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UIUC ACCY 510

Preparation Exam

· 案例展示

1. Jasper Inc. has a December 31 year-end. The covenants for Jasper Inc.’s long-term debt A require, among other things, a current ratio (current assets/current liabilities) of at least 1.2. Based on the following financial information, what should the calculation of the current ratio be using 1)US GAAP and 2) IFRS?

a. Current assets are $30 million.

b. Current accrued liabilities are $9 million.

c. Short-term debt at December 31 is $4 million. The treasurer has indicated he intends to get this debt refinanced before its due date in September, but it is unlikely to happen before the financial statements are issued.

d. Long-term debt A of $4 million has equal principal payments over the next four years.

e. Long-term debt B is due in three years and has a principal balance of $6 million. The treasurer discovered a debt covenant violation in November and a waiver was obtained in December.

f. Long-term debt C is due in five years and has a principal balance of $5 million. The treasurer discovered a debt covenant violation in December and a waiver was obtained on the first day of business in January.

g. A provision to settle litigation for $10 million also needs to be recorded in the year-end accounts. It is likely this amount will be paid sometime in the next year. The current pretax discount rate is 10%.

Use the following information for questions 2 and 3.

Slim Drug Company produced a new drug treatment for obesity. It received government approval in 2011 and the company began selling the drug in 2012. At a staff meeting in late 2012, the controller suggests setting up a provision for possible future claims related to the new drug. The controller states that this would result in better matching revenues and expenses.

2. Using US GAAP, what would be the most appropriate response to the controller’s suggestion:

a. Because sales began in 2012, some expenses should be recorded in 2012 for future claims to result in proper matching.

b. If it is more likely than not claims will be made, then a provision for future claims should be made.

c. If it is more likely than not claims will be made and an estimate of the amount of those claims can be reasonably estimated, then a provision should be recorded.

d. There is no basis for a provision to be recorded at this time.

3. Using IFRS, what would be the most appropriate response to the controller’s suggestion:

a. Because sales began in 2012, some expenses should be recorded in 2012 for future claims to result in proper matching.

b. If it is more likely than not claims will be made, then a provision for future claims should be made.

c. If it is more likely than not claims will be made and an estimate of the amount of those claims can be reasonably estimated, then a provision should be recorded.

d. There is no basis for a provision to be recorded at this time.

4. Sneakers Co. has taken an uncertain tax position on its current year tax return. This position results in a benefit of $150,000. Management of Sneakers believes that it is more likely than not that some amount of the position will prevail. However, they do not believe that the company is likely to ultimately receive the full benefit. Management estimates the amounts and probabilities of the possible estimated outcome as follows:

Possible estimated outcome

(i.e., the amount that will be allowed as a deduction)

Individual probability of occurring (%) Cumulative probability of occurring (%) $150,000 10% 10% $132,000 15% 25% $110,000 30% 55% $50,000 35% 90% $ 0 10% 100%

What tax benefit and what tax liability would Sneakers Co. recognize in its financial statements related to this transaction under 1) US GAAP and 2) under IFRS? Explain your answers.

5. Fun Flowers Consolidated (FFC), has the following deferred tax assets and liabilities:

Description

Amount

Taxing jurisdiction

Deferred tax asset for allowance for doubtful accounts on its accounts receivable

$ 30,000

US

Deferred tax liability for depreciation on PPE

(10,000)

US

Deferred tax liability for pre-paid rent

(25,000)

Foreign A

Deferred tax asset for a litigation accrual expected to be paid in 2 years

42,000

Foreign B

FFC has the legal right of offset for the deferred tax assets and liabilities applicable to the US taxing jurisdiction.

Provide the financial statement presentation for the deferred tax assets and liabilities for FFI under US GAAP and IFRS.

6. What primary factors are considered under ASC 830-10 to help determine functional currency? Choose as many as you consider appropriate.

a. Cash flow

b. Sales prices

c. Sales markets

d. Expenses

e. Financing

f. Intercompany transactions

g. All of the above

  1. A U.S. company owns a subsidiary in Germany. The subsidiary’s balance sheet on December 31, 2013 is given below in Euros. There was no current year activity.                                                                                                     

            Euros                                                     

Cash................................. 250,000

Inventory........................... 500,000

Building............................. 1,500,000              

Total assets..................... 2,250,000

Accounts payable............. 400,000

Owners’ equity …………… 1,850,000

Total Liab & OE……………. 2,250,000

The $/EURO exchange rate on December 31, 2013 is $1.50 for one Euro and the exchange rate at the inception of the subsidiary, November 1, 2013 was $1.35/Euro. Note that the subsidiary has not yet operated, so there is no income statement for the two-month life of the subsidiary. Inventory and fixed assets were purchased on November 1, 2013, and the accounts payable was also established on that date.

Part 1.Assume that the subsidiary is autonomous (free standing) from its parent, from a cash flow perspective.

  1. Name the method that should be used for translating the subsidiary’s financial statements.
  1. Calculate the translation adjustment using the method you named in part A, and be sure to indicate whether the result is a gain or a loss.
  1. Describe the detailed effect(s) of your answer to part (b) on the US parent’s consolidated financial statements. 

Part 2. Assume that the German subsidiary is NOT autonomous (i.e., it is tightly intertwined with its parent company with respect to cash flows).

  1. Name the method that should be used to translate the subsidiary’s financial statements under the assumption in Part 2.
  1. Calculate the translation adjustment for the US Parent’s consolidated financial statements, using the method you named in part d. and be sure to indicate whether the result is a gain or a loss.
  1. Describe the detailed effect(s) of your answer to part (e) on the US parent’s consolidated financial statements.

8. On October 1, 2014, U.S. firm USA Co. forecasted that it would purchase consulting services in March 2015 from an Italian firm for €12,000,000. At the same time, on October 1, 2014, USA Co. entered into an over-the-counter forward currency exchange contract to purchase €12,000,000 and pay $15,000,000 on March 31 to hedge the foreign exchange risk of this forecasted expense. USA expects that there will be no ineffectiveness in this hedge. USA Co. is a U.S. dollar functional currency entity.

Exchange rates Euro/USD

Spot rate

Forward rate for March 31, 2015 delivery

October 1, 2014

€1/$1.20

€1/$1.25

December 31, 2014

€1/$1.48

€1/$1.50

March 31, 2015

€1/$1.60

NA

April 30, 2015

€1/$1.75

NA

a) USA CO. closes its books on December 31, 2014. Assume that on October 1, 2014 the forward contract was properly designated as the hedging instrument and the anticipated expense was designated as the hedged item in a properly documented cash flow hedge accounting program that was expected to be perfectly effective.

Prepare and explainthe required journal entries on December 31, 2014. Ignore discounting.

Explanation

b. In March 2015, the Italian consulting firm provided services to USA Co. and billed USA Co. on March 31 for €12,000,000, payable on April 30, 2015. USA Co. closed out and settled its forward contract on March 31. Prepare and explain the required journal entries (including hedge accounting) on March 31, 2015.

Explanations

c. On April 30, 2015 USA CO. paid the consulting firm. Prepare and explain the required journal entries (including hedge accounting) on April 30, 2015.

Explanations

d. How would the hedging strategy differ if the hedged item was considered to be both the forecasted consulting expense and its subsequent cash settlement?

e. How would the hedge accounting differ if the hedged item was considered to be both the forecasted consulting expense and its subsequent cash settlement?

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