The following are multiple choice questions. Select the correct answer from the options provided and give the answer in the answer sheet provided.
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:
Options:
A. Spot rate at inception of the contract and forward rate at inception of the contract
B. Spot rate at inception of the contract and spot rate at settlement of the contract
C. Forward rate at inception of the contract and spot rate at settlement of the contract
D. Forward rate at inception of the contract and forward rate at settlement of the contract
2. Hugo, Inc., located in New York, with operations in Berlin, Germany, sells its products in the German market. The company receives payment in euros. Zelien, Inc., located in Berlin, sells its products in the U.S. market and receives payment in dollars. The companies do not sell to each other. If Hugo and Zelien enter into a currency swap:
Options:
A. A currency exchange broker will act as a financial intermediary and convert the euros and dollar contracts at an agreed equilibrium conversion rate, thereby eliminating exchange risk for both companies.
B. Hugo agrees to pay Zelien for all exchange rate losses on Zelien's dollar denominated contracts. In turn, Zelien agrees to pay Hugo for all exchange rate losses on Hugo euros denominated transactions.
C. Hugo agrees to assign cash flows from its euros denominated contracts to Zelien. In turn, Zelien agrees to assign cash flows from its dollar denominated contracts to Hugo.
D. Hugo and Zelien agree to sell their euros and dollar denominated contracts to an exchange broker. The broker will sell the contracts in the open market. At maturity, Hugo and Zelien will share responsibility for any losses the broker incurs.
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October 2, 2008
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1 euro = $1.05
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December 31, 2008
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1 euro = $1.10
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January 15, 2009
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1 euro = $1.08
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3. Waco Company, a U.S. corporation, acquired machinery for use in its operations from Lyon Manufacturing on October 2, 2008. The purchase price was 60,000 euros, payable in euros on January 15, 2009. Spot rates for euros on various dates are as follows:
Waco Company estimates the machinery to have a useful life of 10 years and have no salvage value. Waco Company uses straight-line depreciation.
For 2008, what is Waco's cost for the machinery and its depreciation expense?
Options:
A. Cost = $66,000 and depreciation expense = $6,600
B. Cost = $63,000 and depreciation expense = $1,575
C. Cost = $63,000 and depreciation expense = $6,300
D. Cost = $66,000 and depreciation expense = $1,650
4. A Delaware corporation acquired a machine from a company located in Japan on November 1, 2008. The cost of the machine was 5,000,000 yen, which were payable on January 30, 2009, the settlement date for the transaction. On the transaction date, the spot rate for yen was 1 yen = $.0075. In order to manage its exposed liability position, the Delaware Company entered into a forward exchange contract on November 1, 2008. The contract stipulated the Delaware Company could purchase 5,000,000 yen on January 30, 2009, at the forward exchange rate of 1 yen = $.0077. Spot and forward exchange rates on December 31, 2008, and January 31, 2009, were as follows:
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Spot Rate ($/1 yen)
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Forward exchange Rate ($/1 yen)
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December 31, 2008
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$.0076
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$.0079 (30-day)
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January 31, 2009
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$.0078
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For the year ended December 31, 2008, what is the amount of the foreign currency transaction gain or loss associated with the forward exchange contract?
Options:
A. $500
B. $(500)
C. $(1,000)
D. $1,000
5. Waco Company, a U.S. corporation, acquired machinery for use in its operations from Lyon Manufacturing on October 2, 2008. The purchase price was 60,000 euros, payable in euros on January 15, 2009. Spot rates for euros on various dates are as follows:
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October 2, 2008
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1 euro = $1.05
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December 31, 2008
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1 euro = $1.10
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January 15, 2009
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1 euro = $1.08
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Waco Company estimates the machinery to have a useful life of 10 years and have no salvage value. Waco Company uses straight-line depreciation.
What is Waco's foreign currency transaction gain or loss for 2009?
Options:
A. $1,200 gain
B. $1,200 loss
C. $1,800 loss
D. $1,800 gain
6. On November 1, 2008, a U.S. company sold $198,000 of merchandise to a Norwegian company. The receivable was denominated in krone. On the transaction date, the spot rate for krone was 1 krone = $0.15. To protect itself against a weakening of the krone, the Chicago firm entered into a forward exchange contract to deliver 1,320,000 krone on January 30, 2009, the settlement date for the sale. The 90-day forward exchange rate specified in the contract was 1 krone = $0.149. Exchange rates on December 31, 2008, and January 30, 2009, were as follows:
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Spot Rate
($/1 krone)
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Forward Exchange Rate ($/1 krone)
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December 31, 2008
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$0.145
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$0.143 (30-day)
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January 30, 2009
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$0.148
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For the year ended December 31, 2009, what is the amount of the foreign currency transaction gain (loss) associated with the receivable denominated in krone?
Options:
A. $(3,960)
B. $3,960
C. $2,640
D. $(2,640)
7. Fermo, a U.S. company purchased 100 percent of the capital stock of Paris Company on January 1, 2008, when the spot rate was 1 euro = $1.05. On June 30, 2008, Paris acquired a machine at a cost of 400,000 euros when the spot rate was 1 euro = $1.15. The machine has a five-year useful life and no salvage value. Paris uses the straight-line depreciation method. The spot rate at December 31, 2008, was 1 euro = $1.17, and the weighted average rate for the year was 1 euro = $1.165. How much would the depreciation expense be for 2008 if the functional currency was the U.S. dollar?
Options:
A. $42,000
B. $46,000
C. $46,600
D. $46,800
8. Simon Company has two foreign subsidiaries. One is located in France, the other in England. Simon has determined the U.S. dollar is the functional currency for the French subsidiary, while the British pound is the functional currency for the English subsidiary. Both subsidiaries maintain their books and records in their respective local currencies. What methods will Simon use to convert each of the subsidiary's financial statements into U.S. dollars?
Options:
A. Translation for both of the subsidiaries' financial statements.
B. Remeasurement for both of the subsidiaries' financial statements.
C. Remeasurement for the English subsidiary's financial statements and translation for the French subsidiary's financial statements.
D. Translation for the English subsidiary's financial statements and remeasurement for the French subsidiary's financial statements.
9. The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both current and historical exchange rates. Assuming that the local currency of the foreign subsidiary is the functional currency, what total amount should appear for these assets on the U.S. Company's consolidated balance sheet?
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Asset
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Historical Rates
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Current Rate
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Prepaid Insurance
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$60,000
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$48,000
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Buildings (Net)
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$480,000
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$240,000
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Inventories at Cost
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$300,000
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$288,000
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Investments at Cost
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$120,000
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$60,000
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Total
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$960,000
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$636,000
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Options:
A. $636,000
B. $648,000
C. $708,000
D. $960,000
10. The gain or loss on the effective portion of a U.S. parent company's hedge of a net investment in a foreign entity should be treated as:
Options:
A. An adjustment to the retained earnings account in the stockholders' equity section of its balance sheet
B. Other comprehensive income
C. A translation gain or loss in the computation of net income for the reporting period
D. An adjustment to a valuation account in the asset section of its balance sheet
11. When inflation exceeding 100 percent over a three-year period occurs in a country in which a foreign subsidiary is located, which currency should the U.S. parent use as the functional currency?
Options:
A. Use both the local currency of the foreign entity and U.S. dollar as the functional currency.
B. Use the U.S. dollar as the functional currency.
C. Use the local currency of the foreign entity as the functional currency.
D. None of the currencies will be used as the functional currency.
12. On January 2, 2008, Johnson Company acquired a 100 percent interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:
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Foreign Currency Units (FCU)
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Cash
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40,000
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Receivables (net)
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150,000
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Inventories (FIFO)
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500,000
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Plant & Equipment (net)
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1,500,000
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Total
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$2,190,000
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Accounts Payable
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200,000
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Capital Stock
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600.000
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Retained Earnings
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1,390,000
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Total
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$2,190,000
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Perth's income statement for 2008 is as follows:
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Foreign Currency Units (FCU)
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Revenues from Sales
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1,010,000
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Cost of Goods Sold
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(590,000)
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Gross Margin
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420,000
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Operating Expenses (exclusive of depreciation)
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(120,000)
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Depreciation Expense
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(200,000)
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Income Taxes
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40.000
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Net Income
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$60,000
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The balance sheet of Perth at December 31, 2008, is as follows:
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Foreign Currency Units (FCU)
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Cash
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180,000
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Receivables (net)
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210,000
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Inventories (FIFO)
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520,000
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Plant & Equipment (net)
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1,300,000
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Total
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$2,210,000
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Accounts Payable
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180,000
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Capital Stock
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600.000
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Retained Earnings
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1,430,000
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Total
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$2,210,000
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Perth declared and paid a dividend of 20,000 FCU on October 1, 2008. Spot rates at various dates for 2008 follow:
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January 2
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1 FCU = $1.50
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October 1
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1 FCU = $1.60
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December 31
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1 FCU = $1.70
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Weighted Average
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1 FCU = $1.55
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13. Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 2008. Assuming the U.S. dollar is the functional currency, what is the amount of patent amortization for 2008 that results from Johnson's acquisition of Perth's stock on January 2, 2008?
Options:
A. $11,884
B. $11,770
C. $12,550
D. $11,500
14. Accounting standards of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) may be characterized as being based on:
Options:
A. Both FASB and IASB accounting standards are based on principles.
B. FASB accounting standards are based on rules and IASB accounting standards are based on principles.
C. FASB accounting standards are based on principles and IASB accounting standards are based on rules.
D. Both FASB and IASB accounting standards are based on rules.
15. Which of the following types of securities or securities transactions are not exempt from the need to be registered under the Securities Act of 1933?
I. Intrastate issues offered and sold in only one state.
II. Securities issued by certain nonprofit organizations.
Options:
A. I
B. II
C. Both I and II
D. Neither I nor II
16. Which of the laws below requires the updating of financial information for all companies whose stocks are traded on a United States stock exchange?
I. Securities Exchange Act of 1934.
II. Securities Act of 1933.
Options:
A. I
B. II
C. Both I and II
D. Neither I nor II
17. When a registration statement is given a customary review and deficiencies are found that must be corrected before the securities may be offered for sale, which of the following is issued by the SEC?
Options:
A. A deficiency notice
B. A "red herring" letter
C. A comfort letter
D. A comment letter
18. Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements, states that revenues recognized by a new economy Internet firm may include:
Options:
A. Only gross revenues from sales of its own goods or services.
B. Gross revenues from sales of its own goods and services, plus gross revenues from sales of goods and services of other companies made on a commission basis.
C. Gross revenues from sales of its own goods and services, plus commissions on sales of goods and services of other companies.
D. Only net revenues from sales of its own goods and services.
19. What does an underwriter typically require from an accountant which indicates that the company has fulfilled all the accounting requirements in the registration process?
Options:
A. A comment letter
B. An audit opinion
C. A "red herring" letter
D. A comfort letter
20. Which of the following acts created an entity which insures investors from possible losses if an investment house enters bankruptcy?
Options:
A. Federal Deposit Insurance Protection Act
B. Securities Investor Protection Act
C. Investment Advisers Act
D. Federal Bankruptcy Acts
21. Which of the following classes of information are included in the Form 10-K?
I. Management's discussion and analysis.
II. Audited financial statements.
III. Auditor's opinion on the company's internal control system.
Options:
A. I and II
B. I and III
C. II and III
D. I, II, and III