Question

Question 1

A US company that has purchased inventory from a German supplier would be exposed to a net exchange gain on the unpaid balance if

a-The amount to be paid was denominated in dollars

b-The Dollar weakened in relation to the Euro and the Euro was the denominated currency

c-The Dollar strengthened relative to the Euro and the Euro was the denominated currency

d-The company signed a forward contract for the purchase of Euros

Question 2

When the affiliated companies sell on credit the commercial balances, the accounts receivable and the intercompany payables:

a-Appear only in the books of the parent in the consolidated statements

b- They appear only in the books of the subsidiary in the consolidated statements

c-Appear in the books of both the parent company and the subsidiary in the consolidated statements

d-They do not appear in the consolidated statements

Question 3

You are the controller of company P and you have been asked to review this situation to see if it is in the best interest of the company. Company P would like to sell bonds to obtain financing. Company P has an 80% interest in company S and interest rates are down. Company S is smaller than company P and has a lower credit rating. Company P wants to reduce interest costs on company debt S. You have decided

a-Intercompany debt is eliminated when the consolidated statements are prepared so it would be a good idea

bThe intercompany debt would not be eliminated when the consolidated statements are prepared, therefore, it shows a high current relation with the parent company.

c-The intercompany debt would not be eliminated when the consolidated statements were prepared, which would show a high current ratio with the subsidiary

d-A parent can not incur debt for a subsidiary

Question 4

A sign of significant influence in the accounting of capital investments would be:

a-Shared management, employees or technology between the investment and the investor

b-Shared external auditor.

c-Greater percentage of ownership by third parties.

d-Great decrease in the market price per common share

Question 5

A company has purchased, for 50,000 FCs, an electric generator from a foreign company. The exchange rates were 1 FC = $ 0.90 on the delivery date and 1 FC = $ 0.76 when the payment was paid. What is the final value registered if the two-transaction method is used?

a- $ 38,000

b- $ 40,000

c- $ 45,000

d- $ 50,000

Question 6

A arm's length transaction, which would be reflected in the consolidated financial statements, would include:

a-A loan to the president of the subsidiary company

b-The purchase of material from a supplier abroad

c-The sale of fixed assets that are no longer needed to the subsidiary

d-Sales of inventory to a subsidiary

Question 7

The equity method of investment accounting would apply in which situation:

a-When 20-50% of preferred shares are owned

b-When a threshold of 15-20% of the ownership of ordinary shares is reached.

c-When consolidation is impracticable.

d - When less than 20% of the ordinary shares are owned, if the investor can exercise a significant influence over the operations of the investees.

Question 8

An economic advantage of a business combination includes

a-Use of duplicate assets

b-Create separate management teams

c-Coordinated marketing campaigns

d-Combination of levels horizontally within the marketing chain

Question 9

Assuming that the functional currency of a foreign subsidiary is not the local currency, which of the following accounts would be re-evaluated at the historical rate?

a-Accounts Payable

b-Notes payable in the long term

c-Lands

d-Sales Income

Question 10

Callie was admitted to the Adams & Beal Partnership four years ago. The association has a deficiency at the end of the year for the current year. How could this deficiency be accounted for?

a-Use the profit and loss ratios to absorb the deficiency

b-Do not account for the loss in the incurred year, this can be compensated with the income in future years

c-Do not account for the loss in the incurred year, this could be compensated with the income in future years or recovered to compensate the income in previous years

d-The losses are not transmitted to the individual partners of an association

Answer 1

Solution 1:

The answer is C.

Explanation : Since the US company has purchased inventory from German supplier and he has not make full payment yet i. e. there is still standing unpaid balance, then the US company has Euro payable if invoice is denominated in Euro.

In order to make payment, the US company will be required to purchase Euro by using US dollars. So if the US dollars strengthened relative to Euro, then the number of dollars required to purchase Euro will be less and the company will be able to make Euro payment with less dollars and it will results in net foreign exchange gain on unpaid balance

The option A is not correct since if the amount is to be denominated in dollars then there is no foreign currency exposure as the amount is payable in home currency.

The option B is not correct since if the dollar weakened in relation to dollar and Euro was denominated currency, then the number of dollars required to purchase Euro will be high and the dollar outflow will be more and it results in net foreign exchange loss.

The option D is not correct since when we use forward contract to purchase Euro, then the Dollar required to purchase Euro will become fixed and hedging is done and so there will be no foreign exchange gain/loss as the dollar outflow will become fixed.

So the answer is C.

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