1. 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?
a. Both gains are reported within net income.
b. Both gains are reported within accumulated other comprehensive income.
c. 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.
d. 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.
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?
a. $11,350,000
b. $12,000,000
c. $12,200,000
d. $12,350,000
3. 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?
a. $1,472,000
b. $1,480,000
c. $1,490,000
c. $1,500,000
4. 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?
a. $1.66 million
b. $1.82 million
c. $1.96 million
d. $2.00 million
5. 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?
a. Consolidated net income will include $4,000 earned by Small
b. Goodwill at the end of Year One is reported as $30,000
c. The land owned by Small is reported at the end of Year One at $470,000
d. On consolidated financial statements, a $150,000 gain is reported on the land that was owned by Small.
6. 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?
a. $0
b. $200,000
c. $500,000
d. $620,000
7. 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?
a. Tiny's inventory is included at $30,000 but none of its revenues are included
b. Tiny's inventory is included at $30,000 as well as its revenue of $400,000
c. Tiny's inventory is included at $45,000 but none of its revenues are included
d. Tiny's inventory is included at $45,000 as well as its revenue of $400,000
8. Provide the best answer to the following question: Which of the following is a true statement?
a. Both the direct and indirect methods will yield the same amount on the cash flow statement
b. Net income is the starting point to calculate cash from operations using the direct method
c. The calculation of financing and investing activities are performed the same under the direct and indirect methods.
d. Both A and C are true statements
9. Which of the following is the best description of a financial instrument?
a. Any monetary contract denominated in a foreign currency
b. Cash, an investment in equities and any contract to receive or pay cash
c. Any form of a company's own capital stock
d. Any transaction with a bank or other financial institution
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?
a. $0
b. $71 loss
c. $221 gain
d. $292 loss