Selected Transactions 2

Question 1

Plant Company acquired controlling interest in Seed Company in a legal acquisition. Which one of the following could not be part of the entry to record the acquisition?

Answer 1

The entry that Plant will make to record its legal acquisition of Seed cannot include a debit to Goodwill. The entry Plant makes will debit (only) the Investment account and credit whatever form(s) of consideration is given (e.g., Cash, Bonds Payable, Common Stock, etc.). Goodwill cannot be debited at the time of the acquisition, though it may be recognized at the time of consolidation.

Question 2

Under which one of the following circumstances will goodwill be recognized in a business combination carried out as a legal merger?

Answer 2

Goodwill is recognized when the cost of the investment is greater than the fair value of net assets acquired (= the fair value of net assets acquired is less than the cost of the investment). In a legal merger, the goodwill would be recognized on the books of the surviving firm at the time of the business combination.

Question 3

Per IFRS, intangible assets acquired in a business combination should be initially measured at:

Answer 3

Fair value at the acquisition date.

Question 4

Under IFRS, which of the following would not be recognized as part of a business combination?

Answer 4

Contingent asset

Question 5

For financial accounting purposes, which one of the following is not a type of hedge carried out using derivatives?

Answer 5

Speculative

Hedges:
Fair value
Foreign currency
Cash flow

Question 6

Which one of the following is not a characteristic of derivative instruments?

Answer 6

All derivative instruments have the same accounting requirements.

The appropriate accounting requirements depend on the specific purpose of holding or issuing the derivative instrument.

Question 7

Under IFRS, which one of the following instruments is most likely to be treated in its entirety as a financial liability?

Answer 7

Redeemable preferred stock.

Since the preferred shares can be redeemed at the discretion of the issuing corporation, it is not treated as equity, but rather as a liability.

Question 8

Which of the following describes an “accounting mismatch” as that expression is used in IFRS?

Answer 8

Related assets and liabilities are valued using different measures.

Question 9

Which of the following is the correct accounting measurement and treatment under IFRS for assets classified as “Loans and Receivables”?

Answer 9

Amortized cost, with interest and amortization recognized in current income.

Financial assets classified as “Loans and Receivables” are measured at amortized cost, with interest and amortization related to the instrument recognized in current income. This treatment is the same as the treatment under U.S. GAAP for investments held to maturity.

Question 10

Disclosure of information about significant concentrations of credit risk is required for:

Answer 10

All financial instruments.

Question 11

Fair value disclosure of financial instruments may be made in the:

Answer 11

Fair value disclosure of financial instruments may be made in either the body of the financial statements or in the footnotes to the financial statements. If in the footnotes, one note must show fair values and carrying amounts for all financial instruments.

Question 12

When a concentration of credit risk must be disclosed and the exact amount is uncertain, which one of the following amounts must be disclosed?

Answer 12

Maximum amount at risk.

Question 13

If it is not practicable for an entity to estimate the fair value of a financial instrument, which of the following should be disclosed?

I.Information pertinent to estimating the fair value of the instrument.

II.The reasons it is not practicable to estimate fair value.

Answer 13

Both I and II

Question 14

A derivative financial instrument is best described as:

Answer 14

A contract that has its settlement value tied to an underlying notional amount.

Question 15

Which of the following is the characteristic of a perfect hedge?

Answer 15

No possibility of future gain or loss.

A perfect hedge is achieved when the hedge investment has a 100% inverse correlation to the initial investment (hedged item) so that there is no possibility of future gain or loss. A perfect hedge rarely exists.

Question 16

Assume Instco acquires an option to buy (a call option) 100 shares of Opco for $50 per share when the market price of Opco is $45 per share and that Instco paid a premium of $1.00 per share to acquire the options. Which one of the following is the underlying related to Instco’s options?

Answer 16

$50 per option

The underlying of a derivative is a specified price, rate, or other monetary variable, in this case the (strike) price of each option, $50.00.

Question 17

Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $.50 par common stock, when the market price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment?

Answer 17

$100

The intrinsic value of a call option is the difference between the exercise (strike) price and the market price.

Question 18

Which one of the following is not a characteristic of a derivative?

Answer 18

A derivative requires contractual satisfaction by delivery of the subject matter of the contract.

Specifically, the terms of a derivative require or permit the contract to be settled with cash or an asset readily convertible to cash, in lieu of physical delivery of the subject matter of the contract.

Question 19

Hedges of foreign currency risks can be the hedge of:

Answer 19

Fair value or cash flows

Question 20

Which one of the following is an item for which risk associated with the item cannot be hedged for accounting purposes?

Answer 20

Fair value of an investment accounted for using the equity method of accounting.

Question 21

Which one of the following is least likely to be a characteristic of a firm commitment?

Answer 21

It has been recorded as an asset or liability.

A firm commitment has not been recorded (yet) as an asset or liability. A firm commitment occurs when an entity has a contractual obligation or contractual right, but no transaction has been recorded (and no asset or liability recognized) because GAAP requirements for recognition have not yet been met.

Question 22

In a cash flow hedge, the item being hedged is measured using:

Answer 22

The present value of expected cash inflows or outflows.

Question 23

Which one of the following is a characteristic of a forecasted transaction?

Answer 23

Can be a hedged item in a cash flow hedge.

A forecasted transaction is a planned or expected transaction which has not yet been recognized, but which is subject to the risk of changes in related cash flow. As such, the cash flow (inflow or outflow) associated with forecasted transactions can be hedged.

Question 24

Qualified derivatives may be used to hedge the cash flow associated with a/an:

Answer 24

Derivative instruments may be used to hedge the cash flows associated with assets, liabilities, or forecasted transactions.

Question 25

Which of the following items is included in accumulated other comprehensive income or loss?

Answer 25

Prior service costs not previously recognized as a component of net periodic pension costs

Question 26

Which of the following statements concerning derivatives used as foreign currency hedges is/are correct?

I. Can be used to hedge the risk of exchange rate changes on planned transactions.

II. Can be used to hedge the risk of exchange rate changes on available-for-sale investments.

III. Can be used to hedge the risk of exchange rate changes on accounts receivable and accounts payable.

Answer 26

All 3

Question 27

Which one of the following is not a required disclosure for derivatives used as fair value hedges?

Answer 27

The amount of gain or loss arising during the period that was deferred. Gain/loss NOT deferred in FV hedge.

Necessary disclosures:
The amount of net gain or loss recognized in earnings during the period.
The location in the financial statements where any gain or loss is reported.
The net gain or loss in earnings from firm commitment hedges that no longer qualify for hedge treatment.

Question 28

Which of the following statements concerning disclosure requirements for derivatives used as cash flow hedges is/are correct?

I. The net gain or loss recognized in earnings during the period must be disclosed.

II. The amount of gain or loss deferred in other comprehensive income must be disclosed.

III. A listing of derivatives used for cash flow hedges and the amount of each must be disclosed.

Answer 28

I and II

Question 29

Which of the following statements, if either, concerning differences between U.S. GAAP and IFRS in accounting for hedges is/are correct?

I. IFRS permits hedging a forecasted business combination that is subject to foreign exchange risk; U.S. GAAP does not permit hedging in that case.

II. IFRS permits hedging part of the life of a hedged item; U.S. GAAP does not permit hedging of part of the life of a hedged item.

Answer 29

Both

Question 30

Which of the following concepts is not part of the definition of a derivative under IFRS?

Answer 30

The instrument has a notional amount.

Question 31

Per IFRS, intangible assets acquired in a business combination should be initially measured at:

Answer 31

Fair value at the acquisition date.

Question 32

For business combinations, which one of the following statements correctly reflects the determination of the accounts and amounts for the entry to record the combination?

Answer 32

Legal form determines the entry accounts; accounting method determines entry amounts.

Question 33

Combined statements may be used to present the results of operation of:

Answer 33

Combined financial statements are used (when consolidated statements are not appropriate) to show the aggregate results both for companies under common management and for companies under common control (and for unconsolidated subsidiaries).

Question 34

In the preparation of combined financial statements, would the following issues be treated in the same way as when preparing consolidated financial statements or in a different way?

Answer 34

According to ASC 810, if problems associated with minority interest, foreign operations, different fiscal periods, or income taxes occur in the preparation of combined financial statements, they should be treated in the same manner as in the preparation of consolidated financial statements.

Question 35

In measuring an impairment loss for a financial asset under U.S. GAAP and under IFRS, the carrying value of the financial asset would be compared to:

Answer 35

GAAP- FV

IFRS-Recoverable amount

Question 36

Where in its financial statements should a company disclose information about its concentration of credit risks?

Answer 36

The notes to the financial statements.

Question 37

Whether recognized or unrecognized in an entity’s financial statements, disclosure of the fair values of the entity’s financial instruments is required when:

Answer 37

It is practicable to estimate those values.

Question 38

On October 1, 20X4, Mild Co., a U.S. company, purchased machinery from Grund, a German company, with payment due on April 1, 20X5. If Mild’s 20X4 operating income included no foreign exchange transaction gain or loss, then the transaction could have:

Answer 38

Been denominated in U.S. dollars.

Question 39

On December 31, 20X8, the end of its fiscal year, Domco had a foreign currency account payable with a settlement amount greater than its previously recorded carrying amount. Which one of the following would Domco recognize for 20X8?

Answer 39

Exchange loss

Question 40

If a foreign currency exchange gain results from the effects of a change in exchange rates on an account receivable, where will the exchange gain be reported in the financial statements?

Answer 40

As an item of income from continuing operations.

Question 41

In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:

Answer 41

By definition (SFAS #52), an entity’s functional currency is the currency of the primary economic environment in which the entity operates. Normally, that is the currency of the environment in which the entity primarily generates and expends cash.

Question 42

Which one of the following is most likely a foreign currency import transaction by a U.S. company?

Answer 42

The purchase of goods by a U.S. entity would most likely reflect an import transaction and, since it is to be settled in a foreign currency, would be a foreign currency import transaction.

Question 43

Which one of the following would be a foreign currency transaction for the U.S. entity?

Answer 43

A U.S. entity purchases goods from a British entity to be settled in pounds sterling.

Question 44

Which of the following exchange rates may be used in accounting for a forward contract hedging instrument?

Answer 44

Spot and forward rate

The forward rate is used as the basis for determining the change in value of a forward contract. As the forward rate changes, so also will the carrying value of the forward contract, resulting in exchange gains and losses. The spot rate is used to determine the premium or discount on the forward contract. Specifically, the difference between the spot rate and the forward rate at the date of the forward contract is the premium (or discount) on the forward contract, which enters into the determination of income over the life of the contract.

Question 45

A hedge to offset the risk of exchange rate changes on converting the financial statements of a foreign subsidiary to the domestic (functional) currency would be the hedge of:

Answer 45

A net investment in a foreign operation.

Question 46

What kind of hedge can be used to hedge a foreign currency firm commitment?

Answer 46

Cash flow or Fair value

Question 47

Which one of the following correctly reflects a set of events that may result in a sequence of related hedges?

Answer 47

Forecasted transaction -> firm commitment -> recognized liability.

Question 48

Hedging a recognized asset is intended to offset the risk of exchange rate changes between which of the following dates?

Answer 48

Between the dates an asset is recognized and when the asset is fully satisfied.

Question 49

Which of the following actions would an entity most likely take to hedge an investment in a foreign operation?

Answer 49

Borrow from another foreign entity with the same foreign currency as the operation being hedged.

Question 50

Which of the following statements concerning the use of a forward contract to hedge a foreign currency investment held available-for-sale is/are correct?

I. The investment security must not be traded in the investor’s functional currency.

II. The forward contract used as the hedging instrument must be highly effective in hedging the investment.

Answer 50

Both

Question 51

What general kind of hedge, if any, is the hedge of an available-for-sale investment denominated in a foreign currency?

Answer 51

Fair Value

Question 52

In which of the following hedges using a forward contract will at least a portion of any currency exchange gain or loss on the hedging instrument be reported as a translation adjustment in other comprehensive income?

Answer 52

Net investment in foreign operations hedge.

The hedge of a net investment in foreign operations is a fair value hedge, but changes in the fair value of the forward contract (hedging instrument) that are equal to or less than the change in the translated value of the financial statements of the foreign operation are reported as a translation adjustment in other comprehensive income.

Question 53

A hedge to offset the risk of loss on a recognized asset or liability is which of the following types of hedge?

Answer 53

Either a cash flow hedge or a fair value hedge, at management’s discretion.

Question 54

All gains and losses in a speculative forward foreign exchange contract are calculated:

Answer 54

Gains and losses are measured based on the purchase price of the contract and its current settlement value using forward rates.

Question 55

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?

Answer 55

Forward rate only

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)

Question 56

In which one of the following independent circumstances would the local foreign currency of a country least likely be the functional currency for a manufacturing subsidiary of a U.S. company located in that country?

Answer 56

If a subsidiary makes all of its product for sale to and for use by its parent, the subsidiary is likely to be a direct and integral extension of its parent and, therefore, the parent’s currency is likely to be the functional currency, not the local foreign currency of the subsidiary.

Question 57

Which one of the following would best describe the functional currency of a foreign subsidiary of a U.S. parent?

Answer 57

The currency of the primary economic environment in which the subsidiary operates and generates most of its net cash flow.

Question 58

Operating transactions denominated in a foreign currency are converted to the functional currency using the:

Answer 58

Current exchange rate.

Question 59

Determining a foreign subsidiary’s functional currency will take into account which of the following?

I. The extent to which the subsidiary operates, and generates and expends cash in the local foreign economy in which it is located.

II. The cumulative inflation rate in the local foreign economy in which it is located.

Answer 59

Both

Question 60

Which one of the following best describes the currency in which the final consolidated financial statements are presented?

Answer 60

Reporting currency

Question 61

The specific method to be used to convert financial statements of a subsidiary expressed in a foreign currency into the domestic currency of the parent depends primarily on:

Answer 61

The functional currency of the subsidiary.

Question 62

Which one of the following could not be translated using the weighted average exchange rate for the fiscal year?

Answer 62

Cash

Revenues, expenses, gains and losses can use weighted average

Question 63

A subsidiary’s functional currency is the local currency which has not experienced significant inflation. The appropriate exchange rate for translating the depreciation on plant assets in the income statement of the foreign subsidiary is the:

Answer 63

Weighted average exchange rate for the current year.

Question 64

Which one of the following would not be translated using the spot (or current) exchange rate as of the balance sheet date?

Answer 64

Common stock- uses historic rate

Question 65

In converting financial statements from a foreign currency to a reporting currency, which one of the following accounts would not be translated using an exchange rate?

Answer 65

Retained earnings

Calculated using already converted values. Specifically, beginning retained earnings in dollars + converted net income - converted dividends declared = ending retained earnings in dollars.

Question 66

Which one of the following expenses would be remeasured using a historic exchange rate?

Answer 66

Depreciation expense.

COGS and Amortization of intanglibles also use historical rate of their related asset/liability

Question 67

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?

Answer 67

Monetary and non-monetary

Question 68

Papco, a U.S. entity, has a subsidiary, Sapco, located in a foreign country. Sapco is essentially a sales unit for Papco. After remeasuring Sapco’s financial statements from the foreign currency to Papco’s reporting currency, Papco determined that it had a loss on the remeasurement. How should Papco report the loss in its consolidated financial statements?

Answer 68

As income from continuing operations.

Question 69

Papco, a U.S. entity, has a subsidiary, Sapco, located in a foreign country. Sapco is essentially a sales unit for Papco. Which one of the following processes should Papco use to convert Sapco’s financial statements to dollar-based statements for consolidation purposes?

Answer 69

Remeasurement

Because Sapco’s operations are a direct extension of Papco, Sapco’s local foreign currency is not its functional currency. Rather, Papco’s currency, the U.S. dollar, is Sapco’s functional currency. Therefore, its financial statements expressed in the foreign currency will be converted to U.S. dollars using remeasurement.

Question 70

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?

Answer 70

Remeasurement and then translation.

Question 71

Arena Corp. leased equipment from Bolton Corp. and correctly classified the lease as a capital lease. The present value of the minimum lease payments at lease inception was $1,000,000. The executory costs to be paid by Bolton were $50,000, and the fair value of the equipment at lease inception was $900,000. What amount should Arena report as the capital lease obligation at the lease’s inception?

Answer 71

$900,000

The lessee capitalizes the lease at the lesser of the present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Executory costs are not included, they are expensed.

Question 72

Able Co. leased equipment to Baker under a noncancelable lease with a transfer of title. Will Able record depreciation expense on the leased asset and interest revenue related to the lease?

Answer 72

No depreciation expense

Yes to interest revenue

Question 73

What are the components of the lease receivable for a lessor involved in a direct-financing lease?

Answer 73

The minimum lease payments plus residual value

Question 74

In a lease that is recorded as a sales-type lease by the lessor, interest revenue

Answer 74

Should be recognized over the period of the lease using the effective interest method.

Question 75

For a capital lease, the amount recorded initially by the lessee as a liability should normally

Answer 75

Equal the present value of the minimum lease payments at the beginning of the lease.

Question 76

In the notes to South’s June 30, 2004 financial statements, what amounts of subsequent years’ lease payments should be disclosed?

Answer 76

$100,000 per annum for each of the next 5 years and $900,000 in the aggregate

The disclosure requirement is the amount of the minimum lease payment required for each of the next 5 years and the aggregate total future amount including the payments for the first 5 years.

The expense payment of $20,000 is not a predictable amount and is not disclosed as part of the annual lease payment. It is an executory cost

Question 77

Rig Co. sold its factory at a gain and simultaneously leased it back for 10 years. The factory’s remaining economic life is 20 years. The lease was reported as an operating lease.

At the time of sale, Rig should report the gain as

Answer 77

A deferred credit.

The gain or loss on a sale-leaseback is deferred and amortized over the term of the lease for both operating and capital leases.

Because this is an operating lease, the deferred gain is treated as a deferred credit. If it were a capital lease, it would be treated as an asset valuation allowance.

Question 78

Nongovernmental not-for profit organizations that wish to follow generally accepted accounting principles in the preparation of their financial statements should follow

Answer 78

FASB standards.

Question 79

Nongovernmental not-for-profit organizations are required to report their financial statements on

Answer 79

An economic resources measurement focus and full accrual accounting

Question 80

The primary standards-setting body for a public museum that receives the majority of its funding from local property taxes is the

Answer 80

Governmental Accounting Standards Board (GASB).

Question 81

Kind Nurses Assoc. is a voluntary health and welfare organization. Nurses are paid to visit homes of elderly people and are reimbursed for mileage and supplies. Which of the following items should Kind record as a support activity expense in its statement of functional expense?

Answer 81

Fundraising costs

Question 82

Which of the following financial statements would provide information about the ongoing revenues and expenses associated with a voluntary health and welfare organization?

Answer 82

Statement of Activites

Question 83

What is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization?

Answer 83

Residual interest

Question 84

The statement of financial position for a private, not-for-profit college should show separate dollar amounts for:

Answer 84

Net assets without donor restriction, net assets with donor restriction, and total net assets.

Question 85

A nongovernmental not-for-profit organization’s Statement of Activities is similar to which of the following for-profit financial statements?

Answer 85

Income statement

Question 86

When should a conditional pledge to a nongovernmental not-for-profit organization be recognized as revenue?

Answer 86

When the pledge conditions are met.

Question 87

Clay University, a not-for-profit university, earned $300,000 from bookstore revenue and spent $100,000 for faculty research in 20X1. The $100,000 for faculty research came from a $150,000 research grant received in the previous year. What is the effect of these events on net assets without a donor restriction in 20X1?

Answer 87

The $300,000 in bookstore revenue increased net assets without a donor restriction by $300,000. The $100,000 spent came from a net assets with a donor restriction. The $100,000 expense (decrease) and $100,000 amount “released” from donor restriction (increase) will appear in the net asset without a donor restriction section.

Question 88

On the statement of activities for a private, not-for-profit entity, the account net assets released from restrictions would be shown under revenues, gains, and other support as a

Answer 88

Decrease in net assets with a donor restriction and increase in net assets without a donor restriction.

Question 89

Which of the following contributions would not have to be reported as an asset on the Statement of Financial Position of a not-for-profit organization?

Answer 89

An art collector donated a famous oil painting to a local nongovernmental art museum for display in its exhibit hall.

Collections (i.e., inexhaustible fixed assets) donated to a not-for-profit organization do not need to be capitalized.

Question 90

How should a nongovernmental not-for-profit organization report depreciation expense in its Statement of Activities?

Answer 90

It should be included as a decrease in net assets without a donor restriction.

Question 91

Which of the following terms is used to indicate that a donor provided a gift with explicit instructions that the gift is to be used for a specific purpose by the not-for-profit organization but the entire amount may be spent right away?

Answer 91

Net assets with donor restriction

Question 92

Investments in equity securities that have a readily determinable market value and all debt securities of a not-for-profit organization are reported at

Answer 92

FV

Question 93

How should a nongovernmental not-for-profit organization classify gains and losses on investments purchased with net assets with donor restrictions?

Answer 93

Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in net assets without donor restriction.

Question 94

Which of the following types of healthcare organizations recognize depreciation expense?

Answer 94

All healthcare organizations are required to recognize depreciation expense.

Question 95

Valley’s community hospital normally includes proceeds from the sale of cafeteria meals in:

Answer 95

Government-affiliated hospitals normally have three broad categories of revenues:

Patient Service Revenues
Premium Fees
Other Revenues. Within the Other Revenues category is a variety of different activities including proceeds from the sale of cafeteria meals.

Question 96

A private, not-for-profit college holds debt securities in current assets and in noncurrent assets. How would these items be reported on the statement of financial position?

Answer 96

Fair Value

Question 97

Which of the following statements concerning foreign currency hedging is/are correct?

I. The item being hedged is denominated in a foreign currency.

II. The item being hedged must be recorded on the entity’s books in order to be hedged.

Answer 97

I only

Question 98

At the beginning of its fiscal year, a U.S. firm planned a transaction to purchase specialized equipment from a foreign manufacturer. The firm subsequently entered into a contract with the foreign firm. Which of the U.S. firm’s actions could be hedged?

Answer 98

Plan to Purchase
Contract to Purchase

The first would be a hedge of a forecasted transaction, and the second would be a hedge of a firm commitment.

Question 99

For accounting purposes, a hedge to offset the risk of exchange rate changes on a planned transaction would be classified as the hedge of:

Answer 99

A forecasted transaction-non-firm, but planned or expected transaction that will be denominated in a foreign currency.

Question 100

An investment in a foreign operation can be hedged if the foreign operation is a/an:

Answer 100

Equity Method Investee

Subsidiary to be Consolidated

Question 101

When functional classifications are used by private sector health care organizations, they should be based on

Answer 101

Full cost allocations