Question: Assuming that MNC entered into a forward

> Perkins Company acquires 90 percent of the outstanding common stock of the Butterfly Corporation as well as 55 percent of its preferred stock. How should these preferred shares be accounted for within the consolidation process?

> Clarke Company has a subsidiary operating in a foreign country. In relation to this subsidiary, what does the term functional currency mean? How is the functional currency determined?

> What are the major procedural differences in applying the current rate and temporal methods of translation?

> In translating the financial statements of a foreign subsidiary, why is the value assigned to retained earnings especially difficult to determine? How is this problem normally resolved?

> What concept underlies the temporal method of translation? What concept underlies the current rate method of translation? How does balance sheet exposure differ under these two methods?

> How are gains and losses on financial instruments used to hedge the net investment in a foreign operation reported in the consolidated financial statements?

> Why might a company want to hedge its balance sheet exposure? What is the paradox associated with hedging balance sheet exposure?

> What causes balance sheet (or translation) exposure to foreign exchange risk? How does balance sheet exposure compare with transaction exposure?

> What are the two major issues related to the translation of foreign currency financial statements?

> Palmetto Bug Extermination Corporation (PBEC), a U.S. company, regularly purchases chemicals from a supplier in Switzerland with the invoice price denominated in Swiss francs. PBEC has experienced several foreign exchange losses in the past year due to i

> The Pier Ten Company, a U.S. company, made credit sales to four customers in Asia on September 15, 2015, and received payment on October 15, 2015. Information related to these sales is as follows: The Pier Ten Company’s fiscal year en

> On January 1, 2018, Primair Corporation loaned Vista Company $300,000 and agreed to guarantee all of Vista’s long-term debt in exchange for (1) decision-making authority over all of Vista’s activities and (2) an annual

> On February 1, 2017, Linber Company forecasted the purchase of component parts on May 1, 2017, at a price of 100,000 euros. On that date, Linber entered into a forward contract to purchase 100,000 euros on May 1, 2017. It designated the forward contract

> Import/Export Company, a U.S. company, made a number of import purchases and export sales denominated in foreign currency in 2015. Information related to these transactions is summarized in the following table. The company made each purchase or sale on t

> Fergusson Corporation, a U.S. company, manufactures components for the automobile industry. In the past, Fergusson purchased actuators used in its products from a supplier in the United States. The company plans to shift its purchases to a supplier in Po

> Many companies make annual reports available on their corporate web page, often under an Investors tab. Annual reports also can be accessed through the SEC’s EDGAR system at www.sec.gov (under Filings, click Company Filings Search, type in Company Name,

> Vino Veritas Company, a U.S.-based importer of wines and spirits, placed an order with a French supplier for 1,000 cases of wine at a price of 200 euros per case. The total purchase price is 200,000 euros. Relevant exchange rates for the euro are as foll

> Based on past experience, Leickner Company expects to purchase raw materials from a foreign supplier at a cost of 1,000,000 marks on March 15, 2018. To hedge this forecasted transaction, the company acquires a three-month call option to purchase 1,000,00

> Spitz Company ordered merchandise from a foreign supplier on November 20 at a price of 100,000 forints when the spot rate was $0.50 per forint. Delivery and payment were scheduled for December 20. On November 20, Spitz acquired a call option on 100,000 f

> On June 1, Vandervelde Corporation (a U.S.-based manufacturing firm) received an order to sell goods to a foreign customer at a price of 100,000 leks. Vandervelde will ship the goods and receive payment in three months on September 1. On June 1, Vanderve

> On August 1, Ling-Harvey Corporation (a U.S.-based importer) placed an order to purchase merchandise from a foreign supplier at a price of 400,000 ringgits. Ling-Harvey will receive and make payment for the merchandise in three months on October 31. On A

> On October 1, 2017, Sharp Company (based in Denver, Colorado) entered into a forward contract to sell 100,000 rubles in four months (on January 31, 2018) and receive $39,000 in U.S. dollars. Exchange rates for the ruble follow: Sharp’

> An enterprise that holds a variable interest in a variable interest entity (VIE) is required to consolidate the assets, liabilities, revenues, expenses, and noncontrolling interest of that entity if: a. The VIE has issued no voting stock. b. The variable

> Eximco Corporation (based in Champaign, Illinois) has a number of transactions with companies in the country of Mongagua, where the currency is the mong. On November 30, 2017, Eximco sold equipment at a price of 500,000 mongs to a Mongaguan customer that

> On November 1, 2017, Bernard Company (a U.S.-based company) sold merchandise to a foreign customer for 100,000 FCUs with payment to be received on April 30, 2018. At the date of sale, Bernard entered into a six-month forward contract to sell 100,000 FCUs

> On June 1, Cairns Corporation purchased goods from a foreign supplier at a price of 1,000,000 francs and will make payment in three months on September 1. On June 1, Cairns acquired an option to purchase 1,000,000 francs in three months at a strike price

> On June 1, Alexander Corporation sold goods to a foreign customer at a price of 1,000,000 pesos and will receive payment in three months on September 1. On June 1, Alexander acquired an option to sell 1,000,000 pesos in three months at a strike price of

> Use the same facts as in Problem 31 except that Brandlin Company purchases materials from a foreign supplier on December 1, 2017, with payment of 16,000 korunas to be made on March 1, 2018. The materials are consumed immediately and recognized as cost of

> Brandlin Company of Anaheim, California, sells parts to a foreign customer on December 1, 2017, with payment of 16,000 korunas to be received on March 1, 2018. Brandlin enters into a forward contract on December 1, 2017, to sell 16,000 korunas on March 1

> On September 30, 2017, Ericson Company negotiated a two-year, 1,000,000 dudek loan from a foreign bank at an interest rate of 2 percent per year. It makes interest payments annually on September 30 and will repay the principal on September 30, 2019. Eric

> Benjamin, Inc., operates an export/import business. The company has considerable dealings with companies in the country of Camerrand. The denomination of all transactions with these companies is alaries (AL), the Camerrand currency. During 2017, Benjamin

> On April 1, 2017, Mendoza Company borrowed 500,000 euros for one year at an interest rate of 5 percent per annum. Mendoza must make its first interest payment on the loan on October 1, 2017, and will make a second interest payment on March 31, 2018, when

> Voltac Corporation (a U.S. company located in Charlotte, North Carolina) has the following import/export transactions denominated in Mexican pesos in 2017: March 1 ……………………… Bought inventory costing 100,000 pesos on credit. May 1 ……………. Sold 60 percent o

> On December 31, 2017, PanTech Company invests $20,000 in SoftPlus, a variable interest entity. In contractual agreements completed on that date, PanTech established itself as the primary beneficiary of SoftPlus. Previously, PanTech had no equity interest

> On December 15, 2017, Lisbeth Inc. (a U.S. company) purchases merchandise inventory from a foreign supplier for 50,000 schillings. Lisbeth agrees to pay in 45 days after it sells the merchandise. Lisbeth makes sales rather quickly and pays the entire obl

> Peerless Corporation (a U.S. company) made a sale to a foreign customer on September 15, for 100,000 crowns. It received payment on October 15. The following exchange rates for 1 crown apply: September 15 ……………………………. $0.60 September 30 ……………………………… 0.66

> On December 20, 2017, Butanta Company (a U.S. company headquartered in Miami, Florida) sold parts to a foreign customer at a price of 50,000 ostras. Payment is received on January 10, 2018. Currency exchange rates for 1 ostra are as follows: December 20,

> Turbo Corporation (a U.S.-based company) acquired merchandise on account from a foreign supplier on November 1, 2017, for 100,000 markkas. It paid the foreign currency account payable on January 17, 2018. The following exchange rates for 1 markka are kno

> What is the net impact on Dos Santos Company’s 2018 net income as a result of this hedge of a forecasted foreign currency transaction? Assume that the raw materials are consumed and become a part of the cost of goods sold in 2018. a. $80,000 decrease in

> What is the net impact on Dos Santos Company’s 2017 net income as a result of this hedge of a forecasted foreign currency transaction? a. $–0–. b. $400 decrease in net income. c. $1,000 decrease in net income. d. $1,400 decrease in net income. On Novemb

> What is Micro’s net increase or decrease in cash flow from having entered into this forward contract hedge? a. $–0–. b. $1,000 increase in cash flow. c. $1,500 decrease in cash flow. d. $2,000 increase in cash flow. On June 1, 2017, Micro Corp. received

> What is the net impact on Micro’s net income for the quarter ended September 30, 2017, as a result of this forward contract hedge of a firm commitment? a. $–0–. b. $115,000 increase in net income. c. $118,000 increase in net income. d. $120,000 increase

> What is the net impact on Micro’s net income for the quarter ended June 30, 2017, as a result of this forward contract hedge of a firm commitment? a. $–0–. b. $2,400 increase in net income. c. $4,000 decrease in net income. d. $8,000 increase in net inco

> What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? a. $–0–. b. $1,000 increase in cash flow. c. $1,500 decrease in cash flow. d. $3,000 increase in cash fl

> The following describes a set of arrangements between TecPC Company and a variable interest entity (VIE) as of December 31, 2017. TecPC agrees to design and construct a new research and development (R&D) facility. The VIE’s sole purpose is to finance and

> What was the net impact on Jensen Company’s 2018 income as a result of this fair value hedge of a firm commitment? a. $–0–. b. $1,319.70 decrease in income. c. $77,980.30 increase in income. d. $78,680.30 increase in income. On September 1, 2017, Jensen

> What was the net impact on Jensen Company’s 2017 income as a result of this fair value hedge of a firm commitment? a. $–0–. b. $680.30 decrease in income. c. $300 increase in income. d. $980.30 increase in income. On September 1, 2017, Jensen Company re

> Torres Corporation (a U.S.-based company) expects to order goods from a foreign supplier at a price of 100,000 pounds, with delivery and payment to be made on September 20. On July 20, Torres purchased a two-month call option on 100,000 pounds and design

> On March 1, Pimlico Corporation (a U.S.-based company) expects to order merchandise from a supplier in Sweden in three months. On March 1, when the spot rate is $0.10 per Swedish krona, Pimlico enters into a forward contract to purchase 500,000 Swedish k

> Assuming that MNC did not enter into a forward contract, how much foreign exchange gain or loss should it report on its 2017 income statement with regard to this transaction? a. $5,000 gain b. $3,000 gain c. $2,000 loss d. $1,000 loss MNC Corp. (a U.S.-

> On December 1, 2017, Ringling Company (a U.S.-based company) entered into a three-month forward contract to purchase 1,000,000 pesos on March 1, 2018. The following U.S. dollar per peso exchange rates apply: Ringling’s incremental bor

> St. Philip Company ordered parts costing €100,000 from a foreign supplier on January 15 when the spot rate was $0.20 per €. A one-month forward contract was signed on that date to purchase €100,000 at a forward rate of $0.23. The forward contract is prop

> A U.S. exporter has a Thai baht account receivable resulting from an export sale on June 1 to a customer in Thailand. The exporter signed a forward contract on June 1 to sell Thai baht and designated it as a cash flow hedge of a recognized Thai baht rece

> Matthias Corp. had the following foreign currency transactions during 2017: ∙ Purchased merchandise from a foreign supplier on January 20 for the U.S. dollar equivalent of $60,000 and paid the invoice on April 20 at the U.S. dollar equivalent of $50,000.

> Hillsborough Country Outfitters, Inc., entered into an agreement for HCO Media LLC to exclusively conduct Hillsborough’s e-commerce initiatives through a jointly owned (50 percent each) Internet site known as HCO.com. HCO Media receives 2 percent of all

> Grace Co. had a Chinese yuan payable resulting from imports from China and a Mexican peso receivable resulting from exports to Mexico. Grace recorded foreign exchange losses related to both its yuan payable and peso receivable. Did the foreign currencies

> On July 1, 2017, Mifflin Company borrowed 200,000 euros from a foreign lender evidenced by an interest-bearing note due on July 1, 2018. The note is denominated in euros. The U.S. dollar equivalent of the note principal is as follows: Date ______________

> Brief, Inc., had a receivable from a foreign customer that is payable in the customer’s local currency. On December 31, 2017, Brief correctly included this receivable for 200,000 local currency units (LCU) in its balance sheet at $110,000. When Brief col

> On October 1, 2017, Tile Co., a U.S. company, purchased products from Azulejo, a Portuguese company, with payment due on December 1, 2017. If Tile’s 2017 operating income included no foreign exchange gain or loss, the transaction could have a. Been denom

> In accounting for foreign currency transactions, which of the following approaches is used in the United States? a. One-transaction perspective; accrue foreign exchange gains and losses. b. One-transaction perspective; defer foreign exchange gains and lo

> Which of the following combinations correctly describes the relationship between foreign currency transactions, exchange rate changes, and foreign exchange gains and losses? Foreign Exchange Type of Transaction Forelgn Currency Galn or Loss a. Expor

> How are changes in the fair value of an option accounted for in a cash flow hedge? In a fair value hedge?

> What are the differences in accounting for a forward contract used as a cash flow hedge of (a) A foreign currency denominated asset or liability and (b) A forecasted foreign currency transaction?

> What are the differences in accounting for a forward contract used as a fair value hedge of (a) A foreign currency denominated asset or liability and (b) A foreign currency firm commitment?

> What are the differences in accounting for a forward contract used as (a) A cash flow hedge and (b) A fair value hedge of a foreign currency denominated asset or liability?

> On January 1, 2018, Stamford reacquires 8,000 of the outstanding shares of its own common stock for $24 per share. None of these shares belonged to Neill. How does this transaction affect the parent company’s Additional Paid-In Capital account? a. Has no

> Under what conditions can companies use hedge accounting to account for a foreign currency option used to hedge a forecasted foreign currency transaction?

> What is hedge accounting?

> How does a company determine the fair value of a foreign currency forward contract? How does it determine the fair value of an option?

> How do companies report foreign currency derivatives, such as forward contracts and options, on the balance sheet?

> Why would a company prefer a foreign currency option over a forward contract in hedging a foreign currency firm commitment? Why would a company prefer a forward contract over an option in hedging a foreign currency asset or liability?

> How does the timing of hedges of (a) Foreign currency denominated assets and liabilities, (b) Foreign currency firm commitments, and (c) Forecasted foreign currency transactions differ?

> How does a foreign currency option differ from a foreign currency forward contract?

> What does the term hedging mean? Why do companies elect to follow this strategy?

> In what way is the accounting for a foreign currency borrowing more complicated than the accounting for a foreign currency account payable?

> What factors create a foreign exchange gain on a foreign currency transaction? What factors create a foreign exchange loss?

> On January 1, 2018, Stamford issues 10,000 additional shares of common stock for $15 per share. Neill does not acquire any of this newly issued stock. How does this transaction affect the parent company’s Additional Paid-In Capital account? a. Has no eff

> A company makes an export sale denominated in a foreign currency and allows the customer one month to pay. Under the two-transaction perspective, accrual approach, how does the company account for fluctuations in the exchange rate for the foreign currenc

> What concept underlies the two-transaction perspective in accounting for foreign currency transactions?

> The Coca-Cola Company is organized geographically and defines reportable operating segments as regions of the world. The following information was extracted from Note 19 Operating Segments in the Coca-Cola Company 2014 Annual Report: Required 1. Calcul

> The following information was extracted from quarterly reports for Wal-Mart Stores, Inc. (amounts in millions): The following information was extracted from the notes to the financial statements in the Wal-Mart Stores, Inc., Annual Report (for the fisc

> Caplan Pharma, Inc., recently was sued by a competitor for possible infringement of the competitor’s patent on a top-selling flu vaccine. The plaintiff is suing for damages of $15 million. Caplan’s CFO has discussed the case with legal counsel, who belie

> Nuland International Corporation recently acquired 40 percent of Scott Trading Company and appropriately accounts for this investment under the equity method. Nuland’s corporate controller is in the process of determining the company’s operating segments

> Corcoran Heavy Industries Company (CHIC) is organized into four divisions, each of which operates in a different industry. The types of customer served and the method used to distribute products differ across all four of these industries. In addition, ea

> Many companies make annual reports available on their corporate Internet home page. Annual reports also can be accessed through the SEC’s EDGAR system at www.sec.gov (under Filings, click Company Filings Search, type in Company Name, and under Filing Typ

> Many companies make annual reports available on their corporate Internet home page. Annual reports also can be accessed through the SEC’s EDGAR system at www.sec.gov (under Filings, click Company Filings Search, type in Company Name, and under Filing Typ

> The following information for Dorado Corporation relates to the three-month period ending September 30. Dorado expects to purchase 150,000 units of inventory in the fourth quarter of the current calendar year at a cost of $25 per unit, and to have on h

> On January 1, 2018, Stamford issues 10,000 additional shares of common stock for $25 per share. Neill acquires 8,000 of these shares. How will this transaction affect the parent company’s Additional Paid-In Capital account? a. Has no effect on it. b. Inc

> Cambi Company began operations on January 1, 2016. In the second quarter of 2017, it adopted the FIFO method of inventory valuation. In the past, it used the LIFO method. The company’s interim income statements as originally reported un

> Noventis Corporation prepared the following estimates for the four quarters of the current year: Additional Information ∙ First-quarter administrative costs include the $160,000 annual insurance premium. ∙ Advertisin

> Taft Corporation operates primarily in the United States. However, a few years ago it opened a plant in Spain to produce merchandise to sell there. This foreign operation has been so successful that during the past 24 months the company started a manufac

> Mason Company has prepared consolidated financial statements for the current year and is now gathering information in connection with the following five operating segments it has identified. Determine the reportable segments by performing each applicabl

> Following is financial information describing the six operating segments that make up Fairfield, Inc. (in thousands): Consider the following questions independently. None of the six segments has a primarily financial nature. a. What minimum revenue amo

> Ecru Company has identified five industry segments: plastics, metals, lumber, paper, and finance. It appropriately consolidated each of these segments in producing its annual financial statements. Information describing each segment (in thousands) follow

> Vehicle Corporation is organized into four operating segments. The internal reporting system generated the following segment information: The company incurred additional operating expenses (of a general nature) of $1,200,000. Perform the profit or loss

> Assume the company expects to replace the units of beginning inventory sold in April at a cost of $45 per unit and expects inventory at year-end to be between 2,100 and 2,500 units. What amount of cost of goods sold should be recorded for the quarter end

> Assume the company does not expect to replace the units of beginning inventory sold; it plans to reduce inventory by year-end to 500 units. What amount of cost of goods sold should be recorded for the quarter ended March 31? a. $335,000 b. $350,000 c. $3

> The journal entry at March 15 to record the payment of property taxes would include which of the following? a. A debit to Property Tax Expense of $480,000. b. A credit to Cash of $120,000. c. A debit to Prepaid Property Taxes of $360,000. d. A credit to

> Aaron owns 100 percent of the 12,000 shares of Veritable, Inc. The Investment in Veritable account has a balance of $588,000, corresponding to the subsidiary’s unamortized acquisition-date fair value of $49 per share. Veritable issues 3,000 new shares to

> How much of this expense should Calloway’s income statement reflect for the quarter ending March 31? a. –0– b. $40,000 c. $120,000 d. $480,000 On March 15, Calloway, Inc., paid property taxes of $480,000 for the calendar year.