Final Exam Practice Questions - Key

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Central Michigan University *

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501

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Finance

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Jan 9, 2024

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Uploaded by ChiefSardine894

Final Exam Practice Questions – Solutions Many of following questions are from the class note and problems we went over in class. 1. ABC, a U.S. corporation, bought inventory items from a supplier in France on November 5, 2019, for 100,000 euros, when the spot rate was $1.3185 At ABC's December 31, 2019, year-end, the spot rate was $1.3035. On January 15, 2020, ABC bought 100,000 euros at the spot rate of $1.3335 and paid the invoice. How much should ABC report in its income statement for 2019 and 2020 as transaction gain or loss? 2019 2020 a. $ 0 $ 1500 loss b. $ 1500 loss $ 0 c. $ 1500 loss $ 3,000 gain d. $ 1500 gain $ 3,000 loss 2. On December 1, 2019, SMC entered into a transaction to import raw materials from a foreign country. The account is to be settled on March 1 with the payment of 50,000 euros. The spot rates and the forward rates on various dates are as follows: Date Spot Rate $ per Euro Forward Rate (March 1 Settlement) Dec. 1 $1.00 $1.03 March 1 $1.04 $1.04 If SMC uses a forward contract to hedge the payable, what is the overall transaction gain or loss on the company from using the hedge? a. $2,000 gain b. $1,500 loss c. $1,500 gain d. $2,000 loss (2,000) loss from the hedged transaction (1.00 – 1.04) x 50,000 + 500 gain from the hedge (1.04 – 1.03) x 50,000 1

3. On October 1, 2018, Short Company ordered some equipment from a supplier for 200,000 euros. Delivery and payment is to occur on November 30, 2019. The spot rates on October 1, 2018 and November 30, 2019 are $1.50 and $1.30. If the company acquires a forward contract to hedge any unfavorable changes in fair value of the equipment, at what amount is the equipment recorded on the books on November 30, 2019? The forward rate for November 30 settlement is $1.35. a. $300,000 b. $260,000 c. $270,000 d. None of the above 4. On December 1, 2019, a U.S. firm plans to purchase a piece of equipment (with an asking price of 100,000 francs) in Switzerland during January of 2020. The transaction is probable, and the transaction is to be denominated in euros. On December 1, 2019, the company enters into a forward contract to buy 100,000 francs for $1.01 on January 31, 2020. Ans: This type of hedge qualifies for Cash Flow Hedge 5. A wholly owned foreign subsidiary of Import Corporation has certain expense accounts for the year ended December 31, 2019, stated in local currency units (LCU) as follows: LCU Amortization of patent (patent was acquired January 1, 2017) 80,000 Provision for doubtful accounts 80,000 Utility Expense 240,000 The exchange rates at various dates are as follows: Dollar Equivalent of 1 LCU December 31, 2019 $.40 Average for the year ended December 31, 2019 .48 January 1, 2017 .50 The subsidiary's operations were an extension of the parent company's operations. What total dollar amount should be included in Import's income statement to reflect the foregoing expenses for the year ended December 31, 2019? *Amortization of patent (80,000 x .50) = $40,000 Provision for doubtful accounts (80,000 x ,48) = 38,400 2

Utility Expense (240,000 x .48) = 115,200 = $193,600 Total 6. Perez Company's operations are unrelated to the operations of its subsidiary. Certain balance sheet accounts of the foreign subsidiary at December 31, 2019, have been translated into U.S. dollars as follows: Translated at: Current Rates Historical Rates Accounts receivable, current $200,000 $220,000 Accounts receivable, long-term 130,000 140,000 Prepaid insurance 50,000 55,000 Goodwill 100,000 110,000 If the accounting is in accordance with SFAS No. 52 , what total should be included in Perez's balance sheet at December 31, 2019, for the foregoing items? a. $480,000 b. $490,000 c. $495,000 d. $580,000. *All accounts should be reported at the current rate - ($200,000 + $130,000 + $50,000 + $100,000) = $480,000 3

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7. Twodor Company is involved in four separate industries. Selected financial information concerning Twodor's involvement in each of the four industries is presented below: Industry Segment A B C D Total Sales to nonaffiliates $ 80,000 $20,00 0 $24,000 $12,200 $136,200 Intersegment sales 130,000 84,000 12,000 3,800 229,800 Total revenue 210,000 104,00 0 36,000 16,000 366,000 Operating profit (loss) (17,400) 12,000 1,500 (600) (4,500) Identifiable assets 222,000 110,50 0 28,000 26,000 386,500 Required: Using all tests, determine which of the industry segments are reportable segments and explain how nonreportable segments (if any) should be reported. Revenue Test Industry segments A and B are reportable segments under this test because their total revenue is 10% or more of combined total revenue of $366,000. The other segments do not meet this test. Operating Profit Test Industry segments A and B are reportable segments under this test because the absolute amounts of their operating profit or loss are each at least 10% of the greater of (1) the combined profit of all operating segments that did not incur a loss ($12,000 + $1,500 = $13,500), or (2) the combined loss of all operating segments that incurred a loss ($17,400 + $600 = $18,000). Segments A and B both have operating profit or loss of more than $1,800 (10%  $18,000). The other segments are not reportable segments under this test. Identifiable Assets Test Operating segments A and B are reportable segments because their identifiable assets are at least 10% of the combined assets of all segments. The other segments are not reportable segments under this test. Final Test Combined sales to nonaffiliated customers by segments A and B 4

Combined sales to nonaffiliated customers by all segments = $ 100 , 000 $ 136 , 200 = 73% Because the 75% test is not met, one of the segments that did not qualify as a reportable segment under the previous tests must be included as a reportable segment. 5

8. XYX company has income of $100,000 in the first quarter of 2020 and expects the effective annual tax rate for all of 2020 to be 25%, then the provision for income taxes in the first quarter will be $100,000 x 25% = $25,000. If the XYZ has an additional $150,000 of income in the second quarter, and revises their estimate of the effective annual tax rate for all of 2020 to 30%. Required: Calculate the provision for income taxes in the second quarter for XYZ company. Income in 2nd quarter of 2020 150,000 Income in 1st quarter of 2020 100,000 Income for 6 months ended 6/30/20 250,000 Expected effective annual tax rate 30% Income taxes for 6 month period 75,000 Less: amount reported in 1st quarter (25,000) Income tax provision in 2nd quarter 50,000 6

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9. 7

9. Solutions (E15-9): 1. Cash 120,000 Mary, Capital 120,000 Calculation of investment: $ 600 , 000 5 / 6 = $ 720 , 000 - to compute total capital after investment $ 720 , 000 ×( 1 / 6 )= $ 120 , 000 - to compute Mary's investment 2. Book value of interest acquired = ($600,000 + $160,000) ¿ ( 1 / 5 ) = $152,000 Book value acquired ($152,000) is less than assets invested ($160,000) by $8,000 Bonus Method Cash 160,000 Beth, Capital (0.4  $8,000) 3,200 Steph, Capital (0.4  $8,000) 3,200 Linda, Capital (0.2  $8,000) 1,600 Mary, Capital 152,000 Goodwill Method Total capital implied by contract ($160,000/0.20) $800,000 Less: Current balances + Mary's investment * (760 ,000) Goodwill $40 ,000 * ($600,000 + $160,000) Goodwill 40,000 Beth, Capital 16,000 Steph, Capital 16,000 Linda, Capital (0.2  $40,000) 8,000 Cash 160,000 Mary, Capital 160,000 3. Book value of interest acquired = ($600,000 + $160,000)  ¼ = $190,000 Book value of interest acquired ($190,000) is greater than assets invested ($160,000) by $30,000 Bonus Method Cash 160,000 Beth, Capital (0.4  $30,000) 12,000 Steph, Capital (0.4  $30,000) 12,000 Linda, Capital (0.2  $30,000) 6,000 Mary, Capital 190,000 8

Goodwill Method Goodwill implicit in agreement: Current partners' capital balance total $600,000 Percentage interest 75% Implied total capital $800,000 Implied total capital $800,000 Less: Current balances + Mary's investment 760,000 Goodwill $40,000 Cash 160,000 Goodwill 40,000 Mary, Capital 200,000 4. Book value of interest acquired = ($600,000 + $160,000)  0.40 = $304,000 Book value of interest acquired ($304,000) is greater than assets invested ($160,000) by $144,000 Bonus Method Cash 160,000 Beth, Capital (0.4  $144,000) 57,600 Steph, Capital (0.4  $144,000) 57,600 Linda, Capital (0.2  $144,000) 28,800 Mary, Capital 304,000 Goodwill Method Total capital implied by contract ($600,000/0.60) $1,000,000 Less: Current balances + Mary's investment 760,000 Goodwill $240,000 Cash 160,000 Goodwill 240,000 Mary, Capital 400,000 9

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