Lecture 2

Question 1

Amortization of capitalized software cost

Answer 1

equals the greater of straight-line amortization OR sales revenue from the software for the period ÷ total projected sale . Capitlized amt * above

Question 2

Patent amortization and amortization expense

Answer 2

Under U.S. GAAP, the research and development costs should be expensed. The patent will be capitalized and amortized over 10 years (the lesser of legal life or economic life

Question 3

AR Calc

Answer 3

AR (Beg)+Rev-collections-unearned fees = AR End

Question 4

Royalty

Answer 4

Royalties paid should be reported as expense in the period incurred.

Question 5

Goodwill

Answer 5

200,000 of goodwill is capitalized as a component of the purchase of the other entity. $80,000 is expensed since it is an internal development of goodwill and cannot be capitalized. Goodwill is not amortized, but it is subject to an impairment test.

Question 6

R&D

Answer 6

Under U.S. GAAP, R&D contracted out to a third party, preproduction prototypes and models costs, and, costs for searching for new products or new process alternatives are reported as R&D expense

Question 7

Goodwill impairment IFRS

Answer 7

Choice “d” is correct. Goodwill will be decreased by $13,000 because this represents the impairment loss allocated to goodwill. Under IFRS, goodwill impairment is calculated by using a one-step test at the cash generating unit level in which the carrying value of the cash generating unit is compared to the cash generating unit’s recoverable amount ($45,000 − $32,000 = $13,000). An impairment loss is then recognized to the extent that the carrying value of the cash generating unit (including goodwill) exceeds the recoverable amount of the cash generating unit impairment loss, which is $13,000. THIS AMOUNT is first allocated to goodwill. Any remaining impairment loss would be allocated on a pro rata basis to the other assets of the cash-generating unit.

Question 8

Franchise amortization

Answer 8

The $50,000 franchise cost will be amortized on a straight-line basis over 10 years ($5,000 per year). The balance in the franchise account will be $50,000 - $5,000 = $45,000. The 3% of franchise operation revenue is an operating expense, unrelated to the intangible asset balance.

Question 9

Notes recceivable

Answer 9

Interest expense calculated based on the principal balance - principal payments = final balance*Interest rate. This would be interest receivable and a current asset

Question 10

Trademark

Answer 10

The cost of a trademark is amortized over its economic life. Amortized basis is the cost. Dont get confused if they give you something else like the unamorized costs on sellers books

Question 11

Becareful with this trick, repairs occur evenly ththe year roughout mean you gotta divide by two in the end

Answer 11

Since repairs are incurred evenly during the first year (July 1 is average date) only ½ of 40% will be earned in the current year.

Question 12

Cash basis

Answer 12

Income is put in revenue inflows . investment out flow is not taken out of income neither is drawing from capital account

Question 13

R&D expense

Answer 13

Under U.S. GAAP, Research and development includes costs incurred prior to technological feasibility for developed software that is to be sold, leased, or marketed. This software is for internal use, unrelated to production and is not considered research and development. Market research is also not research and development because it is not aimed at discovery of new knowledge to develop a new product or service.

Question 14

Patent

Answer 14

Legal fees and other costs associated with registering a patent are capitalized. Research and development costs are expensed under U.S. GAAP. once the patent is established, legal costs to successfully defend the patent should be capitalized and amortized over the LESSER of the patent’s useful economic life or its legal life.

Question 15

Patent

Answer 15

IF unsuccesful defence that have to expense amount previously capitaized

Question 16

Read question carefully, remmebr to remind yourself to be careful right before the exam

Answer 16

Read question carefully, remmebr to remind yourself to be careful right before the exam

Question 17

intere

Answer 17

Int Rec beg +revenue-interest collected=Intere Rec Ending

Question 18

make note of dates

Answer 18

if rent is due at dec 15 that means half a month of reh as nt is due next mont

Question 19

rev

Answer 19

(Rec beg-unearnedbeg )+ rev-collectons-writeoffs=(rec end-unearned end)

Question 20

Interest payable

Answer 20

Principal-first payment= notes payable balanceinterest rateremaining months of the year not paid

Question 21

Commission payable

Answer 21

Commission earned +salary minimum-salary advances=sales commission payabe

Question 22

Franchise revenue

Answer 22

The franchisor should report revenue from initial franchise fees when all material conditions of the sale have been “substantially performed.” Macklin Co. will recognize the entire initial fee in the current year.

Question 23

R&D inclusions and exclusions

Answer 23

Research is the planned efforts of a company to discover new information that will help either create or improve a new product, service, process, or technique or one in current use. Items not considered research and development include: Routine periodic design changes to old products or troubleshooting in production stage, marketing research, quality control testing and reformulation of a chemical compound.

Question 24

Unlimited right of return

Answer 24

Choice “a” is correct. When there is an unlimited right of return, nothing should be recorded as sales revenue unless four conditions are satisfied. These conditions are the following:
The sales price is substantially fixed (it seems like it is in this question).
The buyer assumes all risk of loss (no information).
The buyer has paid some form of consideration (no information).
The amount of returns can be reasonably estimated (which they can in this question).

Question 25

Software developed internally

Answer 25

For software developed internally, costs incurred in the preliminary project stage are expensed under U.S. GAAP. In this question, the costs AFTER the preliminary project stage are capitalized and depreciated over the economic life of the product (3 years). Depreciation expense is thus $3,333,333. The 5-year life of the equipment on which the package will be used is a distracter.

Question 26

R&D

Answer 26

Choice “b” is correct. Development or improvement of techniques and processes is a research and development (R&D) cost.
Choice “d” is incorrect. Offshore oil “exploration” costs (assumed to be geological and geophysical expenses) that is the primary activity of a company is not an R&D cost. These costs would be expensed (as cost of services sold) by a company whose primary activity is the incurring of such geological and geophysical costs. If these “exploration” costs are not assumed to be geological and geophysical expenses, they would be the drilling of exploratory wells looking for commercial oil & gas deposits; in that event, they would be capitalized and then amortized. Either way, the costs are not an R&D cost.
Choice “c” is incorrect. Research and development performed under contract for others is not an R&D cost. The purchaser buying the research and development will be able to expense its expenditures as R&D costs.
Choice “a” is incorrect. Market research, even though the term contains the word research, is not an R&D cost.

Question 27

revenues

Answer 27

Revenues should be recognized in the period in which they were earned and realized or realizable. Expenses are recognized when an entity’s economic benefits are used up in delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations.
UVW provided advertising services but did not yet benefit from the travel or lodging.

Question 28

Amortization

Answer 28

ohan Co.’s intangible asset is a finite life intangible asset. Finite life intangibles are amortized over the period to be benefited. Abco Co.’s goodwill is not amortized, but is instead analyzed periodically (at least annually) for impairment.

Question 29

1% returns on gross

Answer 29

this means sales returns = 1% * gross sales

Net sales = Sales -sales returns

Becareful with wording

Question 30

startup

Answer 30

GAAP requires that start-up costs, including organizational costs, be expensed as incurred, without exception.

Question 31

permanently withdrawn from sale under governmental order because of a potential health hazard in the product.

Answer 31

The patent has been permanently impaired and a loss equal to its carrying amount should be recorded. The charge against income is: balance of $54,000 written off.

Question 32

Goodwill

Answer 32

Choice “b” is correct. U.S. GAAP requires that goodwill be tested for impairment at the reporting unit level. The evaluation of goodwill impairment involves two major steps.
Step 1: Identify potential impairment by comparing the fair value of each reporting unit with its carrying amount, including goodwill.
Assign assets acquired and liabilities assumed to the various reporting units. Assign goodwill to the reporting units.
Determine the fair values of the reporting units and of the assets and liabilities of those reporting units.
If the fair value of a reporting unit is less than its carrying amount, there is potential goodwill impairment. The impairment is assumed to be due to the reporting unit’s goodwill since any impairment in the other assets of the reporting unit will already have been determined and adjusted for (other impairments are evaluated before goodwill).
If the fair value of a reporting unit is more than its carrying amount, there is no goodwill impairment and Step 2 is not necessary.
Step 2: Measure the amount of goodwill impairment loss by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.
Allocate the fair value of the reporting unit to all assets and liabilities of the unit. Any fair value that cannot be assigned to specific assets and liabilities is the implied goodwill of the reporting unit.
Compare the implied fair value of the goodwill to the carrying value of the goodwill. If the implied fair value of the goodwill is less than its carrying amount, recognize a goodwill impairment loss. Once the goodwill impairment loss has been fully recognized, it cannot be reversed.

Question 33

Amortization

Answer 33

The carrying amount of both tangible and intangible assets held for use needs to be reviewed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The future cash flows expected to result from use of the asset and its eventual disposition need to be estimated. If this sum of undiscounted expected (future) cash flows is less than the carrying amount, an impairment loss or expense needs to be recognized. Tech Co anticipates that cash flow will be generated indefinitely at the current level resulting in no impairment. No expense is recognized.

Question 34

Reversal of impairment under US GAAP

Answer 34

Under U.S. GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.

Question 35

Cash to accrual

Answer 35

The $20,000 decrease in accounts receivable represents cash paid in the current period on accounts receivable from prior periods. Under the cash basis, this $20,000 would be recorded as current period income but under the accrual basis the revenue would have been recorded in the prior periods. Therefore cash basis income in the current period is $20,000 higher than accrual basis income.
The $16,000 increase in accounts payable represents expenses incurred but not yet paid. Under the cash basis, no expense would be recorded for the $16,000 increase because cash has not been paid. Under the accrual basis, expenses totaling $16,000 are recorded when the payables are recorded. As a result, cash basis income is $16,000 higher than accrual basis income.

Question 36

Franchise

Answer 36

The unearned franchise fee will not be reported at $100,000 because the 3 installments of $20,000 are interest free payments. Interest free payments must be discounted and reported at present value. Therefore, the unearned franchise fee is:
Unearned franchise fees = $40,000 cash payment + $48,000 PV of future payments = $88,000

Question 37

Research and development expense

Answer 37

Research and development expense does not include the amount paid for the equipment purchased for current and future projects because the equipment has alternate future uses. This equipment will be capitalized, but the related depreciation expense will be allocated to R&D while the equipment is being used for R&D. Equipment purchased for current projects only is expensed

Question 38

R&D

Answer 38

All relevant costs incurred before technological feasibility is established should be expensed as research and development expenditures. After technological feasibility is established, all relevant costs are capitalized until the product is released for sale. At that point all relevant costs are included in “Inventory” (normal product costs) and charged to “Cost of Goods Sold” when sold

Question 39

IFRS

Research costscpsts
Development

Answer 39

Under IFRS, all research costs must be expensed. The capitalized costs of the patent include the purchase price of the patent, the VAT taxes, and the legal costs to register the patent.Under IFRS, development costs may be capitalized if certain criteria are met. If the patent has been granted, it is generally appropriate to capitalize the related design costs.

Question 40

Impairment

Answer 40

Under U.S. GAAP, impairment analysis begins with a test for recoverability in which the net carrying value of the asset is compared to the undiscounted cash flows expected from the asset. If the net carrying value exceeds the undiscounted cash flows, then an impairment loss is recorded equal to the difference between the carrying value and fair value of the asset. In this problem, the carrying value of $500,000 is less than the undiscounted future cash flows of $515,000, so no impairment loss is recorded.

Question 41

IFRS impairment

Answer 41

xplanation
Choice “c” is correct. Under IFRS, the goodwill impairment test is a one-step test in which the carrying value of a cash-generating unit ( CGU) is compared to the CGU’s recoverable amount, which is the greater of the CGU’s fair value less costs to sell and its value in use (PV of future cash flows expected from the CGU). For this CGU, the fair value less costs to sell of $955,000 is the recoverable amount because it exceeds the value in use of $940,000. The impairment loss is:
Impairment loss = Recoverable amount - Carrying value
Impairment loss = $955,000 - $1,015,000 = $(60,000)

Question 42

Goodwill

Answer 42

Choice “b” is correct. Under U.S. GAAP, goodwill impairment exists because the $3,310,000 fair value of the reporting unit is less than its $3,450,000 carrying value of the reporting unit. After allocating $3,170,000 of the fair value of the reporting unit to its assets and liabilities other than goodwill, the $140,000 ($3,310,000 - $3,170,000) unallocated fair value is the implied fair value of the goodwill and the goodwill impairment loss is:

Question 43

revaluation

Answer 43

he entity has a revaluation loss of $20,000 ($150,000 revalued amount from Year 5 - $130,000 fair value on 12/31/Y6). The revaluation loss will be recorded in Year 6 other comprehensive income and will offset the $30,000 revaluation surplus in accumulated other comprehensive income (AOCI), for a net revaluation surplus of $10,000 reported in AOCI on December 31, Year 6.REVALUATION LOSS IS RECORDED IN oci IF THEIR IS A PREVIOUS REVALUATION GAIN. oTHERWISE IN INCOME STATEMENT

Question 44

Cash Vs Accrual

Answer 44

If prepaid expenses increased. this means per the cash basis, this had been recorded as an expense. But per the accrual basis it should not be an expense because its prepaid . If accrued payables increases. This means per cash nothing was recorded , but infact per accrual an expense should have been recorded.

Question 45

Accrued revenue

Answer 45

Accrual-based revenue will count all sales applicable to Year 2, regardless of when they are collected. Year 2 sales include the cash receipts in Year 2 ($200,000) plus the Year 3 cash receipts applicable to Year 2 ($75,000).

Question 46

amortization of intangible assets (lesser of )

Answer 46

Intangible assets should be amortized over the lesser of the useful economic life or the legal life. The useful economic life is 25 years and the legal life is 30 years, so the copyright will be amortized over 25 years.

Question 47

Goodwill

Answer 47

At a reporting unit level, when the fair value is less than the carrying amount, a loss on impairment is booked on the income statement (a debit) and a reduction in goodwill (credit) is booked to the balance sheet.

Question 48

Revaluation

Answer 48

Make sure you amortize if info if given before calculatin on of revaluation loss or gain

Question 49

IFRS R&D

Answer 49

The research costs associated with an internally developed asset will always be expensed. Assuming a company can reliably measure the costs associated with each component, under IFRS the development costs may be capitalized if all of the following criteria are met:
Technical feasibility has been established.
The company intends to complete the asset.
The company has the ability to sell or use the asset.
Sufficient resources are available to complete the development and sell / use the asset.
The asset will generate future economic benefits.

Question 50

Patent

Answer 50

Development costs of a new product idea are a direct expense. Legal fees incurred to apply for a patent and to successfully defend the patent rights are capitalized as an asset. even though money is spend developed an idea that was patented that money is expensesd

Question 51

R&D

Answer 51

Under U.S. GAAP, the only acceptable method of accounting for research and development costs is a direct charge to expense, except for materials, equipment, or facilities that have alternate future uses that are capitalized and depreciated over their useful live

Question 52

Expense applicable to multiple periods

Answer 52

The entire amount of software maintenance costs ($15,000) cannot be expensed in Year 1 because the maintenance period begins on March 1. Total expense related to the maintenance agreement and the software modifications for the year ended December 31, Year 1, will include the amortization expense of $1,000 and 10 months of expense related to the software maintenance contract, which is $12,500 and not the entire expense of $15,000.

Question 53

READ the questions very carefully t

Answer 53

the day before exam, go over your game plan

Question 54

R&D

Answer 54

Depreciation on equipment used in various R&D projects would be included as a research and development expenditur.Equipment used in research and development activities that has alternative future uses is capitalized and depreciated over its useful life.

Question 55

Engineering followup

Answer 55

Engineering follow-up in an early phase of commercial production is not considered a research and development cost. When the product is in commercial production, it is out of the R&D phase.

Question 56

R&D

Answer 56

Under U.S. GAAP, unless the tangible assets associated with the research and development (R&D) expenses have alternative future uses or the work is undertaken on behalf of others under a contractual agreement, the costs associated with the R&D expenses are direct charged as an expense on the income statement.

Question 57

Software

Answer 57

Costs associated with computer software that is developed to be sold, leased, or licensed may be capitalized once technological feasibility has been established. The costs will continue to be capitalized until the date the software is released for sale. In this question, the product was determined to be technologically feasible on June 30 and was released for sale on October 1. Any costs incurred between July 1 and September 30 (in this case, $750,000) are capitalized. Any costs incurred before June 30 ($1,300,000) or after October 1 ($275,000) are expensed.

Question 58

IFRS goodwill

Answer 58

Goodwill generated internally cannot be capitalized; it will be treated as an expense in the period incurred.

Question 59

Expense calc

Answer 59

two components to expense : Amortization expense and impairment . Fair less costs to sell is used

Question 60

Completed contract

Answer 60

Under the completed contract method, revenue is recognized when the contract is complete, however expected losses are recognized immediately in their entirety. Project 2 is estimated to have a $20,000 loss, [$300,000 − $280,000 − $40,000 = $20,000 loss]. ARB 45 para. 11

Question 61

Percentage of completion

Answer 61

CITD/Total cost * Gross profit-profit previously recognized

Gross profit = Contract price-total costs

Question 62

Total cost

Answer 62

total cost = cost incurred to date +remaining costs

Question 63

Completed contract

Answer 63

When a company uses the U.S. GAAP “completed contract” method to account for a long-term construction contract, revenue is recognized when the job is completed, not when progress billings are collected or when they exceed recorded costs.

Question 64

Final year Percentage of completion

Answer 64

Under the percentage-of-completion method, annual gross profit equals [total cost incurred/total expected cost] × [total expected gross profit] less total gross profit previously recognized. In the final year of the contract, actual rather than expected amounts are used.

Question 65

Completed contract

Answer 65

Contract sales price-actual total costs=gorss profit

Question 66

Current liability in percentage of completion

Answer 66

The excess of accumulated costs(CITD) ($2,000,000) plus estimated earnings ($250,000) over related billings ($1,800,000) will represent a current asset. A liability only exists when progress billings exceed costs and estimated earnings. Estimated earnings under the completed contract method are calculated as follows:
Calculate estimate profit = $9,000,000 − ($2,000,000 + $6,000,000) = $1,000,000
Percent complete = $2,000,000 / ($2,000,000 + $6,000,000) = 25%
Calculate gross profit earned to date = $1,000,000 × 25% = $250,000

Question 67

percentage of completion for two years

Answer 67

make sure you calculate correct cost incurred to date

the estimated total grss profit will be different each year

Question 68

asset/liability calc for two years

Answer 68

If the sum of cumulative costs incurred plus cumulative gross profit recognized exceeds cumulative billings, the excess is reported as a current asset. If cumulative billings exceeds the sum of cumulative costs incurred plus cumulative gross profit recognized, the difference is reported as a current liability. If the two amounts are equal, no asset or liability is recognized. Note that everything is cumulative.
Year End 1 Year End 2
Cumulative costs incurred $ 1,200,000 $ 2,200,000
Add: Cumulative gross profit recognized 800,000 1,800,000
Less: Cumulative billings (2,500,000) (4,000,000)
$ (500,000) $ 0

Question 69

Installment sales

Answer 69

Earned Gross profit = GP% * Collections
Deferred Gross profit=GP%*Installment receivable

Sales-collections-writeoff=installment receivable

Used when no reasonable basis for collectibilit
Somtimes the percentage will give you a close answer

Exclude interest from deferred gp calc

Question 70

Cost recovery

Answer 70

The cost recovery method is appropriate when there is no reasonable basis for estimating collectibility.

Using the cost recovery method, all gross profit on the sale is deferred until the cost of the item sold is collected. In the first year, $18,360 is collected, $15,860 of which is principal reduction ($50,000 x 5% interest = $2,500; $18,360 − $2,500 = $15,860). Since $15,860 is less than the cost of $20,000, no gross profit is recognized in the first year.

notice interest is excluded here too

Question 71

cost recovery and installment sales

Answer 71

Under the cost recovery method, revenue is recognized after cash equaling the cost of the item is collected. Under the installment method, gross profit is recognized as a gross profit percentage times the cash collected from the sale.

Question 72

cost recovery

Answer 72

Choice “b” is correct. Under the cost recovery method, gross profits are not recognized until cash collections exceed the amount of costs incurred. Cost of goods sold totals $2,500. As of June, only $1,000 was collected in cash; because cash collected falls short of cost of goods sold, no gross profits are recognized as of June 30. As of December, $3,400 total was received in cash. $3,400 – $2,500 = $900 in gross profit, which can be recognized as of December 31.

Cash collection-cost=gross profit

Question 73

Non-Monetary

Answer 73

When a nonmonetary exchange lacks commercial substance, the general rule is that no gain or loss is recognized and the book value approach is used. However, in this question, cash/boot is received and a proportional part of the gain is recognized (the $4,000 cash is 20% of the total consideration of $20,000, and the realized gain is $8,000, so $1,600 of the realized gain is recognized and $6,400 of the realized gain is not recognized).

Question 74

Non-Monetary

Answer 74

In any exchange, all realized losses are fully recognized in accordance with the principle of conservatism. Of course, theoretically, such losses should have already been recognized as part of the impairment process. only if the cash amount is less 25% of total consideration(cashplusfairvalueofassetgivenup). If greater than 25% than recognize the full gain

% = total boot/total consideration received ( boot plus fair value of asset receved

Question 75

non-monetry

Answer 75

However, because this exchange lacks commercial substance, Campbell will only recognize a gain if it received boot/cash. If boot/cash is given, or there is no boot/cash in the transaction, then no gain is recognized. Because Campbell pays cash of $700, not gain is recognized.

Question 76

non-monetary

Answer 76

Choice “c” is correct. $0. Under U.S. GAAP, this appears to be a transaction (1) that lacks commercial substance and (2) appears to be an exchange that was made merely to facilitate sales to customers (inventory was traded).
In order to have commercial substance, either (1) the risk, timing, and amount of the expected future cash flows from the asset transferred differs significantly from the risk, timing, and amount of the expected future cash flows from the asset received, or (2) the entity-specific value (based on the company’s expectations of value of the asset and not that of the marketplace) of the asset received differs significantly (in relation to the fair values of the assets exchanged) from the asset transferred.
In this case, inventory was traded for inventory, and only $1,000 of cash was paid in the transaction. The future cash flows configuration does not appear to be affected (as both assets are inventory and the $1,000 cash is not significant), nor would it appear that the entity-specific value of the assets received compared to the assets transferred differs much (and is certainly not significant in relation to the fair value of the assets exchanged).
Further (and perhaps even more compelling for the exchange to be treated as lacking commercial substance), the exchange is inventory for inventory, and inventory is a product that is ordinarily held to be sold to customers. One of the three exceptions (the second one) to the general rule of valuing a transaction at fair value is if the exchange was made solely to facilitate a sale to a third party that is not a party to the exchange (such as a customer). Remember that lack of commercial substance was the third exception.
It appears that this exchange “lacks commercial substance” or falls under the “exchange that facilitates the sale” rules and, since boot was paid, there would be no gain recognized for accounting purposes. Since the fair value of the inventory relinquished exceeded the carrying amount of that inventory, there would be no loss either.

Question 77

Non-monetary

Answer 77

Under IFRS, exchanges of dissimilar assets are regarded as exchanges that generate revenue and all gains and losses are recognized. In this problem, the entity gave up cash and an asset in exchange for equipment with a fair value equal to the carrying value of the asset given up. The following JE can be used to illustrate this problem, assuming that the fair value of the new equipment is $10,000 and that $1,500 in cash was paid

Question 78

non-monetary with commercial substance

Answer 78

For nonmonetary exchanges that contain commercial substance, meaning that the amount and timing of future cash flows changes as a result of this exchange, gains and losses are recognized immediately.

Question 79

General notes on non-monetaru

Answer 79

always make a journal entry for the asset given up and cash involved. than calculate the value of the asset received as a plug.

Remember the gain is on the asset being given up, the difference between book value and fair value of asset given up

Note when boot is paid . The % = boot/considerationed transferred ( boot plus fair value of asset transferred)

Question 80

non monetary commercial substance vs no commercial sustance

Answer 80

When a transaction involving a nonmonetary exchange lacks commercial substance, the reported amount of the nonmonetary asset surrendered is used to record the newly acquired asset. If the transaction has commercial substance, the fair value approach is use.

The fair value of the assets surrendered or received is used for reporting when the exchange has commercial substance.

Question 81

functional currency

Answer 81

The foreign subsidiary’s functional currency is the currency of the environment in which the subsidiary primarily generates and expends cash.
Rule: The functional currency of a company may be:
A foreign entity’s local currency, which is typically the one in which the entity keeps its books;
The currency in which the financial statements will be presented, which is the currency of the parent company; or
A foreign currency other than the one in which the foreign entity maintains its books.
Rule: The functional currency of an entity generally depends upon the environment in which the entity generates and expends cash (unless there is a requirement by law to use another currency), which may be any of the above three. However, the functional currency cannot be the local currency if the foreign entity operates in a highly inflationary environment (i.e., approximately 100% over three years).

Question 82

Foreign exchange gains

Answer 82

Gains and losses resulting from foreign exchange transactions that are an “extension” of the parent’s domestic operations are included as a component of “income from continuing operations” in the period in which they occur. They are not extraordinary items.

Question 83

Foreign exchange

Answer 83

Rule: “Translation adjustments” are not included in determining net income for the period but are disclosed and accumulated as a component of other comprehensive income in consolidated equity until disposed of.
However, gains or losses from remeasuring the foreign subsidiary’s financial statements from the local currency to the functional currency should be included in “income from continuing operations” of the parent company.
Note: Assume the question had asked the following instead:
“What amount should Park report as a foreign exchange gain in its statement of income and comprehensive income (or statement of comprehensive income, by itself)?”
In that case, the answer would have been $15,700.

Question 84

foreign exchange

Answer 84

Cumulative foreign exchange translation loss should be reported as a component of accumulated other comprehensive income. A cumulative foreign exchange translation loss would be a debit to accumulated other comprehensive income; therefore, contra to shareholders’ equity.
Rule: “Translation” adjustments are not included in determining net income for the period but are disclosed and accumulated as a component of other comprehensive income in consolidated equity until sale or until liquidation of the investment takes place.

Question 85

remeasurement

Answer 85

In these circumstances, the remeasurement method is used and the historical rates should be used only for those balance sheet accounts carried at “cost” (most non-monetary items). Otherwise follow the general rule and use the “current” rate.
Choices “a”, “c”, and “d” are incorrect. Bonds payable and accrued liabilities are “monetary” items. Marketable equity securities are non-monetary items, but are reported at fair value. Because they are reported at fair value, they should be remeasured using the current exchange rate.

Question 86

tricks

Answer 86

Think the transaction all the way through. For example if transaction took place in year one but paid in year two e the gain loss woudl be year one year end exchange rate compared to year two

Question 87

FOREIGN CURRENCY

Answer 87

A subsidiary’s financial statements are usually maintained in its local currency. If the subsidiary’s functional currency is its local currency, the subsidiary’s financial statements are simply “translated” to the reporting currency. The resulting adjustment is reported as other comprehensive income. If the subsidiary’s functional currency is not the same as its local currency (the functional currency may be the reporting currency or another currency), the subsidiary’s financial statements must be “remeasured” into the functional currency. The resulting gain or loss on remeasurement is reported in the consolidated income statement. IF FUNCTIONAL CURRENCY =LOCAL CURRENCY THAN TRANSLATION. IF FUNCTIONAL CURRENCY IS NOT THE LOCAL CURRENCY i.e REPORTING CURRENCY THAN REMEASURMENT IS REQUIRED

Question 88

The subsidiary’s functional currency is the currency of the country in which it is located. What total amount should be included in Rowan’s December 31 consolidated balance sheet for the above accounts?

Answer 88

The rate to be used to translate all assets and all liabilities from the functional currency to the reporting currency (the U.S. dollar) is the current rate, that is, the exchange rate in effect at the balance sheet date.nder the translation (current) method, all income statement items, including salaries expense and sales to external customers, are translated using the weighted-average exchange rate for the current year.

Question 89

translation method

Answer 89

When the translation method is used, all assets and liabilities are translated to the reporting currency using the current (year-end) exchange rate, while common stock and additional paid-in capital are translated using historical exchange rates.

Question 90

foreign currency

Answer 90

uionsse common sense for calculat