Exam 19: Derivatives, contingencies, business Segments, and Interim Reports

Inca Company purchases a call option to hedge an investment of 20,000 shares of Limbaugh Company stock.The option agreement provides that if the prices of a share of Limbaugh Company stock is greater than $30 on October 25,Inca receives the difference (multiplied by 20,000 shares).Alternatively,if the price of the stock is less than $30,the option is worthless and will be allowed to expire.Which of the following statements regarding this call option is correct?

A loss contingency that is remote and cannot be reasonably estimated

Allman, Inc., enters into a call option contract with Betts Investment Co. on January 2, 2014. This contract gives Allman the option to purchase 1,000 shares of Upmann stock at $100 per share. The option expires on April 30, 2014. Upmann shares are trading at $100 per share on January 2, 2014, at which time Allman pays $200 for the call option. -Using the information above,the call option would be recorded in the accounts of Allman as

How is income tax expense for the third quarter interim period computed?

Uncertainty that the party on the other side of an agreement will abide by the terms of the agreement is referred to as

In May 2014,the Sailfish Company became involved in litigation.As a result of this litigation,it is probable that Sailfish will have to pay $800,000.In July 2014,a competitor commenced a suit against Sailfish alleging violation of antitrust laws seeking damages of $1,100,000.Sailfish denies the allegations,and the likelihood of Sailfish paying any damages is remote.In September 2014,Urchins County brought action against Sailfish for $900,000 for polluting Lake Kissimmee.It is reasonably possible that Urchins County will be successful,but the amount of damages Sailfish will have to pay is not reasonably determinable.What amount,if any,should be accrued by a charge to income in 2014?

Interim income tax expense is based on

Information obtained prior to the issuance of the current period's financial statements of a company indicates that it is probable that,at the date of the financial statements,a liability will be incurred for obligations related to product warranties on products sold during the current period.During the past three years,product warranty costs have been approximately 1 1/2 percent of annual sales revenue. An estimated loss contingency should be

Which of the following statements regarding requirements for segment disclosures is most accurate?

The reported identifiable assets of a reportable segment exclude which of the following?

Big Bike Plating Company uses chrome to plate motorcycle parts.Big Bike forecasts a need for 100,000 kilos of chrome on January 1,2015.On November 1,2014,Big Bike purchased a call option for 100,000 kilos of chrome on January 1,2015,at a price of $1.05 a kilo,which is the market price on November 1.Big Bike paid $900 for the call option and designated this option as a hedge against price fluctuations for their January purchase of chrome.On December 31,2014 and January 1,2015,the prevailing market price for chrome is $1.25 a kilo.On January 1,2015 Big Bike purchased 100,000 kilos of chrome. Required: Make the necessary entries on Big Bike's books at: (a)November 1,2014 (b)December 31,2014 (c)January 1,2015

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 contingency must be accrued in the accounts and reported in the financial statements when

Stern Fitness Enterprises uses soybeans to make one of their nutritional supplement products.Stern anticipates a need of 700,000 pounds of soybeans in January of 2015.On November 1,2014,Stern purchased a call option for 700,000 pounds of soybeans on January 1,2015,at a price of $0.40 per pound,which is the market price on November 1.Stern paid $1,300 for the call option and designated this option as a hedge against price fluctuations for their January purchase of soybeans.On December 31,2014,and January 1,2015,the prevailing market price for soybeans is $0.45 per pound.On January 1,2015,Stern purchased 700,000 pounds of soybeans. Make the necessary entries on Stern's books at (a)November 1,2014 (b)December 31,2014 (c)January 1,2015

Which of the following is NOT true regarding standards for interim reporting?

Bingo,Inc.,enters into a call option contract with Racer Investment Co.on January 2,2014.This contract gives Bingo the option to purchase 1,000 shares of Saloon stock at $100 per share.The option expires on April 30,2014.Saloon shares are trading at $100 per share on January 2,2014,at which time Bingo pays $100 for the call option.Assume that the price per share of Saloon stock is $115 on April 30,2014,and that the time value of the option has not changed.In order to settle the option contract,Bingo,Inc.,would most likely

Asolo Construction Co.carries $10,000,000 comprehensive public liability insurance with a $200,000 deductible clause.A suit for personal injury damages was brought against Asolo in 2014.Asolo's counsel believes it probable that the insurance company will settle out of court for an estimated amount of $550,000.At December 31,2014,Asolo should report an accrued liability of

The following segments were identified for an enterprise: Which of the four segments is a reportable segment?

On January 1, 2014, Panther Company received a two-year $600,000 loan. The loan calls for payments to made at the end of each year based on the prevailing market rate at January 1 of each year. The interest rate at January 1, 2014, was 10 percent. Aegean company also has a two-year $600,000 loan, but Aegean's loan carries a fixed interest rate of 10 percent. -Panther Company does not want to bear the risk that interest rates may increase in year two of the loan.Aegean Company believes that rates may decrease and they would prefer to have variable debt.So the two companies enter into an interest rate swap agreement whereby Aegean agrees to make Panther's interest payment in 2015 and Panther likewise agrees to make Aegean's interest payment in 2015.The two companies agree to make settlement payments,for the difference only,on December 31,2015.If the interest rate on January 1,2015 is 8 percent,what will be Panther's settlement payment to/from Aegean?

Which of the following is an example of a contingent loss (expense)likely to be recognized in the accounts on a regular basis each year?