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advanced financial accounting

Advanced Financial Accounting 5th Edition Richard E. Baker, Valdean C. Lembke, Thomas E. King - Solutions

A manager you work for is making a business trip to London. The manager has several meetings at the company's operating units in London. In addition, the manager is considering a visit to the International Accounting Standards Committee (IASC) office in London. The manager has asked you to perform
(a) What do you consider to be the main weaknesses of historical cost accounting when prices are rising?(10 marks)(b) State two ways in which firms have adopted different accounting policies for specific items in historical cost accounts so that they partly reflect rising price levels. (4 marks)(c)
In the ASC's handbook, Accounting for the Effect of Changing Prices, accountants are faced with a choice of systems of accounting when dealing with the effects of inflation.Requirements(a) Briefly describe the three factors which combine to make up these systems of accounting.(b) Explain the main
(a) Explain the primary objective of current purchasing power accounting and outline the basic technique.(b) What do you consider are the advantages and disadvantages of current purchasing power accounting as a method of adjusting financial statements for price level changes?
(a) Provide a definition of the deprival value of an asset.(b) For a particular asset, suppose the three bases of valuation relevant to the calculation of its deprival value are (in thousands of pounds): \(£ 12, £ 10\) and \(£ 8\).Construct a matrix of columns and rows showing all the possible
An assistant accountant of Changeling plc has been requested to prepare a profit and loss account using the CPP model for the year ended 31 March 1991. He has calculated the net operating profit for the year and the remaining entries are yet to be completed.The profit and loss accounts for the year
The accountant of Newsprint plc has produced three sets of accounts for the year ended 31 December 1988 using the historic cost, replacement cost with specific index adjustments and current purchasing power with general price index adjustments.The historic and replacement cost accounts are set out
The Paraffin Supply Company Limited acquired freehold land as a depot for its delivery vans and started business on 1 January 1986. It collected sufficient paraffin from a wholesaler each day to satisfy known orders. The wholesaler was paid in cash and the customers paid cash on delivery. The
Air Fare plc is the subsidiary of an American parent company. It had been incorporated in the United Kingdom in 1985 to provide in flight packed meals for American airlines on return flights from the United Kingdom.The fixed assets in the annual accounts have been carried at cost less depreciation
(A) The Bureau Limited is a company that is being incorporated to organise and manage a computer bureau operation. The directors are considering whether to finance the company by equity or equity and loan.They estimate that the company will require \(£ 5000000\) and that the rate of return on
It has been stated that: 'Current cost accounts allow for the impact of specific price changes on the net operating assets and thus the operating capability of the business. The same tools of analysis as those applied to historical cost accounts are generally appropriate. The ratios derived from
The U.S. dollar strengthened against the German mark. Will imports from Germany into the United States be more expensive in U.S. dollars or less expensive? Explain.
How are assets and liabilities that are denominated in a foreign currency measured on the transaction date? On the balance sheet date?
Sun Company, a U.S. corporation, has an account payable of \(\$ 200,000\) denominated in Canadian dollars. If the direct exchange rate increases, will Sun Company experience a foreign currency transaction gain or loss on this payable?
What are some ways a U.S. company can hedge against the risk of changes in the exchange rates for foreign currencies?
A forward exchange contract may be used (a) to hedge an exposed foreign currency position, (b) to hedge an identifiable foreign currency commitment, or (c) to speculate in foreign currency markets. What are the main differences in accounting for these three uses?
How should the following items be reported on the financial statements, if shown at all?a. Foreign Currency Receivable from Brokerb. Foreign Currency Transaction Lossc. Foreign Currency Transaction Gaind. Dollars Payable to Exchange Brokere. Premium on Forward Contractf. Foreign Currency Units g.
Since the early 1970s, the U.S. dollar has both increased and decreased in value against other currencies such as the Japanese yen, the Swiss franc, and the German mark. The value of the U.S. dollar, as well as the value of currencies of other countries, is determined by the balance between the
On November 30, 20X5, Bow Company received goods with a cost denominated in pounds. During December 20X5, the dollar's value declined relative to the pound. Bow believes that the original exchange rate will be restored by the time payment is due in 20X6.\section*{Required}a. State how Bow should
Using the library or electronic resources, obtain the monthly exchange rates for the last five years for the U.S. dollar versus (1) the Japanese yen. (2) the German mark. (3) the British pound, and (4) the Mexican peso. Prepare a chart, with time on the horizontal axis, showing the exchange rates
Suppose the direct foreign exchange rates in U.S. dollars are:1 British pound \(=\$ 1.60\)1 Canadian dollar \(=\$ .74\)\section*{Required}a. What are the indirect exchange rates for the British pound and the Canadian dollar?b. How many pounds must a British company pay to purchase goods costing
Upon arrival at the international airport in the country of Canteberry, Charles Alt exchanged \(\$ 200\) into florins, the local currency unit. Charles received 1,000 florins in exchange for the \(\$ 200\) of U.S. currency. After completing his business, and upon departure from Canteberry's
Merchant Company had the following foreign currency transactions:1. On November 1, 20X6. Merchant sold goods to a company located in Munich, Germany. The receivable was to be settled in German marks on February 1, 20X7, with the receipt of DM 250,000 by Merchant Company.2. On November 1. 20X6.
Delaney Inc. has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. For each of the following independent cases, determine the December \(31,20 \mathrm{X} 2\), year-end balance in the
Harris Inc. had the following transactions:1. On May I, Harris Inc. purchased parts from a Japanese company for a U.S. dollar equivalent value of \(\$ 8,400\), to be paid on June 20 . The exchange rates were:2. On July 1, Harris Inc. sold products to a French customer for a U.S. dollar equivalent
On December 1, 20X1, Rone Imports, a U.S. company, purchased clocks from Switzerland for 15,000 francs (SFr), to be paid on January 15, 20X2. Rone's fiscal year ends on December 31, and Rone's reporting currency is the U.S. dollar. The exchange rates are:\section*{Required}a. In which currency is
Chocolate De-lites imports and exports chocolate delicacies. Some transactions are denominated in U.S. dollars and others in foreign currencies. A summary of accounts receivable and accounts payable on December 31, 20X6, before adjustments for the effects of changes in exchange rates during 20X6,
Merit \& Family purchased engines from Germany for 30,000 marks on March 10, with payment due on June 8. Also, on March 10, Merit acquired a 90-day forward contract to purchase 30,000 marks at a forward rate of DM \(1=\$ .58\). The forward contract was acquired to hedge Merit \& Family's
Pumped Up Company purchased equipment from Switzerland for 140,000 francs on December 16, 20X7, with payment due on February 14, 20X8. On December 16, 20X7, Pumped Up also acquired a 60 -day forward contract to purchase francs at a forward rate of \(\mathrm{SFr} 1=\$ .67\). On December 31, 20X7,
Select the correct answer for each of the following questions.1. Dale Inc.. a U.S. company, bought machine parts from a German company on March 1, 20X1, for 30,000 marks, when the spot rate for marks was \(\$ .4895\). Dale's year-end was March 31 , when the spot rate was \$.4845. On April 20, 20X1,
Marko Company sold spray paint equipment to Spain for \(5,000,000\) pesetas ( \(\mathrm{P}\) ) on October 1, with payment due in six months. The exchange rates were:\section*{Required}a. Did the dollar strengthen or weaken relative to the peseta during the period from October 1 to December 31? Did
Alman Company sold pharmaceuticals to a Swedish company for 200.000 kronor (SKr) on April 20 , with settlement to be in 60 days. On the same date, Alman entered into a 60 -day forward contract to sell 200.000 kronor at a forward rate of 1 krona \(=\$ .167\) in order to hedge its exposed foreign
Choose the correct answer for each of the following questions.1. On November 15, 20X3, Chow Inc., a U.S. company, ordered merchandise FOB shipping point from a German company for 200.000 marks. The merchandise was shipped and invoiced on December 10, 20X3. Chow paid the invoice on January 10, 20X4.
Jerber Electronics Inc. sold electrical equipment to a Netherlands company for 50,000 guilders (G) on May 14, with collection due in 60 days. On the same day, Jerber Electronics entered into a 60 -day forward contract to sell 50,000 guilders at a forward rate of G \(1=\$ .541\). Jerber Electronics'
On November 1. 20X6. Smith Imports Inc. contracted to purchase teacups from England for 30,000 pounds (). The teacups were to be delivered on January 30, 20X7, and payment would be due on March 1, 20X7. On November 1, 20X6. Smith Imports entered into a 120-day forward contract to receive 30,000
On December 1, 20X1, Sycamore Company acquired a 90 -day speculative forward contract to sell 120.000 German marks (DM) at a forward rate of DM \(1=\$ .58\). The rates are as follows:\section*{Required}a. Prepare a schedule showing the effects of this speculation on \(20 \mathrm{X} 1\) income
Nick Andros of Streamline suggested that the company speculate in foreign currency as a partial hedge against its operations in the cattle market, which fluctuates like a commodity market. On October 1, 20X1. Streamline bought a 180-day forward contract to purchase \(50,000,000\) yen ( \(¥\) ) at
Select the correct answer for each of the following questions.1. The following information applies to Denton Inc.'s sale of 10,000 foreign currency units under a forward contract dated November 1, 20X5, for delivery on January 31, 20X6:Denton entered into the forward contract to speculate in the
Jon-Jan Restaurants purchased green rice, a special variety of rice, from China for 100,000 renminbi on November 1, 20X8. Payment is due on January 30, 20X9. On November 1, 20X8, the company also entered into a 90 -day forward contract to purchase 100,000 reuminbi. The rates were as
Tex Hardware sells many of its products overseas. The following are some selected transactions.1. Tex sold electronic subassemblies to a firm in France for 120,000 French francs (FF) on June 6, when the exchange rate was \(\mathrm{FF} 1=\$ .1750\). Collection was made on July 3 , when the rate was
Globe Shipping, a U.S. company, is an importer and exporter. The following are some transactions with foreign companies.1. Globe Shipping sold blue jeans to a French importer on January 15 for \(\$ 7,400\), when the exchange rate was FF \(1=\$ .185\). Collection, in dollars, was made on March 15 ,
On December 1, 20X1, Micro World, Inc., entered into a 120-day forward contract to purchase 100,000 marks (DM). Micro World's fiscal year ends on December 31. The direct exchange rates were as follows:\section*{Required}Prepare all journal entries for Micro World Inc. for the following independent
Part \(I\)Maple Company had the following export and import transactions during 20X5:1. On March 1, Maple sold goods to a German company for 30,000 marks, receivable on May 30. The spot rates for marks were DM \(1=\$ .65\) on March 1 and DM \(1=\$ .68\) on May 30 .2. On July 1, Maple signed a
Dexter Inc. had the following items in its unadjusted and adjusted trial balances at December 31, 20X5:1. On December 1, 20X5, Dexter sold goods to a company in Germany for 70,000 German marks. Payment in German marks is due on January 30, 20X6. On the transaction date, Dexter entered into a 60-day
1. According to FASB 133, which of the following is not an underlying?a. A security price.b. A monthly average temperature.c. The price of a barrel of oil.d. The number of foreign currency units.2. The intrinsic value of a cash-flow hedge has increased since the last balance sheet date. Which of
Mega Company believes the price of oil will increase in the coming months. Therefore, it decides to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil.On November \(30,20 \mathrm{X} 1\), Mega purchases call options
On March 1, 20X2, Mega sells the options at their value on that date and acquires 10,000 barrels of oil at the spot price. On June 1.20X2. Mega sells the oil for \(\$ 34\) per barrel.\section*{Required}a. Prepare the journal entry required on November \(30,20 \times 1\), to record the purchase of
Blank Corporation prepared the following summarized balance sheet on January 1, 20X1:\section*{Required}Select the correct answer for each of the following questions.1. If Shepard Company purchases 80 percent of the common shares of Blank Corporation for \(\$ 90.000\), the amount reported as
Musical Corporation purchases 80 percent of the common shares of Dustin Corporation on January 1, 20X2. On January 2, 20X2, Dustin Corporation purchases 60 percent of the common stock of Rustic Corporation. Information on company book values on the date of purchase and operating results for \(20
The summarized balance sheet of Separate Company on January 1, 20X3, contained the following amounts:On January 1, 20X3, Joint Corporation purchased 70 percent of the common shares and 60 percent of the preferred shares of Separate Company at underlying book value.\section*{Required}Give the
Pride Corporation owns 80 percent of Simba Corporation's outstanding common stock. Simba, in turn, owns 10 percent of Pride's outstanding common stock.\section*{Required}a. What percent of the dividends paid by Simba are reported as dividends declared in the consolidated financial statements?b.
Clayton Corporation purchased 75 percent of the common stock and 40 percent of the preferred stock of Topple Company on January 1, 20X6, for \(\$ 270,000\) and \(\$ 80,000\), respectively. At the time of purchase, the balance sheet of Topple contained the following balances:\section*{Required}Give
Clayton Corporation purchased 75 percent of the common stock and 40 percent of the preferred stock of Topple Company on January 1, 20X6, for \(\$ 270,000\) and \(\$ 80,000\), respectively. At the time of purchase, the balance sheet of Topple contained the following balances:For the year ended
On January 1, 20X2, Fischer Corporation purchased 90 percent of the common shares and 60 percent of the preferred shares of Culbertson Company at underlying book value. The balance sheet of Culbertson Company at the time of purchase contained the following balances:The preferred shares are
Grasper Corporation owns 70 percent of the common stock of Latent Corporation and 25 percent of the common stock of Dally Corporation. In addition, Latent Corporation owns 40 percent of the stock of Dally Corporation. Grasper, Latent, and Dally reported operating income of \(\$ 90,000\), \(\$
Promise Enterprises purchased 90 percent of the voting common stock of Brown Corporation on January 1. 20X3, for \(\$ 315,000\). Immediately after its ownership was acquired by Promise, Brown purchased 60 percent of the stock of Tann Company for \(\$ 120,000\). During 20X3, Promise Enterprises
Grower Supply Corporation holds 85 percent of the voting common stock of Schultz Company. At the end of \(20 \times 4\), Schultz Company had funds to invest and purchased 30 percent of the stock of Grower Supply Corporation. Schultz Company records dividends received from Grower Supply Corporation
The Talbott Company purchased 80 percent of the stock of Short Company on January 1, 20X8, at underlying book value. On December 31, 20X9, Short Company purchased 10 percent of the stock of Talbott Company. Balance sheets for the two companies on December 31, 20X9, are as
Lake Company reported the following summarized balance sheet data as of December 31, 20X2:Lake Company issues 4,000 additional shares of its \(\$ 10\) par value stock to its shareholders as a stock dividend on April 20, 20X3. The market price of Lake Company's shares at the time of the stock
Stable Home Builders Inc. purchased 80 percent of the stock of Acme Concrete Works on January \(1,20 \times 3\), for \(\$ 360,000\). The balance sheet of Acme Concrete contained the following amounts at the time of the combination:During each of the next three years, Acme Concrete reported net
Weal Corporation purchased 60 percent of the shares of Modern Products Company on December \(31,20 \times 7\), for \(\$ 240,000\) and 20 percent on January \(1,20 \times 9\), for \(\$ 96,000\). Summarized balance sheets for Modem Products Company on the dates indicated are as follows:Modem Products
Blatant Advertising Corporation acquired 60 percent of the shares of Quinn Manufacturing Company on December \(31,20 \times 1\), at underlying book value of \(\$ 180.000\). The balance sheet of Quinn Manufacturing Company on January 1. 20X7, contained the following balances:On January 1.20X7. Quinn
Browne Corporation purchased 11.000 shares of Schroeder Corporation on January 1. 20X3 , at underlying book value. On December 31. 20X8. Schroeder Corporation reported the following balance sheet amounts:On January 1, 20X9. Schroeder Corporation issued an additional 5,000 shares of its \(\$ 10\)
Stacey Corporation owns 80 percent of the common shares and 70 percent of the preferred shares of Upland Company, all purchased at underlying book value on January 1, 20X2. The balance sheets of Stacey Corporation and Upland Company immediately after the acquisition contained the following
Purple Corporation owns 80 percent of Corn Corporation's common stock. It purchased the shares on January 1, 20X1, for \(\$ 520,000\). At the date of acquisition, Corn Corporation reported common stock outstanding of \(\$ 400,000\) and retained earnings of \(\$ 200,000\). The excess of purchase
Akron Inc. owns 80 percent of the capital stock of Benson Company and 70 percent of the capital stock of Cashin Inc. Benson Company owns 15 percent of the capital stock of Cashin Inc. Cashin Inc., in turn, owns 25 percent of the capital stock of Akron Inc. These ownership interrelationships are
Pound Manufacturing Corporation prepared the following balance sheet as of January 1, 20X8:The company is considering a 2 for 1 stock split, a stock dividend of 4,000 shares, or a stock dividend of 1,500 shares on its \(\$ 10\) par value common stock. The current market price per share of Pound
Emerald Corporation purchased 10,500 shares of the common stock and 800 shares of the 8 percent preferred stock of Pert Company on December 31, 20X4, at underlying book value. Pert Company reported the following balance sheet amounts on January 1, 20X5:The preferred stock of Pert Company is \(\$
Presley Pools Inc. purchased 60 percent of the common stock of Jacobs Jacuzzi Company on December 31, 20X6, for \(\$ 1,800,000\). All the excess of the cost of the investment over the book value of the shares acquired was attributable to goodwill. On December 31, 20X7, the management of Presley
Brown Company owns 90 percent of the common stock and 60 percent of the preferred stock of White Corporation, both acquired at underlying book value on January 1, 20X1. Trial balances for the companies on December 31, 20X6, are as follows:White Corporation's preferred shares pay a 7.5 percent
Apex Corporation acquired 75 percent of the common stock of Beta Company on May 15, 20X3, at underlying book value. The balance sheet of Beta Company on December 31, 20X6, contained the following amounts:During 20X7. Apex earned operating income of \(\$ 90,000\), and Beta reported net income of
Penn Corporation purchased 80 percent ownership of ENC Company on January 1, 20X2, at underlying book value. On January 1, 20X4, Penn Corporation sold 2,000 shares of ENC Company stock for \(\$ 60,000\) to American School Products. Trial balances for the companies on December 31, \(20 \times 4\),
Craft Corporation held 80 percent of the outstanding common shares of Delta Corporation on December 31. 20X2. Balance sheets for the two companies on that date were as follows:On January 1. 20X3, Delta Corporation issued 4.000 additional shares of its \(\$ 10\) par value common stock to
Shady Lane Manufacturing Company holds 75 percent of the common stock of Tin Products Corporation. The balance sheets of the two companies for January 1, 20X1, are as follows:On January 2, 20X1, Shady Lane purchased an additional 2500 shares of common stock directly from Tin Products for \(\$
First Boston Corporation purchased 80 percent of the common stock of Gulfside Corporation on January 1, 20X5. Gulfside Corporation holds 60 percent of the voting shares of Paddock Company, and Paddock Company owns 10 percent of the stock of First Boston Corporation. All purchases were made at
The following ownership relations exist between Black Corporation and its affiliates:The 20X3 operating income given for each investor excludes income from intercorporate investments. Dividends of \(\$ 40,000, \$ 15,000\) and \(\$ 20,000\), respectively, were paid by Black Corporation, Red
Why not simply add a fourth part to the three-part consolidation workpaper to permit preparation of a consolidated cash flow statement?
Why is income that is assigned to the noncontrolling interest added back to consolidated net income to compute net cash flow from operating activities in a consolidated statement of cash flows?
What balances, if any, are likely to be different in the consolidated cash flow statement if pooling of interests accounting is used in recording a company's acquisition of a subsidiary rather than purchase accounting?
How does the effect of pooling of interests accounting for a business combination differ from that of purchase accounting with respect to the elimination of the parent's investment in subsidiary account in periods following the combination?
When common shares are exchanged in a pooling of interests, how is the amount of additional paid-in capital of the combined entity determined?
Is it possible to have a noncontrolling interest reported on the consolidated balance sheet when one company has acquired substantially all of another's common stock in a pooling of interests? Explain.
How do purchase and pooling of interests accounting differ with regard to the treatment of profits on inventory transfers that occurred before the time of the business combination?
Parent Company has no goodwill recorded before combining with Subsidiary Company in a pooling of interests. How is it possible for there to be goodwill reported on the consolidated balance sheet immediately following the combination?
What portion of the 20X1 net income of Green Company is included in consolidated net income under (a) purchase and (b) pooling of interests accounting if Brown Company acquires ownership of Green Company on October 18, 20X1?
How is it possible to eliminate a subsidiary's retained earnings balance when the parent company investment account is eliminated in the consolidation workpaper and still provide for the carryforward of retained earnings following a pooling of interests?
Why do companies that file consolidated tax returns often feel the need to allocate tax expense to the individual affiliates?
Why is it not possible simply to add together the separately computed earnings per share amounts of individual affiliates in deriving consolidated earnings per share?
How are dividends that are paid to preferred shareholders of the parent and to preferred shareholders of the subsidiary treated in computing consolidated earnings per share?
What factors may cause a subsidiary's income contribution to consolidated eamings per share to be different from its contribution to consolidated net income?
How are rights, warrants, and options of subsidiary companies treated in the computation of consolidated earnings per share?
What effect does the presence of a noncontrolling interest have on the computation of consolidated earnings per share?
Stage Corporation has both convertible preferred stock and convertible debentures outstanding at the end of \(20 \times 3\). The annual cash payment to the preferred shareholders and to the bondholders is the same, and the two issues convert into the same number of common
Johnson Corporation purchased 100 percent ownership of Freelance Company at underlying book value on March 3, 20X2. Johnson Corporation makes frequent inventory purchases from Freelance Company. Johnson uses the equity method in accounting for its investment in Freelance. Both companies are subject
Northland Company acquires 90 percent of the voting shares of United Nurseries Corporation in a pooling of interests accomplished through an exchange of common shares. Consolidated earnings per share for the period in which the business combination occurs is lower than earnings per share that would
The consolidated cash flows from operations of Jones Corporation and Short Manufacturing for 20X2 decreased quite substantially from 20X1 despite the fact that consolidated net income increased slightly in \(20 \times 2\).\section*{Required}a. What factors included in the computation of
In its consolidated cash flow statement for the year ended December 31, 20X2, Lamb Corporation reported operating cash inflows of \(\$ 284,000\), cash outflows of \(\$ 230,000\) and \(\$ 80,000\) for investing and financing activities, respectively, and an ending cash balance of \(\$ 57,000\). Lamb
The controller of Becon Corporation has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for the year ended December 31 . 20X4. Becon owns 60 percent of the stock of Handy Corporation, which it purchased on May 7 . 20X1. You have
The accountant for Consolidated Enterprises Inc. has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for 20X3. The accountant has asked for assistance in preparing a statement of cash flows for the consolidated entity.
The following 20X2 consolidated statement of cash flows is presented for Acme Printing Company and its subsidiary, Jones Delivery:Acme Printing Company purchased 60 percent of the voting shares of Jones Delivery in 20X1 for \(\$ 40,000\) above book value.\section*{Required}a. Determine the net

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