Académique Documents
Professionnel Documents
Culture Documents
BANK
Advanced
Accountin
g
Part 2
ISBN 978-621-95096-5-7
Published by:
BANDOLIN ENTERPRISE
No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600,
Philippines
TABLE OF CONTENTS
CHAPTER 13
BUSINESS COMBINATIONS (PART 1).............1
OVERVIEW ON THE TOPIC...........................................1
INTRODUCTION........................................................1
OBJECTIVE..............................................................4
SCOPE...................................................................5
DEFINITION OF BUSINESS COMBINATION........................5
Essential elements in the definition of a business combination 5
ACCOUNTING FOR BUSINESS COMBINATION....................7
IDENTIFYING THE ACQUIRER........................................8
DETERMINING THE ACQUISITION DATE.........................10
RECOGNIZING AND MEASURING GOODWILL..................11
Consideration transferred...............................12
Non-controlling interest..................................12
Previously held equity interest in the acquiree13
Net identifiable assets acquired.....................13
RESTRUCTURING PROVISIONS....................................22
SPECIFIC RECOGNITION PRINCIPLES............................23
1. Operating leases.......................................23
2. Intangible assets.......................................26
EXCEPTION TO THE RECOGNITION PRINCIPLE CONTINGENT LIABILITIES
32
EXCEPTIONS TO BOTH THE RECOGNITION AND MEASUREMENT PRINCIPLES
34
Additional concepts on Consideration transferred 37
EXCEPTIONS TO THE MEASUREMENT PRINCIPLE.............40
CHAPTER 13: SUMMARY..........................................43
CHAPTER 13: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................44
CHAPTER 13: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).........................................48
CHAPTER 13: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
55
CHAPTER 14
BUSINESS COMBINATIONS (PART 2)............63
SHARE-FOR-SHARE EXCHANGES.................................63
BUSINESS COMBINATION ACHIEVED IN STAGES..............67
BUSINESS COMBINATION ACHIEVED WITHOUT TRANSFER OF CONSIDERATION 70
MEASUREMENT PERIOD............................................73
DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION TRANSACTION 79
Reacquired rights...........................................82
Settlement of pre-existing relationships between the acquirer
and acquiree...................................................82
SUBSEQUENT MEASUREMENT AND ACCOUNTING...........89
DISCLOSURES........................................................96
CHAPTER 14: SUMMARY..........................................96
CHAPTER 14: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)............................................................97
CHAPTER 14: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).........................................99
CHAPTER 14: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................108
CHAPTER 15
BUSINESS COMBINATIONS (PART 3)..........115
SCOPE...............................................................358
DEFINITIONS........................................................358
PREPARATION OF SEPARATE FINANCIAL STATEMENTS.....359
COST METHOD.....................................................359
FAIR VALUE METHOD.............................................359
EQUITY METHOD..................................................360
DISCLOSURE........................................................361
CHAPTER 20: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................362
CHAPTER 20: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................362
CHAPTER 20: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................363
CHAPTER 20: THEORY OF ACCOUNTS REVIEWER........364
CHAPTER 20 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS
........................................................................364
CHAPTER 21
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
.............................................................365
OBJECTIVE..........................................................365
Two ways of conducting foreign activities....365
Two main accounting issues.........................365
SCOPE...............................................................366
FUNCTIONAL CURRENCY.........................................366
CHANGE IN FUNCTIONAL CURRENCY.........................368
FOREIGN CURRENCY TRANSACTIONS.........................369
Initial recognition..........................................369
Subsequent measurement...........................370
Monetary items.............................................370
Direct and indirect quotation........................371
RECOGNITION OF EXCHANGE DIFFERENCES................371
ITEMS MEASURED AT OTHER THAN HISTORICAL COST...381
SEVERAL EXCHANGE RATES.....................................383
EXCHANGE DIFFERENCES RECOGNIZED IN OCI...........384
FOREIGN OPERATIONS...........................................385
Translation to the presentation currency......385
Translation procedures.................................386
Translation of a foreign operation.................393
Net investment in a foreign operation..........401
Disposal or partial disposal of a foreign operation 413
HYPERINFLATIONARY ECONOMY...............................414
Translation procedures Hyperinflationary economy
414
DISCLOSURE........................................................419
CHAPTER 21: SUMMARY........................................419
CHAPTER 21: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................420
CHAPTER 21: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................424
CHAPTER 21: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................435
CHAPTER 21: THEORY OF ACCOUNTS REVIEWER........445
CHAPTER 21 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS
........................................................................453
CHAPTER 22
QUESTIONS
CHAPTER 26
CORPORATE LIQUIDATION AND REORGANIZATION
615
INTRODUCTION....................................................615
CORPORATE LIQUIDATION.......................................615
Measurement basis......................................615
Financial reports...........................................616
REORGANIZATION.................................................642
Types of corporate reorganization................642
CHAPTER 26: SUMMARY........................................643
CHAPTER 26: MULTIPLE CHOICE THEORY (FOR CLASSROOM INSTRUCTION
PURPOSES)..........................................................646
CHAPTER 26: MULTIPLE CHOICE COMPUTATIONAL (FOR CLASSROOM
INSTRUCTION PURPOSES).......................................651
CHAPTER 26: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES)
........................................................................658
APPENDICES
APPENDIX A...........................................664
INTERMEDIATE FINANCIAL ACCOUNTING - PART 1A CONTENTS AT A
GLANCE
APPENDIX B...........................................665
INTERMEDIATE FINANCIAL ACCOUNTING - PART 1B CONTENTS AT A
GLANCE
APPENDIX C...........................................666
INTERMEDIATE FINANCIAL ACCOUNTING - PART 2 CONTENTS AT A
GLANCE
APPENDIX D...........................................667
INTERMEDIATE FINANCIAL ACCOUNTING - PART 3 CONTENTS AT A
GLANCE
APPENDIX E............................................668
ADVANCED ACCOUNTING - PART 1 CONTENTS AT A GLANCE
REFERENCES..........................................669
Chapter 13
Business Combinations (Part 1)
Chapter 13: Multiple Choice Computational (For classroom
instruction purposes)
Measuring goodwill / gain on bargain purchase
Use the following information for the next two questions:
Fact pattern
On January 1, 20x1, DIMINUTIVE Co. acquired all of the assets and
assumed all of the liabilities of SMALL, Inc. As of this date, the
carrying amounts and fair values of the assets and liabilities of
SMALL acquired by DIMINUTIVE are shown below:
Carrying
Assets
amounts
Fair values
Cash in bank
40,000
40,000
Receivables
800,000
480,000
Allowance for probable losses
on
(120,000)
receivables
Inventory
2,080,000
1,400,000
Building net
4,000,000
4,400,000
Goodwill
400,000
80,000
Total assets
7,200,000
6,400,000
Liabilities
Payables
1,600,000
1,600,000
1,600,000
1,800,00
0
140,000
180,000
1,080,0
00
Additional information:
The computer software is considered obsolete.
The patent has a remaining useful life of 10 years and a
remaining legal life of 12 years.
FLEXIBLE, Inc. recognized the research and development costs as
expenses when they were incurred.
Customer contract #1 refers to an agreement between FLEXIBLE,
Inc. and Numbers Co., a customer, wherein FLEXIBLE, Inc. is to
supply goods to Numbers Co. for a period of 5 years. As of
acquisition date, the remaining period in the agreement is 3
years. LITHE and FLEXIBLE believe that Numbers Co. will renew
the agreement at the end of the current contract. The agreement
is not separable.
Customer contract #2 refers to FLEXIBLEs insurance segments
portfolio of one-year motor insurance contracts that are
cancellable by policyholders.
FLEXIBLE, Inc. transacts with its customers solely through
purchase and sales orders. As of acquisition date, has a backlog
of customer purchase orders from 60% of its customers, all of
whom are recurring customers. The other 40% of FLEXIBLEs
customers are also recurring customers. However, as of
acquisition date, FLEXIBLE has no open purchase orders or other
contracts with those customers.
The internet domain name is registered.
How much is the goodwill (gain on bargain purchase)?
a. 900,000
b. 600,000 c. 420,000 d. 1,680,000
Other recognition and measurement principles
14. On January 1, 20x1, SUBTERFUGE Co. acquired all of the
identifiable assets and assumed all of the liabilities of
DECEPTION, Inc. by paying cash of 4,000,000. On this date, the
identifiable assets acquired and liabilities assumed have fair
values of 6,400,000 and 3,600,000, respectively.
Additional information:
SUBTERFUGE intends to sell immediately a factory plant included
in the identifiable assets of DECEPTION. All of the held for sale
classification criteria under PFRS 5 are met. As of January 1,
20x1, the factory plant has a fair value of 1,200,000 and a
carrying amount of 1,000,000 in the books of DECEPTION. Costs
to sell the factory plant is 80,000.
Not included in the identifiable asset of DECEPTION is a research
and development intangible asset that SUBTERFUGE does not
intend to use. The fair value of this asset is 200,000.
Also, not included in the identifiable asset of DECEPTION is a
customer list, with an estimated value of 40,000, in the form of
a database where the nature of the information is subject to
national laws regarding confidentiality.
d.
Contingent liabilities
15. On January 1, 20x1, CHIDE Co. acquired 90% of the identifiable
assets and assumed all of the liabilities of SCOLD, Inc. by paying
cash of 4,000,000. On this date, SCOLDs identifiable assets and
liabilities have fair values of 6,400,000 and 3,600,000,
respectively. Non-controlling interest has a fair value of 320,000.
As of January 1, 20x1, SCOLD had the following which were not
included in the acquisition-date fair value measurement of liabilities:
SCOLD has an existing contract with a customer to deliver
products at a specified future date. In accordance with the
agreement, SCOLD shall pay a penalty for failure to deliver the
said goods. CHIDE determined that the fair value of the penalty is
40,000. However, because CHIDE expects to comply with the
agreement, it was assessed that payment of penalty is
improbable.
SCOLD has guaranteed a bank loan of a third party. CHIDE shall
replace SCOLD as the guarantor. If the third party defaults on the
loan, CHIDE will be held liable for the guarantee. CHIDE
determined that the fair value of the guarantee is 120,000.
However, both SCOLD and CHIDE believe that the third party will
not default on its loan from the bank.
There is a pending unresolved litigation filed by a third party
against SCOLD. CHIDE determined that the fair value of settling
the litigation is 200,000. However, because the legal counsels of
both CHIDE and SCOLD strongly believe that they will win the
case, it was assessed that payment for the settlement of the
litigation is improbable.
How much is the goodwill (gain on bargain purchase)?
a. 1,880,000
b. 1,200,000
c. 1,560,000
d. 1,520,000
Consideration transferred and indemnification asset
16. On January 1, 20x1, PRODIGIOUS Co. acquired all of the
identifiable assets and assumed all of the liabilities of
EXTRAORDINARY, Inc. by paying cash of 4,000,000. On this date,
the identifiable assets acquired and liabilities assumed have fair
values of 6,400,000 and 3,600,000, respectively.
The terms of the business combination agreement are shown below:
Half of the 4,000,000 agreed consideration shall be paid on
January 1, 20x1 and the other half on December 31, 20x5. The
prevailing market rate as of January 1, 20x1 is 10%.
In addition, PRODIGIOUS agrees to provide for the following:
a. A piece of land with a carrying amount of 2,000,000 and fair
value of 1,200,000 shall be transferred to the former owners
of EXTRAORDINARY.
b. After the combination, EXTRAORDINARYs activities shall be
continued by PRODIGIOUS. PRODIGIOUS agrees to provide a
patented
technology
for
use
in
the activities
of
EXTRAORDINARY. The patented technology has a carrying
d.
Deferred taxes
17. On January 1, 20x1, ATTAINDER Co. acquired all of the assets
and assumed all of the liabilities of DISHONOR, Inc. As of this
date, the carrying amounts and fair values of the assets and
liabilities of DISHONOR acquired by ATTAINDER are shown below:
Carrying
Assets
amounts
Fair values
Cash in bank
40,000
40,000
Receivables
800,000
480,000
Allowance for probable losses
on
(120,000)
receivables
Inventory
2,080,000
1,400,000
Building net
4,000,000
4,400,000
Goodwill
400,000
80,000
Total assets
7,200,000
6,400,000
Liabilities
Payables
1,600,000
1,600,000
Liabilities
Dividends payable
Other payables
400,000
1,600,000
2,000,000
400,000
1,600,000
2,000,000
Chapter 14
Business Combinations (Part 2)
Chapter 14: Multiple Choice Computational (For classroom
instruction purposes)
Consideration transferred Measurement
Use the following information for the next five questions:
On January 1, 20x1, COLLOQUY Co. acquired all of the identifiable
assets and assumed all of the liabilities of CONVERSATION, Inc. by
issuing its own ordinary shares. Information at acquisition date is
shown below:
COLLOQUY
CONVERSATION Combine
Co.
, Co.
d entity
(carrying
amounts)
(fair values)
16,000,00
9,600,000
6,400,000
Identifiable assets
0
Goodwill
?
Total assets
9,600,000
6,400,000
?
Liabilities
Share capital
Share premium
Retained earnings
Total liabilities &
equity
2,800,000
2,400,000
1,200,000
3,200,000
3,600,000
1,200,000
1,000,000
600,000
6,400,000
2,800,000
4,800,000
?
9,600,000
6,400,000
Additional information:
COLLOQUYs share capital consists of 60,000 ordinary shares with
par value of 40 per share.
CONVERSATIONs share capital consists of 3,000 ordinary shares
with par value of 400 per share.
1. How much is the fair value of consideration transferred on the
business combination?
a. 4,000,000 b . 2,400,000
c. 4,400,000
d. 4,800,000
2. How many shares were issued in the business combination?
a. 40,000
b. 12,000 c. 36,000 d. 10,000
3. How much is the acquisition-date fair value per share?
a. 400
b. 440
c. 280
d. 360
4. How much goodwill was recognized on acquisition date?
a. 980,000
b. 1,200,000
c. 1,280,000
d.
1,080,000
5. What is the retained earnings of the combined entity immediately
after the business combination?
a. 3,120,000 b. 3,320,000
c. 3,280,000
d. 3,200,000
Fair value of acquirers shares is reliably determinable
10
11
a. (1,680,000)
b. (1,320,000)
c. (880,000)
d. 0
12
13
d.
14
On the other hand, SLAVE recognized the license fee paid to THRALL
as prepayment and amortized it based on the number of products
sold. The carrying amount of the prepayment on January 1, 20x1 is
200,000.
On January 1, 20x1, THRALL has determined that the fair value of
the license agreement is 480,000. The fair value determined
consists of 160,000 at-market (based on market participants'
estimates) and 320,000 off-market (based on the excess of fair
value derived from cash flow estimates over at-market values;
480,000 160,000) components. The off-market component is
favorable to SLAVE and unfavorable to THRALL, as royalty rates have
increased considerably in comparable markets since the initiation of
the contract. The contract does not have any cancellation clause or
any minimum royalty payment requirements.
How much is the goodwill (gain on bargain purchase)?
a. 1,200,000
b. 840,000 c. 980,000 d. 920,000
Settlement of pre-existing relationship Not a reacquired
right
20. MULIEBRITY Co. purchases raw materials from FEMINITY, Inc.
under a five-year supply contract at fixed rates. Currently, the
fixed rates are higher than the rates at which MULIEBRITY could
purchase similar raw materials from another supplier. MULIEBRITY
is allowed under the supply agreement to terminate the contract
before the end of the five-year term, but only by paying a
400,000 penalty.
On January 1, 20x1, with three years remaining under the supply
contract, MULIEBRITY Co. acquired all of the identifiable assets and
assumed all of the liabilities of FEMINITY, Inc. by paying cash of
4,000,000. On this date, FEMINITYs identifiable assets and
liabilities have fair values of 6,400,000 and 3,600,000,
respectively.
Included in the total fair value of FEMINITY is 640,000 related to the
fair value of the supply contract with MULIEBRITY. The 640,000
represents a 280,000 component that is at market because the
pricing is comparable to pricing for current market transactions for
the same or similar items (selling effort, customer relationships and
so on) and a 360,000 component for pricing that is unfavorable to
MULIEBRITY because it exceeds the price of current market
transactions for similar items. There are no other assets or liabilities
related to the contract in either MULIEBRITYs or FEMINITYs books as
of acquisition date.
How much is the goodwill (gain on bargain purchase)?
a. 840,000 b. 1,200,000
c. 920,000 d. 980,000
Settlement of pre-existing relationship Non-contractual
21. On January 1, 20x1, DEMULCENT Co. acquired all of the
identifiable assets and assumed all of the liabilities of
EMBARRASSING, Inc. by paying cash of 4,000,000. On this date,
EMBARRASSINGs identifiable assets and liabilities have fair
values of 6,400,000 and 3,600,000, respectively.
15
Initial
and
subsequent
measurement
22. On January 1, 20x1, VERITY FIRMNESS Co. acquired all of the
identifiable assets and assumed all of the liabilities of FIRMNESS,
Inc. by paying cash of 4,000,000. On this date, FIRMNESSs
identifiable assets and liabilities have fair values of 6,400,000
and 3,600,000, respectively.
VERITY agrees to pay an additional amount equal to 10% of the 20x1
year-end profit that exceeds 1,600,000. FIRMNESS historically has
reported profits of 1,200,000 to 1,600,000 each year.
After assessing the expected level of profits for the year based on
forecasts and plans, as well as industry trends, VERITY estimated
that the fair value of the contingent consideration is 40,000.
How much is the goodwill (gain on bargain purchase)?
a. 1,180,000
b. 1,200,000
c. 1,240,000
980,000
d.
23. Case #1: (Refer to previous problem) The actual profit for the
year is 2,200,000. The contingent consideration will be settled
on January 15, 20x2. The entry on December 31, 20x1 includes a
a. debit to loss of 20,000 to be recognized in profit or loss
b. credit to gain of 20,000 to be recognized in profit or loss
c. debit to loss of 20,000 to be recognized in OCI
d. credit to gain of 20,000 to be recognized in OCI
24. Case #2: (Refer to previous problem) The actual profit for the
year is 1,200,000. The entry on December 31, 20x1 includes a
a. debit to loss of 40,000 to be recognized in profit or loss
b. credit to gain of 40,000 to be recognized in profit or loss
c. debit to loss of 40,000 to be recognized in OCI
d. credit to gain of 40,000 to be recognized in OCI
Contingent
consideration
Initial
and
subsequent
measurement
25. On January 1, 20x1, PRECIPITOUS Co. acquired all of the
identifiable assets and assumed all of the liabilities of STEEP, Inc.
by issuing 10,000 of its own shares with par value of 40 per
share. On this date, STEEPs identifiable assets and liabilities have
fair values of 6,400,000 and 3,600,000, respectively, while
PRECIPITOUSs shares have fair value of 400 per share.
In addition, PRECIPITOUS agrees to issue additional 1,000 shares to
the former owners of STEEP if the market price per share of
16
17
Chapter 15
Business Combinations (Part 3)
Chapter 15: Multiple Choice Computational (For classroom
instruction purposes)
Applications of the Direct valuation method
Use the following information for the next four questions:
UNFLEDGED Co. is contemplating on acquiring IMMATURE, Inc. The
following information was gathered through a diligence audit:
The actual earnings of IMMATURE, Inc. for the past 5 years are
shown below:
Earning
Year
s
4,800,00
20x1
0
5,200,00
20x2
0
5,400,00
20x3
0
5,000,00
20x4
0
7,200,00
20x5
0
27,600,0
Total
00
18
Earnings
20x1
20x2
20x3
20x4
20x5
Total
480,000
520,000
540,000
500,000
560,000
2,600,000
Year-end net
assets
1,920,000
2,320,000
2,160,000
2,240,000
2,360,000
11,000,000
19
20
Liabilities
Share capital:
10,000 ordinary shares, 40
par
8,000 ordinary shares, 400
par
Retained earnings
Total liabilities and equity
5,200,000
2,800,000
400,000
3,200,000
800,000
6,400,000
3,600,000
9,600,000
21
c. (A+C) (D x %)
d. (A+B) [(D x %) B]
22
23
24
25
26
27
Chapter 15 questions
1
. C 6. C
2
. A 7. D
3
. D 8. B
4
. C 9. C
5
1
. A 0. D
B
C
B
C
A
16
.
17
.
18
.
19
.
20
.
C
C
D
A
D
21
.
22
.
23
.
24
.
25
.
A
A
D
C
B
28
26
.
27
.
28
.
29
.
30
.
A
A
A
B
C
31
.
32
.
33
.
34
.
35
.
A
B
B
C
C
Chapter 16
Consolidated Financial Statements (Part
1)
Accounts payable
Bonds payable
Share capital
Share premium
Retained earnings
Total liabilities and equity
80,000
120,000
480,000
160,000
200,000
1,040,000
24,000
200,000
96,000
320,000
On January 1, 20x1, the fair value of the assets and liabilities of XYZ,
Inc. were determined by appraisal, as follows:
XYZ, Inc.
Cash
Accounts receivable
Inventory
Equipment
Accumulated
depreciation
Accounts payable
Net assets
Carryi
ng
amou
nts
20,000
48,000
92,000
200,00
0
(40,00
0)
(24,00
0)
296,0
00
Fair
value
s
20,000
48,000
124,00
0
240,00
0
(48,00
0)
(24,00
0)
360,0
00
29
Fair
value
increm
ent
32,000
40,000
(8,000)
64,000
XYZ, Inc.
Cash
Accounts
receivable
Inventory
Carryi
ng
amou
nts
20,000
Fair
value
s
20,000
48,000
48,000
92,000
124,00
32,000
30
Fair
value
increm
ent
-
Equipment
Accumulated
depreciation
Accounts payable
Net assets
200,00
0
(40,000
)
(24,000
)
296,0
00
0
240,00
0
(48,00
0)
(24,00
0)
360,0
00
40,000
(8,000)
64,000
XYZ, Inc.
ASSETS
92,0
00
300,0
00
420,0
00
300,0
00
800,0
00
(240,00
0)
1,672,0
00
Cash
Accounts receivable
Inventory
Investment in subsidiary
Equipment
Accumulated depreciation
TOTAL ASSETS
228,000
88,000
60,000
200,000
(80,00
0)
496,00
0
Accounts payable
Bonds payable
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
31
120,000
120,00
0
200,000
176,000
376,00
0
1,672,0
00
0
496,00
0
Sales
Cost of goods sold
Gross profit
Depreciation expense
Distribution costs
Interest expense
Profit for the year
XYZ, Inc.
480,00
0
(288,00
0)
192,00
0
(40,00
0)
(72,00
0)
80,0
00
32
Retained
earnings
Total equity
96,000
296,000
XYZ, Inc.
ASSETS
Cash
Accounts receivable
Inventory
Investment in subsidiary
Equipment
Accumulated depreciation
TOTAL ASSETS
92,000
300,000
420,000
300,000
800,000
(240,000)
1,672,000
200,000
(80,000)
496,000
172,000
120,000
292,000
680,000
260,000
440,000
1,380,000
1,672,000
120,000
120,000
200,000
176,000
376,000
496,000
228,000
88,000
60,000
Sales
33
XYZ, Inc.
480,000
0
(660,000
)
540,000
(160,000
)
(128,000
)
(12,000)
240,000
(288,000)
192,000
(40,000)
(72,000)
80,000
34
Chapter 17
Consolidated Financial Statements (Part
2)
Chapter 17: Multiple Choice Computational (For classroom
instruction purposes)
Fair value decrement
Use the following information for the next two questions:
Popo Co. acquired 80% of Momo Co. on January 1, 20x1 for
800,000. The following information was determined at acquisition
date:
Popo
Momo
Momo
Co.
Co.
Co.
Carryin Carryin
g
g
Fair
amount amount
value
4,000,00 2,000,00 1,600,0
Equipment
0
0
00
Accumulated
(800,00 (400,000 ( 320,0
depreciation
0)
)
00)
3,200,00 1,600,00 1,280,0
Net
0
0
00
Remaining useful life Jan. 1, 20x1 10 years
years
5 years
35
Owl Co. paid 600,000 for its 75% interest in Owlet Co. Owl elected
to value NCI at fair value. Owlets net identifiable assets
approximated their fair values at acquisition date. The acquisition
resulted in a goodwill attributable to NCI of 40,000.
Since the acquisition date, Owlet has made accumulated profits of
800,000. There have been no changes in Owlets share capital
since acquisition date. The group determined that goodwill has been
impaired by 32,000.
A summary of the individual statements of financial positions of the
entities as at the end of reporting period is shown below:
Owlet
Owl Co. Co.
4,000,0 2,000,0
Total assets
00
00
Total liabilities
Share capital
Retained earnings
Total liabilities and
equity
800,000 480,000
1,200,0
400,000
00
2,000,0 1,120,0
00
00
4,000,0 2,000,0
00
00
d. 5,620,000
d. 5,622,000
36
d.
d.
d.
37
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative costs
Profit before tax
Income tax expense
Profit after tax
Pig Co.
4,000,
000
(1,600
,000)
2,400
,000
(800
,000)
(320
,000)
1,280
,000
(384
,000)
89
6,000
Piglet Co.
2,8
80,000
(1,2
00,000)
1,6
80,000
(1
80,000)
1,1
00,000
(3
80,000)
720,000
All of Piglets income and expenses (including profit from intercompany sale) were earned and incurred evenly during the year.
16. How much is the consolidated sales?
a. 6,556,000
b. 4,852,000
c. 4,786,000
4,636,000
d.
d.
d.
38
20. Bear Co. owns 75% of Cub Co.s ordinary shares. Cub Co. has
12%, 400,000 outstanding cumulative preference shares, none
of which are held by Bear Co. The carrying amount of Cubs net
identifiable assets at acquisition date approximates fair value.
Bear and Cub reported individual profits of 936,000 and 700,000,
respectively, for the year ended December 31, 20x1. Neither
company declared dividends. There are 3-year dividends in arrears
on the outstanding cumulative preference shares of Cub Co. It was
assessed that goodwill is not impaired.
How much is the profit attributable to owners of the parent and NCI,
respectively?
Owners of Parent
NCI
a. 1,425,000
163,000
b. 1,377,000
163,000
c. 1,377,000
211,000
d. 1,425,000
211,000
39
Chapter 18
Consolidated Financial Statements (Part
3)
Chapter 18: Multiple Choice Computational (For classroom
instruction purposes)
Impairment of goodwill
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by
issuing 5,000 shares with fair value of 60 per share and par value
of 40 per share.
XYZs shareholders equity as of January 1, 20x1 comprises the
following:
(at carrying
amounts)
Share capital
200,000
Retained
earnings
96,000
Total equity
296,000
On January 1, 20x1, the fair values of the assets and liabilities of
XYZ, Inc. were determined by appraisal, as follows:
Carrying
Fair
Fair value
XYZ, Inc.
amounts
values
increment
Cash
20,000
20,000
48,000
48,000
Accounts receivable
92,000 124,000
32,000
Inventory
200,000 240,000
40,000
Equipment
Accumulated
(40,000) (48,000)
(8,000)
depreciation
(24,000) (24,000)
Accounts payable
Net assets
296,000
360,00
64,000
0
The remaining useful life of the equipment is 4 years.
During 20x1, no dividends were declared by either ABC or XYZ.
There were also no inter-company transactions.
The group determined that goodwill is impaired by 4,000.
ABCs and XYZs individual financial statements at year-end are
shown below:
Statements of financial position
As at December 31, 20x1
ABC Co.
XYZ, Inc.
ASSETS
92,
000
300,
000
Cash
Accounts receivable
40
228,0
00
88,0
00
420,
000
300,
000 800,
000
(240,
000)
1,672
,000
Inventory
Investment in subsidiary
Equipment
Accumulated depreciation
TOTAL ASSETS
60,0
00
200,0
00
(80,0
00)
496,
000
172,
000
120,
000
292,
000
680,
000
260,
000
440,
000
1,380,
000
1,672
,000
ABC Co.
1,200,
000
(660,
000)
540,
000
(160,
000)
(128,
000)
(12,
000)
240
,000
Sales
Cost of goods sold
Gross profit
Depreciation expense
Distribution costs
Interest expense
Profit for the year
120,0
00
120,0
00
200,0
00
176,0
00
376,0
00
496,
000
XYZ, Inc.
480,
000
(288,0
00)
192,
000
(40,0
00)
(72,0
00)
80,
000
Case #1: On acquisition date, ABC Co. elected to measure noncontrolling interest as its proportionate share in XYZ, Inc.s net
identifiable assets.
1. How much is the consolidated profit for 20x1?
41
a. 296,000
(1)
(2)
(3)
Consideration transferred
Non-controlling interest
in the acquiree
Previously held equity
interest in the acquire
Total
Fair value of net
identifiable assets
acquired
Goodwill
Case #1
(proportionate)
300,000
Case #2
(fair value)
300,000
72,000
75,000
372,000
375,000
(360,000)
(360,000)
12,000
15,000
As of December 31, 20x1, XYZ, Inc. increased its net assets (after
fair value adjustments) by 40,000 to 400,000. The NCI in net
assets is updated as follows:
Case #1
Case #2
(proportiona
(fair
te)
value)
NCI at acquisition date Jan. 1, 20x1
72,000
75,000
Subsequent increase (20% x 40,000)
8,000
8,000
42
80,000
83,000
43
ASSETS
Cash
Accounts receivable
Inventory
ABC Co.
XYZ,
Inc.
92,000
300,000
420,000
228,000
88,000
60,000
44
Consolidat
ed
320,000
388,000
480,000
Investment in
subsidiary
Equipment
Accumulated
depreciation
Goodwill
TOTAL ASSETS
300,000
800,000
(240,000
)
1,672,00
0
200,000
1,040,000
(80,000)
(336,000)
12,000
496,000
1,904,000
120,000
120,000
200,000
176,000
-
292,000
120,000
412,000
680,000
260,000
472,000
80,000
376,000
1,492,000
496,000
1,904,000
45
360,000
40,000
8,000
4,000
52,000
412,000
72,000
10,400
82,400
46
800,000
1,200,000
2,000,000
4,000,000
480,000
400,000
1,120,00
0
2,000,00
0
21. How much is the goodwill to be presented in the June 30, 20x3
consolidated financial statements?
a. 550,000
b. 620,000 c. 485,000 d. 530,000
22. How much is the NCI in net assets?
a. 538,000
b. 584,000 c. 624,000 d. 638,000
23. How much is the consolidated retained earnings?
a. 2,864,000 b. 2,924,000
c. 2,874,000
d. 2,984,000
24. How much is the consolidated total assets?
a. 5,310,000 b. 5,942,000
c. 5,982,000
d. 5,350,000
d. 4,724,000
47
800,000
1,200,000
2,000,000
4,000,000
480,000
400,000
1,120,00
0
2,000,00
0
d. 5,280,000
d. 4,220,000
48
d.
49
Peter sold goods costing 80,000 to Simon for 128,000. Onethird of the inventory remains as of Dec. 31, 20x1.
Simon sold goods costing 40,000 to Peter for 60,000. One-half
of the goods remain in inventory as of December 31, 20x1.
On January 1, 20x1, Simon sold to Peter equipment for 20,000.
The equipment has a historical cost of 40,000 and accumulated
depreciation of 16,000 and a remaining useful life of 5 years on
the date of sale.
On July 1, 20x1, Simon Co. purchased 50% of the outstanding
bonds of Peter Co. from the open market for 240,000. The
interest income accruing on the bonds for the year was received
by Simon from Peter.
The bonds payable carry an interest rate of 10% and were
originally issued by Peter at face amount.
Peter declared dividends of 160,000.
Simon declared dividends of 80,000.
Goodwill is impaired by 8,000.
There have been no changes in Simons share capital.
Simon Co.
ASSETS
Cash
Accounts receivable
Inventory
Investment in bonds
Investment in subsidiary
Equipment
Accumulated depreciation
TOTAL ASSETS
488,000
4,020,000
(1,444,000)
5,664,000
200,000
(91,200)
720,000
284,000
400,000
684,000
3,200,000
1,780,000
4,980,000
5,664,000
83,200
83,200
200,000
436,800
636,800
720,000
1,448,000
712,000
440,000
85,200
20,000
268,000
238,000
50
Simon Co.
3,728,00
0
(1,700,00
0)
2,028,00
0
Sales
Cost of goods sold
Gross profit
Interest income
1,020,000
(472,000)
548,000
8,000
(644,000
)
(256,000
)
(40,000)
72,000
1,160,0
00
Depreciation expense
Distribution costs
Interest expense
Loss on sale of equipment
Dividend income
Profit for the year
(144,000)
(4,000)
380,800
d. 4,650,000
d. 1,934,000
51
Identifiable assets
Total assets
Liabilities
Share capital:
100 ordinary
shares
60 ordinary
shares
Retained earnings
Total liabilities and
equity
Small Co.
(legal parent,
accounting
acquiree)
21,600
21,600
Big Co.
(legal subsidiary,
accounting acquirer)
44,400
44,400
8,400
20,400
3,600
7,200
9,600
16,800
21,600
44,400
52
a. 22,800
b. 25,680
c. 16,800
d. 26,400
53
Chapter 19
Consolidated Financial Statements (Part
4)
Chapter 19: Multiple Choice Computational (For classroom
instruction purposes)
Acquisition date Vertical group
Scenario #1:
1. On January 1, 20x1, S1 acquires 60% interest in S2. On January 1,
20x3, P acquires 80% interest in S1. What is the acquisition date?
a January 1, 20x1 for S1 only
b January 1, 20x3 for S2 only
c January 1, 20x1 for both S1 and S2
d January 1, 20x3 for both S1 and S2
e a and b
2. When is goodwill computed?
a January 1, 20x1 for S1 only
b January 1, 20x3 for S2 only
c January 1, 20x1 for both S1 and S2
d January 1, 20x3 for both S1 and S2
e a and b
Scenario #2:
3. On January 1, 20x1, P acquires 80% interest is S1. On January 1,
20x3, S1 acquires 60% interest in S2. What is the acquisition
date?
a January 1, 20x1 for S1 only
b January 1, 20x3 for S2 only
c January 1, 20x1 for both S1 and S2
d January 1, 20x3 for both S1 and S2
e a and b
Acquisition date D-shaped group
Scenario #1:
4. P acquires 80% interest in S1 on January 1, 20x1. P acquires 25%
interest in S2 on January 1, 20x2. S1 acquires 30% interest in S2
on January 1, 20x3. What is the acquisition date?
a January 1, 20x1 for S1 only
b January 1, 20x3 for S2 only
c January 1, 20x2 for S2
d a and c
e a and b
Scenario #2:
5. S1 acquires 30% interest in S2 on January 1, 20x1. P acquires
25% interest in S2 on January 1, 20x2. P acquires 80% interest in
S1 on January 1, 20x4.
a January 1, 20x4 for S1 only
b January 1, 20x2 for S2 only
c January 1, 20x4 for both S1 and S2
d a and c
e a and b
54
400,0
00
800,0
00
1,200,
000
S1
200,0
00
480,0
00
680,
000
120,000
480,000
600,000
152,000
320,000
208,000
8,000
200,000
112,000
1,200,000
680,000
320,000
408,
000
(320,0
00)
88,
000
192,0
00
(120,0
00)
72,
000
S2
320,0
00
320,
000
55
NCI in S2
38,110
29,120
22,690
60,040
S1
100,000
112,000
S2
40,000
112,000
S2
192,000
168,000
56
408,
000
(320,0
00)
88,
000
192,0
00
(120,0
00)
72,
000
57
S1
120,000
100,000
S2
40,000
160,000
Liabilities
Share capital (4.00 par
value)
Retained earnings
Total liabilities and
equity
560,
000
800,
000
1,360
,000
S1
200,
000
480,
000
680,
000
280,
000
480,
000
600,
000
1,360
,000
152,
000
320,
000
208,
000
680,
000
S2
320,00
0
320,0
00
8,00
0
200,00
0
112,00
0
320,0
00
58
B
120,00
0
100,00
0
40,000
160,00
0
8,000
32,000
192,00
0
72,000
B
C
440,00 320,00
560,000
0
0
59
E
-
Other assets
Total assets
Liabilities
Share capital
Retained earnings
Total liabilities and
equity
800,000
1,360,0
00
31, 20x1
D
E
256,0 128,0
00
00
(224,0 (80,0
00)
00)
32,00 48,0
0
00
60
a. 439,632
b. 358,400
c. 425,680
d. 443,932
19,520
9,600
17,600
18,768
43,248
31,272
36,720
37,860
0
0
6,890
0
0
2,530
0
61
62
b. Yes, LASSITUDE Co. holds 50% of the voting power and has the
casting vote at board meetings in the event that there is not a
majority decision.
c. No, LASSITUDE Co. owns only 50% of the entitys shares and
therefore does not have control.
d. No, control can be exercised only through voting power, not
through a casting vote.
(Adapted)
10. VOLUBLE TALKATIVE Co. has sold all of its shares to the public.
The company was formerly a state-owned entity. The national
regulator has retained the power to appoint the board of
directors. An overseas entity acquires 55% of the voting shares,
but the regulator still retains its power to appoint the board of
directors. Who has control of the entity?
a. The national regulator.
b. The overseas entity.
c. Neither the national regulator nor the overseas entity.
d. The board of directors.
(Adapted)
11. A manufacturing group has just acquired a controlling interest
in a football club that is listed on a stock exchange. The
management of the manufacturing group wishes to exclude the
football club from the consolidated financial statements on the
grounds that its activities are dissimilar. How should the football
club be accounted for?
a. The entity should be consolidated as there is no exemption
from consolidation on the grounds of dissimilar activities.
b. The entity should not be consolidated using the purchase
method but should be consolidated using equity accounting.
c. The entity should not be consolidated and should appear as an
investment in the group accounts.
d. The entity should not be consolidated; details should be
disclosed in the financial statements.
(Adapted)
12. On January 1, 20x1, TRICE Co. obtained control of INSTANT Co.
Subsequently, there have changes in the ownership interests over
INSTANT; however, the TRICEs control over INSTANT was
unaffected. Which of the following statements is incorrect?
a. Once control has been achieved, further transactions whereby
the parent entity acquires further equity interests from noncontrolling interests, or disposes of equity interests but without
losing control, are accounted for as equity transactions
b. The carrying amounts of the controlling and non-controlling
interests are adjusted to reflect the changes in their relative
interests in the subsidiary.
c. Any difference between the amount by which the noncontrolling interests is adjusted and the fair value of the
consideration paid or received is recognized directly in equity
and attributed to the owners of the parent.
d. The carrying amount of any goodwill should be adjusted and
gain or loss is recognized in profit or loss.
63
64
a. False, False
True
d.
True
19. Which of the following is not a valid condition that will exempt
an entity from preparing consolidated financial statements?
a. The parent entity is a wholly owned subsidiary of another
entity.
b. The parent entitys debt or equity capital is not traded on the
stock exchange.
c. The ultimate parent entity produces consolidated financial
statements available for public use that comply with PFRS.
d. The parent entity is in the process of filing its financial
statements with a securities commission.
(Adapted)
20. Where should non-controlling interests be presented in the
consolidated balance sheet?
a. Within long-term liabilities.
b. In between long-term liabilities and current liabilities.
c. Within the parent shareholders equity.
d. Within equity but separate from the parent shareholders
equity.
(Adapted)
Chapter 19 - Suggested answers to review theory questions
1
.
2
.
3
.
4
.
5
.
6. D
7. D
8. B
9. B
1
0. C
1
1.
1
2.
1
3.
1
4.
1
5.
16. A
17. C
18. C
19. D
20. D
65
Chapter 20
Separate Financial Statements
Chapter 20: Multiple Choice Computational (For classroom
instruction purposes)
Separate financial statements
Use the following information for the next four questions:
Bandolin Co. had the following investment transactions during 20x1:
Acquired 80% interest in Zaskar, Inc. for 4,000,000 on January 1,
20x1. Zaskar reported profit of 40M and declared dividends of
1,200,000 during 20x1. The fair value of the investment on
December 31, 20x1 is 4.8M.
Acquired 20% interest in Goat Co. for 400,000 on July 1, 20x1.
Transaction costs incurred amounted to 80,000. Goat reported
profit of 8M for the six months ended December 31, 20x1 and
declared year-end dividends of 800,000. The fair value of the
investment on December 31, 20x1 is 420,000.
Bandolins policy is to measure investments in subsidiaries at cost
and investments in associates at fair value through profit or loss in
the separate financial statements.
1. How much is the carrying amount of the investment in subsidiary
in the December 31, 20x1 consolidated financial statements?
a. 4,000,000 b. 4,800,000
c. 36,000,000
d. 0
2. How much is the carrying amount of the investment in subsidiary
in the December 31, 20x1 separate financial statements?
a. 4,000,000 b. 4,800,000
c. 36,000,000
d. 0
3. How much is the carrying amount of the investment in associate
in the December 31, 20x1 separate financial statements?
a. 480,000
b. 420,000 c. 1,920,000
d. 0
4. How much is net investment income recognized in the 20x1
separate financial statements for the investments referred to
above?
a. 100,000
b. 180,000 c. 33,600,000
d. 1,060,000
Chapter 20: Theory of Accounts Reviewer
1. Which of the following are required under PAS 27 to produce
separate financial statements?
a. A listed entity with at least one wholly owned subsidiary
b. A listed entity with at least one subsidiary, whether wholly or
partially owned.
c. An entity, whether listed or unlisted, with at least one affiliate
(e.g., a subsidiary, an associate or an interest in a joint
venture)
d. PAS 27 does not mandate which entities should produce
separate financial statements.
66
D
B
D
D
67
Chapter 21
The Effects of Changes in Foreign
Exchange Rates
Chapter 21: Multiple Choice Computational (For classroom
instruction purposes)
Foreign currency transaction Direct quotation Purchase
Use the following information for the next six questions:
On November 29, 20x1, ABC Co. placed a non-cancellable purchase
order for the importation of a machine with a purchase price of
40,000 from a company based in France. The contract term is FOB
shipping point. The machine was shipped on December 1, 20x1 and
was received by ABC on December 15, 20x1. The purchase price was
settled on January 3, 20x2.
The following are the exchange rates:
November 29, 20x1..55:1
December 1, 20x1.58:1
December 15, 20x1..57:1
December 31, 20x1..60:1
January 3, 20x2.61:1
1. The entry on November 29, 20x1 includes
a. a debit to accounts payable for 2,320,000.
b. a credit to machinery for 2,320,000.
c. a debit to machinery for 2,320,000
d. none of these
2. The entry on December 1, 20x1 includes
a. a debit to accounts payable for 2,320,000.
b. a credit to machinery for 2,320,000.
c. a debit to machinery for 2,320,000
d. none of these
3. The total FOREX gain (loss) recognized in 20x1 is
a. 40,000
b. (80,000) c. (200,000)
d. (120,000)
4. The adjustment to the machinery account on December 31, 20x1
is increase (decrease)
a. 80,000
b. (80,000) c. 40,000 d. 0
5. The total FOREX gain (loss) recognized in 20x2 is
a. (40,000)
b. (80,000) c. (200,000)
d. (120,000)
6. The net adjustment to the machinery account on January 3, 20x2
is increase (decrease)
a. 80,000
b. (120,000)
c. (40,000) d. 0
Foreign currency transaction Direct quotation Sale
Use the following information for the next four questions:
On November 29, 20x1, ABC Co. received a non-cancellable sale
order for the exportation of inventories from a UK-based company.
68
d. 2,840,000
Swedish
146,572
(66,667)
69
c. (3,922)
d. 0
66,667
0
Subsequent measurement
Use the following information for the next five questions:
On December 1, 20x1, ABC Co. acquired equipment for BRL 40,000
(Brazilian reals) when the exchange rate is 24:BRL1. ABC Co.
reported foreign exchange loss of 80,000 in its 20x1 statement of
profit or loss and a 20,000 foreign exchange gain of 20,000 in its
20x2 statement of profit or loss.
13. What is the exchange rate on December 31, 20x1?
a. 24:BRL1
b. 26:BRL1
c. 25.5:BRL1
of these
d. None
70
71
Both the acquisitions described above are on cash basis. At yearend, ABC Co. determined the following:
The equipment was found to have a recoverable amount of THB
28,000. The closing rate is 1.3: THB 1.
Half of the inventories purchased remain unsold. ABC estimated
that the net realizable value of the unsold inventories is ZAR
1,200. The closing rate is 6.
24. How much is the impairment loss on the equipment?
a. 11,600
b. 2,000
c. 9,280
d. None
25. How much is the impairment loss on the inventory?
a. 2,800
b. 800
c. 2,240
d. None
Buying and selling rates
Use the following information for the next two questions:
ABC Co. had the following foreign currency transactions on April 1,
20x1:
Purchased goods worth CHF 40,000 (francs) from Swiss Company,
a company based in Switzerland.
Sold goods with sale price of VEB 4,000 (bolivars) to Venezuelan
Company, a company based in Venezuela.
Both the transactions were settled on April 30, 20x1. The following
were the spot exchange rates:
Buying
Selling
Swiss Francs
April 1, 20x144:CHF1
48: CHF1
April 30, 20x1.47:CHF1
50: CHF1
Bolivars
April 1, 20x110:CHF1
April 30, 20x1.13:CHF1
12: CHF1
16: CHF1
72
73
At the date of the acquisition the fair value of the net assets of the
subsidiary were 5,600,000 wons. This included a fair value
adjustment in respect of land.
ABC Co. elected to measure non-controlling interest at the NCIs
proportionate share of the fair value of the subsidiarys net assets.
The group determined at year-end that goodwill is not impaired.
There were no changes in the share capital of the subsidiary during
the year.
The relevant exchange rates are as follows:
Date
Exchange rates
Jan. 1, 20x1.0.03: KRW 1
Average for the year..0.04: KRW 1
Dec. 31, 20x1..0.05: KRW 1
A summary of the individual financial statements of the entities at
the end of reporting period are shown below:
Statements of financial position
As at December 31, 20x1
ASSETS
Investment in subsidiary
Other assets
TOTAL ASSETS
ABC Co.
(pesos)
180,000
8,000,000
8,180,000
XYZ, Inc.
(wons)
5,200,000
5,200,000
1,600,000
4,000,000
2,580,000
6,580,000
8,180,000
240,000
800,000
4,160,000
4,960,000
5,200,000
Revenues
Expenses
Profit for the year
XYZ, Inc.
(wons)
2,400,000
(1,440,000
)
960,00
0
74
d. 1,696,000
Current assets
Investment in subsidiary
Property, plant and equipment
TOTAL ASSETS
Current liabilities
Noncurrent liabilities
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
*Amounts in millions.
Statements of profit or loss
75
XYZ, Inc.
ADMm*
8,800
7,200
16,000
4,000
4,800
8,800
4,000
2,800
6,800
4,000
2,000
6,960
12,960
21,760
400
800
8,000
9,200
16,000
XYZ, Inc.
ADMm
32,000
(16,000)
16,000
(4,000)
(1,200)
400
11,200
(4,000)
7,200
(800)
6,400
76
184,000
296,000
160,000
400,000
(80,000)
960,000
77
Loan payable
Share capital
Retained earnings
Total equity
Total liabilities and
equity
120,000
400,000
440,000
840,000
960,000
480,000
(200,000)
280,000
(40,000)
(160,000)
80,000
Additional information:
The building was acquired on January 1, 20x0.
The share capital was issued on January 1, 20x0.
Revenues were earned and expenses were incurred evenly during
the year.
Selected values of general price indices (CPI) are shown below:
January 1, 20x0
100
Average for 20x0
110
January 1, 20x1
120
Average for 20x1
125
December 31, 20x1
140
78
79
80
81
Compute
for
the
FOREX
12: CHF1
16: CHF1
gain/loss
from
the
82
83
ABC Co.
(pesos)
90,000
4,000,000
4,090,000
XYZ, Inc.
(wons)
2,600,000
2,600,000
800,000
2,000,000
1,290,000
3,290,000
4,090,000
120,000
400,000
2,080,000
2,480,000
2,600,000
Revenues
Expenses
Profit for the year
XYZ, Inc.
(wons)
1,200,0
00
(720,0
00)
480,
000
84
Current assets
Investment in subsidiary
Property, plant and equipment
TOTAL ASSETS
Current liabilities
Noncurrent liabilities
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
*Amounts in millions.
ABC Co.
m*
4,000
880
6,000
10,880
XYZ, Inc.
ADMm*
4,400
2,000
2,400
4,400
2,000
1400
3,400
2,000
1000
3,480
6,480
10,880
200
400
4,000
4,600
8,000
3,600
8,000
XYZ, Inc.
ADMm
16,00
0
(8,000
)
8,000
(2,000
)
(600
)
20
0
5,600
(2,000
)
3,60
0
(400
)
3,20
0
85
a) XYZ, Inc. has applied local GAAP, but has made some attempt to
adapt to IFRS (to which PFRSs are consistent). As a result, XYZ,
Inc. has written off research previously capitalized as an
extraordinary item prior period adjustment in the sum of ADM200
million. The remainder of the extraordinary item is the recognition
of a fall in value of some plant that was damaged during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was
ADM4,000 million after taking into account the removal of
capitalized research discussed above. Goodwill is unimpaired.
c) The increase in the fair value of XYZ, Inc. over carrying value is
attributable to machines which are depreciated over five years on
the straight line basis.
d) During the year, ABC Co. sold 60 million in goods to XYZ, Inc. at
a margin of 20%. All of the goods had been utilized in production
by the year-end, but only one half of the relevant finished goods
have been sold. XYZ, Inc. received the goods on September 1 and
paid on September 21. The foreign exchange difference remains
in current liabilities.
e) ABC Co. made a loan of 100 million to XYZ, Inc. immediately
after the acquisition on January 1. This is still outstanding at yearend. ABC Co. has recorded the asset in current assets. The
subsidiary has recorded the liability in noncurrent liabilities at the
rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and
received by ABC Co. on that day.
The following exchange rates are relevant:
ADM to 1.00
January 1.5
September 16
September 21.6.5
December 31..8
Weighted average for year.7
Requirements: Compute for the following (round-off amounts to
nearest million):
a. Consolidated total assets.
b. Consolidated total liabilities.
c. Consolidated total equity.
d. Prepare the consolidation working paper for comprehensive
income.
20. ABC Co. held 100% ownership interest of XYZ, Inc. but sold the
entire investment on August 1, 20x1 for 250,000.
The following information was determined as of this date:
Carrying amount of XYZs net identifiable assets
206,000
Carrying amount of NCI (including accumulated OCI
attributable to NCI)
41,200
Goodwill
6,000
ABC Co. had previously recognized translation gains of 1,600 in
other comprehensive income on its investment in XYZ, Inc.
Requirement: Compute for the total gain to be recognized in profit
or loss on disposal date.
86
92,000
Accounts receivable
148,000
Inventory
80,000
Building
200,000
Accumulated depreciation
(40,000)
Total assets
480,000
Loan payable
60,000
Share capital
200,000
Retained earnings
220,000
Total equity
Total liabilities and
equity
420,000
480,000
240,000
(100,000)
140,000
(20,000)
(80,000)
40,000
Additional information:
The building was acquired on January 1, 20x0.
The share capital was issued on January 1, 20x0.
Revenues were earned and expenses were incurred evenly during
the year.
Selected values of general price indices (CPI) are shown below:
January 1, 20x0
100
Average for 20x0
110
87
January 1, 20x1
Average for 20x1
December 31, 20x1
120
125
140
88
89
The
The
The
The
The
90
91
24. If the $ falls in value against the peso, and you have net $
liabilities:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
25. If the $ rises in value against the peso, and you have net $
assets:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
26. If the $ falls in value against the peso, and you have net $
assets:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
27. If the $ rises in value against the peso, and you have net $
liabilities:
a. An exchange loss will result.
b. An exchange gain will result.
c. Neither gain nor loss will result.
d. a or b, depending on the movement of the $.
(Adapted)
28.
a.
b.
c.
d.
29.
a.
b.
c.
d.
92
on
93
most
inter-company
trading
a. ignored.
b. recognized in profit or loss
c. recognized in equity.
d. a or c
94
95
51. The central bank of Country X buys and sells its own currency
to ensure that the currency is always exchanged in a ratio of 2:1
with the currency of Country Y. What can we conclude about
these two currencies?
a. Country X is using the euro.
b. Country X has pegged its currency to the currency of Country
Y.
c. Country X has an undesirable currency.
d. Country X allows its currency to float relative to the currency
of Country Y.
(Adapted)
52. What is the proper treatment of unrealized foreign exchange
gains?
a. They should be deferred on the statement of financial position
until cash is received.
b. The principle of conservatism requires that they should never
be recognized.
c. They should not be recorded until cash is received and the
exchange transaction is completed.
d. They should be recognized in profit or loss on the date the
exchange rate changes.
(Adapted)
53. RIGHTEOUS Co., a foreign subsidiary of MORAL Co., has written
down its inventory to net realizable value under the lower of cost
and NRV rule. When consolidating RIGHTEOUS Cos statement of
financial position into the groups financial statements, what
exchange rate should be used for the inventory?
a. historical rate
c. closing rate
b. average rate
d. cannot be determined
(Adapted)
54. Foreign operations that are an integral part of the operations
of the entity would have the same functional currency as the
entity. Where a foreign operation functions independently from
the parent, the functional currency will be
a. That of the parent.
b. Determined using the guidance for determining an entitys
functional currency.
c. That of the country of incorporation.
d. The same as the presentation currency.
(Adapted)
Chapter 21 - Suggested answers to review theory questions
1. D
2. D
3. D
4. D
5. D
11
.
12
.
13
.
14
.
15
C
C
A
C
C
21
.
22
.
23
.
24
.
25
B
A
D
B
B
31
.
32
.
33
.
34
.
35
41
.
42
.
43
.
44
.
45
A
A
B
A
A
96
B
A
A
D
A
51
.
52
.
53
.
54
.
B
D
C
B
6. B
7. D
8. B
9. C
10
. B
.
16
.
17
.
18
.
19
.
20
.
B
D
B
A
B
.
26
.
27
.
28
.
29
.
30
.
A
A
A
B
B
.
36
.
37
.
38
.
39
.
40
.
.
46
.
47
.
48
.
49
.
50
.
B
B
D
B
A
97
C
B
B
B
C
Chapter 23
Accounting for Derivatives and Hedging
Transactions (Part 2)
Chapter 23: Multiple Choice Computational (For classroom
instruction purposes)
Fair value hedge of a recognized asset
Use the following information for the next eight questions:
On December 15, 20x1, ABC Co. sold goods to a Japanese firm for
4,000,000 yens. ABC Co. was concerned about the fluctuation in the
Japanese yen, so on this date, ABC Co. entered into a 30-day forward
contract to sell 4,000,000 yens for 1,880,000 to a bank at the
forward rate of 0.47.
Relevant rates are shown below:
Dec. 15,
20x1
Spot rate
0.48
Forward rate
0.47
Dec. 31,
20x1
0.49
0.485
Jan. 15,
20x2
0.46
0.46
98
8 The total net effect of the two contracts in 20x1 and 20x2 profit
or loss is gain (loss)
a. 40,000
b. (40,000)
c. 100,000 d. 0
No hedging designation (Held for speculation)
Use the following information for the next five questions:
ABC Co. expects the value of yens to decrease in the next 30 days.
Accordingly, on December 15, 20x1, ABC Co. enters into a 30-day
forward contract to sell 4,000,000 yens at the forward rate of 0.47.
On December 31, 20x1, the forward rate was 0.485 and by January
15, 20x2, the spot rate moved to 0.46.
9 The entry to record the forward contract on December 15, 20x1
includes
a a debit to forward contract for 60,000
b a credit to forward contract for 60,000
c a debit to loss on forward contract for 60,000
d none
10 How much is the gain (loss) on change in fair value of the
derivative on December 31, 20x1?
a. 60,000 in profit or loss c. (60,0000) in OCI
b. (40,000) in OCI
d. (60,000) in profit or loss
11 The derivative asset (liability) to be included in the December 31,
20x1 statement of financial position is
a. 1,960,000 b. (1,920,000)
c. 60,0000 d. (60,000)
12 How much is the gain (loss) on change in fair value of the
derivative on January 15, 20x2?
a. 120,000
b. (120,000)
c. 100,000 d.
(100,000)
13 How much is the net cash settlement receipt (payment) on
January 15, 20x2?
a. 40,000
b. (40,000)
c. 1,840,000
d.
(1,840,000)
Fair value hedge of a recognized liability
Use the following information for the next seven questions:
On December 15, 20x1, ABC Co. purchased goods from a Korean
firm for 40,000 wons. ABC Co. was concerned about the fluctuation
in the Korean won, so on this date, ABC Co. entered into a 30-day
forward contract to buy 40,000 wons for 49,600 from a bank at the
forward rate of 1.24.
Relevant rates are shown below:
Spot rate
Forward rate
Dec. 31,
20x1
1.26
1.27
99
Jan. 15,
20x2
1.30
1.30
d. 50,800
Dec. 31,
20x1
0.49
0.485
100
Jan. 15,
20x1
0.46
0.46
Dec. 31,
20x1
1.26
1.27
Jan. 15,
20x2
1.30
1.30
101
102
Date
Oct. 1, 20x1
Dec. 31, 20x1
Mar. 31, 20x2
Spot
price
155
151
147
Forwa
rd
price
160
153
147
Fair value
of forward
contract
(asset)
27,727 a
52,000 b
Fair value
of firm
commitme
nt
(liability)
(27,727)
(52,000)
in
in
in
in
103
Date
Oct. 1,
20x1
Dec. 31,
20x1
Mar. 31,
20x2
Spot
price
Forwar
d price
Fair value
of forward
contract
(asset)
41
40
32
30
39,608
50
50
(40,000)b
Fair value of
firm
commitment
(liability)
(39,608)
40,000
104
Forward price
45
55
60
105
Dec. 1, 20x1
1.20
1.24
Dec. 31,
20x1
1.23
1.27
Jan. 31,
20x2
1.30
1.30
Additional information:
ABC Co. chooses to account for the hedging instrument as a cash
flow hedge.
The initial spot/forward difference (or forward points) amounts to
16,000 over the 2-month term of the forward contract [400,000
x (1.24 forward rate - 1.20 spot rate)]. This difference will be
amortized as interest expense using the effective interest
method.
Given the spot/forward relationship above, the implicit interest
rate is 19.84% per annum or 1.6530% per month.
The following are the relevant present value factors:
Dec. 31, 20x1: PV of 1, @ 0.5%, n=1 (1 month)0.99502
Jan. 31, 20x2: PV of 1, @ 0.5%, n=0 (maturity date)1
58 The inventory account is debited on December 1, 20x1 for
a. 400,000
b. 480,000 c. 496,000 d. 0
59 The FOREX gain (loss) on the hedged item on December 31, 20x1
is
a. (12,000)
b. 12,000 c. 9,886
d.
60 How much is recognized in other comprehensive income on
December 31, 20x1? debit (credit)
a. 19,876
b. (19,874) c. 16,312 d. 0
61 The derivative asset (liability) recognized on December 31, 20x1
is
106
a. 19,876
b. (19,874) c. 11,940
d. (11,940)
62 The FOREX gain (loss) on the hedged item on January 31, 20x2 is
a. (28,000)
b. 28,000 c. 26,399 d. 0
63 How much is recognized in other comprehensive income on
January 31, 20x2? debit (credit)
a. 20,126
b. (20,126) c. 18,234 d. 0
64 The net cash settlement receipt (payment) on January 15,
20x2 is
a. (20,130)
b. 20,130 c. (24,000) d. 24,000
107
Chapter 24
Accounting for Derivatives and Hedging
Transactions (Part 3)
Chapter 24: Multiple Choice Computational (For classroom
instruction purposes)
No hedging designation
Use the following information for the next four questions:
On December 1, 20x1, ABC Co. enters into a silver futures contract
to purchase 4,000 ounces of silver on February 1, 20x2 for 200
per ounce. The broker requires an initial margin deposit of 80,000.
The quoted prices per ounce of silver are as follows:
Dec. 1, 20x1
Dec. 31, 20x1
Feb. 1, 20x2
200
190
185
1. The entries on December 1, 20x1 include
a debit to deposit with broker for 80,000
b credit to cash for 80,000
c a and b
d none
2. How much is the derivative asset (liability) as of December 31,
20x1?
a. 0
b. (34,668) c. (40,000) d. 40,000
3. How much is the total net effect of the derivative on the 20x1 and
20x2 profit or loss? Gain (loss)
a. (60,000)
b. 60,000 c. (40,000) d. 40,000
4. How much is the net settlement on February 1, 20x2? Receipt
(payment)
a. 20,000
b. (20,000) c. (60,000) d. 60,000
Fair value hedge of a recognized asset hedged item
measured at fair value
Use the following information for the next seven questions:
ABC Co. is a commodity trader. On December 1, 20x1, ABC Co.
carries in its inventory 400 troy ounces of gold valued at 4,800,000
(or 12,000 per troy ounce). ABC Co. measures its inventory of gold
at fair value less costs to sell through profit or loss.
To protect the fair value of its inventory against a potential decline in
prices, ABC Co. enters into a short futures contract on December
1, 20x1 to sell 400 troy ounces of gold at 12,100 per troy ounce on
February 1, 20x2 (the expected date of sale of the inventory). The
futures contract requires an initial margin deposit of 384,000.
We will assume that the fair values shown below already reflect
costs to sell.
Dec. 1,
20x1
Dec. 31, 20x1
Feb. 1, 20x2
Spot price
12,000
12,250
108
11,800
Futures price
12,100
12,300
11,800
Feb. 1, 20x2
Spot price
354
371
338
Futures price
360
374
338
109
Feb. 1, 20x2
Spot price
210
240
250
Futures price
200
235
250
110
a. 200,000
320,000
b. (200,000)
c. (320,000)
d.
111
a. (480)
b. 480
c. (960)
d. 960
29. How much is the net cash settlement receipt (payment) on the
derivative instrument on June 30, 20x1?
a. 3,360
b. (3,360) c. (9,520) d. 9,520
30. How much is the total net effect of the hedging instrument on
profit or loss? Favorable (unfavorable)
a. 3,840
b. (3,840) c. (9,520) d. 9,520
31. If all of the inventory purchased were sold on July 15, 20x1,
how much is the cost of goods sold?
a. 384,800
b. 375,280 c. 381,440 d. 371,920
Fair value hedge of a recognized asset Put option
Use the following information for the next three questions:
On December 15, 20x1, ABC Co. sold goods to a Japanese firm for
4,000,000 yens. ABC Co. was concerned about the fluctuation in the
Japanese yen, so on this date, ABC Co. purchased a foreign currency
put option for 30,000 to sell 4,000,000 yens at 0.47 on January
15, 20x2.
Dec. 15, Dec. 31, Jan. 15,
20x1
20x1
20x1
Spot rate
0.48
0.49
0.46
Fair values of the foreign
currency put option
30,000
20,000
32,000
32. How much is the gain (loss) on the put option on December
31, 20x1?
a. 0
b. 40,000 c. (10,000) d. 10,000
33. How much is the net gain (loss) on the exercise of the put
option on January 15, 20x1?
a. (20,000)
b. 20,000 c. 12,000 d. 8,000
34. Assume that the spot rate on January 15, 20x2 is 0.48. How
much is the gain (loss) on the put option on January 15, 20x1?
a. (20,000)
b. 20,000 c. (32,000) d. (40,000)
No hedging designation Call option
Use the following information for the next three questions:
On April 1, 20x1, ABC Co. enters into a call option contract with an
investment banker which gives ABC Co. the option to purchase 4,000
XYZ, Inc. shares of stocks at a strike price of 100 per share. The call
option expires on July 1, 20x1. ABC Co. pays the investment banker
2,400 for the call option. The market price of the XYZ, Inc. shares
on April 1, 20x1 is 100 per share.
Additional information:
112
April 1,
20x1
June 30,
20x1
100/sh.
2,400
106/sh.
1,600
35. How much is the gain (loss) on the call option on June 30, 20x1
arising from change in intrinsic value?
a. 24,000
b. (24,000) c. 800
d. (800)
36. How much is the gain (loss) on the call option on June 30, 20x1
arising from change in time value?
a. 800
b. (800)
c. 24,000 d. (24,000)
37. How much is the net cash settlement receipt (payment) on the
call option on July 1, 20x1?
a. 24,000
b. (24,000) c. 23,200 d. (23,200)
Cash flow hedge of a forecasted sale transaction (Indirect
quotation)
Use the following information for the next six questions:
ABC Co. forecasts a sale to an Indian customer of INR 1,120,000
(Indian Rupee) in six months. On October 1, 20x1 when the spot rate
is 1: INR 1.40, ABC Co. obtained an option to sell INR 1,120,000 for
783,216 (1 : INR1.43). The option has a cost and fair value of
25,600 on inception date.
ABC Co. chose to base effectiveness on the changes in the intrinsic
value of the option, as measured by the spot rate of the currency
underlying the option (e.g., spot intrinsic value). Changes in the
fair value of the option other than intrinsic value (e.g., time value,
impact of counterparty nonperformance risk) are excluded from the
assessment of effectiveness and will be reported in profit or loss as
they occur.
The following information was determined:
Date
Spot rate
Time value
of option a
Fair
value
of
option
a
Oct. 1,
20x1
Dec. 31,
20x1
Apr. 1,
20x2
1 : INR
1.40
1 : INR
1.45
1 : INR
1.50
25,600
25,600
13,196
24,000
36,552
d.
113
on
d.
on
114
115
ABC Co. expects that the current interest rates will decrease in the
future. Thus, ABC Co. enters into a receive fixed, pay variable
interest rate swap. Swap payments shall be made at each year-end.
The following are the current market rates:
Jan. 1,
20x1
10%
Jan. 1,
20x2
12%
Jan. 1,
20x3
14%
58. The derivative asset (liability) on December 31, 20x1 is
a. 135,204
b. (135,204)
c. 80,000 d. (80,000)
59. Unrealized gain (loss) on the derivative instrument recognized
in profit or loss on December 31, 20x1 is
a. 135,204
b. (135,204)
c. 80,000 d. 0
60. Unrealized gain (loss) on the hedged item recognized in profit
or loss on December 31, 20x1 is
a. 135,204
b. (135,204)
c. 80,000 d. 0
61. The interest expense recognized in 20x2 is
a. 400,000
b. 264,796 c. 463,776 d. 535,204
62. The derivative asset (liability) on December 31, 20x2 is
a. 140,352
b. (140,352)
c. 168,342 d. (168,342)
63. Unrealized gain (loss) on the derivative instrument recognized
in profit or loss on December 31, 20x2 is
a. 140,352
b. (140,352)
c. (168,342)
d. 0
64. Unrealized gain (loss) on the hedged item recognized in profit
or loss on December 31, 20x2 is
a. 140,352
b. (140,352)
c. (168,342)
d. 0
65. The interest expense recognized in 20x3 is
a. 400,000
b. 540,351 c. 493,867 d. 565,304
116
Chapter 25
Accounting for Derivatives and Hedging
Transactions (Part 4)
Chapter 25: Multiple Choice Computational (For classroom
instruction purposes)
Hedge of a net investment in foreign operation
Use the following fact pattern for the next eight questions:
Fact pattern
On July 1, 20x1, ABC Co. acquired 100% interest in XYZ, Inc., a
company situated in a foreign country. The currency of this country
is the Armenian Dram (AMD). The business combination did not
result to any goodwill. The year-end financial statements of the
combining constituents show the following information:
July 1, 20x1
Date of acquisition
ABC Co.
XYZ, Inc.
(in
(in AMD)
pesos)
40,000,00 24,000,00
0
0
8,000,000
8,000,000
4,000,000
Total assets
48,000,00
0
24,000,00
0
68,000,00
0
40,000,00
0
Liabilities
32,000,00
0
12,000,00
0
32,000,00
0
14,000,00
0
7,000,000
16,000,00
0
12,000,00
0
48,000,00
0
24,000,00
0
Assets
Investment in
subsidiary
Receivable from
XYZ, Inc.
Payable to ABC
Co.
Equity - Jan. 1,
20x1
Profit for the
year
Total liabilities
and equity
16,000,00 12,000,00
0
0
20,000,00
7,000,000
0
68,000,00 40,000,00
0
0
1
1
1
1
1
:
:
:
:
:
AMD
AMD
AMD
AMD
AMD
1.50
2.00
1.75
1.54
2.02
117
a. 2,400,000
1,000,000
b. (2,400,000)
c. (1,000,000)
d.
d.
d.
118
119
Market
price 12/31/x1
1,800
1,900
220
75
120
121
a. (80,000)
b. 80,000
c. (30,000) d. 0
122
123
124
125
126
127
(Adapted)
32. A company enters into an interest rate swap in order to hedge
a $5,000,000 variable-rate loan. The loan is expected to be fully
repaid this year on June 10. The contract requires that if the
interest rate on April 30 of next year is greater than 11%, the
company receives the difference on a principal amount of
$5,000,000. Alternatively, if the interest rate is less than 11%, the
company must pay the difference. Which of the following
statements is correct regarding this contract?
a. The swap agreement effectively hedges the variable interest
payments.
b. The timing of the swap payment matches the timing of the
interest payments and, therefore, the variable interest
payments are hedged.
c. The timing of the swap payment does not match the timing of
the interest payments and, therefore, the variable interest
payments are not hedged.
d. This swap represents a fair value hedge.
(Adapted)
Use the following information for the next four questions:
Fact pattern
Hall, Inc., enters into a call option contract with Bennett Investment
Co. on January 2, 2002. This contract gives Hall the option to
purchase 1,000 shares of WSM stock at $100 per share. The option
expires on April 30, 2002. WSM shares are trading at $100 per share
on January 2, 2002, at which time Hall pays $100 for the call option.
33.
a.
b.
c.
d.
128
129
(Adapted)
41. Futures contracts differ from forward contracts in which of the
following ways?
a. Performance of each party in a futures transaction is
guaranteed by a clearinghouse.
b. All of these choices are correct.
c. Futures contracts require a daily settling of any gains or loses.
d. Futures contracts are standardized.
(Adapted)
42. Which of the following statements accurately describes how
futures contracts differ from forward contracts?
a. Futures contracts are standardized.
b. Futures contracts require a daily settling of gains and losses.
c. All of these choices are correct.
d. The performance of counterparties to a futures contract is
guaranteed by a clearinghouse.
(Adapted)
43. When a call option on a future is exercised, the buyer receives:
a. a short position in the underlying future.
b. an option to purchase the underlying future.
c. the physical good.
d. a long position in the underlying future and a cash payment.
(Adapted)
44. Which of the following statements about swap agreements is
FALSE?
a. They are standardized agreements, similar to futures.
b. Counterparties are the principles who engage in a swap
agreement.
c. They allow for the exchange of different sets of future cash
flows.
d. Interest rate and currency are common types of swaps.
(Adapted)
45. Which of the following requires the purchase of
underlying asset at a specified price?
a. Purchasing a call option.
c. Writing a call option.
b. Writing a put option.
d. Purchasing a put option.
(Adapted)
the
130
47. Ron Jensen is a speculator who does not currently own GHP
Corporation common stock but believes it will increase in market
value by 25 percent over the next month. Jensen can most likely
achieve the highest percentage return on the expected stock
price increase by:
a. writing GHP put options.
c. buying GHP put options.
b. buying GHP call options.
d. buying GHP common stock.
(Adapted)
48. Which of the following statements about derivatives is TRUE?
a. Although forwards have terms that are not standardized, the
clearinghouse of that exchange still takes the opposite position
of each trade, thereby protecting the counterparties from
default risk.
b. Although minimal, arbitragers face the risk of the market value
of the underlying asset declining by an amount greater then
what was protected with the hedge.
c. When a call option on a future is exercised, the seller receives
a short position in the underlying future plus pays cash to the
holder of the option.
d. The market value of a financial derivative is primarily a
function of the relative demand and supply for that contract.
(Adapted)
49. If an oil wholesaler expects to buy some gasoline for his
customers in the future and wants to hedge his risk, he needs to:
a. sell gasoline now.
c. do nothing.
b. sell crude oil futures contract. d. buy crude oil futures contract.
(Adapted)
50. Which of the following statements about forward contracts is
CORRECT? A long trader agrees to:
a. take delivery, and a short trader agrees to take delivery
b. take delivery, and a short trader agrees to make delivery.
c. take delivery, and a short trader agrees to make delivery.
d. make delivery, and a short trader agrees to take delivery.
(Adapted)
51. If a farmer expects to sell his wheat in anticipation of a harvest
and wants to hedge his risk, he needs to:
a. sell wheat now.
c. buy wheat futures contracts now.
b. buy wheat now.
d. sell wheat futures contracts now.
(Adapted)
52. Which of the following statements about speculators and
hedgers in the futures market is TRUE?
a. Hedging can allow a business to guard against a price increase
in a commodity without sacrificing profit if the commodity
price decreases.
b. A speculator would use futures to take a long position in a
commodity if its price is expected to decrease.
c. A speculator would use futures to take a short position in a
commodity if its price is expected to increase.
d. Hedgers guard against market price changes that would cause
a reduction in their operating profit.
(Adapted)
131
132
133
134
d. swap
135
I.
136
137
138
139
140
141
(AICPA)
111. Hedge accounting is permitted for all of the following types of
hedges except
a. Trading securities.
b. Unrecognized firm commitments.
c. Available-for-sale securities.
d. Net investments in foreign operations.
(AICPA)
112. Which of the following is a general criterion for a hedging
instrument?
a. Sufficient documentation must be provided at the beginning of
the process.
b. Must be highly effective only in the first year of the hedge's
life.
c. Must contain a nonperformance clause that makes
performance probable.
d. Must contain one or more underlyings.
(AICPA)
113. For an unrecognized firm commitment to qualify as a hedged
item it must
a. Be binding on both parties.
b. Be specific with respect to all significant terms.
c. Contain a nonperformance clause that makes performance
probable.
d. All of the above.
(AICPA)
114. A hedge of the exposure to changes in the fair value of a
recognized asset or liability, or an unrecognized firm
commitment, is classified as a
a. Fair value hedge.
c. Foreign currency hedge.
b. Cash flow hedge.
d. Underlying.
(AICPA)
115. Gains and losses on the hedged asset/liability and the hedged
instrument for a fair value hedge will be recognized
a. In current earnings.
b. In other comprehensive income.
c. On a cumulative basis from the change in expected cash flows
from the hedged instrument.
d. On the balance sheet either as an asset or a liability.
(AICPA)
116. Gains and losses of the effective portion of a hedging
instrument will be recognized in current earnings in each
reporting period for which of the following? (Item #1) Fair value
hedge; (Item #2) Cash flow hedge
a. Yes No
b. Yes Yes c. No No
d. No Yes
(AICPA)
117. Which of the following risks are inherent in an interest rate
swap agreement?
142
I.
143
144
A
A
C
B
A
A
D
A
B
C
D
A
B
A
B
D
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
B
C
D
D
D
A
B
C
C
C
D
C
A
C
B
A
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
B
C
D
A
B
C
B
C
D
B
D
D
B
B
D
C
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
D
D
B
D
A
C
D
A
D
C
B
D
C
A
C
C
145
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
C
A
C
C
D
A
B
D
A
C
B
A
C
B
B
B
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
D
B
B
A
D
B
D
A
C
D
A
A
D
A
A
A
121.
122.
123.
124.
125.
126.
127.
C
C
A
D
D
A
C
17.
18.
19.
20.
B
A
B
C
37.
38.
39.
40.
C
C
B
D
57.
58.
59.
60.
D
A
A
D
77.
78.
79.
80.
C
A
C
B
146
97.
98.
99.
100.
D
B
D
C
117.
118.
119.
120.
C
A
C
C
Chapter 26
Corporate Liquidation and
Reorganization
Chapter 26: Multiple Choice Computational (For classroom
instruction purposes)
Statement of affairs
Use the following information for the next eleven questions:
Fact pattern
Andrix Asterix Co. has filed for voluntary insolvency and is about to
liquidate its business. Andrix Asterix Co.s statement of financial
position immediately prior to the liquidation process is shown below:
Andrix Asterix Co.
Statement of financial position
As of December 31, 20x0
ASSETS
Current assets:
Cash
Accounts receivable
Note receivable
Inventory
Prepaid assets
160,000
880,000
400,000
2,120,000
40,000
3,600,000
Noncurrent assets:
Land
Building, net
Equipment, net
2,000,000
8,000,000
1,200,000
11,200,000
14,800,000
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Accrued expenses
Current tax payable
Accounts payable
884,000
1,400,000
4,000,000
6,284,000
Noncurrent liabilities:
Note payable (secured by equipment)
Loan payable (secured by land and building)
Capital deficiency:
Share capital
Retained earnings (deficit)
1,200,000
8,000,000
9,200,000
2,000,000
(2,684,000)
(684,000)
14,800,000
Additional information:
The
following
information
was
determined
commencement of the liquidation process:
a. Only 76% of the accounts receivable is collectible.
147
before
the
d. 2,908,800
d. 3,628,800
d. 9,620,000
148
11.
How much can the shareholders expect to
recover from their equity interests?
a. 483 ,000
b. (478,800)
c. (165,186)
d. 0
Statement of realization and liquidation
Use the following information for the next ten questions:
Use the fact pattern in the preceding problem (Andrix Asterix Co.) in
addition to the information provided below:
Additional information:
a. An accrued interest receivable of 40,000 was not yet recorded.
b. Administrative expenses expected to be incurred during the
liquidation process is 120,000. This amount is not yet reflected
on the statement of financial position.
c. Accrued interest on the loan payable amounting to 60,000 was
not reflected in the statement of financial position.
The following are the transactions that have transcribed during the
period:
a. Of the total account receivable, only 660,000 have been
collected. The remaining balance was written-off.
b. Only 90% of the note receivable was collected. The remaining
balance was written-off. All of the accrued interest was collected.
c. Half of the inventory was sold for 1,200,000. Actual costs to sell
were 20,000.
d. The balance of the prepaid assets account was written-off.
e. The land and building were sold for 10,400,000, as expected.
f. The equipment was sold for 880,000.
g. Of the total accrued expenses, only the accrued salaries of
100,000 were paid.
h. The current tax payable was paid in full.
i. The loan payable and interest payable were paid in full.
j. 880,000 were paid for the note payable. The lender waived
payment for the balance.
k. Actual administrative expenses paid amounted to 108,000.
12.
The opening entry in the books of the receiver
includes an estate equity (deficit) of
a. (1,555,200) b. (684,000)
c. (1,435,200)
d. (1,415,200)
13.
The statement of realization and liquidation will
show total assets to be realized of
a. 14,640,000 b. 14,800,000
c. 14,068,800
d. 14,234,200
14.
The statement of realization and liquidation will
show total assets acquired of
a. 180,000
b. 800,000 c. 40,000 d. 0
15.
The statement of realization and liquidation will
show total assets realized of
a. 13,250,000 b. 13,540,000
c. 12,920,000
d. 13,520,000
16.
The statement of realization and liquidation will
show total assets not realized of
a. 1,060,000 b. 820,000 c. 724,000 d. 0
149
17.
The statement of realization and liquidation will
show total liabilities to be liquidated of
a. 15,664,000 b. 15,484,000
c. 15,544,000
d. 15,244,000
18.
The statement of realization and liquidation will
show total liabilities assumed of
a. 60,000
b. 180,000 c. 160,000 d. 0
19.
The statement of realization and liquidation will
show total liabilities liquidated of
a. 10,560,000 b. 10,548,000
c. 10,440,000
d. 10,988,000
20.
The statement of realization and liquidation will
show total liabilities not liquidated of
a. 4,748,000 b. 5,104,000
c. 4,784,000
d. 0
21.
The statement of realization and liquidation will
show net gain (loss) for the period of
a. 220,000
b. 112,000 c. (112,000)
d. 0
Recovery of claims by order of priority
Use the following information for the next two questions:
The statement of affairs of Darrell Putix Co. indicates that unsecured
creditors without priority with total claims of 720,000 may expect
to recover 288,000 if all of the assets of Darrell Putix Co. were sold.
Among the creditors of Darrell Putix Co. are the following:
Government taxes payable of 400,000, inclusive of 80,000
assessments and surcharges.
XYZ bank loan payable of 4,000,000 and accrued interest of
200,000, backed by collateral security with realizable value of
4,800,000.
Alpha Financial Co. loan payable of 3,200,000 backed by
collateral security with realizable value of 2,000,000.
Mr. Bombay loan payable of 1,000,000 and accrued interest of
200,000. No collateral security.
22.
How much is the expected recovery of partially
secured creditors?
a. 2,480,000 b. 2,160,000
c. 1,280,000
d. 0
23.
Bombay?
a. 780,000
Recovery of claims
Use the following information for the next five questions:
Rex Toothpix Co. is undergoing liquidation. Information on Rex
Toothpix Co.s assets and liabilities is shown below:
Book
Realizabl
ASSETS
value
e value
Assets pledged to fully secured
360,000
480,000
creditors
Assets pledged to partially secured
208,000
192,000
creditors
Free assets
600,000
576,000
150
1,168,000
1,248,000
LIABILITIES
Unsecured liabilities with priority
Fully secured creditors
Partially secured creditors
Unsecured creditors without priority
288,000
288,000
384,000
384,000
240,000
240,000
432,000
432,000
1,344,000
1,344,000
24.
If the assets are sold at realizable values, how
much cash is available to pay unsecured creditors without
priority?
a. 336,000
b. 384,000 c. 624,000 d. 288,000
25.
What is the estimated recovery percentage of
unsecured creditors without priority?
a. 89%
b. 78%
c. 80%
d. 75%
26.
How much is the total estimated deficiency to
unsecured creditors?
a. (89,000)
b. (72,000) c. (192,000)
d. (96,000)
27.
How much can the partially secured creditors
expect to recover from their claims?
a. 384,000
b.234,000 c. 230,400 d. 276,000
28.
How much can the unsecured creditors
without priority expect to recover from their claims?
a. 432,000
b. 345,600 c. 384,000 d. 348,000
Recovery percentage of shareholders
29.
The following summarizes the results of the
liquidation process of Rhadvix Co.s operations:
Gains on realization of assets
720,000
1,280,00
Losses on realization of assets
0
Additional assets discovered and realized during
200,000
liquidation
Additional liabilities recorded and settled during
120,000
liquidation
2,800,00
Share capital (at original book value)
0
1,200,00
Deficit (at original book value)
0
How much is the recovery percentage of shareholders?
a. 80%
b. 70%
c. 76%
d. 75%
Recovery of shareholders claims
Use the following information for the next two questions:
Raymund Lipstix Co. owns 80% of PH Care, Inc. During the year, PH
Care, Inc. filed for bankruptcy and is about to enter into liquidation.
Raymund Lipstix Co. has an outstanding unsecured receivable of
4,000,000 from PH Care, Inc. together with an investment in
subsidiary of 20,000,000. The statement of affairs of PH Care, Inc.
shows a 100% recovery for outside creditors and a 20% recovery for
inside creditors.
151
30.
How much can Raymund Lipstix Co. expect to
recover from its receivable?
a. 800,000
b. 4,800,000
c. 640,000 d.0
31.
How much can Raymund Lipstix Co. expect to
recover from its investment in subsidiary?
a. 20,000,000 b. 4,000,000
c. 4,640,000
d. 0
Errors
32.
Berns Sunog-kutix Co. has voluntarily filed
petition for bankruptcy. Berns Sunog-kutix Co.s inexperienced
accountant determined that the expected recovery percentage of
unsecured creditors without priority is 20%. The unsecured
creditors have refuted this and demanded an audit of the
accountants computations. The following information was
determined from the accountants working papers:
Assets and liabilities immediately before the commencement of
liquidation process:
Total assets - at book value
8,000,000
Unsecured creditors with priority
1,040,000
Fully secured creditors
3,600,000
Partially secured creditors
2,080,000
Unsecured creditors without priority
1,760,000
During the period, assets with total book value of 4,000,000
were sold for 3,760,000. A portion of the proceeds were used to
settle fully secured liabilities of 2,160,000 and partially secured
liabilities of 1,480,000.
The remaining unsold assets have the following realizable values:
Assets pledged to fully secured creditors
1,280,000
Assets pledged to partially secured creditors
560,000
All other assets
2,060,000
Further investigations revealed the following:
a. Estimated liquidation expenses amounting to 160,000 were
not yet recorded.
b. Additional unsecured liability without priority of 200,000
should be accrued.
What is the correct estimated recovery percentage of unsecured
creditors without priority?
a. 40%
b. 42.53% c. 45.37% d. 47.33%
Receivership journal entry
Use the following information for the next two questions:
Joseph Fantastix Co. has filed a petition for insolvency. The winding
up of Joseph Fantastix Co.s affairs will be entrusted to a receiver.
The following information was gathered:
Book
Realizable
value
value
Assets
1,200,000
1,000,000
Liabilities:
Unsecured liabilities with priority
Fully secured creditors
Partially secured creditors
Unsecured liabilities without priority
152
80,000
480,000
160,000
560,000
80,000
480,000
160,000
560,000
1,280,000
Unrecorded items:
Dividend receivable
Interest payable
Estimated administrative expenses
1,280,000
20,000
8,000
40,000
33.
How much is the estate equity (deficit) in the
opening journal entry made by the receiver in its books?
a. (80,000)
b. 80,000 c. (308,000)
d. (68,000)
34.
How much is the estimated deficiency to
unsecured creditors without priority in the statement of affairs?
a. (308,000)
b. 308,000 c. (80,000) d. (280,000)
Statement of realization and liquidation
Use the following information for the next two questions:
The following information was taken from the statement of
realization and liquidation of Jury and John Bombastix Co., which is
undergoing liquidation:
ASSETS:
8,000,00
Assets to be realized
0
Assets acquired
60,000
4,720,00
Assets realized
0
Assets not realized
880,000
LIABILITIES:
Liabilities liquidated
Liabilities not liquidated
Liabilities to be
liquidated
Liabilities assumed
SUPPLEMENTARY ITEMS:
Supplementary
expenses
Supplementary income
8,520,00
0
4,760,00
0
11,480,0
00
128,000
100,000
72,000
35.
How much is the net gain (loss) for the period?
a. (4,132,000) b. (28,000) c. 4,160,000
d. (4,160,000)
36.
If the estate deficit at end of the period is
3,480,000, how much is the ending balance of cash?
a. 400,000
b. 388,000 c. 960,000 d. 460,000
153