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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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