreign entity's books were maintained in the currency of the largest customer.B) produce the same results as if the foreign entity's books were maintained solely in the local currency.C) produce the same results as if the foreign entity's books were maintained solely in the U.S. dollar.D) produce the results reflective of the foreign entity's economics in the local currency.

Q: A foreign entity is a subsidiary of a U.S. parent company and has always used the current rate method to translate its foreign financial statements on behalf of its parent company. Which one of the following statements is false?A) The U.S. dollar is the functional currency of this company.B) Changes in exchange rates between the subsidiary's country and the parent's country are not expected to affect the foreign entity's cash flows.C) Translation adjustments are shown in stockholders' equity as increases or decreases in other comprehensive income.D) Translation adjustments are not shown on the income statement.

Q: Paskin Corporation's wholly-owned Canadian subsidiary has a Canadian dollar functional currency. In translating the subsidiary's account balances into U.S. dollars for reporting purposes, which one of the following accounts would be translated at historical exchange rates?A) Accounts ReceivableB) Notes PayableC) Capital StockD) Retained Earnings

Q: Pelmer has a foreign subsidiary, Sapp Corporation of Germany, whose functional currency is the euro. Sapp's books are maintained in euros. On December 31, 2011, Sapp has an account receivable denominated in British pounds. Which one of the following statements is true?A) Because all accounts of the subsidiary are translated into U.S. dollars at the current rate, the Account Receivable is not adjusted on the subsidiary's books before translation.B) The Account Receivable is remeasured into the functional currency, thus eliminating the need for translation.C) The Account Receivable is first adjusted to reflect the current exchange rate in euros and then translated at the current exchange rate into dollars.D) The Account Receivable is adjusted to euros at the current exchange rate, and any resulting gain or loss is included as a translation adjustment in the stockholders' equity section of the subsidiary's separate balance sheet.

Q: The primary goal behind consolidating financial statements of a controlled subsidiary isA) assuring that the subsidiary financial statements are the same under the temporal method or the current rate method.B) assuring that the individual nature of the subsidiary entity is not lost in the consolidation.C) representing the conversion of statements at the historical exchange rate.D) representing the company's underlying economic condition.

Q: All of the following factors would be used to define a foreign entity's functional currency, exceptA) high volume of intercompany transactions.B) expenses for foreign entity primarily driven by local factors.C) financing for foreign entity denominated in local currency.D) foreign entity's status as a local tax haven for transfer pricing purposes.

Q: Selvey Inc. is a wholly-owned subsidiary of Parsfield Incorporated, a U.S. firm. The country where Selvey operates is determined to have a highly inflationary economy according to GAAP definitions. Therefore, for purposes of preparing consolidated financial statements, the functional currency isA) its reporting currency.B) its current rate method currency.C) the US dollar.D) its local currency.

Q: A U.S. firm has a Belgian subsidiary that uses the British pound as its functional currency. According to GAAP, the U.S. dollar from Belgian unit's point of view will beA) its only foreign currency.B) its local currency.C) its current rate method currency.D) its reporting currency.

Q: On March 1, 2011, Amber Company sold goods to a foreign customer at a price of 50,000 foreign currency units. The customer will pay in three months. At the time of the sale, Amber paid $2,000 to acquire an option to sell 50,000 foreign currency units in three months at the strike price of $0.39. On May 30, 2011, the customer sent in 50,000 foreign currency units. Quarterly financial reports are prepared on March 31. Ignore the time value of money. Relevant exchange rates are as follows: Spot Rate Mar 1, 2011 $0.39 Mar 31, 2011 $0.45 May 30, 2011 $0.36 Required: Prepare the journal entries required for these transactions, if the foreign currency option is designated as a fair value hedge.

Q: On December 18, 2011, Wabbit Corporation (a U.S. Corporation) has a Forward Contract recorded on their ledger as a debit balance of $17,500. The forward contract was related to a purchase of electronic components purchased overseas, which were going to be re-sold in the United States. On December 20, the forward contract was settled with a payment of $20,000, and the related parts which cost $118,000 were sold for $160,000 cash. The forward contract is set up to lock in the price for the electronic components when they are sold. The forward contract was settled net. Assume this is a cash flow hedge. Required: Prepare the journal entries required by Wabbit on December 20.

Q: Ferb Company is a U.S.-based importer of fine fabrics. They periodically place orders with an Italian manufacturer for bolts of fabric at a price typically set in euros. Because they have business on an ongoing basis in euros, Ferb also enters into forward contracts to speculate on the Euro. On September 15, Ferb entered into a 45-day forward contract to purchase 2,000,000 euros. Ferb has a year-end of September 30. The forward contract cannot be settled net. Relevant exchange rates are shown below: Spot Rate Forward Rate to October 30, 2011 Sep 15, 2011 $1.415 $1.397 Sep 30, 2011 $1.395 $1.399 Oct 30, 2011 $1.410 $1.410 Required: Prepare the journal entries to account for the forward contract for September and October.

Q: Opie Industries is a manufacturer of plastic bottles. On September 1, 2011, Opie purchased an option contract at a cost of $2,000. The purpose of the option is to hedge against increases in the price of this type of plastic, "PET." The option is to buy 1,000,000 pounds of PET on March 1, 2012 for $.75 per pound. If the market price of PET is below $.75 on March 1, Opie will let the option expire. If the market price is above $.75, then Opie will exercise the option. The option is to be settled net. Opie assumes a 6% annual borrowing rate. Assume this is a cash flow hedge. Required: Prepare the entry that Opie should record on September 1, 2011. Then, assuming that the price of PET is $.72 on December 31, 2011 (Opie's year end), prepare the entry that Opie should record. Finally, prepare the entries for March 1, 2012, assuming that the price of PET is $.78.

Q: Ivan has 14,000 barrels of oil that were purchased a month ago at $50.00 per barrel. On November 1, 2011 Ivan hedges the value of the inventory by entering into a forward contract to sell 14,000 barrels of oil on January 31, 2012 for $60.00 per barrel. The forward contract is to be settled net. Assume this is a fair value hedge. Required: Assume a 6% discount rate is reasonable, and using a mixed-attribute model, prepare the journal entries to account for this hedge at the following dates: When the market price is... November 1, 2011 $60.00 per barrel December 31, 2011 $65.00 per barrel January 31, 2012 $62.00 per barrel

Q: On January 1, 2011, Bosna borrowed $100,000 from Lenda. The three-year term note carries a variable rate interest, based on LIBOR, and interest is payable at December 31 of each year, compounded annually. The first year's rate of interest is 7% and Bosna would like to assure that their rate does not increase. Bosna enters into a pay-fixed, receive-variable interest rate swap agreement with Swamp City Bank, under which Bosna will pay 7%, fixed. At December 31, 2011, it is determined that Bosna's interest rate to Lenda for 2012 will be 6%. At December 31, 2012, the interest rate for 2013 was determined to be 8%. Treat as a cash flow hedge. Required: Determine the estimated fair value of the hedge at December 31, 2011, and prepare the related journal entries required to document this hedge and the related interest payments at December 31, 2011, 2012, and 2013, including final repayment on 12/31/13. Assume a flat interest rate curve.

Q: On January 1, 2011, Bambi borrowed $500,000 from Lonni. The five-year term note carries a variable rate interest, based on LIBOR, and interest is payable at December 31 of each year, compounded annually. The first year's rate of interest is 6% and Bambi would like to assure that their rate does not increase. Bambi enters into a pay-fixed, receive-variable interest rate swap agreement with Third National Bank, under which Bambi will pay 6%, fixed. At December 31, 2011, it is determined that Bambi's interest rate to Lonni for the next year will be 5%. Treat as a cash flow hedge. Required: Determine the estimated fair value of the hedge at December 31, 2011, and prepare the related journal entry required to document this hedge and the related interest payment at December 31, 2011. Assume the interest rate curve is flat.

Q: Astrotuff Company is planning to purchase 200,000 pounds of nylon from Tangsun Company. On November 1, 2011, Astrotuff entered into a 90-day forward contract to hedge the planned purchase. The forward contract is to purchase 200,000 pounds of nylon at $1.80 per pound (forward rate at November 1, 2011). On November 1, 2011, the spot price of nylon is $1.75 per pound, but Astrotuff anticipates significant increases in the price of nylon. The forward contract is to be settled net. On December 31, 2011, Astrotuff's year end, the forward rate to January 30, 2012 is $1.78 per pound. The spot and forward rates on January 30, 2012 are $1.85 per pound. Astrotuff uses a 6% discount rate relating to their hedging activity. Astrotuff purchases 200,000 pounds of nylon on January 30 when the forward contract expires. Required: Prepare the necessary journal entries to account for this cash flow hedge and related purchase of nylon.

Q: On December 15, 2011, Electronix Company purchased inventory from a foreign supplier for 2,000,000 foreign currency units (fcu's). Payment will be made on February 13, 2012. On December 15, 2011, to hedge the transaction, Electronix signed a forward contract to buy 2,000,000 fcu's in 60 days. Electronix uses a discount rate of 5% resulting in a 45-day present value factor of .9938. The forward contract will be settled net. The related exchange rates are shown below: Spot Rate Forward Rate to 2/13/12 December 15, 2011 $0.010 = 1 fcu $0.010 = 1 fcu December 31, 2011 $0.012 = 1 fcu $0.011 = 1 fcu February 13, 2012 $0.013 = 1 fcu $0.013 = 1 fcu On December 15, 2011, Electronix recorded a debit to Inventory and a credit to Accounts Payable (fcu) for $20,000, using the current spot rate. Required: 1. Show the required entries on December 31, 2011 if the hedge is a cash flow hedge. Round to the nearest whole dollar. 2. Show the required entries on December 31, 2011 if the hedge is a fair value hedge. Round to the nearest whole dollar.

Q: Wild West, Incorporated (a U.S. corporation) sold inventory to a company in the Philippines for 1,600,000 pesos on account on February 1, 2011, with payment expected in 90 days. Wild West entered into a forward contract to hedge this transaction, and properly accounts for the transaction as a cash flow hedge. Wild West has a March 31 fiscal year end, and uses an 8% discount rate, resulting in a 30-day present value factor of .9934. The forward contract is settled net. The relevant exchange rates are shown below: Spot Rate Forward Rate to May 2, 2011 February 1, 2011 $0.0229 = 1 peso $0.0270 = 1 peso March 31, 2011 $0.0254 = 1 peso $0.0268 = 1 peso May 2, 2011 $0.0280 = 1 peso $0.0280 = 1 peso Required: Record the journal entries needed by Wild West on February 1, March 31, and May 2. Round all entries to the nearest whole dollar.

Q: Slickton Corporation, a U.S. holding company, enters into a forward contract on November 1, 2011 to speculate in Singapore dollars (S$). The forward contract requires Slickton to sell 1,000,000 Singapore dollars to the exchange broker on January 30, 2012. Net settlement is not permitted. Relevant exchange rates for the Singapore dollar are listed below: 11/1/11 12/31/11 1/30/12 Spot rate $0.806 $0.797 $0.802 30-day forward rate $0.805 $0.792 $0.796 90-day forward rate $0.804 $0.795 $0.789 Required: Prepare the journal entries required by Slickton on November 1, 2011, December 31, 2011 (year end), and January 30, 2012.

Q: Onoly Corporation (a U.S. manufacturer) sold parts to its customer in Hong Kong on December 8, 2011 with payment of 500,000 Hong Kong Dollars (HKD) to be received in sixty days on February 6, 2012. Onoly has a December 31 year end. The following exchange rates apply: Spot Rate Forward Rate to February 6 December 8, 2011 $.1150 $.1150 December 31, 2011 $.1300 $.1250 February 6, 2012 $.1400 $.1400 Required: 1. Assuming no forward contract is taken, what is the amount of foreign currency exchange gain or loss that would be recorded in 2011, and in 2012? 2. Assuming a 60-day forward contract is taken on December 8 with the intent of hedging this foreign currency transaction, and that this hedge is properly accounted for as a cash flow hedge, what is the net effect on income to be recorded in 2011, and in 2012?

Q: On November 1, 2010, Ironside Company (a U.S. manufacturer) sold an airplane for 1 million New Zealand dollars (NZ$) to a New Zealand company, Wellington Corporation. Ironside will receive payment on January 30, 2011 in New Zealand dollars. In order to hedge the accounts receivable position, Ironside entered into a 90-day forward contract on November 1, 2010 to sell 1 million New Zealand dollars. On November 1, 2010, the forward rate is US$0.79 per New Zealand dollar. The forward contract will be settled net. This is a fair value hedge. Ignore the time value of money. The relevant exchange rates per New Zealand dollar: Spot Rate Forward Rate to 1/30/11 Nov. 1, 2010 US$0.79 US$0.79 Dec. 31, 2010 US$0.75 US$0.76 Jan. 30, 2011 US$0.73 US$0.73 Required: Record the journal entries that Stateside would need to prepare at November 1, 2010, December 31, 2010 and January 30, 2011. December 31 is the fiscal year end.

Q: On November 1, 2010, Stateside Company (a U.S. manufacturer) sold an airplane for 1 million New Zealand dollars (NZ$) to New Zealand company Aukland Corporation. Stateside will receive payment on January 30, 2011 in New Zealand dollars. In order to hedge the accounts receivable position, Stateside entered into a 90-day forward contract to sell 1 million New Zealand dollars on January 30, 2011. On November 1, 2010, the 90-day forward rate is US$0.73 per New Zealand dollar. The forward contract will be settled net. Account for the hedge as a fair value hedge. Ignore the time value of money. The relevant exchange rates per New Zealand dollar: Spot Rate Forward Rate to 1/30/11 Nov. 1, 2010 US$0.73 US$0.73 Dec. 31, 2010 US$0.75 US$0.76 Jan. 30, 2011 US$0.79 US$0.79 Required: Record the journal entries that Stateside would need to prepare at November 1, 2010, December 31, 2010 and January 30, 2011. December 31, 2010 is the fiscal year end.

Q: On November 1, 2010, Athom Corporation purchased 5,000 television sets for its merchandise inventory from Sockk, a South Korean firm, at a total quoted cost of 600,000,000 won (W). On this date, the spot rate for the won was $1 = 1,080W. On the same day, Athom invested $500,000 cash in a non-interest bearing account with a Japanese bank, to hedge its exposed liability position. The account payable to Sockk is due on January 30, 2011. The exchange rates on December 31, 2010 and January 30, 2011 were $1 = 1,060W, and $1 = 1,030W, respectively. Athom agreed to pay Sockk in won. The bank deposit made by Athom will be held in won, but will be withdrawn in dollars by Athom on January 30th. Assume that Athom has a December 31 year-end. Assume this is a fair value hedge. Required: Prepare all the journal entries for Athom Corporation's General Journal on November 1, 2010, December 31, 2010, and January 30, 2011. Round entries to the nearest whole dollar. If no entry is required on a particular date, indicate "No entry" in the General Journal.

Q: On November 1, 2010, Mayberry Corporation, a U.S. corporation, purchased from Cantata Corporation, a Mexican company, some machinery that cost 1,000,000 pesos. The invoice was payable in pesos on January 30, 2011. To hedge against rapid changes in the peso, Mayberry entered into a forward contract on November 1, 2010 with AB Trader & Company, a US brokerage and investment firm. The contract specified that Mayberry would buy 1,000,000 pesos from AB Trader at $0.084 per peso for settlement on January 30, 2011. Assume that all three companies are subject to the same accounting standards and have December 31st year-ends. The spot rates for pesos on November 1, December 31, and January 30, are $0.082, $0.080, and $0.089, respectively. The 30-day forward rate for pesos on December 31, 2010 is $0.083. The forward contract is not settled net. Required: Record General Journal entries for Mayberry Corporation on November 1, December 31, and January 30. If no entry is required on a particular date, indicate "No entry" in the General Journal. This is a fair value hedge.

Q: On November 1, 2011, Moddel Company (a U.S. corporation) entered into a 90-day forward contract to purchase 200,000 British pounds. The purpose of the forward contract is to hedge a commitment to purchase special equipment on January 30, 2012 from a British firm Jeckyl Inc. The invoice price on the purchase commitment is denominated in British pounds. The forward contract is not settled net. Assume Moddel uses a 12% interest rate. Use a fair value hedge. The relevant exchange rates are stated in dollars per pound: Forward Rate Spot Rate to Jan. 30, 2012 November 1, 2011 $1.32 $1.35 December 31, 2011 $1.47 $1.50 January 30, 2012 $1.55 - Required: 1.What journal entry did Moddel record on November 1, 2011? 2.What journal entries did Moddel record on December 31, 2011? 3.What journal entries did Moddel record on January 30, 2012 if the purchase was made?

Q: On June 1, 2011, Dapple Industries purchases an option contract for $5,000 on 10,000 gallons of aviation gas to minimize its purchasing cost price exposure. At the time, the market price is $2.50 per gallon and the option price of $2 per gallon will expire 6 months later. Dapple can exercise the option at its discretion. When Dapple prepares quarterly reports on June 30, Dapple is still holding the option. On June 30, the market price of aviation gas is $4.50 per gallon. The option is to be settled net. On August 1, Dapple exercises the option when the gas market price is $5.00 per gallon and purchases 40,000 gallons of gas. On August 15, Dapple uses all of the gas on a charter flight. Required: What are Dapple's journal entries with regard to the aviation gas option? Assume this is a cash flow hedge. Ignore the time value of money.

Q: On November 1, 2011, Ross Corporation, a calendar-year U.S. corporation, invested in a purely speculative contract to purchase 1 million euros on January 30, 2012, from Trattoria Company, an Italian brokerage firm. Ross agreed to purchase 1,000,000 euros from Trattoria at a fixed price of $1.420 per euro. Trattoria agreed to transmit 1,000,000 euros to Ross on January 30, 2012. Net settlement is not permitted. The spot rates for euros are: Nov 01, 2011 1 euro = $1.415 Dec 31, 2011 1 euro = $1.395 Jan 30, 2012 1 euro = $1.410 The 30-day futures rate for euros on December 31, 2011 was $1.405. Required: Prepare the General Journal entries that Ross would record on November 1, December 31, and January 30.

Q: On November 1, 2011, Portsmith Corporation, a calendar-year U.S. corporation, invested in a purely speculative contract to purchase 1 million yen on January 30, 2012, from the Karoke Trading Company, a Japanese brokerage firm. Portsmith agreed to purchase 1,000,000 yen from Karoke at a fixed price of $0.0100 per yen. Karoke agreed to transmit 1,000,000 yen to Portsmith on January 30. Net settlement is not permitted. The spot rates for yen are: Nov 01, 2011 1 yen = $0.0097 Dec 31, 2011 1 yen = $0.0104 Jan 30, 2012 1 yen = $0.0106 The 30-day forward rate for yen on December 31, 2011 was $0.0104. Required: Prepare the General Journal entries that Portsmith would record on November 1, December 31, and January 30.

Q: Use the following information to answer the question(s) below.On December 1, 2011, Thomas Company, a U.S. corporation, purchases inventory from a vendor in Italy for 400,000 euros. Payment is due in 90 days. To hedge the transaction, Thomas signs a forward contract to buy 400,000 euros in 90 days at $1.3670. Thomas uses a discount rate of 6% (present value factor for 30 days = .9950; 60 days = .9901; 90 days = .9851). Assume the forward contract will be settled net and this is a cash flow hedge. Currency exchange rates are shown below:DateSpot RateForward Rate to February 29December 1, 2011$1.3694$1.3670December 31, 2011$1.3642$1.3660January 30, 2012$1.3670$1.3690February 29, 2012$1.3712$1.3712What is the fair value of the forward contract at February 29?A) $-0-B) $1,654.97 assetC) $1,654.97 liabilityD) $1,680 asset

Q: Use the following information to answer the question(s) below.On November 2, 2011, Bellamy Corporation sells product to their Danish customer. At the same time, Bellamy signed a forward contract to sell 200,000 Danish krone in ninety days to hedge the account receivable at $0.1905, the 90-day forward rate. The receivable is expected to be collected in ninety days. Assume the forward contract will be settled net and this is a fair value hedge. The related exchange rates are shown below:DateSpot RateForward Rate to January 31November 2, 2011$0.1910$0.1905December 31, 2011$0.1920$0.1912January 31, 2012$0.1915$0.1915Assuming a present value factor of 1 for simplicity, what is the fair value of this forward contract on January 31?A) $-0-B) $ 60 assetC) $160 liabilityD) $200 liability

Q: On May 1, 2011, Listing Corporation receives inventory items from their Bulgarian supplier. At the same time, Listing signed a forward contract to purchase 75,000 Bulgarian lev in sixty days to hedge the inventory purchase at $0.738, the 60-day forward rate. Payment for the inventory will be due in sixty days in Bulgarian lev. Assume the forward contract will be settled net and this qualifies as a fair value hedge. The related exchange rates are shown below: Date Spot Rate Forward Rate to June 30 May 1, 2011 $0.7270 $0.7380 May 31, 2011 $0.7350 $0.7400 June 30, 2011 $0.7420 $0.7420 Assuming a present value factor of 1 for simplicity, what is the fair value of this forward contract on May 31? A) $150 asset B) $150 liability C) $375 asset D) $375 liability

Q: International accounting standards differ from U.S. Generally Accepted Accounting Principles in that International standards A) require that firm sale or purchase commitments are accounted for as fair value hedges. B) require that firm sale or purchase commitments are accounted for as cash flow hedges. C) state that firm sale or purchase commitments may not be treated as a hedged transaction. D) permit firm sale or purchase commitments to be accounted for as either fair value hedges or cash flow hedges.

Q: When preparing their year-end financial statements, the Warner Company includes a footnote regarding their hedging activities during the year. Which of the following is not required to be disclosed? A) How hedge effectiveness is determined and assessed B) The specific types of risks being hedged, and how they are being hedged C) Alternative hedging options declined D) The net gain or loss reported for the period for fair value hedges and where in the financial statements it is reported

Q: Cirtus Corporation, a U.S. corporation, placed an order for inventory from a Mexican supplier on September 18 when the spot rate was $0.0840 = 1 peso. The invoice price will be denominated in pesos. At that time, they entered into a 30-day forward contract (designated as a fair value hedge of the firm commitment to purchase) to purchase 860,000 pesos at a forward rate of $0.0810. On October 18 when the inventory was received, the spot rate was $0.0890. At what amount should the inventory be carried on Cirtus' books? A) $69,660 B) $72,240 C) $76,540 D) $860,000

Q: Taydus Corporation, a U.S. corporation, sold goods on December 2 to a company overseas, and is now carrying a receivable denominated in euros. Taydus signed a 60-day forward contract on that same date to sell euros. The spot rate was $1.40 on the date they signed the contract and the 60-day forward rate was $1.36. At the end of that month when they closed the books at their fiscal year-end, the spot rate was $1.42 and the 30-day forward rate was $1.40. Assume this is a fair value hedge. The forward contract will not be settled net. What would be reported by Taydus for the year ending December 31? A) Net exchange gain B) Net exchange loss C) Deferred exchange gain D) Deferred exchange loss

Q: The purchase price of an option contract is typically recorded as A) an expense. B) an asset. C) an amortized cost. D) a component of shareholders equity.

Q: A fair value hedge differs from a cash flow hedge because a fair value hedge A) cannot be used for firm purchase or sales commitments. B) is not recorded unless it is a highly-effective hedge. C) records gains or losses in the value of the derivative directly to earnings of the company. D) defers the gains or losses in the value of the derivative using Other Comprehensive Income.

Q: A forward contract used as a cash flow hedge will be recorded as an asset if A) the holder is expecting to receive a payment as a result of the contract. B) the holder is accounting for the hedged instrument as a fair value hedge. C) the holder is hedging the net investment in a foreign entity. D) the holder is using the alternate accounting method and deferring all gains or losses from the hedge.

Q: Barnes Company entered into a forward contract during the current year to hedge the risk of a material supply cost increase. Based on the current market, at year-end the present value of the estimated amount they will have to pay in ten months is $750,000. What entry would be recorded at year-end closing, assuming that no amount was recorded for this contract until this time? A) Forward Contract (+A) $750,000 Other Comprehensive Income (+SE) $750,000 B) Forward Contract (+A) $750,000 Earnings (+SE) $750,000 C) Other Comprehensive Income (-SE) $750,000 Earnings (+SE) $750,000 D) Other Comprehensive Income (-SE) $750,000 Forward Contract (+L) $750,000

Q: When a cash flow hedge is appropriate, the effective portion of the gain or loss on the derivative is A) deferred using other comprehensive income. B) recognized immediately at the time the agreement is made. C) recognized over time, amortized over the period of the agreement. D) recognized over time, offset by the fluctuation in the value of the hedged asset or liability.

Q: If a financial instrument is classified as a cash flow hedge, then A) its gains or losses are reported in the income statement if a fiscal year-end occurs before the settlement date. B) it is classified as a held-to-maturity asset. C) it does not require a notional amount. D) its gains or losses are reported in the balance sheet if a fiscal year-end occurs before the settlement date.