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modern advanced accounting

Advanced Accounting 13th Global Edition Joseph H. Anthony, Bruce Bettinghaus, Floyd A. Beams, Kenneth Smith - Solutions

3. Assuming that this hedge relationship qualifies for hedge accounting:a. Determine the estimated fair value of the hedge at December 31, 2016. Recall that the hedge contract is in effect for the 2017, 2018, 2019, and 2020 interest payments.b. Prepare the entry at December 31, 2016, to account for
P 13-4 Fair-value hedge, interest rate swap Refer to Problem P 13-3 and assume that instead of initially signing a variable-rate loan, Cam receives a fixed rate of 8 percent on the loan on January 1, 2016. Instead of entering into a pay-fixed, receive-variable interest rate swap with Gra, Cam
4. Assuming that the LIBOR rate is 5.5 percent on December 31, 2017, prepare all the necessary entries to account for the interest rate swap at December 31, 2017, including the 2017 interest payment.Accounting for Derivatives and Hedging Activities 469
3. Assuming that this hedge relationship qualifies for hedge accounting:a. Determine the estimated fair value of the hedge at December 31, 2016. Recall that the hedge contract is in effect for the 2017, 2018, 2019, and 2020 interest payments.b. Prepare the entry at December 31, 2016, to account for
2. Do you think that this hedge would be considered effective and therefore would qualify for hedge accounting?
P 13-3 Cash-flow hedges, interest rate swap On January 1, 2016, Cam borrows $400,000 from Ven. The five-year term note is a variable-rate one in which the 2016 interest rate is determined to be 8 percent, the LIBOR rate at January 1, 2016, +2%.Subsequent years’ interest rates are determined in a
P 13-2 Sale commitments, entries, no net settlement US Mill, Inc. sold merchandise to Jang Ltd. for W25bn on October 1, 2014. The billing date is on October 1, 2014, and payable in 120 days, on January 30, 2015. Mill decided to enter a forward contract to deliver W25bn to its exchange broker in 180
Journal entries and adjusting entries of foreign currency commitment Sean, Inc., a retailer based in the United States, entered into a forward contract with €250,000, payable in 90 days to Queen NV in the Netherlands to hedge its, purchase transaction on November 1, 2014. The 90-day forward
2. Prepare the adjusting entry on December 31, 2016.468 CHAPTER 13 p R O B L E M S P 13-1
E 13-7 Firm purchase commitment, foreign currency hedge On November 2, 2016, Baz, a U.S. retailer, ordered merchandise from Mat of Japan. The merchandise is to be delivered to Baz on January 31, 2017, at a price of 1,000,000 yen. Also on November 2, Baz hedged the foreign currency commitment with
E 13-6 Purchase commitment, foreign currency hedge, net settlement Dimple AG ordered merchandise of €20,000 from US Clark Ltd. on September 1, 2014, when the spot rate for the euro was $0.77. The merchandise was to be delivered on October 1, 2014, when the spot rate was $0.79. On the transaction
3. Car entered into a third forward contract for speculation. At December 31, 2016, what amount of foreign currency transaction gain should Car include in income from this forward contract? Explain.
2. Car entered into the second forward contract to hedge a commitment to purchase equipment being manufactured to Car’s specifications. At December 31, 2016, what amount of net gain or loss on foreign currency transactions should Car include in income from this forward contract? Explain.
E 13-5[Based on AICPA] Various foreign currency hedge situations On December 12, 2016, Car entered into three forward exchange contracts, each to purchase 100,000 Canadian dollars in 90 days. Assume a 12 percent interest rate. The relevant exchange rates are as follows:Spot Rate Forward Rate (for
E 13-4 Hedging of an existing asset Pattay Corporation purchases 200,000 pounds of copper on September 1, 2016, at $2 per pound. In order to hedge the value of the copper, on October 1, 2016, Pattay enters into a forward contract to sell the 200,000 pounds on January 31, 2017, at $2.3 per pound.
E 13-3 Firm sales commitment Tuan Corporation enters into a firm sales commitment with Nyonya Corporation to sell 200,000 tons of coal deliverable in three months, on January 31, 2017, at the market price. Tuan also decides to enter into a forward contract to buy 200,000 tons of coal deliverable on
E 13-2 Hedge of a firm purchase commitment Refer to Exercise E13-1 and assume that Puan Corporation enters the contract to hedge a firm purchase commitment.Repeat parts 1 and 2 under this assumption.
2. Assume that the wheat is subsequently sold on July 1, 2017, at $5 per bushel. What journal entries will Puan make on that date?
E 13-1 Hedge of an anticipated purchase On November 1, 2016, Puan Corporation enters into a 90-day forward contract with a wheat speculator to purchase 300,000 bushels of wheat at $4.30. The contract is to be settled net. Puan enters the contract in order to hedge an anticipated wheat purchase. The
10. Describe how to account for a forward contract that is intended as a hedge of an identifiable foreign currency commitment.E x E R c I S E S
9. Briefly describe how derivatives are accounted for according to the International Accounting Standards Board. Is the accounting similar to U.S. GAAP? How is it different?
8. ASC 815 allows companies to account for certain hedges of existing foreign currency–denominated receivables and payables as cash-flow hedges. Also in ASC 815, hedges of existing assets and liabilities must be accounted for as fair-value hedges. Explain the circumstances that must be present
7. Explain the circumstances under which fair-value hedge accounting should be used and when cash-flow hedge accounting should be used.
6. Interest rate swaps were used in the chapter to highlight the differences between fair-value and cash-flow hedge accounting. Explain what type of risk is being hedged when a receive-fixed, pay-variable swap is used to hedge an existing fixed-rate loan.466 CHAPTER 13
5. Interest rate swaps were used in the chapter to highlight the differences between fair-value and cash-flow hedge accounting. Explain what type of risk is being hedged when a pay-fixed, receive-variable swap is used to hedge an existing variable-rate loan.
4. A hedged firm purchase or sale commitment typically qualifies for fair-value hedge accounting if the hedge is documented to be effective. Compare the accounting for both the derivative and the firm purchase or sale commitment under each of these circumstances: (a) the hedge relationship is
3. What are foreign currency commitments? Why are they considered special?
2. What are the differences in the treatment of gain and loss in fair value and cash flow hedge accounting?
1. How do hedge items qualify for hedge accounting? Explain how these items are assessed.
PR 14-2 Should a firm readjust after the fiscal period end if before the release of their statements the exchange rate is materially different?
PR 14-1 What is required to disclose concerning the changes in a firm’s cumulative translation adjustment?
3. Prepare consolidation working papers for Par Corporation and Subsidiary for the year ended December 31, 2016.
2. Prepare the necessary journal entries for Par to account for its investment in San for 2016 under the equity method.
P 14-9 Translation worksheet, parent accounting, consolidation San is a 90 percent–owned foreign subsidiary of Par, acquired by Par on January 1, 2016, at book value equal to fair value, when the exchange rate for LCUs of San’s home country was $0.24. San’s functional currency is the LCU. Par
PWA Corporation paid $1,710,000 for 100 percent of the stock of SAA Corporation on January 1, 2016, when the stockholders’ equity of SAA consisted of 5,000,000 LCU capital stock and 3,000,000 LCU-retained earnings. SAA’s functional currency is the local currency unit, and any cost/book value
2. Prepare the necessary journal entries for Pel to account for its investment in Sar for 2016.P 14-8 Parent accounting and consolidation under translation
P 14-7 Translation worksheet, parent accounting Pel, a U.S. firm, paid $308,000 for all the common stock of Sar of Israel on January 1, 2016, when the exchange rate for sheqels was $0.35. Sar’s equity on this date consisted of 500,000 sheqels common stock and 300,000 sheqels retained earnings.
4. Exchange rates for 2016 are summarized as follows:Current exchange rate, January 1, 2016 $0.70 Exchange rate when new equipment was acquired 0.68 Average exchange rate for 2016 0.67 Exchange rate for December 31, 2016, inventory 0.66 Exchange rate for dividends 0.66 Current exchange rate,
3. The NZ$60,000 of equipment consists of NZ$50,000 included in the business combination and NZ$10,000 purchased during 2016, when the exchange rate was $0.68. A depreciation rate of 20 percent is applicable to all equipment for 2016.
2. The NZ$120,000 cost of sales consists of NZ$50,000 inventory on hand at January 1, 2016, and NZ$100,000 in purchases during the year, less NZ$30,000 ending inventory that was acquired when the exchange rate was $0.66.
P 14-6 Remeasurement worksheet Phi, a U.S. firm, acquired 100 percent of Stu’s outstanding stock at book value on January 1, 2016, for$112,000. Stu is a New Zealand–based company, and its functional currency is the U.S. dollar. The exchange rate for New Zealand dollars (NZ$) was $0.70 when Phi
P 14-5 Remeasurement worksheet Par of Chicago acquired all the outstanding capital stock of Sar of London on January 1, 2016, for $1,120,000.The exchange rate for British pounds was $1.40 and Sar’s stockholders’ equity was £800,000, consisting of £500,000 capital stock and £300,000 retained
P 14-4 Translation worksheet Oppa Corporation’s adjusted trial balance in Korean won at December 31, 2016, is summarized as follows(in thousands):498 CHAPTER 14 Debits Cash W20,000 Accounts receivable 150,000 Inventories 600,000 Buildings 800,000 Equipment 750,000 Cost of sales 300,000
P 14-3 Translation worksheet, parent accounting Pyl acquired all the outstanding capital stock of Soo of London on January 1, 2016, for $800,000, when the exchange rate for British pounds was $1.50 and Soo’s stockholders’ equity consisted of £400,000 capital stock and £100,000 retained
P 14-2 Parent accounting under the equity method Pla purchased a 40 percent interest in Sor, a foreign company, on January 1, 2016, for $342,000, when Sor’s stockholders’ equity consisted of 3,000,000 LCU capital stock and 1,000,000 LCU retained earnings.Sor’s functional currency is its local
3. Develop a proof of your calculation of the Investment in Sco account balance at December 31, 2016.
2. Determine the balance of Pak’s Investment in Sco account at December 31, 2016.
P 14-1 Parent accounting under the equity method Pak purchased a 40 percent interest in Sco of Germany for $1,080,000 on January 1, 2016. The excess cost over book value is due to a patent with a 10-year amortization period. A summary of Sco’s net assets at December 31, 2015, and at December 31,
7. Inflation data of a foreign country for three years are as follows:Index Change in Index Annual Rate of Inflation January 1, 2015 150 —January 1, 2016 200 50 50 , 150 = 33%January 1, 2017 250 50 50 , 200 = 25%January 1, 2018 330 80 80 , 250 = 32%The cumulative three-year inflation rate is:a
6. Certain balance sheet accounts of a foreign subsidiary of Row at December 31, 2016, have been translated into U.S. dollars as follows:Translated at Current Rates Historical Rates Note receivable, long-term $240,000 $200,000 Prepaid rent 85,000 80,000 Patent 150,000 170,000$475,000 $450,000 The
5. The Jem Company used the current rate method when translating foreign currency amounts at December 31, 2016. At that time, Jem had foreign subsidiaries with 1,500,000 local currency units in long-term receivables and 2,400,000 LCU in long-term debt. The rate of exchange in effect when the
4. The Clark Company owns a foreign subsidiary that had net income for the year ended December 31, 2016, of 4,800,000 local currency units, which was appropriately translated into $800,000.On October 15, 2016, when the rate of exchange was 5.7 LCU to $1, the foreign subsidiary paid a dividend to
3. The Dee Company owns a foreign subsidiary with 3,600,000 local currency units of property, plant, and equipment before accumulated depreciation at December 31, 2018. Of this amount, 2,400,000 LCU were acquired in 2016, when the rate of exchange was 1.6 LCU to $1, and 1,200,000 LCU were acquired
2. On January 1, 2016, the Ben Company formed a foreign subsidiary. On February 15, 2016, Ben’s subsidiary purchased 100,000 local currency units (LCU) of inventory; 25,000 LCU of the original inventory made up the entire inventory on December 31, 2016. The subsidiary’s functional currency is
E 14-8 Acquisition excess allocation effects, specific account translation, and remeasurement 1. Fay had a realized foreign exchange loss of $15,000 for the year ended December 31, 2016, and must determine whether the following items will require year-end adjustment:Fay had an $8,000 equity
E 14-7 Acquisition—excess allocation On January 1, 2016, Minang Sdn. Bhd. of Malaysia acquired a 90 percent interest in Urden AG of Germany for 180 million Malaysian ringgits (MYR). The book value of Uden’s net assets was equal to fair value on this date, except for undervalued equipment of
E 14-6 Acquisition—Excess allocation and amortization effect Pal acquired all the stock of Sta of Britain on January 1, 2016, for $163,800, when Sta had capital stock of £60,000 and retained earnings of £30,000. Sta’s assets and liabilities were fairly valued, except for equipment with a
E 14-5 Acquisition—Excess allocation and amortization effect On January 1, 2016, Krab Co. Ltd. of Thailand acquires an 80 percent interest in Shin Co. Inc., a Japanese firm, for 150bn Thai baht on January 1, 2016, when the book value of Shin’s net assets equals fair value, and the remainder is
E 14-4 Buildings remeasurement effect Singa Company of Singapore is a 100 percent-owned subsidiary of PT Keraton, an Indonesian firm, and its functional currency is the Singaporean dollar. The functional currency of PT Keraton is the Indonesian rupiah.The current exchange rate for Singaporean
E 14-3 Acquisition date effects On January 1, 2016, Pai, a U.S. firm, purchases all the outstanding capital stock of Sta, a British firm, for $880,000, when the exchange rate for British pounds is $1.55. The book values of Sta’s assets and liabilities are equal to fair values on this date, except
4. The year-end balance of accounts receivable on the books of a foreign subsidiary should be translated by the parent company for consolidation purposes at the:a Historical rate b Current rate c Negotiated rate d Average rate 5. When remeasuring foreign currency financial statements into the
3. A subsidiary’s functional currency is the local currency, which has not experienced significant inflation. The appropriate exchange rate for translating the depreciation expense on plant assets in the income statement of the foreign subsidiary is the:a Exit rate b Historical exchange rate c
2. A company is translating account balances from another currency into dollars for its December 31, 2016, statement of financial position and its calendar year 2016 earnings statement and statement of cash flows. The average exchange rate for 2016 should be used to translate:a Cash at December 31,
E 14-2 Translation/remeasurement differences 1. When consolidated financial statements for a U.S. parent and its foreign subsidiary are prepared, the account balances expressed in foreign currency must be converted into the currency of the reporting entity. One objective of the translation process
9. Which one of the following would not give rise to changes in a parent company’s equity adjustment from translation account?a Remeasurement of a foreign subsidiary’s statements b Hedge of a net investment in a foreign subsidiary c Long-term intercompany loans to its foreign subsidiary d
8. A U.S. firm has a $10,000,000 investment in a foreign subsidiary, and the U.S. dollar is weakening against the currency of the country in which the foreign entity is located, which is also the subsidiary’s functional currency. On the basis of this information, one would expect the consolidated
7. An exchange gain on a long-term loan of a U.S. parent company to its British subsidiary whose functional currency is the British pound is:a Recognized in consolidated income currently b Deferred until the loan is settled c Treated as an equity adjustment from translation d Treated as an equity
6. Sum is a 100 percent–owned subsidiary of a U.S. corporation. The country in which Sum is located has been determined to have a highly inflationary economy. Given this information, the functional currency of Sum is:a Its local currency b The U.S. dollar c Its recording currency d None of the
5. Pal, a U.S. Corporation, made a long-term, dollar-denominated loan of $600,000 to its British subsidiary on January 1, 2016, when the exchange rate for British pounds was $1.53. If the subsidiary’s functional currency is its local currency, this transaction is a foreign currency transaction
4. Average exchange rates are used to translate certain items from foreign income statements into U.S. dollars. Such averages are used to:a Approximate the effects of using the current exchange rates in effect on the transaction dates b Avoid using different exchange rates for some revenue and
3. Which one of the following items from the financial statements of a foreign subsidiary would be translated into dollars using the historical exchange rate?a Accounts payable b Amortization of bond premium c Common stock d Inventories
2. Which of the following foreign subsidiary accounts will be converted into the same number of U.S. dollars, regardless of whether translation or remeasurement is used?a Accounts receivable b Inventories c Machinery d Prepaid insurance
E 14-1 Translation/remeasurement differences 1. A German subsidiary of a U.S. firm has the British pound as its functional currency. Under the provisions of ASC Topic 830, the U.S. dollar from the subsidiary’s viewpoint would be:a Its local currency b Its recording currency c A foreign currency d
12. How does the choice of functional currency affect how the gain or loss on a hedge of a net investment in a foreign subsidiary is reported in the financial statements?E x E R c I S E S
11. Under the current rate method, all the expenses are translated using some form of current-period exchange rate. Under the temporal method, some expenses such as salaries and utilities are translated using current rates but others, such as cost of goods sold and depreciation expense, use
10. In the current-rate-method example in the chapter, the parent’s other comprehensive income adjustment related to its investment in the subsidiary was larger than the other comprehensive income adjustment on the subsidiary’s translated financial statements. Why?
9. If a company’s sales were very seasonal—for example, a holiday-tree grower—would it be appropriate to use the annual average exchange rate to translate and remeasure sales and other expenses? Why or why not?
8. Under what circumstances would a foreign entity’s financial statements need to be both remeasured and translated? Would this process have an effect on both the income statement and other comprehensive income? Explain.
7. The gain or loss on remeasurement is included in net income each year if the temporal method is used.Explain why this makes sense economically.Foreign Currency Financial Statements 491
6. If the current rate method is used, the gain or loss on translation is included under other comprehensive income. Explain why this makes sense economically.
5. Describe what the temporal method is and under what circumstances it should be used.
4. Describe what the current rate method is and under what circumstances it should be used.
3. What procedure is used to allocate the investment purchase price at the date of acquisition of a foreign subsidiary?
2. How does ASC Topic 830 define a highly inflationary economy? If the economy is deemed to be highly inflationary, which method for converting the financial statements to the reporting currency is used?How does the use of this method improve the economic representational faithfulness of the
1. Define the functional currency concept and briefly describe how a foreign entity’s functional currency is determined. Why is this definition critical from a financial reporting perspective?
PR 12-1 What are the primary characteristics that define a derivative? How many paragraphs does it take the ASC to define a derivative completely?
P 12-5 Denominated sales and purchase transaction entries Pete Inc., a U.S. company, sold inventory to Ping Pte. Ltd. for 20,000 Singapore dollars and to Satria Tbk.for 300mn Indonesian rupiahs on December 1, 2014, when the spot rate for the SGD was $0.798 and for the rupiah was $0.0000875. At the
P 12-4 Accounting for foreign currency–denominated receivables and payables—multiple years The accounts of Lin, a U.S. corporation, show $81,300 accounts receivable and $38,900 accounts payable at December 31, 2016, before adjusting entries are made. An analysis of the balances reveals the
P 12-3 The economics of derivatives Consider the same basic facts as in P12-2, but instead of a forward contract Sue purchases put options to sell 300,000 bushels at $5.20 per bushel. The options cost $0.05 a bushel.REQuIRED: Determine the economic income of the sales transaction at various price
P 12-2 The economics of derivatives Dodo Corporation enters into a forward agreement with Waldo Corporation on September 1, 2016, to sell 500,000 tons of coal on July 1, 2017, at $55.30. Dodo’s cost of the coal is $54.90 per ton. The contract allows for net settlement.REQuIRED: Determine the
P 12-1 The economics of derivatives Wang Corporation enters into a forward agreement with Sung Corporation on April 1, 2016, to buy 250,000 gallons of fuel oil at $3.52 on December 31, 2016. At the time of inception of the forward, the price for fuel oil is $3.55. On December 31, 2016, the price of
E 12-10 Various foreign currency–denominated transactions settled in subsequent year ATV had two foreign currency transactions during December 2016, as follows:December 12 Purchased electronic parts on account from Tok of Japan at an invoice price of 50,000,000 yen when the spot rate for yen was
E 12-9 Various foreign currency–denominated transactions settled in subsequent year Meo imports merchandise from some Canadian companies and exports its own products to other Canadian companies.The unadjusted accounts denominated in Canadian dollars at December 31, 2016, are as follows:Account
E 12-8[Based on AICPA] Various foreign currency–denominated transactions 1. On September 1, 2016, Ban received an order for equipment from a foreign customer for 300,000 euros, when the U.S. dollar equivalent was $400,000. Ban shipped the equipment on October 15, 2016, and billed the customer for
E 12-7 Accounting for foreign currency–denominated sales Wall Corporation, a U.S. company, sold inventory items to PT Keraton of Indonesia for 300,000,000 Indonesian rupiah on July 1, 2016, when the spot rate was 13,200 Indonesian rupiah. PT Keraton paid the invoice on July 30, 2016, when the
E 12-6 Accounting for foreign currency–denominated sales settled in subsequent year On October 15, 2016, Rise Corporation of the United States sold inventory items to Chai Company of Thailand for 245,000 Thai baht, to be paid on January 15, 2017. Exchange rates for Thai baht on selected dates are
E 12-5 Call option Star Ltd. is a furniture manufacturer. Star purchases a call option with a price of $20,000 to prevent the fluctuation of lumber prices. The call option gives Star Ltd. the right to purchase 1,000 pounds of lumber at a price of $100 per pound.Other costs to process the 1,000
E 12-4 Accounting for foreign currency–denominated purchases Zip purchased merchandise from Tas of Japan on November 1, 2016, for 10,000,000 yen, payable on December 1, 2016.The spot rate for yen on November 1 was $0.0075, and on December 1 the spot rate was $0.0076.REQuIRED 1. Did the dollar
E 12-3 Denominated purchase transaction entries Sally Inc., a U.S. company, purchased merchandise from Hein AG for $10,000 and from Lemo NV for 15,000 euros on December 20, 2013, when the spot rate for the euro was $0.713. Sally closed its books on December 31, 2013, when the spot rate for the euro
E 12-2 Denominated sales transaction entries Abe Inc., a U.S. company, sold its inventory to Poui SA for $20,000 and to Brit Ltd. for 20,000 euros on December 10, 2013, when the spot rate for the euro was $0.723. Abe closed its books on December 31, 2014, when the spot rate for the euro was $0.718

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