Question 1

Which of the following is an effect of the reclassification of trading securities as available-for-sale?

Accepted Answer

A) The balance sheet would need to be adjusted to report the securities at fair market value and there would be no effect on the income statement. 
B) There would be no effect on either the balance sheet or the income statement. 
C) The balance sheet would need to be adjusted to report the securities at fair market value and unrealized gains or losses on the date of the transfer would be included in net income. 
D) There would be no effect on the balance sheet and unrealized gains or losses on the date of the transfer would be included in net income.

Question 2

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
$\begin{array} { lr r } &\text { Parent Company Inc.}& \text { Child Company Inc. }\\text { Total assets}&\$ 37,234 &\$ 5,379\
\\text { Total liabilities } & \$ 23,467 & \$ 3,764 \ \text { Total shareholders' equity } & \$ 13,767 & \$ 1,615 \ \text { Total liabilities and shareholders' equity } & \$ 37,234 & \$ 5,379 \end{array}$
Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560. 
-What would be the net income in the consolidated income statement for year X2 assuming any excess purchase price relates to goodwill, and goodwill was found to be impaired by $830?

Accepted Answer

A) $1,461 
B) $1,560 
C) $1,012.2 
D) $730

Question 3

Wilde Corporation owns 30% of the outstanding stock of Bernie Inc. Bernie recorded net income of $10 million and paid dividends of $3 million in 2006. For each of the following ratios, state the effect (higher, lower, or no effect) that the use of the equity method would have on Wilde's financial ratios compared to the use of the cost method in 2006. Explain your answers.

i. Gross margin
ii. Total asset turnover
iii. Cash flow from operations to current liabilities
iv. Debt-to-equity

Accepted Answer

The answer of Wilde Corporation owns 30% of the outstanding...

Question 4

Under U.S. GAAP, the method used to convert financial statements of foreign subsidiaries into the reporting currency depends upon:

Accepted Answer

A) the size of the subsidiary. 
B) the functional currency of the subsidiary. 
C) the temporal location of the subsidiary. 
D) the current method used by the subsidiary.

Question 5

Pauly Co. reports a foreign currency translation gain of $5 million in its statement of shareholders' equity. From this, you can infer that:

Accepted Answer

A) they have foreign operations where the U.S. dollar is the functional currency. 
B) they have foreign operations where local currency is the functional currency. 
C) they entered into a foreign currency transaction that year. 
D) None of the above

Question 6

A U.S. company has a subsidiary located in Great Britain. If the British pound is the functional currency and is appreciating relative to the dollar, what will happen to the following ratios after translation? $$\begin{array}{l}
\text { Debt-to-equity } \quad \text { Net profit margin }\
\begin{array} { l c c } 
\text { A) } & \text { Higher } & \text { Lower } \
\text { B) } & \text { Higher } & \text { Same } \
\text { C) } & \text { Same } & \text { Same } \
\text { D) } & \text { Lower } & \text { Higher }
\end{array}
\end{array}$$

Accepted Answer

A) Option A 
B) Option B 
C) Option C 
D) Option D

Question 7

Compared to the equity method, the cost method of accounting for an investment in a profitable company results in:

Accepted Answer

A) lower earnings and lower cash flows. 
B) higher earnings and higher cash flows. 
C) lower earnings and no effect on cash flows. 
D) higher earnings and no effect on cash flows.

Question 8

Match between columns
                        Premises:  A pasta company is worried about the value of its Italian subsidiary.
 A hedge fund thinks that the Canadian dollar is overvalued.
 A diamond importer must make non-dollar payments.
 A copper fabricator enters into a long-term supply contract.
 A shipyard desires to fix its floating rate payments.
 A borrower wants to take advantage of lower floating interest rates.
 A wine distributor has French franc-denominated zero coupon bonds.

Accepted Answer

The Answer of Speculative and Fair value hedge and Cash is...

Question 9

When purchase accounting is used for acquisitions, prior year financial statements presented for comparative purposes should be restated as if the companies had always been combined.

Accepted Answer

A) True 
 B)False

Question 10

If the functional currency of a foreign-based subsidiary of an American company is the local currency, the current rate method of translation should be used for consolidation purposes.

Accepted Answer

A) True 
 B)False

Question 11

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
$\begin{array} { lr r } &\text { Parent Company Inc.}& \text { Child Company Inc. }\\text { Total assets}&\$ 37,234 &\$ 5,379\
\\text { Total liabilities } & \$ 23,467 & \$ 3,764 \ \text { Total shareholders' equity } & \$ 13,767 & \$ 1,615 \ \text { Total liabilities and shareholders' equity } & \$ 37,234 & \$ 5,379 \end{array}$
Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560. 
-What would be total liabilities in the consolidated financial statements for the date on which the merger became effective, assuming any excess purchase price relates to goodwill?

Accepted Answer

A) $28,221 
B) $27,231 
C) $27,741 
D) $25,462

Question 12

If the temporal method is used for foreign currency translation and the foreign subsidiary has an excess of monetary liabilities over monetary assets, an increase in the strength of the dollar will result in a translation loss.

Accepted Answer

A) True 
 B)False

Question 13

When using the current rate method to record foreign subsidiary results, all assets and liabilities are translated at a rate, in effect as of the statement date.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is incorrect? An analyst should be aware of the following when analyzing a company that has significant investments recorded using the equity method.

Accepted Answer

A) Cash flow received from investee may be substantially different from investment income recorded. 
B) As investee's liabilities are not recorded on the company's balance sheet, there may be significant off-balance-sheet financing. 
C) They must mark investment in investee to market even though there may be no ready market in which they can sell their investment. 
D) Company must record pro rata share of investee's earnings, which may not be well correlated with changes in market value of investee.

Question 15

Which of the following is allowed to be reported on fair value basis under SFAS 159?

Accepted Answer

A) Investment in subsidiaries that need to be consolidated 
B) Lease assets and obligations 
C) Derivatives 
D) Postretirement benefit assets and obligations

Question 16

Reported sales in US dollars of revenues from a foreign subsidiary will be the same regardless of the functional currency.

Accepted Answer

A) True 
 B)False

Question 17

If a company chooses the fair value option for an asset or liability, all changes in the fair value of the asset (or liability), including unrealized gain and losses, will be included in net income.

Accepted Answer

A) True 
 B)False

Question 18

Translation is the process under which local currency results are translated into the functional currency.

Accepted Answer

A) True 
 B)False

Question 19

Flowers Inc. an American company has two overseas subsidiaries located in Great Britain (Roses PLC) and in Holland (Tulips Inc.). Flowers prepares consolidated financial statements. The reporting currency is the U.S. dollar.

Most of Roses's operations and sales take place in Britain, and the transactions are denominated in the British pound. Additionally, Roses makes its own financing and operating decisions, independently of Flowers Inc.

Tulip Inc. is a sales outlet for Roses PLC and operating decisions are made by the British subsidiary, Roses.

a. Identify the method(s) Flowers Inc. should use to convert the financial results of Roses PLC into the U.S. dollar for purposes of consolidation.
b. Identify the method(s) Flowers Inc. should use to convert the financial results of Tulip Inc. into the U.S. dollar for purposes of consolidation.
c. Explain how a decline in the value of the British pound relative to the U.S. dollar will affect Flowers' earnings in the reporting currency.

Accepted Answer

The answer of Flowers Inc. an American company has two...

Question 20

A U.S. company has a subsidiary located in Great Britain. Information for the subsidiary for the year ended December 31, 2006, is as follows:
 $\begin{array}{ll}
&\text { British pound }\
\text { Gross profit margin } & 40 \% \
\text { Inventory } & 2,000\
\
&\text { Exchange Rate }\
\text { Balance sheet date } & 1 \text { pound }=\$ 1.6 \
\text { Average exchange rate } & 1 \text { pound }=\$ 1.5 \
\text { Historical rate } & 1 \text { pound }=\$ 1.4
\end{array}$

-After converting to U.S. dollars using the appropriate method, gross profit margin is 40%. What method is being used to record British subsidiaries financial statements?

Accepted Answer

A) The current rate method 
B) The temporal method 
C) The conversion method 
D) Not determinable from information given

Exam 5: Analyzing Investing Activities: Intercorporate Investments

Which of the following is an effect of the reclassification of trading securities as available-for-sale?

Under U.S. GAAP, the method used to convert financial statements of foreign subsidiaries into the reporting currency depends upon:

Pauly Co. reports a foreign currency translation gain of $5 million in its statement of shareholders' equity. From this, you can infer that:

Compared to the equity method, the cost method of accounting for an investment in a profitable company results in:

Matching

When purchase accounting is used for acquisitions, prior year financial statements presented for comparative purposes should be restated as if the companies had always been combined.

If the functional currency of a foreign-based subsidiary of an American company is the local currency, the current rate method of translation should be used for consolidation purposes.

If the temporal method is used for foreign currency translation and the foreign subsidiary has an excess of monetary liabilities over monetary assets, an increase in the strength of the dollar will result in a translation loss.

When using the current rate method to record foreign subsidiary results, all assets and liabilities are translated at a rate, in effect as of the statement date.

Which of the following is incorrect? An analyst should be aware of the following when analyzing a company that has significant investments recorded using the equity method.

Which of the following is allowed to be reported on fair value basis under SFAS 159?

Reported sales in US dollars of revenues from a foreign subsidiary will be the same regardless of the functional currency.

If a company chooses the fair value option for an asset or liability, all changes in the fair value of the asset (or liability), including unrealized gain and losses, will be included in net income.

Translation is the process under which local currency results are translated into the functional currency.