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Question;31. Undie Inc. has many foreign operations, and uses the U.S. dollar as its functional currency worldwide. Which of the following statements istrue with respect to foreign operations?A. All assets and liabilities are translated at current exchange rates.B. Monetary assets and liabilities are translated at current exchange rates.C. Translation gains and losses are reported in equity section of balance sheet.D. Non-monetary assets and liabilities are translated at average exchange rates for the year.32. Pauly Co. reports a foreign currency translation gain of $5M in its statement of shareholders' equity. From this, you can infer: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.33. Which exchange rates are used for foreign subsidiaries with different functional currencies? Using the following abbreviations identify which of the below are correct methods for convertingaccounts receivable.Year-end rates: YEAverage rates: ARHistorical rates: HRA. Choice AB. Choice BC. Choice CD. Choice D 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:34. 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?A. The Current Rate MethodB. The Temporal MethodC. The Conversion MethodD. Not determinable from information given35. If sales were 3,000 in British pounds for the fiscal year and the temporal method was used, what would this be in U.S. dollars?A. $4,800B. $4,500C. $4,200D. $4,00036. If the British pound was determined to be the functional currency, what would inventory be in US dollars?A. $3,500B. $3,200C. $3,000D. $2,80037. Depreciation expense would be:A. lower using conversion method than temporal method.B. lower using temporal method than current rate method.C. lower using current rate method than conversion method.D. lower using all-current rate method than temporal method.38. Current ratio:A. would be unchanged after applying the current rate method.B. would be unchanged after applying the temporal method.C. would be unchanged after applying the conversion method.D. would be higher after applying the temporal method.39. Which exchange rates are used for foreign subsidiaries with different functional currencies? Using the following abbreviations, identify which of the below are correct methods for convertinginventory.Year-end rates: YEAverage rates: ARHistorical rates: HRA. Choice AB. Choice BC. Choice CD. Choice D40. Corporation A acquires Corporation T for $90M, using 25% debt and 75% equity, in 2006. The fair value and book value of net assets acquired are $60M. Which of the following statements aretrue?I. If pooling-of-interests accounting is used, no goodwill will be recorded.II. If purchase accounting is used, goodwill of $30M will be recorded.III. If purchase accounting is used, Corporation A's stockholders' equity will increase by $90M on date of acquisition.IV. If purchase accounting is used, net income in future years will be lower than if pooling-of-interests was used.A. I, II and IIIB. I and II onlyC. I, II and IVD. all of the above41. When an acquisition is made and accounted for using thepurchase method, thepost-acquisition common stock account:A. is the sum of the pre-acquisition common stock accounts of the two combining companies.B. is the pre-acquisition common stock account of the acquired company only.C. is the pre-acquisition common stock account of the acquiring company plus the par value of new stock issued to affect the acquisition.D. is the pre-acquisition common stock account of the acquiring company plus the fair value of new stock issued to affect the acquisition.42. When an acquisition is made and accounted for using the purchase method, thepost-acquisition retained earnings account:A. is the sum of the pre-acquisition retained earnings accounts of the two combining companies.B. is the pre-acquisition retained earnings account of the acquiring company only.C. is the pre-acquisition retained earnings accounts of the acquiring company plus net income of acquired company in year of acquisition.D. is the pre-acquisition retained earnings accounts of the acquiring company less treasury stock of the acquired company.43. In-process R&D:A. is written off immediately to retained earnings.B. is only an issue when purchase accounting is used.C. is capitalized on the balance sheet and never amortized.D. is expensed immediately under pooling of interests. Xena Corporation has a foreign subsidiary, Zete Corporation, located in Japan. At the end of fiscal 2006, Zete has:44. Assume Xena uses the current rate method for translating Zeta's financial statements from the yen into U.S. dollars. If the yen appreciates relative to the dollar, which of the following istrue?A. Xena will record a foreign currency translation gain on the income statement.B. Xena will record a foreign currency translation loss on the income statement.C. Xena will record a foreign currency translation gain in the equity section of the balance sheet.D. Xena will record a foreign currency translation loss in the equity section of the balance sheet.45. Assume Xena uses the temporal method for translating Zeta's financial statements from the yen into U.S. dollars. If the yen appreciates relative to the dollar, which of the following istrue?A. Xena will record a foreign currency translation gain on the income statement.B. Xena will record a foreign currency translation loss on the income statement.C. Xena will record a foreign currency translation gain in the equity section of the balance sheet.D. Xena will record a foreign currency translation loss in the equity section of the balance sheet.46. 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?A. Choice AB. Choice BC. Choice CD. Choice D47. A U.S. company has a subsidiary located in Great Britain. If the U.S. dollar is the functional currency and the British pound is appreciating relative to the dollar, what will happen to the following ratios after remeasurement?A. Choice AB. Choice BC. Choice CD. Choice D48. Under U.S. GAAP, the method used to convert financial statements of foreign subsidiaries into the reporting currency depends upon: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.49. Under U.S. GAAP, the method used to convert financial statements of foreign subsidiaries in countries experiencing hyperinflation is:A. the current rate method.B. the inflation method.C. the temporal method.D. the transition method. The following information is from L&H's 2004 income statement:Feedback: Pre-tax income in 2005 is $3,900 ($2,600 x 1.5), an increase of $1,300. Starting with 2004, add back amortization expense no longer permitted by SFAS 142 (income increases by $2,000) less the impact of the sales decline of $1,400 (at 50% gross margin = $700 real economic income decrease).50. Pre-tax earnings growth of 50% for 2005 has just been announced after the close of trading, but further disclosure will not be made until tomorrow. That night, you review 2004 and conclude that, all else being equal, in 2005A. Sales decreased by approximately $1,400B. Sales increased by approximately $2,600C. Investment income doubled, enabling L&H to cut interest expense by $500D. L&H sold investments and/or fixed assets, realizing a gain of $1,30051. Based upon your analysis, you reflect that L&H managementA. is more than holding its own in a tough economic environment.B. needs to strengthen its marketing.C. is achieving growth in its new product line.D. has adroitly managed its asset portfolio. Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year's depreciation in the year acquired using ten-year lives. Monthly operating results are as follows:Assume revenue and earnings remain same for the next year. Company is following SFAS 142.Feedback:It can be either $42,000 or $48,000. Under GAAP for purchase accounting, there are two alternatives. Although income is always reported from the acquisition date forward, it is permitted to report 12 months sales of the acquired company, as long as 12 months expenses are included and pre-acquisition earnings are backed out. The simpler (and easier for the reader) approach is to only report post-acquisition (i.e., six months in this example) sales and expenses.52. If accounted for as a pooling-of-interests, 2005 consolidated earnings are reported as:A. $12,000B. $13,200C. $14,400D. It cannot be determined without further information53. If accounted for as a purchase, 2005 consolidated revenues are reported as:A. $36,000B. $42,000C. $48,000D. It cannot be determined without further information54. If accounted for as a purchase, 2005 consolidated earnings are reported asA. $10,700B. $11,900C. $12,700D. $13,20055. If accounted for as a purchase, 2006 consolidated earnings are reported asA. $10,700B. $13,400C. $11,950D. $14,40056. When accounting for an investment under the equity method, what situations may reduce the carrying value of the investment?I. Investee experiences significant losses.II. Investee distributes dividends in excess of earnings.III. Investee sells additional shares for less than book value.IV. Investee engages in a stock split.A. I and IIB. II and IVC. I, II and IIID. I, III and IV57. Both consolidation and equity method accounting assume a dollar earned by a subsidiary is equivalent to a dollar earned for a parent, even if not received in cash. The limitations of this assumption of dollar-for-dollar equivalence include which of the following?I. Dividends restricted by law and loan covenants.II. Risks due to political and economic factors.III. Tax liabilities from remittance of earnings.IV. Minority interests that limit parent's discretion.A. None of the aboveB. IIC. I and IIID. I, II, III and IV58. Old Co. was acquired by Raptor for cash, at a significant premium to book value, on January 1, 2004. Since that time, the now wholly owned subsidiary has had modest growth and all of its earnings have been distributed to its parent. Some of Old's bonds remain publicly traded. Which of the following is most likely?A. An increase in Old's total assets from 2003 to 2005.B. An increase in Old's pre-tax income from 2003 to 2005.C. An increase in Old's stockholders' equity from 2003 to 2005.D. A Raptor guarantee of the bonds.59. Which of the following is allowed to be reported on fair value basis under SFAS 159?A. Investment in subsidiaries that need to be consolidatedB. Lease assets and obligationsC. DerivativesD. Postretirement benefit assets and obligations

 

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