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1. The transaction gain or loss to be recognized over the term of a forward exchange contract entered into to speculate in a foreign currency within

1. The transaction gain or loss to be recognized over the term of a forward exchange contract entered into to speculate in a foreign currency within a fiscal year is measured by the difference between the:
Answer

spot rate at inception of the contract and forward rate at inception of the contract.

spot rate at inception of the contract and spot rate at settlement of the contract.

forward rate at inception of the contract and spot rate at settlement of the contract.

forward rate at inception of the contract and forward rate at settlement of the contract.

2. On January 1, Year One, Big Company acquires 100 percent of the outstanding shares of Small Company by issuing its own stock worth $12 million. The shares of Small had been worth only $11 million in the period leading up to the acquisition but Big had to pay a premium in order to obtain all of the stock. Big paid an additional $200,000 in cash to attorneys as direct consolidation costs and another $150,000 in stock issuance costs. According to US GAAP, what should be the basis for reporting the assets and liabilities of Small within consolidated financial statements created on the date of acquisition?
Answer

$11,350,000

$12,000,000

$12,200,000

$12,350,000



4. Bowman Company reported translation adjustments in its stockholders' equity section of $2,000,000. These adjustments were added to the other items disclosed in Bowman's stockholders' equity. Bowman's translation adjustments resulted from its 80% interest in the capital stock of a Danish subsidiary. Based upon the facts presented, which of the following statements is true?
Answer

The credits in dollars on the Danish trial balance exceeded the debits in dollars by $2,000,000.

The debits in dollars on the Danish trial balance exceeded the credits in dollars by $2,000,000.

The debits in dollars on the Danish trial balance exceeded the credits in dollars by $2,500,000.

The credits in dollars on the Danish trial balance exceeded the debits in dollars by $2,500,000.


6. On November 1, Year One, the Haynie Company signs a contract to receive one million Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000). This contract is a derivative because its value is derived from the future value of the Japanese yen in relation to the US dollar. On December 31, Year One, the Haynie Company is producing financial statements. How is this forward exchange contract reported?

Answer

It is shown as an asset or a liability at its fair value.

It is shown only as an asset at its fair value.

It is shown only as a liability at its fair value.

It is only disclosed in the notes to the financial statements because it is a future transaction.


8. On December 31, Year One, Giant Company acquired 100 percent of the outstanding stock of Tiny Company. On that date, Tiny was reporting inventory with a cost of $30,000 (but a fair value of $45,000) and sales for the year of $400,000. Upon acquisition, Giant produces consolidated financial statements to combine the two companies. Which of the following statements is correct about these consolidated statements?
Answer

Tiny’s inventory is included at $30,000 but none of its revenues are included.

Tiny’s inventory is included at $30,000 as well as its revenue of $400,000.

Tiny’s inventory is included at $45,000 but none of its revenues are included.

Tiny’s inventory is included at $45,000 as well as its revenue of $400,000.



9. A foreign currency transaction gain will be recognized by a U.S. company when it has a receivable from a foreign company
Answer

denominated in dollars and the foreign currency weakens relative to the dollar before payment is received

denominated in foreign currency and the foreign currency strengthens relative to the dollar before payment is received.

denominated in dollars and the foreign currency strengthens relative to the dollar before payment is received.

denominated in foreign currency and the foreign currency weakens relative to the dollar before payment is received.

10. On November 1, Year One, the Abernethy Company signs a forward exchange contract to receive one million Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000). On that same day, Abernethy agrees to acquire inventory for one million yen when it is delivered on February 1, Year Two. The forward exchange receivable is designated as a hedge for this commitment. On November 1, the spot (current) exchange rate is $1 for 94 Japanese yen but that rate change, by December 31, to $1 for 96 Japanese yen. As of December 31, Year One, the forward exchange rate to be paid one month in the future is $1 for 103 Japanese yen. What is the overall impact to be recognized on net income at the end of Year One?
Answer

0

$71 loss

$221 gain

$292 loss










12. Near the end of the Year One, a company buys two derivatives that will come due in the next year. One of these derivatives was properly designed as a cash flow hedge. The other derivative was properly designed as a fair value hedge. By the end of the year, the fair value of both of these derivatives had increased. Where will these gains be reported?

Answer

In net income for both hedges

In accumulated other comprehensive income for both hedges

In net income for the fair value hedge and in accumulated other comprehensive income for the cash flow hedge.

In net income for the cash flow hedge and in accumulated other comprehensive income for the fair value hedge.

13. Big Company buys 80 percent of the outstanding shares of Little Company on January 1, Year One. Big paid an amount that was in excess of the underlying fair value of the subsidiary's assets and liabilities so that this was not viewed as a bargain purchase. On that date, Little held equipment worth $300,000 but with a net book value of $200,000. This equipment had a ten-year remaining life with no expected residual value. One year later, when Little still held this equipment as well as other, newly-bought pieces, Big reported a net account of $900,000 and Little reported a net account of $500,000. Assume no asset impairments have taken place. What is the consolidated balance to be reported for equipment?

Answer

$1,472,000

$1,480,000

$1,490,000

$1,500,000








20. Provide the best answer to the following question: Which of the following is a true statement?
Answer

Both the direct and indirect methods will yield the same amount on the cash flow statement

Net income is the starting point to calculate cash from operations using the direct method

The calculation of financing and investing activities are performed the same under the direct and indirect methods

Both A and C are true statements

21. On December 1, Year One, a company acquires two three-month financial instruments that qualify as derivatives. Financial instrument A was bought to serve as a fair value hedge. Financial instrument B was bought to serve as a cash flow hedge. By the end of Year One, both of these financial instruments have increased in value by $1,000. How should these gains in value be reported by the company on the Year One financial statements?
Answer

Both gains are reported within net income.

Both gains are reported within accumulated other comprehensive income.

The gain on the fair value hedge is reported within net income whereas the gain on the cash flow hedge is reported within accumulated other comprehensive income.

The gain on the fair value hedge is reported within accumulated other comprehensive income whereas the gain on the cash flow hedge is reported within net income.


26. Which of the following is the best description of a financial instrument?

Answer

Any monetary contract denominated in a foreign currency.

Cash, an investment in equities, and any contract to receive or pay cash.

Any form of a companys own capital stock.

Any transaction with a bank or other financial institution.


27. One company purchases all of the outstanding shares of another company. The acquiring company incurs the following costs to make this purchase: $300,000 to outside accountants and attorneys as direct consolidation costs, $200,000 as a reasonable allocation of internal costs attributed to this purchase, $120,000 in stock issuance costs in connection with shares issued by the acquiring company to the owners of the acquired company. What amount of these costs should be expensed immediately as incurred?
Answer

Zero

$200,000

$500,000

$620,000


29. Tall Company buys all of the outstanding stock of Small Company on November 1, Year One for $500,000 and is now preparing consolidated financial statements at the end of Year One. Small earned revenues of $10,000 per month during Year One along with expenses of $8,000 per month. On November 1, Year One, Small had only one asset—a piece of land with a cost of $300,000 and a fair value of $450,000—and no liabilities. The land continues to appreciate in value and is worth $470,000 at the end of Year One. Which of the following statements is true about the consolidated financial statements at the end of Year One?
Answer

Consolidated net income will include $4,000 earned by Small.

Goodwill at the end of Year One is reported as $30,000.

The land owned by Small is reported at the end of Year One at $470,000.

On consolidated financial statements, a $150,000 gain is reported on the land that was owned by Small.

30. Big Company buys 80 percent of the outstanding shares of Little Company on January 1, Year One. Big paid an amount that was in excess of the underlying fair value of the subsidiary's assets and liabilities so that this was not viewed as a bargain purchase. On that date, Little had land worth $500,000 but with a book value of $300,000. Several years later, when Little still held this land as well as other parcels of land, Big reported a Land account of $1.1 million and Little reported a Land account of $700,000. Assume no asset impairments have taken place. What is the consolidated balance to be reported for land?
Answer

$1.66 million

$1.82 million

$1.96 million

$2.00 million






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1. Forward rate at inception of the contract and spot rate at settlement of the contract
2. $ 12,200,000
3. The debits in dollars on the Danish trail balance exceeded the credits in dollars by $...

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