Sunday 21/06/2009 / / College of commerce
50 marks / Accounting department
Name: …………………………………………………… Id.:………………………………..
Question 1 : Choose the best answer :( 20 marks)
1. / A US firm has a Belgian subsidiary that uses the British pound as its functional currency. The US dollar from Belgian unit’s point of view will bea. / a foreign currency.
b. / its local currency
c. / its current rate method currency
d. / its reporting currency
2. / Selvey Inc. is a completely owned subsidiary of Parsfield Incorporated a US firm. The country where Selvey operates is deemed to have a highly inflationary economy . Therefore, the functional currency is
a. / its reporting currency.
b. / its current rate method currency.
c. / the US dollar.
d. / its local currency.
3. / All of the following factors would be used to define a functional currency, except
a. / High volume of intercompany transactions.
b. / expenses primarily driven by local factors.
c. / financing denominated in local currency.
d. / status as a local tax haven for transfer pricing purposes.
4. / When the financial statements of a foreign subsidiary one year after acquisition are consolidated with the parent company, Retained Earnings is
a. / translated at the current exchange rate.
b. / Remeasured at the current exchange rate.
c. / Remeasured at the historical exchange rate.
d. / None of the above answers is correct.
5. / Peachey has a foreign subsidiary, Schrivener Corporation of Germany, whose functional currency is the euro. On December 31, 19X2, Schrivener has an account receivable denominated in British pounds. Which one of the following statements is true?
a. / Because all accounts of the subsidiary are translated into US dollars at the current rate, the Account Receivable is not adjusted on the subsidiary’s books before translation.
b. / The Account Receivable is remeasured into the functional currency and remeasurement obviates translation.
c. / The Account Receivable is first adjusted to reflect the current exchange rates in euros and then translated at the current rate into dollars.
d. / The Account Receivable is adjusted to euros at the current exchange rate and any resulting gain or loss is included as a translation adjustment in the stockholders’ equity section of the subsidiary’s separate balance sheet.
6. / Paskin’s Corporation’s wholly-owned Canadian subsidiary has a Canadian dollar functional currency. In translating its account balances into US dollars for reporting purposes, which one of the following accounts would be translated at historical exchange rates?
a. / Accounts Receivable.
b. / Notes Payable.
c. / Capital Stock.
d. / Retained Earnings.
7. / A foreign entity is a subsidiary of a US parent company and has always used the current rate method to translate its foreign financial statements on behalf of its parent company. Which one of the following statements is incorrect?
a. / The US dollar will be the functional currency of this company.
b. / Changes in exchange rates between the subsidiary’s country and the parent’s country are not expected to affect the foreign entity’s cash flows.
c. / Translation adjustments are shown in stockholders’ equity as increases or decreases in other comprehensive income.
d. / Translation adjustments are not shown on the income statement.
8. / The objective of remeasurement is to
a. / produce the same results as if the books were maintained in the currency of the foreign entity’s largest customer.
b. / produce the same results as if the books were maintained solely in the local currency.
c. / produce the same results as if the books were maintained solely in the functional currency.
d. / produce the results reflective of the entity’s economics in the local currency.
9. / Which of the following assets and/or liabilities are considered monetary?
a. / Intangible Assets and Plant, Property, and Equipment.
b. / Bonds Payable and Common Stock.
c. / Cash and Accounts Payable.
d. / Notes Receivable and Inventories carried at cost.
10. / Which one of the following accounts would be translated at the historical exchange rate when the local currency is the functional currency?
a. / Deferred Income Taxes.
b. / Accumulated Depreciation on Equipment.
c. / Prepaid Insurance.
d. / Additional paid-in capital.
11. / Similar operating segments may be combined if the segments have similar economic characteristics. Which one of the following is a similar economic characteristic ?
a. / The segments’ management teams.
b. / The tax reporting law sections.
c. / The distribution method for products or services.
d. / The expected rates of return and risk for the segment’s productive assets.
12. / Which of the following conditions would not indicate that two business segments should be classified as a single operating segment?
a. / They have similar amounts of intersegment revenues or expenses.
b. / They have a similar distribution of products.
c. / They have similar production processes.
d. / They have similar products or services.
13. / On June 7, 2006, Hawk Corporation sold a tract of land for $70,000 that resulted in a $30,000 gain on the sale. Hawk agreed to accept one payment of $35,000 on August 15 and a second payment of $35,000 on December 15. Hawk had a calendar year-end. What amount of gain was reported during the second, third, and fourth quarters of the year from this sale?
a. / $30,000, $0 and $0.
b. / $10,000, $10,000 and $10,000.
c. / $0, $15,000 and $15,000.
d. / $7,500 for each of four quarters.
14. / What is the threshold for reporting a major customer?
a. / 5 percent of revenues.
b. / 5 percent of profits.
c. / 10 percent of revenues.
d. / 10 percent of profits.
15. / Pratincole has the following 2005 financial data:
Consolidated revenue per income statement $1,800,000
Intersegment sales 270,000
Intersegment transfers 120,000
Combined revenues of all segments 2,190,000
Pratincole should add segments if
a. / the sum of its segments external revenue does not exceed 1,350,000
b. / the sum of its segments external revenue does not exceed 1,620,000
c. / the sum of its segments revenue including intersegment revenue does not exceed 1,643,000
d. / the sum of its segments revenue including intersegment revenue does not exceed 1,971,000
16. / Which of the following is not a quantitative threshold for defining a segment’s materiality?
a. / Segment assets are 10% or more of the combined assets of all operating segments.
b. / The segment absolute value of its profit or loss is 10% or more of the greater of (1) the combined reported profit of all operating segments that reported a profit or (2) the absolute value of the combined reported loss of all operating segments that reported a loss.
c. / Segment reported revenue, including intersegment revenues, is 10% or more of the combined revenue of all operating segments.
d. / Segment residual profit after the cost of equity is 10% or more of the combined residual profit of all operating segments.
17. / For an operating segment to be considered a reporting segment under the “reported revenue” threshold, its reported revenue must be 10% or more of
a. / the combined enterprise revenues, eliminating all relevant intracompany transfers and balances.
b. / the combined revenues, excluding intersegment revenues, of all operating segments.
c. / the combined revenues, including intersegment revenues, of all operating segments.
d. / the consolidated revenue of all operating segments.
18. / An enterprise has eight reporting segments. Five segments show an operating profit and three segments show an operating loss. In determining which segments are classified as reporting segments under the “reported profits” test, which of the following statements is correct?
a. / The test value for all segments is 10% of consolidated net profit.
b. / The test value for profitable segments is 10% or more of those segments reporting a profit, and the test value for loss segments is 10% or more of those segments reporting a loss.
c. / The test value for loss segments is 10% of the greater of (a) the absolute value of the sum of those segments reporting losses, or (b) 10% of consolidated net profit.
d. / The test value for all segments is 10% of the greater of (a) the absolute value of the sum of those segments reporting profits, or (b) the absolute value of the sum of those segments reporting losses.
19. / Dotteral Corporation experienced a $100,000 extraordinary loss in the second quarter of 2006 in their bird operating segment. The loss should be recognized
a. / Only at the consolidated report level at the end of the year.
b. / entirely in the second quarter of 2006 in the bird operating segment.
c. / in equal amounts allocated to the remaining three quarters of 2006 at the corporate level.
d. / in equal amounts allocated to the remaining three quarters of 2006 of the bird segment.
20. / How should a discontinued operation loss made during the third quarter be recognized?
a. / The effect is deferred until year-end before it is recognized.
b. / The effect is recognized from the beginning of the third quarter.
c. / The effect is recognized from the beginning of the year.
d. / The effect is recognized from the beginning of the fourth quarter.
Q / 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 10 / 11 / 12 / 13 / 14 / 15 / 16 / 17 / 18 / 19 / 20
A / D / C / D / D / C / C / A / C / C / D / C / A / A / C / A / D / C / D / B / B
Question 2: (18 marks)
Seakam Corporation, a British subsidiary of Pearce Corporation (a US company) was formed by Pearce on January 1, 20X7 in exchange for all of the subsidiary's common stock. Seakam has now ended its second year of operations on December 31, 20X8. Relevant exchange rates are:January 01, 20X7 = 1£ = $1.40
April 01, 20X7 = 1£ = $1.42
December 31, 20X8 = 1£ = $1.37
20X8 average rate = 1£ = $1.36
The US dollar is Seakam’s functional currency, but it keeps its records in pounds.
Seakam's adjusted trial balance is presented below for the calendar year 20X8.
In
Pounds
Debits:
Cash / £ / 172,000
Accounts receivable / 308,000
Notes receivable / 98,000
Building / 400,000
Land / 100,000
Depreciation expense / 10,000
Other expenses / 117,000
Salary expense / 376,000
Total debits / £ / 1,581,000
Credits
Accumulated depreciation / £ / 17,500
Accounts payable / 200,000
Common stock / 550,000
Retained earnings / 213,500
Sales revenue / 600,000
Total credits / £ / 1,581,000
Required: Prepare Seakam's:
- Translated income statement; and
- Translated balance sheet.
Name: …………………………………………………… Id.:………………………………..
Solution : Requirement 1 ( identify used method …………………………………)
Seakam CorporationTranslated Income Statement
For the Year Ended December 31, 20X8
amount / Ex. rate / Translated amount
Sales revenue / 600.000 / 1.36 / 816,000
Expenses:
Salary expense / 376,000 / 1.36 / 511,360
Depreciation expense / 10,000 / 1.42 / 14,200
Other expenses / 117,000 / 1.36 / 159,120
Income before exchange gains or losses / 131,320
Exchange loss / -20,610
Net income / 110,710
Retained earnings, January 1, 20X8 / 322,300
Retained earnings, December 31, 20X8 / 433,010
Requirement 2
Seakam CorporationTranslated Balance Sheet
December 31, 20X8
amount / Ex. rate / Translated amount
Cash / 172,000 / 1.37 / 235,640
Accounts receivable / 308,000 / 1.37 / 421,960
Notes receivable / 98,000 / 1.37 / 134,260
Building-net / 400,000 / 1.42 / net543,150
Land / 100,000 / 1.42 / 142,000
Total assets / 1,477,010
Accounts payable / 200,000 / 1.37 / 274,000
Common stock / 550,000 / 1.4 / 770,000
Retained earnings / 213,500 / 433,010
Total liabilities & equities / 1,477,010
Question 3: ( 6 marks)
The following data relate to Plover Corporation’s industry segments:Industry Segment / Sales to
External
Customers / Inter-
segment
Sales / Segment
Assets
Oil Exploration / $ / 40,000 / $ / 156,000
Refinery / 120,000 / 360,000
Plastics / 10,000 / $ / 10,000 / 60,000
Chemicals / 110,000 / 80,000 / 570,000
Solar Power / 10,000 / 36,000 / 138,000
Totals / $ / 290,000 / $ / 126,000 / $ / 1,284,000
Required:
1. / Which of Plover's operating segments would be considered reporting segments under the “revenue” test?
2. / Which of Plover's operating segments would be considered reporting segments under the “asset” test?
Requirement 1
The test value is 10% of the combined revenues of all operating segments including intersegment revenues, or, 10% x $416,000 or $41,600. Based on this test value, Refinery, Chemicals, and Solar Power would be the reporting segments because each of these segments has more than $41,600 in total sales.
Requirement 2
The test value is 10% of the combined identifiable assets or 10% x $1,284,000 or $1,284. Based on this test value, Oil Exploration, Refinery, Chemicals, and Solar Power would be the reporting segments because each of these segments has more than $1,284 in segment assets.
Question 4: (8 marks)
Rail Corporation is preparing its interim financial statements for the third quarter of calendar 2006. The following information was gathered for the third quarter:1. / Credit sales for the quarter / $2,000,000
2. / Cash sales for the quarter / 500,000
3. / Inventories, July 1 (FIFO cost method) / 250,000
4. / Cash purchases of inventory during the quarter / 400,000
5. / Inventory purchases made on account for the quarter / 650,000
6. / Estimated cost of goods sold ratio(per cent of sales) / 45%
7. / Selling and general administrative expenses paid / 111,000
8. / Effective corporate tax rate / 28%
9. / Loss on sale of securities sold on June 30, 2006 / 75,000
10. / Annual insurance premiums paid on the August 1 / 84,000
(the anniversary date of the policy)
Additional information
At the end of the year, Rail accrues its annual pension and depreciation expenses which amount to $40,000 and $62,000, respectively.
Required:
Prepare Rail's interim income statement for the third quarter of calendar 2006.
Solution :
Rail CorporationInterim Income Statement
For the Calendar Quarter Ending on September 30, 2006
Sales Revenue ($2,000,000 + $500,000)
Less: / $ / 2,500,000
Cost of Goods Sold (2,500,000 x 45%) / 1,125,000
Selling and general and administrative expenses paid / 111,000
Insurance expense ($84,000/12 months x 2 months) / 14,000
Depreciation expense (62,000/4) / 15,500
Estimated pension expense ($40,000/4) / 10,000
Income before taxes / $ / 1,224,500
Income tax expense ($1,224,500 x 28%) / 342,860
Net income / $ / 881,640
2 bonus marks for all students
With best wishes
Mohammad Marwan Al ashi