Question 1

You are trying to determine the functional currency of a foreign unit.For the following three factors determine what conditions would result in the foreign currency being the functional currency:
a.Sales Prices
b.Financing
c.Relationships between the Parent and the Foreign Unit

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Question 2

Six years ago Moline Industries acquired a new machine to use in its primary manufacturing operations.The machine cost $47 million and the company expected the machine to have a ten-year useful life with a zero salvage value.The company uses straight-line depreciation for the asset.However,because of changes within the industry,Moline reevaluated the machine at the end of Year 6 and estimated that the machine is capable of generating undiscounted future cash flows of $12 million.Based on the quoted market prices of similar assets,Moline estimates the fair value of the machine at $10.5 million.
Required:
1.What is the machine's book value at the end of Year 6?
2.Should Moline recognize an impairment of the asset? Why or why not? If yes,what amount?
3.At the end of Year 6,what amount should the machine be listed at on Moline's balance sheet?

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Question 3

Harbour Company purchased a new piece of equipment with a list price of $200,000 and subject to a 6 percent discount if paid within 45 days.Harbour paid within the discount period.The company also paid $1,650 to obtain title to the equipment and $650 as the license fee for the first year of operation.It paid $2,475 to level the area in which the equipment would be located and $11,750 to relocate other equipment that would have interfered with the proper operation of the new equipment.Harbour paid $500 for property and liability insurance for the first year of operation.What is the acquisition cost of this equipment that Harbour should record in its accounting records? Indicate the treatment of any amount not included in acquisition cost.

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Question 4

Examine the five following cases and determine if the functional currency of a U.S.parent's foreign unit is the foreign currency or the U.S.Dollar.
 $\begin{array}{l}
\begin{array}{|lll|}
 \hline\text { Scenario }\
 \hline  \text { Receivables and payables denominated in}\
  \text {  foreign currency are not usually remitted to }\
  \text { parent company.}\

\hline  \text { Sales prices are influenced by worldwide}\ 
  \text { competitive conditions and responsive on a }\
  \text { short-term basis to exchange rate changes.}\

\hline  \text { Foreign unit obtains materials primarly from}\ 
  \text { its own country.}\

\hline  \text { The unit's financing is taken care of through }\
  \text { ongoing fund transfers by the parent.}\

\hline   \text { There is a low volume of intercompany }\
  \text { transactions and little operational}\
  \text { interrelations between the U.S. parent and }\
  \text { foreign unit.}\
\hline 
\end{array}
\begin{array}{|lll|}
 \hline\text { Fumctional Courency is? }\
\hline 
\
\
\
\hline \

\
\
\hline \

\
\hline \
\

\hline 
\
\
\
\
\hline

\end{array}
\end{array}$

Accepted Answer

The answer of Examine the five following cases and determine...

Question 5

Interpretation No.46R relates to the issue of whether an investing firm is the primary beneficiary in a variable-interest entity.When is an entity classified as a variable interest entity?

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The answer of Interpretation No.46R relates to the issue of...

Question 6

Stock Trader,Inc.began operations in 2012.Stock Trader has acquired a number of equity investments during 2012.None have been sold.Stock Trader exerts no influence over any of its investments each of which represents a small percentage of the investee.An analysis of Stock Trader's investment portfolios shows the following totals at December 31,2012:
 $\begin{array}{l}
\begin{array}{lll}
\
\text {Aggregate Cost}\
\text {Aggregate Fair Value}\
\text {Dividends received from}\
\text { nvestments }
\end{array}
\begin{array}{lll}
&\text { Available-for-Sale }\
\text { Trading Securities } & \text { Securities } \
 \$ 49,000 & \$ 65,000 \
\$ 39,000 & \$ 90,000 \
\$ 5,000 & \$ 9,000
\end{array}
\end{array}$ 
Based on the information provided,describe how Stock Trader would present this information in its financial statements.You should discuss what amounts would appear in each financial statement.

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The answer of Stock Trader,Inc.began operations in 2012.Stock Trader has...

Question 7

Below you will find the balance sheet and income statement of a US Corp.'s foreign subsidiary at the end of its first year of operations.The following exchange rates were in effect during the period:
Jan.1,2012 - $1 = 1FC
Dec.31,2012 - $1.70 = 1FC
The average exchange rate during the period was $1.40=1FC.The common stock was issued on January 1,2012.
Assuming that the foreign currency is the functional currency,translate the financial statements into U.S.dollars.
 \(\begin{array}{l}
\begin{array}{lll}
 \text {Balance Sheet}\
 \text {As of December 31 ,}\
 \text {(Amounts in Foreign Currency)}\
 \text {Assets:}\
 \text {Cash and cash equivalents}\
 \text {Accounts Receivable}\
 \text {Inventory}\
 \text {Current Assets}\
 \text {Equipment}\
 \text {Less: Accumulated depreciation}\
 \text {Equipment-Net}\
 \text {Land}\
 \text {Total assets}\
 \text {Liabilities}\
 \text {Accounts Payable}\
 \text {Accrued Salaries Payable}\
 \text {Rent Expense Payable}\
 \text {ncome Tax Payable}\
 \text {Current Liabilities}\
 \text {Long-term note payable}\
 \text {Total Liabilities}\
 \text {Stockholders' Equity:}\
 \text {Common stock}\
 \text {Retained earnings}\
 \text {Total liabilities and stockholders' equity}\
\end{array}
\begin{array}{lll}
\
2012\
\
\
18,000 \
33,000 \
\underline{24,000} \
75,000 \
42,225 \
\underline{(1,725) }\
40,500 \
\underline{34,500} \
\underline{\underline{150,000}} \
\
48,000 \
14,758 \
7,500 \
\underline{3,000} \
 73,258 \
\underline{45,000}\
18,258\
\
30,000\
\underline{1,742}\
\underline{150,00}\

\end{array}
\end{array}\) 
 $\begin{array}{l}
\begin{array}{lll}
  \text {Income Statement}\
  \text {For the year ended December 31,2012}\
  \text {(Amounts in foreign currency)}\
  \text {Revenues}\
  \text {Cost of goods sold}\
  \text {Gross Profit}\
  \text {Operating Expenses}\
  \text {Depreciation expense}\
  \text {Salary expense}\
  \text {Insurance Expense}\
  \text {Rent Expense}\
  \text {Interest Expense}\
  \text {Total Operating Expenses}\
  \text {Income from Operations}\
  \text {Income Tax Expense}\
  \text {Net income}\
\text { Dividends paid to Common Shareholders }
\end{array}
\begin{array}{lll}
\
\
\
97,500 \
(58,500)\
&39,000\
\
(1,725) \
(24,625) \
(1,700) \
(4,875) \
\underline{(2,520)}\
&\underline{(35,445)}\
&3,555 \ 
&\underline{(1,067)} \ 
&\underline{\underline{ 2.488}}\
747\
\end{array}
\end{array}$

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The answer of Below you will find the balance sheet...

Question 8

Buchaneer Co.,a waste collection company,estimates that its landfill will be in operation for five years and will cost $300 million to build,with generation of $900 million in revenues during its useful life.According to Federal Law,Buchaneer must decommission and decontaminate the site at the end of its useful life.Based on estimates by its engineers,Buchaneer will have to spend $20 million on this process when the landfill is finally shut down in five years.Buchaneer's credit adjusted rate of interest is 10%.(Hint: Use PV factors to estimate fair value of this ARO.)
Required:
1.In accounting for asset retirement obligations,how should Buchaneer account for the costs associated with this decommissioning process according to U.S.GAAP? Show journal entries and prepare an amortization table.
2.How should these costs be reported on the income statement and how does this treatment improve the matching process?

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The answer of Buchaneer Co.,a waste collection company,estimates that its...

Question 9

United owns Estada,a European based subsidiary for which the Euro is the functional currency.Estada had a net asset position at January 1,2012 of 1,200,000 Euros and reported income of 350,000 Euros for 2012,which was earned evenly throughout the year.In addition,Estada paid 100,000 Euros of dividends at December 31,2012.The following were in effect during 2012:
 $\begin{array} { l l } 
\text { January 1, } 2012 & 1 \text { Euras } = \$ 0.99 \
\text { Average far 2012 } & 1 \text { Euras } = \$ 0.98 \
\text { December 31, 2012 } & 1 \text { Eures } = \$ 1.10
\end{array}$ 
Determine the amount of the unrealized translation gain or loss United should record for 2012 with respect to Estada.

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The answer of United owns Estada,a European based subsidiary for...

Question 10

Pop,Inc.acquires 100% of the outstanding shares of Snap Corp.for $3,923,450 and accounts for the transaction using the purchase method.The purchase price Pop paid for Snap exceeded Snap's book value for four reasons:
1.Snap's long-term depreciable assets have a market value of $1,250,000.
2.Deferred income taxes of $125,000 arise from the excess of market value over the book value of the depreciable assets.
3.Pop assigns a value of $90,000 to Snap's customer list and records it as an intangible asset.
4.Goodwill exists equal to the difference between the acquisition cost and the market value of the identifiable assets and liabilities acquired.
Information about Pop and Snap's balance sheet at the acquisition date and the current market value of Snap's assets appears below:
 \(\begin{array}{l}
\begin{array}{lll}
\text {Consolidated Fintancial Information}\
\text {Pop, Inc. and Snap Corp.}\
\text {Acquisition Date}\
\ 
\
\
\
\text {Assets}\
\text {Current Assets}\
\text {Depreciable Assetsless}\
\text {Accumulated Depreciation}\
\text {Intangible Asset - Customer}\
\text {List}\
\text {Goodwill}\
\text {Total Assets}\
\
\text {Liabilities and Equities}\
\text {Liabilities}\
\text {Deferred Income Tax Liability}\
\text {Shareholders' Equity}\
\text {Total Liabilities and Equities}\
\end{array}
\begin{array}{lll}
\
\
\
&&\text {Snap at }\
&&\text {Current }\
 \text { Historical}& \text {  Historical}& \text {Market }\
 \text { Cost-Pop}& \text {  Cost-Snap}& \text {Value }\
\
\$ 4,230,600 & \$ 1,330,000 &\$ 1,330,000 \
\$ 7,245,000 & \$ 945,000 &\$ 1,250,000\
\
\$ 0 & \$ 0 &\$ 90,000  \
\
\$ 0 & \$ 0\
\$ 11,475,600 &  \$ 2,275,000\
\ \
\$ 6,100,600 & \$ 1,670,000 & \$ 1,670,000 \
\$ 0 & \$ 0 & \$ 125,000 \
\$ 5,375,000 & \$ 605,000 & \
\$ 11,475,600 & \$ 2,275,000 &
\end{array}
\begin{array}{lll}
\
\
\
\
\text {Consolidater }\
\text {at Date of }\
\text {Acq }\
\
\ 
\ 
\ 
\ 
\ 
\ 
\
\
\
\
\
\
\
\end{array}

\end{array}\) 
Required: Complete the table for Snap's current market values and the consolidated amounts at the date of acquisition.

Accepted Answer

The answer of Pop,Inc.acquires 100% of the outstanding shares of...

Question 11

When there are two or more investing firms in an entity,how is it determined which entity consolidates the variable interest entity?

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The answer of When there are two or more investing...

Question 12

Although the organizational structure and operating policies of a particular foreign unit determine its functional currency,discuss two actions that a management team might take to ensure that the foreign currency is the functional currency.

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Question 13

Carlson Company began constructing a building for its own use in January 2012.During 2012,Carlson incurred interest of $75,000 on specific construction debt and $16,750 on other borrowings.Interest computed on the weighted-average amount of accumulated expenditures for the building during 2012 as $55,000
Required:
What amount of interest should Carlson capitalize?

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The answer of Carlson Company began constructing a building for...

Question 14

On January 1,2012,Brock Company purchased $200,000,8% bonds of Universal Co.at par.Interest is payable annually on December 31.The bonds mature in five years on December 31,2016.
Required
a.At the date of purchase at what amount should Brock record the bond investment?
b.Determine the amount of cash interest Brock would receive in 2012.
c.At December 31,2012 the bonds have a fair market value of $203,500 how will this information affect Brock's financial statements given that the bonds are classified as:
1.Held-to-Maturity
2.Trading
3.Available for Sale

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The answer of On January 1,2012,Brock Company purchased $200,000,8% bonds...

Question 15

The three types of costs incurred in coal production are acquisition costs (costs to acquire the coal rich lands plus the present value of future cash flows necessary to restore the sites minus the cost of the land),exploration costs (costs of mining),and development costs (pipes,roads,and so on,to extract and transport the coal to customers).
Required:
Should each of these costs be capitalized or expensed? Explain.

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The answer of The three types of costs incurred in...

Question 16

For some transactions U.S.GAAP requires that value changes are recognized on the balance sheet and the income statement when they occur,even if not realized.Discuss what types of transactions get this type of treatment and the logic behind this accounting.

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The answer of For some transactions U.S.GAAP requires that value...

Question 17

Coffee Corp.purchased 45% of the outstanding shares of Cream Corp.for $1,845,000.The investment allows Coffee to exert significant influence over the operations of Cream.During 2011 Cream recognized net income of $2,500,000 and paid $650,000 in dividends.Discuss how Coffee should account for its investment in Cream and how the information would appear in Coffee's balance sheet,income statement,and cash flow statement.

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The answer of Coffee Corp.purchased 45% of the outstanding shares...

Question 18

U.S.GAAP requires firms to expense immediately all internal expenditures for R&D costs.Alternatively,U.S.GAAP could require firms to capitalize and subsequently amortize all internal expenditures on R&D that have future potential.
Required:
Why have standard setters chosen not to allow the capitalization alternative? How would analysts be better served if U.S.GAAP required capitalization of R&D costs?

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The answer of U.S.GAAP requires firms to expense immediately all...

Question 19

Caruso Company incurred the following costs during 2012 in connection with its research and development activities.
 $\begin{array}{|l|r|}
\hline\text { Cost of equipment acquired that will have alternative } & \$ 220,000 \
\text { uses in future R\&D projects over the next } 4 \text { years } & \
\text { (uses straight-line depreciation) } & \
\hline \text { Materials consumed in R\&D projects } &  67,000\
\hline \text { Consulting fees paid to outsiders for R\&D projects } &  80,000 \
\hline \text { Personnel costs of persons involved in R\&D projects } & 108,000 \
\hline \text { Indirect costs reasonably allocable to R\&D projects } & 45,000 \
\hline \text { Materials purchased for future R\&D projects } & 34,000\
\hline
\end{array}$ 
REQUIRED: Compute the amount to be reported as research and development expense by Caruso on its income statement for 2012.(Assume equipment is purchased at the beginning of the year and economic viability has not been achieved.)

Accepted Answer

The answer of Caruso Company incurred the following costs during...

Question 20

The following problem requires some of the following present value information:
 $\begin{array} { | l | l| } 
\hline \text { PV af an arthary annuity for } 20 \text { periods at } 12 \% & 7.46944 \
\hline \text { PV af an ardinary annuty for } 19 \text { periods at } 12 \% & 8.36497 .36578 \
\hline \text { PV af an arthary annuty for } 18 \text { periods at } 10 \% 12 \% & 8.20147 .24967 \
\hline \text { PV af } 1 \text { for } 20 \text { periods at } 10 \% 12 \% & 0.10367\
\hline
\end{array}$ 
Bioco sold a patent on a new laser process to Agent Co.The sales agreement,which was signed on January 1,2011,requires Agent Co.to pay Bioco $2 million immediately.In addition,Agent is required to pay 500,000 each December 31 for 20 years starting with December 31,2011.Agent and Bioco estimate that 12 percent is an appropriate interest rate for this arrangement.
Required:
a.Compute the present value of the receivable on Bioco's books on January 1,2011 immediately after receiving the $1 million down payment.
b.Compute the present value of the receivable on Biotech's books on December 31,2011.
c.Compute the present value of the receivable on Biotech's books on December 31,2012.

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The answer of The following problem requires some of the...

Quiz 8: Investing Activities

You are trying to determine the functional currency of a foreign unit.For the following three factors determine what conditions would result in the foreign currency being the functional currency: a.Sales Prices b.Financing c.Relationships between the Parent and the Foreign Unit

Interpretation No.46R relates to the issue of whether an investing firm is the primary beneficiary in a variable-interest entity.When is an entity classified as a variable interest entity?

When there are two or more investing firms in an entity,how is it determined which entity consolidates the variable interest entity?

Although the organizational structure and operating policies of a particular foreign unit determine its functional currency,discuss two actions that a management team might take to ensure that the foreign currency is the functional currency.

For some transactions U.S.GAAP requires that value changes are recognized on the balance sheet and the income statement when they occur,even if not realized.Discuss what types of transactions get this type of treatment and the logic behind this accounting.