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

On January 1,2014,Hannah Ventures,Inc. ,received a three-year,$1 million loan with interest payments due at the end of each year and the principal to be repaid on December 31,2016.The interest rate for the first year is the prevailing market rate of 9 percent,and the rate each succeeding year will be equal to the prevailing market rate on January 1 of that year.Hannah also entered into an interest rate swap agreement related to this loan.Under the terms of the swap agreement,in the years 2015 and 2016,Hannah will receive a swap payment based on the principal amount of $1 million.If the January 1 interest rate is greater than 9 percent,Hannah will receive a swap payment for the difference;and if the January 1 interest rate is less than 9 percent,Hannah will make a swap payment for the difference.The swap payments are made on December 31 of each year.On January 1,2015,the interest rate is 8 percent,and on January 1,2016,the interest rate is 12 percent. Make all the journal entries necessary on Hannah's books at the dates shown below.For purposes of estimating future swap payments,assume that the current interest rate is the best forecast of the future interest rate (round all entries to the nearest dollar).

Disclosure usually is NOT required for

An inventory loss from market decline of $1,200,000 occurred in April 2014.Discus Company recorded this loss in April 2014 after its March 31,2014,quarterly report was issued.None of this loss was recovered by the end of the year.How should this loss be reflected in the quarterly income statements of Discus Company? Three months ended (2014): March 31 June 30 September 30 December 31

On November 1,2014,Balloon Company sold some limited edition art prints to Sitake Company for ¥47,850,000 to be paid on January 1,2015.The current exchange rate on November 1,2014,was ¥110=$1,so the total payment at the current exchange rate would be equal to $435,000.Balloon entered into a forward contract with a large bank to guarantee the number of dollars to be received.According to the terms of the contract,if ¥47,850,000 is worth less than $435,000,the bank will pay Balloon the difference in cash.Likewise,if ¥47,850,000 is worth more than $435,000,Balloon must pay the bank the difference in cash.Assuming the exchange rate on December 31,2014 is ¥115=$1,what amount will Balloon disclose as the fair value of the forward contract on December 31,2014 (answers rounded to the nearest dollar)?

For which type of derivative are changes in the fair value deferred and recognized as an equity adjustment?

On January 17,2014,an explosion occurred at an Boondocks Fireworks plant causing extensive property damage to area buildings.Although no claims had yet been asserted against Boondocks by March 10,2014,Boondocks' management and counsel concluded that it is reasonably possible Boondocks will be responsible for damages and that $2,500,000 would be a reasonable estimate of its liability.Boondocks' $10,000,000 comprehensive public liability policy has a $500,000 deductible clause.In Boondocks' December 31,2014,financial statements,which were issued on March 25,2015,how should this item be reported?

On March 1,Suki Corporation entered into a firm commitment to purchase specialized equipment from the Sashimi Trading Company for ¥80,000,000 on June 1.The exchange rate on March 1 is ¥100 = $1.To reduce the exchange rate risk that could increase the cost of the equipment in U.S.dollars,Suki pays $20,000 for a call option contract.This contract gives Suki the option to purchase ¥80,000,000 at an exchange rate of ¥100 = $1 on June 1.On June 1,the exchange rate is ¥105 = $1.How much did Suki save by purchasing the call option (answers rounded to the nearest dollar)?

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 December 31,2014 is 12 percent,what amount will Panther report as the fair value of the interest rate swap at December 31,2014 (answers rounded to the nearest dollar)?

When gains or losses on derivatives designated as fair value hedges exceed the gains or losses on the item being hedged,the excess

Which of the following is the most likely candidate for a contingent liability that must be accrued?

A contingent loss should be disclosed in a note to the financial statements but should not be recorded as a liability if the

A contract,traded on an exchange,that allows a company to buy a specified quantity of a commodity or a financial security at a specified price on a specified future date is referred to as a(n)

The sum of reportable segment sales must be a least equal to what percent of total company sales?

On July 1,2014,Stagger Company sold some limited edition art prints to Wakaramas Company for ¥38,500,000 to be paid on September 30 of that year.The current exchange rate on July 1,2014,was ¥110=$1,so the total payment at the current exchange rate would be equal to $350,000.Stagger entered into a forward contract with a large bank to guarantee the number of dollars to be received.According to the terms of the contract,if ¥38,500,000 is worth less than $350,000,the bank will pay Stagger the difference in cash.Likewise,if ¥38,500,000 is worth more than $350,000,Stagger must pay the bank the difference in cash. -Using the information above and assuming the exchange rate on September 30 is ¥115=$1,what amount will Stagger pay to,or receive from,the bank (rounded to the nearest dollar)?

The calculation of a reportable segment's operating income or loss excludes which of the following?

During 2014,Ongoing Company became involved in a tax dispute with the IRS.At December 31,2014,Ongoing's tax adviser believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was $450,000 but could be as much as $650,000.After the 2014 financial statements were issued,Ongoing received and accepted an IRS settlement offer of $550,000.What amount of accrued liability would Ongoing have reported in its December 31,2014,balance sheet?

A truck owned and operated by Roadhog Company was involved in an accident with an auto driven by M.Sore on January 12,2014.Roadhog received notice on April 24,2014,of a lawsuit for $750,000 damages for a personal injury suffered by M.Sore.Roadhog's counsel believes it is reasonably possible that M.Sore will be successful against the company for an estimated amount in the range between $200,000 and $500,000.No amount within this range is a better estimate of potential damages than any other amount.It is expected that the lawsuit will be adjudicated in the latter part of 2015.What amount of loss should Roadhog accrue at December 31,2014?

Which type of contract is unique in that it protects the owner against unfavorable movements in the prices or rates while allowing the owner to benefit from favorable movements?

A company enters into a futures contract with the intent of hedging an account payable of DM350,000 due on December 31.The contract requires that if the U.S.dollar value of DM350,000 is greater than $175,000 on December 31,the company will be required to pay the difference.Alternatively,if the U.S.dollar value is less than $175,000,the company will receive the difference.Which of the following statements is correct regarding this contract?

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