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On December 1, Year 1, the Fairfax Company signs a contract to receive 1 million Euros on January 31, Year 2 at a price of $1.1 million in a two month forward contract. On December 1, the spot rate for Euros is $1.1 in US dollars. Why would Fairfax enter into this contract?
If a company enters into a forward contract to pay a fixed price for a currency on a future date, they are hoping that the market price on that date is higher than the price they are agreeing to pay. They may also be looking to lock in a fixed price to reduce the risk of exchange rate fluctuation on an existing obligation.
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A US company is in the process of consolidating a subsidiary operating in China. The two companies have different functional currencies, so the Chinese accounts are being translated into US dollars. Some accounts are translated at historical rates while others are translated at the current rate as of the balance sheet date. Which of the following is true about the subsidiary's accounts?
When translating financial statements of companies with different functional currencies, inventory and accounts receivable are translated at the current rate as of the balance sheet date.
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The Robinson Company produces a balance sheet that shows a large figure in accumulated other comprehensive income within stockholder's equity. Which of the following could not have led to this figure?
Investments reported as trading securities do not affect other comprehensive income; all other items are included in other comprehensive income.
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Consolidated financial statements are typically prepared when one company has a controlling financial interest in another unless:
The exceptions to not consolidating a majority owned subsidiary are when the subsidiary is in legal reorganization or bankruptcy and or the subsidiary operates under severe foreign currency exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the subsidiary.
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Of the following is not a characteristic that is used to determine the primary beneficiary of a variable interest entity under US GAAP?
Under the VIE model, the primary beneficiary is not required to have greater than 50% ownership of the VIE. The primary beneficiary is the entity that has the power to direct the activities of a VIE that most significantly impact the entity's economic performance and absorbs the expected VIE losses and/or receives the expected VIE residual returns.
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Of the following characteristics, which would be used to determine the primary beneficiary of a variable interest entity under US GAAP?
The VIE model states that the primary beneficiary is not required to maintain more than a 50% ownership of the VIE, rather the primary beneficiary would be the entity which has the ability to direct the activities of the ViE which most significantly impact the entity's performance and absorb expected VIE losses and receive returns.
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Giant Company buys all outstanding shares of Little Company on October 1, Year 1 for $450,000. In Year 1, Little earned revenue of $15,000 per month and incurred expenses of $12,000 per month. On the date of the sale, Little had only one asset, a piece of land, with a book value of $350,000 and a fair value of $400,000. It had no liabilities. By the end of Year 1, the land had appreciated in value and was worth $410,000. Which of the following statements is true regarding the consolidated financial statements at the end of Year 1?
Little had net income of $3K per month ($15K in revenue - $12K in expenses). The consolidated financial statements will only include the net income earned after the purchase of the business, which will include October-December. The net income of Little included in the consolidated statements will be $3K per month x 3 months.
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During Year 1, the James Company buys all outstanding shares of the Holmes company for $4 million even though Holmes has net assets with a fair value of only $3.5 million. One reason for this excess payment is that Homes owns land worth $1.5 million with a book value of only $800,000. Prior to the purchase of Holmes, James owned its own land with a book value of $400,000 and a fair value of $700,000. Two years later, both companies still own this land and both have acquired additional acreage. James reports land at a book value of $1 million and fair value of $1.1 million; Holmes reports land with a book value of $2 million and a fair value of $2.5 million. At what amount will land be reported at the end of Year 3 in the consolidated balance sheet?
The consolidated statements will include the combined book values of the land owned by each company ($1M in land owned by James + $2M in land owned by Holmes).
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Hope Company owns 100% of the outstanding shares of Howard Company. During the current year, Hope sold inventory costing $80,000 to Howard for $90,000. This inventory has since been sold to a third party and Howard has not paid Hope for the purchase. At the balance sheet date, Hope has total current assets of $850,000 and Howard has total current assets of $550,000. Assume that there were no allocations established at the date of acquisition. What is the total amount of current assets reported in the consolidated balance sheet?
The consolidated statements will include the combined book values of each company's current assets, but outstanding intercompany balances will be removed. Thus the consolidated statements include $850K owned by Hope + $550K owned by Howard - $90K receivable due for the inventory.
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Which of the following financial instruments is not considered a derivative financial instrument?
A bank certificate of deposit is not a derivative financial instrument. The other options are.
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A derivative financial instrument is best described as:
A derivative is an instrument that derives its value from the value of some other instrument.
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Of the following hedge examples, which would likely be a fair value hedge?
A fair value hedge protects the user from decreases in the fair value of an asset such as their inventory. Obsolescence is a common decrease in fair value.
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