ACC 401 Week 8 Quiz - Strayer
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Quiz 7 Chapter 11 and 12
Chapter 11
International Financial Reporting
Standards
Multiple Choice—Conceptual
1. The goals of the International
Accounting Standards Committee include all of the following except
a. 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 investors
c. 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
include
a. 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 year
a. 2011.
b. 2012.
c. 2013.
d. 2014.
9. Benefits of the FASB Accounting Standards Codification (ASC)
include all of the following except
a. 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 to
a. 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 except
a. 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 that
a. 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 assumption
d. US GAAP allows the use of the LIFO cost flow assumption.
13. One difference between IFRS and GAAP in valuing inventories is
that
a. 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
at
a. 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 comparing
a. the asset’s carrying amount and its fair
value under US GAAP.
b. the asset’s carrying amount and its
discounted future cash flows less cost to sell under IFRS.
c. the asset’s carrying amount and its undiscounted
future cash flows under US GAAP.
d. the asset’s carrying amount and its
undiscounted future cash flows less disposal cost under IFRS.
17. In accounting for liabilities, IFRS
interprets “probable” as
a. 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 except
a. 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:
|
Component
|
Cost
|
Useful life
|
|
Frame
|
€7,200,000
|
24
years
|
|
Engine
|
4,800,000
|
20
years
|
|
Other
|
2,400,000
|
10
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 include
a. 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 include
a. a credit to accumulated depreciation of
€1,200,000.
b. a debit to depreciation expense of €1,440,000
c. 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 of
a. €1,440,000.
b. €1,200,000
c. €800,000.
d. €600,000.
22. Accounting terminology that differs
between IFRS and US GAAP include all of the following except
a. 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 except
a. 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 include
a. 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. £9,440
c. £10,000.
d. £11,800.
26. In the first twelve months following the
sale, Bellingham would reduce the Contract liability – warranty account by
a. £784.
b. £980
c. £1,180.
d. £1,380.
27. In the first twelve months, Bellingham
would record warranty expense of
a. £784.
b. £980
c. £1,180.
d. £1,380.
28. Significant differences between IFRS and
Chinese GAAP include all of the following except
a. 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 except
a. 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 companies
d. 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:
2011 2012
a. gain gain
b. gain loss
c. loss loss
d. loss gain
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 of
Date Foreign
Currency
November 1 $0.73
December 31 0.71
March 1 0.74
The entry to record the forward contract
is
a. FCU Receivable 350,000
Premium on Forward Contract 15,000
Dollars Payable 365,000
b. Dollars Receivable 365,000
Discount on Forward Contract 15,000
FCU Payable 350,000
c. FCU Receivable 365,000
Discount on Forward Contract 15,000
Dollars Payable 350,000
d. Dollars Receivable 350,000
Discount on Forward Contract 15,000
FCU
Payable 365,000
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 of
Date Foreign
Currency
November 1 $0.73
December 31 0.71
March 1 0.74
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 Balance Gain/Loss Recorded
a. $319,500 $9,000
gain
b. $319,500 $9,000
loss
c. $333,000 $4,500
gain
d. $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. Craiger’s 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 Craiger’s income statements as foreign exchange (transaction)
gain or loss for the years ended March 31, 2011 and 2012?
2011 2012
a. $0 $0
b. $0 $350
loss
c. $350 loss $0
d. $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 Stuart’s favor. The resulting gain should be reported
in the financial statements as a(n):
a. component of
othercomprehensiveincome.
b. component of
incomefromcontinuingoperations.
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
7 August 31,
(year end) September 7
Spot-rate 2.08 2.05 2.04
30-day rate 2.07 2.03 --
60-day rate 2.06 1.99 --
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
Rate
Spot
rate For
Dec. 1, 2011
September 1, 2011 1.46 1.47
September 30, 2011 (year-end) 1.50 1.48
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
Rate
Spot
rate For
Dec. 1, 2011
September 1, 2011 1.46 1.47
September 30, 2011 (year-end) 1.50 1.48
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 of
Date Foreign Currency
November 1 $0.93
December 31 0.91
March 1 0.94
The entry to record the forward contract
is
a. FCU Receivable 225,000
Premium on Forward Contract 7,500
Dollars Payable 232,500
b. Dollars Receivable 232,500
Discount on Forward Contract 7,500
FCU Payable 225,000
c. FCU Receivable 232,500
Discount on Forward Contract 7,500
Dollars Payable 225,000
d. Dollars Receivable 225,000
Discount on Forward Contract 7,500
FCU Payable 232,500
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 of
Date Foreign Currency
November
1 $0.83
December
31 0.81
March
1 0.84
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 Balance Gain/Loss Recorded
a. $170,000 $4,000 gain
b. $162,000 $4,000 loss
c. $168,000 $2,000 gain
d. $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
3 August 31, (year
end) September 3
Spot-rate 1.58 1.55 1.54
30-day rate 1.57 1.53 --
60-day rate 1.56 1.49 --
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
Rate
Spot
rate For Aug. 1,
2011
April 1, 2011 1.16 1.17
April 30, 2011
(year-end) 1.20 1.18
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
Rate
Spot
rate For Aug. 1,
2011
April 1, 2011 1.16 1.17
April 30, 2011
(year-end) 1.20 1.18
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
12-1 On 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 $1.61
December 31 1.67
February 1 1.62
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.
12-2 On 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
Rate
Date Spot Rate (Delivery on 4/1)
December 1 0.390 0.375
December 31 0.370 0.373
April 1 0.385 --
Required:
Prepare
journal entries necessary for Derrick during 2010 and 2011 to account for the
transactions described above.
12-3 Colony 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, 2011 1.2980
December 31, 2010 – Spot rate 1.3060
Forward rate for delivery on March 1, 2011 1.3150
March 1, 2011 – Spot rate 1.2972
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.
12-6 On 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.
12-7 On 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,
2010 1 euro = 1.45
December 31,
2010 1 euro = 1.43
January 31,
2011 1 euro = 1.44
Required:
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
Rate
Spot
Rate for 2/1/12
November
1, 2011 $0.0954 $0.0948
Balance
sheet date (12/31/11) 0.0949 0.0944
February
1, 2012 0.0947
4. 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 import–export 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 firm’s 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 firm’s 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 wouldn’t 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?
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