Exam 8: Investing Activities

Below you will find the balance sheet and income statement of a US Corp.'s foreign subsidiary at the end of its first year of operations.The following exchange rates were in effect during the period: Jan.1,2012 - $1 = 1FC Dec.31,2012 - $1.70 = 1FC The average exchange rate during the period was $1.40=1FC.The common stock was issued on January 1,2012. Assuming that the foreign currency is the functional currency translate the financial statements into U.S.dollars.

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Question 1

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Orman Company is a large international canning company.Orman uses straight-line depreciation for financial reporting purposes and accelerated depreciation for tax reporting.The company's tax rate is 35%.Selected financial information about Orman appears below. Required:a.Compute the amount of depreciation expense that Orman recognized for income tax purposes for year 2010 and 2009.The amount reported as the deferred tax liability relating to temporary depreciation differences represents the cumulative income tax delayed as of each balance sheet date because Orman uses accelerated depreciation for tax purposes and straight-line depreciation for financial statement reporting. b.Compute the fixed asset turnover ratio for years 2010 and 2009 using the amounts reported for financial statement purposes. c.Compute the fixed asset turnover ratio for years 2010 and 2009 using the amounts reported for tax purposes.

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a.Compute the amount of depreciation expense that Orman recognized for income tax purposes for year 2010 and 2009.The amount reported as the deferred tax liability relating to temporary depreciation differences represents the cumulative income tax delayed as of each balance sheet date because Orman uses accelerated depreciation for tax purposes and straight-line depreciation for financial statement reporting.
b.Compute the fixed asset turnover ratio for years 2010 and 2009 using the amounts reported for financial statement purposes.
c.Compute the fixed asset turnover ratio for years 2010 and 2009 using the amounts reported for tax purposes.

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

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Question 3

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1.Decentralize decision making to the foreign unit.The greater the degree of autonomy of the foreign unit,the more likely its currency will be the functional currency.
2.Minimize remittances/dividends.The greater the degree of earnings retention by the foreign unit,the more likely its currency will be the functional currency.

The ____________________ method views a corporate acquisition as conceptually identical to the purchase of any single asset.

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Question 4

Under which of the following scenarios would an entity not be classified as a variable interest entity?

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Question 5

When a company has a minority passive investment it will recognize changes in the market value of the investment as ____________________ gains and losses.

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Question 6

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

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Question 7

Pop,Inc.acquires 100% of the outstanding shares of Snap Corp.for $3,923,450 and accounts for the transaction using the purchase method.The purchase price Pop paid for Snap exceeded Snap's book value for four reasons: 1.Snap's long-term depreciable assets have a market value of $1,250,000. 2.Deferred income taxes of $125,000 arise from the excess of market value over the book value of the depreciable assets. 3.Pop assigns a value of $90,000 to Snap's customer list and records it as an intangible asset. 4.Goodwill exists equal to the difference between the acquisition cost and the market value of the identifiable assets and liabilities acquired. Information about Pop and Snap's balance sheet at the acquisition date and the current market value of Snap's assets appears below: Required: Complete the table for Snap's current market values and the consolidated amounts at the date of acquisition.

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Question 8

Using the information below calculate the average total depreciable life of the assets: Infarmaton fram the Balance Shet: Depreciable As5ets \ 2,458,600 \ 1,985,400 Accumulated Depreciation (1,350,700) (1,046,000) Depreciable A55ets (Net) \ 1,107,900 \ 939,400 $Using the information below calculate the average total depreciable life of the assets: \begin{array}{l} \text { Infarmaton fram the Balance Shet: }\\ \begin{array} { l l l } & \mathbf { 2 0 1 2 } & \mathbf { 2 0 1 1 } \\ \text { Depreciable As5ets } & \$ 2,458,600 & \$ 1,985,400 \\ \text { Accumulated Depreciation } & ( 1,350,700 ) & ( 1,046,000 ) \\ \text { Depreciable A55ets (Net) } & \$ 1,107,900 & \$ 939,400 \end{array} \end{array}$

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Question 9

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

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Question 10

When dividends from an investment are recognized as a reduction of the investment account,the investment must have been of which type?

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Question 11

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

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Question 12

The term used to describe the amount of a company's annual interest cost that should be capitalized is known as:

(Multiple Choice)

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Question 13

A key characteristic of asset measurement is best described as:

(Multiple Choice)

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Question 14

Which one of the following is an example of the expected benefit approach for valuing long-lived assets?

(Multiple Choice)

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Question 15

Examine the five following cases and determine if the functional currency of a U.S.parent's foreign unit is the foreign currency or the U.S.Dollar.

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Question 16

Firms recognize an impairment loss when the carrying amount of a tangible fixed asset is deemed "not recoverable" as specified by GAAP.GAAP defines a carrying amount as "not recoverable" if

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Question 17

When a foreign entity has the U.S.dollar as its functional currency,it uses which exchange rate to translate monetary assets and liabilities?

(Multiple Choice)

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Question 18

All of the following are types of intercorporate investments in capital stock except:

(Multiple Choice)

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Question 19

Assume that Hsu Company needs to acquire a large special-purpose materials handling facility.Given that no outside vendor exists for this type of facility and that the company has available engineering,management,and productive capacity,the Hsu borrows funds and builds the facility.Identify the costs that should be capitalized as part of this facility.

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Question 20

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

The ____________________ method views a corporate acquisition as conceptually identical to the purchase of any single asset.

Under which of the following scenarios would an entity not be classified as a variable interest entity?

When a company has a minority passive investment it will recognize changes in the market value of the investment as ____________________ gains and losses.

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

When dividends from an investment are recognized as a reduction of the investment account,the investment must have been of which type?

The term used to describe the amount of a company's annual interest cost that should be capitalized is known as:

A key characteristic of asset measurement is best described as:

Which one of the following is an example of the expected benefit approach for valuing long-lived assets?

Examine the five following cases and determine if the functional currency of a U.S.parent's foreign unit is the foreign currency or the U.S.Dollar.

Firms recognize an impairment loss when the carrying amount of a tangible fixed asset is deemed "not recoverable" as specified by GAAP.GAAP defines a carrying amount as "not recoverable" if

When a foreign entity has the U.S.dollar as its functional currency,it uses which exchange rate to translate monetary assets and liabilities?

All of the following are types of intercorporate investments in capital stock except:

Overview of Financial Reporting, financial Statement Analysis, and Valuation

Asset and Liability Valuation and Income Measurement

Income Flows Versus Cash Flows: Understanding the Statement of Cash Flows

Profitability Analysis

Risk Analysis

Accounting Quality

Financing Activities

Operating Activities

Forecasting Financial Statements

Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach

Valuation: Cash-Flow-Based Approaches

Valuation: Earnings-Based Approaches

Valuation: Market-Based Approaches

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