Question 1

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)?

Accepted Answer

A)  $0
B)  $18,913
C)  $20,714
D)  $416,087 B

Question 2

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

Accepted Answer

A)  possibility of loss is remote.
B)  actual incurrence of a loss is reasonably possible.
C)  outcome is uncertain.
D)  contingency involves pending or threatened litigation. B

Question 3

In exchange for the rights inherent in an option contract,the owner of the option will typically pay a price

Accepted Answer

A)  only when a call option is exercised.
B)  only when a put option is exercised.
C)  when either a call option or a put option is exercised.
D)  at the time the option is received regardless of whether the option is exercised or not. D

Question 4

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?

Accepted Answer

A)  $650,000
B)  $550,000
C)  $450,000
D)  $0

Question 5

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).
(1)January 1,2014
(2)December 31,2014
(3)December 31,2015
(4)December 31,2016

Accepted Answer

The answer of On January 1,2014,Hannah Ventures,Inc.,received a three-year,$1 million...

Question 6

On November 5,2014,a Longhaul Rental truck was in an accident with an auto driven by Alana Rodriguez.Longhaul Rental received notice on January 12,2015,of a lawsuit for $700,000 damages for personal injuries suffered by Rodriguez.Longhaul Rental's counsel believes it is probable that Rodriguez will be awarded an estimated amount in the range between $300,000 and $550,000,and that $400,000 is a better estimate of potential liability than any other amount.Longhaul's accounting year ends on December 31,and the 2014 financial statements were issued on March 2,2015.What amount of loss should Longhaul accrue at December 31,2014?

Accepted Answer

A)  $0
B)  $300,000
C)  $400,000
D)  $550,000

Question 7

If a cannery wanted to lock in the price they would pay for peaches in August four months before harvest (in April of the same year),they would be most likely to enter into which kind of agreement?

Accepted Answer

A)  Interest rate swap
B)  Fixed commodities contract
C)  Futures contract
D)  Option

Question 8

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

Accepted Answer

A)  affects reported net income.
B)  is recognized as an equity adjustment.
C)  is recognized as part of comprehensive income.
D)  is not recognized.

Question 9

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)

Accepted Answer

A)  interest rate swap.
B)  forward contract.
C)  futures contract.
D)  option.

Question 10

Which of the following liabilities is NOT contingent?

Accepted Answer

A)  A liability to replace a specific defective television set already returned to the manufacturer
B)  A liability to pay pension benefits if a specific employee lives to retirement
C)  A liability to pay any adverse judgment for a product liability case currently on appeal
D)  A liability to pay for books received by a college bookstore under terms that allow for the return for full refund of any books not sold

Question 11

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?

Accepted Answer

The answer of An inventory loss from market decline of...

Question 12

Which of the following contingencies should be accrued in the accounts and reported in the financial statements?

Accepted Answer

A)  The company is forcefully contesting a personal injury lawsuit and a loss is possible and reasonable estimable.
B)  An accommodation endorsement involving a remote loss
C)  It is probable that a company will receive $50,000 in settlement of a lawsuit.
D)  The estimated expenses of a one-year product warranty.

Question 13

The following segments were identified for an enterprise:

Which of the five segments is a reportable segment?

Accepted Answer

A)  All are reportable segments
B)  All but 1 and 2
C)  3 and 5 only
D)  All but 2

Question 14

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

Accepted Answer

A)  100%
B)  75%
C)  50%
D)  65%

Question 15

A truck owned and operated by Mingus Company was involved in an accident with an auto driven by S.Nara on January 12,2014.Mingus received notice on April 24,2014,of a lawsuit for $800,000 damages for a personal injury suffered by S.Nara.Mingus's counsel believes it is probable that S.Nara will be successful against the company for an estimated amount in the range between $100,000 and $400,000.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 Mingus accrue at December 31,2014?

Accepted Answer

A)  $400,000
B)  $250,000
C)  $100,000
D)  $800,000

Question 16

Which of the following statements is correct regarding FASB ASC Topic 270,"Interim Financial Reporting," and IAS No.34,"Interim Financial Reporting"?

Accepted Answer

A)  Both pronouncements view each reporting interval as a separate accounting period.
B)  Only IAS No. 34 views each reporting interval as a separate accounting period.
C)  Only FASB ASC Topic 270 views each reporting interval as a separate accounting period.
D)  Only IAS No. 34 views each interim period as an integral part of each annual period.

Question 17

When a company with reportable segments issues interim condensed financial statements,current GAAP requires that the interim reports provide all of the following for each reportable segment except

Accepted Answer

A)  revenues for external customers.
B)  intersegment revenues.
C)  total assets.
D)  a measure of segment profit or loss.

Question 18

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 12 percent,what will be Panther's settlement payment to/from Aegean?

Accepted Answer

A)  $6,000 payment
B)  $6,000 receipt
C)  $12,000 payment
D)  $12,000 receipt

Question 19

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 1,000 shares of Upmann stock in this contract is referred to as the

Accepted Answer

A)  collateral.
B)  notional amount.
C)  option premium.
D)  derivative.

Question 20

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?

Accepted Answer

A)  $400,000
B)  $250,000
C)  $100,000
D)  $0

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