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Question 1

where do effective/ineffective portions of a CF hedge go?

Answer 1

• ineffective = NI

* effective = OCI

Question 2

what are the off-BS risks of acct loss from interest rate swap agreements?

Answer 2

• credit risk (nonperformance of counterpart)

- market risk (risk of exch’ing lower rate for higher)

Question 3

what do derivatives include?

Answer 3

futures, forwards, options, and swaps

*not bank cert. of deposits

Question 4

what is a perfect hedge?

Answer 4

no future G/L

Question 5

what is the best description of a derivative fin. instrument?

Answer 5

a contract that has its settlement value tied to an underlying notional amt

Question 6

what is the rule for functional currency of an entity?

Answer 6

it is generally the environment the entity primarily generates and expends cash

*not subject to an inflationary environment (100% in 3+ years)

Question 7

what are the conversion rates used in translation method?

Answer 7

• IS = WA rate

*BS =YE rate, but
… SE + APIC = HC rate
… roll forward RE

G/L goes to OCI

Question 8

what are the conversion rates used in remeas. method?

Answer 8

• BS = monetary at YE rate
  … nonmonetary at HC rate (FA, inv, invest, IA, CS)
• IS = WA rate
  … HC rate for BS related items (DE, COGS, amort)

G/L goes to NI

Question 9

balance from translation/remeas. of sub’s foreign currency FS’s is reported in consol. IS when sub’s fxn’al currency is the:

Answer 9

reporting currency, not foreign

*if sub’s fxn’al currency is its local, translate to reporting

Question 10

what rate is used to record a transaction denominated in a foreign currency?

Answer 10

the spot rate

Question 11

resulting A/L from expected svc income over expected costs are amort’d over:

Answer 11

period of est’d svc income or loss

Question 12

what do perm. diff’s affect?

Answer 12

they affect current tax computation, not def’d

Question 13

what do temp. diff’s affect?

Answer 13

both current and def’d tax computation

*JE:
Dr: tax exp (now + later)
Cr: owe now/L
Cr: owe later/L

Question 14

what is the formula to get ITE/ben?

Answer 14

owe now + owe later (change) = ITE/ben

Question 15

what tax rate is used for TD?

Answer 15

we use future enacted TR

Question 16

what are ex’s of PD?

Answer 16

• tax-exempt int. (muni, state)
• life ins. proceeds on officer’s key man policy
• life ins. prem’s when corp. is beneficiary
• penalties, fines, bribes, kickbacks, etc
• nondeductible portion of meal +entertainment exp
• DRD for corp’s
• excess % depletion over cost depletion

*invest int exp is deductible up to net invest inc

Question 17

what are the ex’s of DTA and DTL items? (TD ex’s)

Answer 17

*DTA = PPD/unearned rent/int/royalties, BDE, est. L/warranty exp, def’d comp. L, and start-up exp’s
…they result in a “gift cert” and pay taxes early (higher TI)

*DTL = installment sales, contractors acct (% vs completed), equity method (undistr’d div’s), DE, amort, PPD exp (cash basis - tax)
…pay taxes later (lower TI)
.. DTL also includes increase in rent receivable

Question 18

what is the JE to record taxes for DTL TD?

Answer 18

*to record taxes:

ITE - current 60 (TI*%)
ITE - def’d 7.5 (TD)
DTL 7.5
IT/P 60

*to record Y2 reversal of DTL:

DTL 7.5
ITB - def’d/cash 7.5

Question 19

if DTA is more likely than not (50%+) that part/all of DTA will not be realized, what do we report?

Answer 19

a VA is recog’d

• not permitted under IFRS

Question 20

what is the JE to record taxes for DTA TD?

Answer 20

*to record taxes:

         DTA    90 ITE - current    240
              IT/P         240
         ITB - def'd    90

*if no TI is expected after Y2:

             DTA    90
ITE - current  240
       DTA  VA        60 (unused)
          ITB - def'd   30
                  IT/P   240

..usually ITE-c and VA are netted

*for reversal of DTA:
(gift cert.)
ITE def’d 30
DTA 30