FAR 11 Flashcards
What general kind of hedge, if any, is the hedge of a recognized asset or liability?
The hedge of a recognized asset or liability may be either a fair value hedge or a cash flow hedge, depending on management’s designation. However, the hedge of a recognized asset or liability denominated in a foreign currency generally will be a cash flow hedge.
Tramco has an investment classified as available-for-sale which is denominated in 80,000 units of a foreign currency. In order to hedge its investment, Tramco acquired a forward exchange contract for 100,000 units of the foreign currency in which its investment is denominated. During the year, the value of the investment decreased $9,000 and the value of the forward contract increased by $10,000. For the year, which one of the following amounts should Tramco recognize from the forward contract as hedging (offsetting) the decrease in value of the investment?
Because the forward contract was designated as hedging the investment, a change in the value of the investment would be offset by a change in the value of the forward contract. However, because the amount of the forward contract (100,000 foreign currency units) exceeded the amount of the investment being hedged (80,000 foreign currency units - FCU), only 80,000 FCU/100,000 FCU = .80 of the change in the forward contract can be used to offset a change in the investment. The other .20 change in the forward contract must be treated as speculative. Therefore, .80 of the $10,000 change in the value of the contract, or $8,000, can be used to offset the $9,000 change in the value of the investment. The other $2,000 must be treated as a speculative gain.
On September 1, 2004, Brady Corp. entered into a foreign exchange contract for speculative purposes by purchasing 50,000 Euros for delivery in 60 days. The rates to exchange $1 for 1 Euro follow:
9/1/04 9/30/04 Spot rate .75 .70 30-day forward rate .73 .72 60-day forward rate .74 .73 In its September 30, 2004, income statement, what amount should Brady report as foreign exchange loss?
The correct answer is the difference between the 60-day forward rate on September 1 of $0.74 and the 30-day forward rate on September 30 of $0.72, or $0.02 x 50,000 Euros = $1,000, the correct amount of the loss.
For forward contracts entered into for speculative purposes, which of the following exchange rates, if any, will be used to measure the contracts prior to maturity?
The forward rate is used, and the spot rate is not. When a forward contract is entered into for speculative purposes, the contract is measured using the forward rates as of the dates the contract is initiated and at any subsequent measurement date(s) (e.g., balance sheet date). Changes in the forward rate create gains and losses on the forward contract, which are recognized in the period in which the forward rate changes.
Which one of the following would constitute a highly inflationary economy when determining the functional currency of a foreign entity?
For determining a functional currency, a highly inflationary (hyperinflationary) economy is one that has experienced a cumulative inflation of 100% or more over the past 3 years. Inflation of 35% per year over the past three years is a cumulative 105% and constitutes a highly inflationary economy.
Which of the following should be reported as a debit to other comprehensive income in preparing the statement of comprehensive income?
Translation gains and losses are reported in other comprehensive income; a translation loss would result in a debit (decrease) to other comprehensive income. A translation gain would result in a credit (increase) to other comprehensive income.
Which one of the following would not be translated using either the spot exchange rate as of the balance sheet date or the weighted average exchange rate for the period?
When converting financial statements from a foreign currency to a reporting currency using translation, paid-in capital accounts are translated using the historic exchange rate in effect when the account amount arose (or when the investment was made, if later). Therefore, common stock would not be translated using either the spot (or current) exchange rate as of the balance sheet date or the weighted average exchange rate for the period, but the historic exchange rate for the common stock.
Orr Corporation had a realized foreign exchange loss of $13,000 for the year ended December 31, 2008, and must also determine whether the following items will require year-end adjustment.
Orr had a $7,000 gain resulting from the translation of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 2008.
Orr had an account payable to an unrelated foreign supplier payable in the supplier’s local currency. The U.S. Dollar equivalent of the payable was $60,000 on October 31, 2008 and $64,000 on December 31, 2008. The invoice is payable on January 30, 2009.
In Orr’s 2008 consolidated income statement, what amount should be included as foreign exchange loss?
Orr Corporation had a realized foreign exchange loss of $13,000 for the year ended December 31, 2008, and must also determine whether the following items will require year-end adjustment.
Orr had a $7,000 gain resulting from the translation of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 2008.
Orr had an account payable to an unrelated foreign supplier payable in the supplier’s local currency. The U.S. Dollar equivalent of the payable was $60,000 on October 31, 2008 and $64,000 on December 31, 2008. The invoice is payable on January 30, 2009.
In Orr’s 2008 consolidated income statement, what amount should be included as foreign exchange loss?
Remeasurement, based on the temporal method of conversion, converts foreign currency amounts to reporting currency amounts using different exchange rates for different accounts based on which of the following distinctions?
The distinction used for applying different exchange rates to different accounts when using remeasurement is based on whether the account is monetary or non-monetary.
If the functional currency of a foreign subsidiary is a foreign currency other than the subsidiary’s recording currency, which one of the following will be used to convert the subsidiary’s financial statements to the final reporting currency?
Remeasurement and then translation would be used to convert to the reporting currency when a foreign currency other than the foreign subsidiary’s recording currency is the functional currency. Specifically, the financial statements would be remeasured from the recording currency to the other foreign functional currency, and the remeasured financial statements would then be translated to the reporting currency
Restorations of carrying value for long-lived assets are permitted if an asset’s fair value increases subsequent to recording an impairment loss for which of the following?
If an asset is held for disposal, previous losses can be recovered. The logic is that the recovery will be realized in the near future if the asset is in the process of being disposed. In contrast, an asset held for use CANNOT recover previous impairment because there is no certainty regarding the ultimate realization of those losses.
A company has a long-lived asset with a carrying value of $120,000, expected future cash flows of $130,000, present value of expected future cash flows of $100,000, and a market value of $105,000. What amount of impairment loss should be reported?
The recoverable cost (expected future cash flows) of $130,000 exceeds the $120,000 book value. Therefore, the asset is not impaired, and no loss is recorded. Although both the market value and present value of the future cash flows are less than book value, as long as the nominal sum of future cash flows ($130,000) exceeds book value, no impairment is recorded. The firm is expected to recover its book value.
On July 1, 2004, one of Rudd Co.’s delivery vans was destroyed in an accident. On that date, the van’s carrying value was $2,500.
On July 15, 2004, Rudd received and recorded a $700 invoice for a new engine installed in the van in May 2004, and another $500 invoice for various repairs. In August, Rudd received $3,500 under its insurance policy on the van, which it plans to use to replace the van.
What amount should Rudd report as gain (loss) on disposal of the van in its 2004 income statement?
The gain of $300 is the difference between the insurance proceeds and the sum of the carrying value of the van plus the cost of the new engine. The repair cost is expensed. It does not increase the value of the van. $300 = $3,500 - $2,500 - $700.
Under IFRS the test for asset impairment is to compare the carrying value of the asset to its recoverable amount. Which of the following is the recoverable amount according to IFRS?
The greater of fair value less cost to sell or value in use is the recoverable amount according to IFRS.
An inventory loss from a market price decline occurred in the first quarter, and the decline was not expected to reverse during the fiscal year.
However, in the third quarter, the inventory’s market price recovery exceeded the market decline that occurred in the first quarter.
For interim financial reporting, the dollar amount of net inventory should:
When interim period inventory market value declines are not considered temporary (not expected to reverse), they are recognized in the quarter in which the decline occurs. Later recoveries are recognized as gains to the extent of previous losses only. The inventory may not be marked up above cost.
