Chapter 09

Foreign Currency Transactions and Hedging Foreign Exchange Risk

1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British compan
y on April 8, 2008. Pigskin received payment of 35,000 British pounds on May 8,
2008. The exchange rate was $1 = 0.65 on April 8 and $1 = 0.70 on May 8. What amou
nt of foreign exchange gain or loss should be recognized? (round to the nearest
dollar)
D. $3,846 loss
Norton Co., a U.S. corporation, sold inventory on December 1, 2008, with paymen
t of 10,000 British pounds to be received in sixty days. The pertinent exchange
rates were as follows:
2. For what amount should Sales be credited on December 1?
D. $17,241
3. What amount of foreign exchange gain or loss should be recorded on December 3
1?
E. $941 gain
4. What amount of foreign exchange gain or loss should be recorded on January 30
?
B. $1,516 loss
Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, o
n May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May
31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:
5. For what amount should Brisco's Accounts Payable be credited on May 8?
A. $2,500,000
6. How much Foreign Exchange Gain or Loss should Brisco record on May 31?
C. $20,000 loss
7. How much U.S. $ will it cost Brisco to finally pay the payable on June 7?
E. $2,400,000
8. On June 1, CamCo received a contract to sell inventory for 500,000. The sale w
ould take place in 90 days. CamCo immediately signed a 90-day forward contract t
o sell the yen as soon as they are received. The spot rate on June 1 was $1 = 240
and the 90-day forward rate was $1 = 234. At what amount would CamCo record the
Forward Contract on June 1?
B. $0
9. Belsen purchased inventory on December 1, 2008. Payment of 200,000 stickles w
as to be made in sixty days. Also on December 1, Belsen signed a contract to pur
chase 200,000 in sixty days. The spot rate was $1 = 2.80 and the 60-day forward ra
te was $1 = 2.60. On December 31, the spot rate was $1 = 2.90 and the 30-day forwa
rd rate was $1 = 2.62. Assume an annual interest rate of 12% and a fair value hed
ge. The present value for one month at 12% is .9901.
In the journal entry to record the establishment of a forward exchange contract,
at what amount should the Forward Contract account be recorded on December 1?
E. $0, since there is no cost, there is no value for the contract at this date
10. Meisner Co. ordered parts costing 100,000 for a foreign supplier on May 12 wh
en the spot rate was $.24 per stickle. A one-month forward contract was signed o
n that date to purchase 100,000 at a forward rate of $.25 per stickle. On June 12
, when the parts were received and payment was made, the spot rate was $.28 per
stickle. At what amount should inventory be reported?
B. $28,000
Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16,
2008, with payment of 10 million Korean won to be received on January 15, 2009.
The following exchange rates applied:
11. Assuming a forward contract was not entered into, what would be the net impa
ct on Car Corp.'s 2008 income statement related to this transaction?
C. $200 gain
12. Assuming a forward contract was entered into, what would be the net impact o
n Car Corp.'s 2008 income statement related to this transaction? Assume an annua
l interest rate of 12% and a fair value hedge. The present value for one month a
t 12% is .9901.
E. $295.05 loss
13. Assuming a forward contract was entered into on December 16, what would be t
he net impact on Car Corp.'s 2009 income statement related to this transaction?
A. $500 gain
14. Mills Inc. had a receivable from a foreign customer that is due in the local
currency of the customer (stickles). On December 31, 2008, this receivable for 2
00,000 was correctly included in Mills' balance sheet at $132,000. When the rece
ivable was collected on February 15, 2009, the U.S. dollar equivalent was $144,0
00. In Mills' 2009 consolidated income statement, how much should have been repo
rted as a foreign exchange gain?
E. $12,000
15. A spot rate may be defined as
A. The price a foreign currency can be purchased or sold today
16. The forward rate may be defined as
B. The price today at which a foreign currency can be purchased or sold in the f
uture
17. Which statement is true regarding a foreign currency option?
D. A foreign currency option gives the holder the right but not the obligation t
o buy or sell foreign currency in the future
18. A U.S. company sells merchandise to a foreign company denominated in U.S. do
llars. Which of the following statements is true?
C. No foreign exchange gain or loss will result
19. A U.S. company sells merchandise to a foreign company denominated in the for
eign currency. Which of the following statements is true?
A. If the foreign currency appreciates, a foreign exchange gain will result
20. A U.S. company buys merchandise from a foreign company denominated in U.S. d
ollars. Which of the following statements is true?
C. No foreign exchange gain or loss will result
21. A U.S. company buys merchandise from a foreign company denominated in the fo
reign currency. Which of the following statements is true?
D. If the foreign currency appreciates, a foreign exchange loss will result
22. SFAS 133 provides guidance for hedges of all the following sources of foreig
n exchange risk except
E. Deferred foreign currency gains and losses
23. All of the following data may be needed to determine the fair value of a for
ward contract at any point in time except
C. The future spot rate
24. A forward contract may be used for which of the following?
1) A fair value hedge of an asset.
2) A cash flow hedge of an asset.
3) A fair value hedge of a liability.
4) A cash flow hedge of a liability.
E. 1, 2, 3 and 4
25. A company has a discount on a forward contract for an asset. How is the disc
ount recognized over the life of the contract?
C. It is charged to accumulated other comprehensive income
26. A speculative derivative would be similar to which type of hedge?
B. An option designated as a fair value hedge
27. Which of the following statements is true concerning hedge accounting?
D. Hedges of foreign currency firm commitments are used for future sales or purc
hases
28. All of the following hedges are used for future purchase/sale transactions e
xcept
E. Forward contracts used to hedge a foreign currency denominated liability
On December 1, 2007, Keenan Company, a U.S. firm, sold merchandise to Velez Com
pany of Spain for 150,000 euro. Payment is due on February 1, 2008. Keenan enter
ed into a forward exchange contract on December 1, 2007, to deliver 150,000 euro
on February 1, 2008 for $.97. Keenan chose to use a foreign currency option to
hedge this foreign currency asset designated as a cash flow hedge. Relevant exch
ange rates follow:
29. Compute the value of the foreign currency option at December 1, 2007.
D. $7,500
30. Compute the value of the foreign currency option at December 31, 2007.
A. $6,000
31. Compute the value of the foreign currency option at February 1, 2008.
B. $4,500
32. Compute the U.S. dollars received on February 1, 2008.
C. $145,500
33. Which of the following approaches is used in the United States in accounting
for foreign currency transactions?
B. Two-transaction perspective; accrue foreign exchange gains and losses
34. When a U.S. company purchases parts from a foreign company, which of the fol
lowing will result in no foreign exchange gain or loss?
A. The transaction is denominated in U.S. dollars
35. Alpha, Inc., a U.S. company, had a receivable from a customer that was denom
inated in pesos. On December 31, 2008, this receivable for 75,000 pesos was corr
ectly included in Alpha's balance sheet at $8,000. The receivable was collected
on March 2, 2009, when the U.S. equivalent was $6,900. How much foreign exchange
gain or loss will Alpha record on the income statement for the year ended Decem
ber 31, 2009?
A. $1,100 loss
On April 1, 2007, Shannon Company, a U.S. company, borrowed 100,000 euros from a
foreign lender by signing an interest-bearing note due April 1, 2008. The dolla
r value of the loan was as follows:
36. How much foreign exchange gain or loss should be included in Shannon's 2007
income statement?
D. $6,000 loss
37. How much foreign exchange gain or loss should be included in Shannon's 2008
income statement?
D. $2,000 loss
38. Angela, Inc., a U.S. company, had a euro receivable from exports to Spain an
d a British pound payable resulting from imports from England. Angela recorded f
oreign exchange gain related to both its euro receivable and pound payable. Did
the foreign currencies increase or decrease in dollar value from the date of the
transaction to the settlement date?
B. B above
39. Frankfurter Company, a U.S. company, had a ruble receivable from exports to
Russia and a euro payable resulting from imports from Italy. Frankfurter recorde
d foreign exchange loss related to both its ruble receivable and euro payable. D
id the foreign currencies increase or decrease in dollar value from the date of
the transaction to the settlement date?
C. C above
Parker Corp., a U.S. company, had the following foreign currency transactions du
ring 2009:
(1.) Purchased merchandise from a foreign supplier on July 5, 2009 for the U.S.
dollar equivalent of $80,000 and paid the invoice on August 3, 2009 at the U.S.
dollar equivalent of $82,000.
(2.) On October 1, 2009 borrowed the U.S. dollar equivalent of $872,000 evidence
d by a non-interest-bearing note payable in euros on October 1, 2009. The U.S. d
ollar equivalent of the note amount was $860,000 on December 31, 2009 and $881,0
00 on October 1, 2010.
40. What amount should be included as a foreign exchange gain or loss from the t
wo transactions for 2009?
C. $10,000 gain
41. What amount should be included as a foreign exchange gain or loss from the t
wo transactions for 2010?
D. $21,000 loss
Winston Corp., a U.S. company, had the following foreign currency transactions d
uring 2008:
(1.) Purchased merchandise from a foreign supplier on July 16, 2008 for the U.S.
dollar equivalent of $47,000 and paid the invoice on August 3, 2008 at the U.S.
dollar equivalent of $54,000.
(2.) On October 15, 2008 borrowed the U.S. dollar equivalent of $315,000 evidenc
ed by a non-interest-bearing note payable in euros on October 15, 2008. The U.S.
dollar equivalent of the note amount was $295,000 on December 31, 2008 and $299
,000 on October 15, 2009.
42. What amount should be included as a foreign exchange gain or loss from the t
wo transactions for 2008?
D. $13,000 gain
43. What amount should be included as a foreign exchange gain or loss from the t
wo transactions for 2009?
E. $4,000 loss
44. Williams, Inc., a U.S. company, has a Japanese yen account receivable result
ing from an export sale on March 1 to a customer in Japan. The exporter signed a
forward contract on March 1 to sell yen and designated it as a cash flow hedge
of a recognized receivable. The spot rate was $.0094 and the forward rate was $.
0095. Which of the following did the U.S. exporter report in net income?
B. Premium revenue
45. Larson Company, a U.S. company, has an India rupee account receivable result
ing from an export sale on September 7 to a customer in India. Larson signed a f
orward contract on September 7 to sell rupees and designated it as a cash flow h
edge of a recognized receivable. The spot rate was $.023 and the forward rate wa
s $.021. Which of the following did the U.S. exporter report in net income?
B. Premium revenue
46. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a forei
gn supplier on July 7 when the spot rate was $.025 per rupee. A one-month forwar
d contract was signed on that date to purchase 100,000 rupee at a rate of $.027.
The forward contract is properly designated as a fair value hedge of the 100,00
0 rupee firm commitment. On August 7, when the parts are received, the spot rate
is $.028. At what amount should the parts inventory be carried on Primo's books
?
E. $2,800
47. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand b
ahts from a foreign supplier on July 7 when the spot rate was $.025 per baht. A
one-month forward contract was signed on that date to purchase 1,000,000 bahts a
t a rate of $.027. The forward contract is properly designated as a fair value h
edge of the 1,000,000 baht firm commitment. On August 7, when the parts are rece
ived, the spot rate is $.028. What is the amount of accounts payable that will b
e paid at this date?
E. $28,000

48. On December 1, 2009, Joseph Company, a U.S. company, entered into a three-mo
nth forward contract to purchase 50,000 pesos on March 1, 2010. The following U.
S. dollar per peso exchange rates apply:
Joseph's incremental borrowing rate is 12 percent. The present value factor for
two months at an annual interest rate of 12 percent is .9803. Which of the follo
wing is included in Joseph's December 31, 2009 balance sheet for the forward con
tract?
E. $490.15 liability
49. On April 1, Quality Corporation, a U.S. company, expects to order merchandis
e from a German supplier in three months, denominating the transaction in euros.
On April 1, the spot rate is $1.19 per euro and Quality enters into a three-mon
th forward contract to purchase 400,000 euros at a rate of $1.20. At the end of
three months, the spot rate is $1.21 per euro and Quality orders and receives th
e merchandise, paying 400,000 euros. What are the effects on net income from the
se transactions?
C. $4,000 Premium Expense plus a $4,000 negative Adjustment to Net Income when t
he merchandise is received
50. On August 31, Ram Corporation, a U.S. company, expects to order merchandise
from a German supplier in three months, denominating the transaction in euros. O
n August 31, the spot rate is $1.19 per euro and Quality enters into a three-mon
th forward contract to purchase 600,000 euros at a rate of $1.20. At the end of
three months, the spot rate is $1.21 per euro and Ram orders and receives the me
rchandise, paying 600,000 euros. What are the effects on net income from these t
ransactions?
C. $6,000 Premium Expense plus a $6,000 negative Adjustment to Net Income when t
he merchandise is sold
51. Woolsey Corporation, a U.S. company, expects to order goods from a British s
upplier at a price of 250,000 pounds, with delivery and payment to be made on Oc
tober 24. On July 24, Woolsey purchased a three-month call option for 250,000 Br
itish pounds and designated this option as a cash flow hedge of a forecasted for
eign currency transaction. The following exchange rates apply:
What amount will Woolsey include as an option expense in net income during the p
eriod July 24 to October 24?
A. $4,000
52. Atherton, Inc., a U.S. company, expects to order goods from a foreign suppli
er at a price of 100,000 lira, with delivery and payment to be made on April 17.
On January 17, Atherton purchased a three-month call option on 100,000 lira and
designated this option as a cash flow hedge of a forecasted foreign currency tr
ansaction. The following exchange rates apply:

What amount will Atherton include as an option expense in net income during the
period January 17 to April 17?
D. $5,000
On May 1, 2007, Mosby Company received an order to sell a machine to a customer
in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and pay
ment was received on March 1, 2008. On May 1, 2007, Mosby purchased a put option
giving it the right to sell 2,000,000 pesos on March 1, 2008 at a price of $190
,000. Mosby properly designates the option as a fair value hedge of the peso fir
m commitment. The option cost $3,000 and had a fair value of $3,200 on December
31, 2007. The following spot exchange rates apply:
Mosby's incremental borrowing rate is 12 percent and the present value factor f
or two months at a 12 percent annual rate is .9803.
53. What was the net impact on Mosby's 2007 income as a result of this fair valu
e hedge of a firm commitment?
A. $1,760.60 decrease
54. What was the net impact on Mosby's 2008 income as a result of this fair valu
e hedge of a firm commitment?
D. $188,760.60 increase
55. 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?
C. $9,000 increase
On March 1, 2007, Mattie Company received an order to sell a machine to a custo
mer in England at a price of 200,000 British pounds. The machine was shipped and
payment was received on March 1, 2008. On March 1, 2007, Mattie purchased a put
option giving it the right to sell 200,000 British pounds on March 1, 2008 at a
price of $380,000. Mattie properly designates the option as a fair hedge of the
pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on
December 31, 2007. The following spot exchange rates apply:
Mattie's incremental borrowing rate is 12 percent and the present value factor
for two months at a 12 percent annual rate is .9803.
56. What was the net impact on Mattie's 2007 income as a result of this fair val
ue hedge of a firm commitment?
B. $1,760.60 decrease
57. What was the net impact on Mattie's 2008 income as a result of this fair val
ue hedge of a firm commitment?
E. $379,760.60 increase
58. 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?
B. $10,000 increase
On October 1, 2007, Eagle Company forecasts the purchase of inventory from a Bri
tish supplier on February 1, 2008, at a price of 100,000 British pounds. On Octo
ber 1, 2007, Eagle pays $1,800 for a three-month call option on 100,000 pounds w
ith a strike price of $2.00 per pound. The option is considered to be a cash flo
w hedge of a forecasted foreign currency transaction. On December 31, 2007, the
option has a fair value of $1,600. The following spot exchange rates apply:
59. What journal entry should Eagle prepare on October 1, 2007?
E. E above
60. What journal entry should Eagle prepare on December 31, 2007?
D. D above
61. What is the amount of option expense for 2008 from these transactions?
B. $1,600
62. What is the amount of Adjustment to Accumulated Other Comprehensive Income f
or 2008 from these transactions?
A. $1,000
63. What is the amount of Cost of Goods Sold for 2008 as a result of these trans
actions?
C. $201,000
64. What is the 2008 effect on net income as a result of these transactions?
B. $201,600

Chapter 10
Translation of Foreign Currency Financial Statements
Multiple Choice Questions
1. In accounting, the term translation refers to
E. A procedure to prepare a foreign subsidiary's financial statements for consol
idation
2. What is a company's functional currency?
A. The currency of the primary economic environment in which it operates
3. According to SFAS 52, which method is usually required for translating a fore
ign subsidiary's financial statements into the parent's reporting currency?
B. The current rate method
4. In translating a foreign subsidiary's financial statements, which exchange ra
te does the current method require for the subsidiary's assets and liabilities?
D. The exchange rate in effect as of the balance sheet date
5. The translation adjustment from translating a foreign subsidiary's financial
statements should be shown as
C. A component of stockholders' equity on the consolidated balance sheet
Westmore, Ltd. is a British subsidiary of a U.S. company. Westmore's functional
currency is the pound sterling. The following exchange rates were in effect duri
ng 2008:
6. Westmore reported sales of 1,500,000 during 2008. What amount (rounded) would
have been included for this subsidiary in calculating consolidated sales?
A. $2,380,952
7. On December 31, Westmore had accounts receivable of 280,000. What amount (roun
ded) would have been included for this subsidiary in calculating consolidated ac
counts receivable?
B. $451,613

8. Gunther Co. established a subsidiary in Mexico on January 1, 2008. The subsid

iary engaged in the following transactions during 2008:

What amount of foreign exchange gain or loss would have been recognized on Gunth
er's consolidated income statement for 2008?
E. $250,000 loss
Darron Co. was formed on January 1, 2009 as a wholly owned foreign subsidiary o
f a U.S. corporation. Darron's functional currency was the stickle (). The follow
ing transactions and events occurred during 2007:

9. What exchange rate should have been used in translating Darron's revenues and
expenses for 2009?
B. $1 = .44
10. What was the amount of the translation adjustment for 2009?
B. $302,137 increase in relative value of net assets
11. Which of the following translation methods was originally mandated by SFAS N
o. 8?
D. Temporal Method
12. Which accounts are re-measured using current exchange rates?
D. All current assets and liabilities
13. For a foreign subsidiary that uses the U.S. dollar as its functional currenc
y, what translation method is required?
D. Temporal Method
Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's
functional currency was the U.S. dollar.
14. Which one of the following statements would justify this conclusion?
A. Most of the subsidiary's sales and purchases were with companies in the U.S.
15. What must Dilty do to ready the subsidiary's financial statements for consol
idation?
E. Re-measure them
Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had bee
n stated in U.S. dollars as follows:
16. If a foreign currency is the functional currency of this subsidiary, what to
tal should have been included in Tulip's balance sheet for the preceding items?
C. $602,000
17. If the U.S. dollar is the functional currency of this subsidiary, what total
should have been included in Tulip's balance sheet for the items above?
E. $616,000

A subsidiary of Porter Inc., a U.S. company, was located in a foreign country.

The functional currency of this subsidiary was the stickle (). The subsidiary acq
uired inventory on credit on November 1, 2008, for 120,000 that was sold on Janua
ry 17, 2009 for 156,000. The subsidiary paid for the inventory on January 31, 200
9. Currency exchange rates between the dollar and the stickle were as follows:
18. What figure would have been reported for this inventory on Porter's consolid
ated balance sheet at December 31, 2008?
A. $24,000
19. What figure would have been reported for cost of goods sold on Porter's cons
olidated income statement at December 31, 2009?
E. $28,80020. A U.S. company's foreign subsidiary had the following amounts in s
tickles () in 2009:

The average exchange rate during 2009 was 1 = $.96. The beginning inventory was a
cquired when the exchange rate was 1 = $1.20. The ending inventory was acquired w
hen the exchange rate was 1 = $.90. The exchange rate at December 31, 2009 was 1 =
$.84.
20. Assuming that the foreign country had a highly inflationary economy, at what
amount should the foreign subsidiary's cost of goods sold have been reflected i
n the 2009 U.S. dollar income statement?
D. $11,613,600
21. A historical exchange rate for a foreign subsidiary is best described as
A. The rate at date of acquisition for a purchase transaction
22. A net asset balance sheet exposure exists and the foreign currency appreciat
es. Which of the following statements is true?
E. There is a positive translation adjustment
23. A net asset balance sheet exposure exists and the foreign currency depreciat
es. Which of the following statements is true?
D. There is a negative translation adjustment
24. A net liability balance sheet exposure exists and the foreign currency appre
ciates. Which of the following statements is true?
D. There is a negative translation adjustment
25. A net liability balance sheet exposure exists and the foreign currency depre
ciates. Which of the following statements is true?
E. There is a positive translation adjustment
26. Which method of translating a foreign subsidiary's financial statements is c
orrect?
C. Current rate method
27. Which method of re-measuring a foreign subsidiary's financial statements is
correct?
E. Temporal method
28. Under the temporal method, inventory at market would be restated at what rat
e?
C. Current rate
29. Under the current rate method, inventory at market would be restated at what
rate?
C. Current rate
30. Under the temporal method, common stock would be restated at what rate?
D. Historical rate
31. Under the current rate method, common stock would be restated at what rate?
D. Historical rate
32. Under the current rate method, property, plant & equipment would be restated
at what rate?
C. Current rate
33. Under the temporal method, property, plant & equipment would be restated at
what rate?
D. Historical rate
34. Under the current rate method, retained earnings would be restated at what r
ate?
E. Composite amount
35. Under the temporal method, retained earnings would be restated at what rate?
E. Composite amount
36. Under the current rate method, depreciation expense would be restated at wha
t rate?
B. Average rate
37. Under the temporal method, depreciation expense would be restated at what ra
te?
D. Historical rate
38. Under the temporal method, how would cost of goods sold be restated?
E. Composite amount
39. Under the current rate method, how would cost of goods sold be restated?
B. Average rate
40. How is the disposition of the translated gain or loss reported on the parent
company's financial statements?
D. Other comprehensive income
41. How is the disposition of the re-measurement gain or loss reported on the pa
rent company's financial statements?
A. Net income/loss on the income statement
42. A highly inflationary economy is defined as
B. Cumulative 3-year inflation in excess of 100%
43. If a subsidiary is operating in a highly inflationary economy, how are the f
inancial statements to be restated?
D. Re-measurement
44. When consolidating a foreign subsidiary, which of the following statements i
s true?
A. Parent reports a cumulative translation adjustment using the equity method
45. When preparing a consolidating statement of cash flows, which of the followi
ng statements is false?
A. Subsidiary dividends are deducted as a financing activity
The following account balances are available for Esposito, an Italian U.S. subsi
diary for 2009:
46. Compute the cost of goods sold for 2009 in U.S. dollars using the temporal m
ethod.
B. $387,750
47. Compute the cost of goods sold for 2009 in U.S. dollars using the current ra
te method.
C. $388,800
48. Compute ending inventory for 2009 under the temporal method.
D. $14,850
49. Compute ending inventory for 2009 under the current rate method.
E. $15,150
The following inventory balances for 2008 in local currency units (LCU) are giv
en:
50. Compute the December 31, 2008, inventory balance using the lower of cost or
market method under the temporal method.
A. $429,000
51. Compute the December 31, 2008, inventory balance using the current rate meth
od.
A. $454,400
Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 2
00,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on
March 1, 2009. The equipment was purchased on January 1, 2008, when the exchange
rate for the peso was $.11. Relevant exchange rates for the peso are as follows
:
52. The financial statements for Perez are translated by its U.S. parent. What a
mount of gain or loss would be reported in its translated income statement?
C. $1,590
53. The financial statements for Perez are re-measured by its U.S. parent. What
amount of gain or loss would be reported in its translated income statement?
D. $1,090

Certain balance sheet accounts of a foreign subsidiary of Parker Company at Dece

mber 31, 2008, have been restated into U.S. dollars as follows:
54. Assuming the functional currency of the subsidiary is the U.S. dollar, what
total should be included in Parker's consolidated balance sheet at December 31,
2008, for the above items?
A. $407,500
55. Assuming the functional currency of the subsidiary is the local currency, wh
at total should be included in Parker's consolidated balance sheet at December 3
1, 2008, for the above items?
B. $418,000
56. If the current rate used to restate these balances is $.95, what was the his
torical rate used to restate the same balances?
A. $.90
Kennedy Company acquired all of the outstanding common stock of Hastie Company
of Canada for U.S. $350,000 on January 1, 2009, when the exchange rate for the C
anadian dollar was U.S. $.70. The fair value of the net assets of Hastie was equ
al to their book value of C$450,000 (Canadian dollars) on the date of acquisitio
n. Any excess cost over fair value was attributed to an unrecorded patent with a
remaining life of five years. The functional currency of Hastie is the Canadian
dollar.
For the year ended December 31, 2009, Hastie's translated net income was $25,000
. The average exchange rate for the Canadian dollar during 2009 was U.S. $.68 an
d the 2009 year-end exchange rate was U.S. $.65.
57. Calculate the U.S. $ amount allocated to the patent at January 1, 2009.
B. $35,000
58. Amortization of the patent, translated, for 2009 would be
C. $6,800
59. Compute the amount of the patent reported on the consolidated balance sheet
at December 31, 2009.
E. $26,000
60. Kennedy's share of Hastie's net income for 2009 would be
C. $18,200
Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2007
. Selected account balances are available for the year ended December 31, 2008 a
nd are stated in euro, the local currency.
61. Assume the functional currency is the euro, compute the restated amount for
sales for 2008.
C. $380,000
62. Assume the functional currency is the euro, compute the restated amount for
inventory for 2008.
D. $20,200
63. Assume the functional currency is the euro, compute the restated amount for
equipment for 2008.
B. $90,900
64. Assume the functional currency is the euro, compute the restated amount for
dividends for 2008.
D. $19,400
65. Assume the functional currency is the euro, compute the restated amount for
accumulated depreciation for 2008.
C. $45,450
66. Assume the functional currency is the euro, compute the restated amount for
depreciation expense for 2008.
E. $8,550
67. Assume the functional currency is the U.S. dollar, compute the restated amou
nt for sales for 2008.
C. $380,000
68. Assume the functional currency is the U.S. dollar, compute the restated amou
nt for inventory for 2008.
B. $19,600
69. Assume the functional currency is the U.S. dollar, compute the restated amou
nt for equipment for 2008.
A. $81,900
70. Assume the functional currency is the U.S. dollar, compute the restated amou
nt for dividends for 2008.
D. $19,400
71. Assume the functional currency is the U.S. dollar, compute the restated amou
nt for accumulated depreciation for 2008.
A. $40,950
72. Assume the functional currency is the U.S. dollar, compute the restated amou
nt for depreciation expense for 2008.
A. $8,190

Chapter 14
Partnerships: Formation and Operation
1. Cherryhill and Hace had been partners for several years and they decided to a
dmit Quincy to the partnership. The accountant for the partnership believed that
the dissolved partnership and the newly formed partnership were two separate en
tities. What method would the accountant have used for recording the admission o
f Quincy to the partnership?
C. The goodwill method
2. When the hybrid method is used to record the withdrawal of a partner, the par
tnership.
E. Revalues assets and liabilities but does not record goodwill
3. The disadvantages of the partnership form of business organization, compared
to corporations, include
B. Unlimited liability for the partners
4. The advantages of the partnership form of business organization, compared to
corporations, include
A. Single taxation
5. The dissolution of a partnership occurs
E. When there is any change in the individuals who make up the partnership
6. The partnership of Clapton, Seidel and Thomas was insolvent and will be unabl
e to pay $30,000 in liabilities currently due. What recourse was available to th
e partnership's creditors?
D. They may seek remuneration from any partner they choose
Cleary, Wasser and Nolan formed a partnership on January 1, 2007, with investme
nts of $100,000, $150,000 and $200,000, respectively. For division of income, th
ey agreed to (1) interest of 10% of the beginning capital balance each year, (2)
annual compensation of $10,000 to Wasser and (3) sharing the remainder of the i
ncome or loss in a ratio of 20% for Cleary and 40% each for Wasser and Nolan. Ne
t income was $150,000 in 2007 and $180,000 in 2008. Each partner withdrew $1,000
for personal use every month during 2007 and 2008.
7. What was Wasser's share of income for 2007?
A. $63,000
8. What was Nolan's share of income for 2007?
C. $58,000
9. What was Cleary's share of income for 2007?
D. $29,000
10. What was Nolan's capital balance at the end of 2007?
D. $246,000
11. What was Wasser's capital balance at the end of 2007?
E. $201,000
12. What was Cleary's capital balance at the end of 2007?
B. $117,000
13. What was Wasser's share of income for 2008?
B. $75,540
14. What was Nolan's share of income for 2008?
D. $70,040
15. What was Cleary's share of income for 2008?
A. $34,420
16. What was Nolan's capital balance at the end of 2008?
E. $304,040
17. What was Wasser's capital balance at the end of 2008?
C. $264,540
18. What is Cleary's capital account balance at the end of 2008?
C. $139,420
19. Jell and Dell were partners with capital balances of $600 and $800 and an in
come sharing ratio of 2:3. They admitted Zell to a 30% interest in the partnersh
ip and the total amount of goodwill credited to the original partners was $700.
What amount did Zell contribute to the business?
E. $630
A partnership began its first year of operations with the following capital bala
nces:
Young, Capital: $143,000
Eaton, Capital: $104,000
Thurman, Capital: $143,000
The Articles of Partnership stipulated that profits and losses be assigned in th
e following manner:
Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned
to Thurman.
Each partner was to be attributed with interest equal to 10% of the capital bala
nce as of the first day of the year.
The remainder was to be assigned on a 5:2:3 basis, respectively.
Each partner was allowed to withdraw up to $13,000 per year.
Assume that the net loss for the first year of operations was $26,000 with net i
ncome of $52,000 in the second year. Assume further that each partner withdrew t
he maximum amount from the business each year.
20. What was Young's share of income or loss for the first year?
B. $11,700 loss
21. What was Eaton's share of income or loss for the first year?
C. $10,400 loss
22. What was Thurman's share of income or loss for the first year?
A. $3,900 loss
23. What was the balance in Young's Capital account at the end of the first year
?
B. $118,300
24. What was the balance in Eaton's Capital account at the end of the first year
?
D. $80,600
25. What was the balance in Thurman's Capital account at the end of the first ye
ar?
C. $126,100
26. What was Young's share of income or loss for the second year?
E. $28,080 income
27. What was Eaton's share of income or loss for the second year?
B. $4,160 income
28. What was Thurman's share of income or loss for the second year?
C. $19,760 income
29. What was the balance in Young's Capital account at the end of the second yea
r?
A. $133,380
30. What was the balance in Eaton's Capital account at the end of the second yea
r?
E. $71,760
31. What was the balance in Thurman's Capital account at the end of the second y
ear?
D. $132,860
32. Which of the following is not a characteristic of a partnership?
D. A partnership requires written Articles of Partnership
33. Partnerships have alternative legal forms including all of the following exc
ept:
C. Subchapter S Corporation
34. Which of the following type of organization is classified as a partnership o
r similar to a partnership, for tax purposes?
(I.) Limited Liability Company
(II.) Limited Liability Partnership
(III.) Subchapter S Corporation
E. I, II and III
35. Which of the following statements is correct regarding the admission of a ne
w partner?
C. The right to participate in management of the business can be conveyed withou
t the consent of other existing partners
36. Withdrawals from the partnership accounts are typically not used
C. To record interest earned on a partner's capital balance
37. The partnership contract for Hanes and Jones LLP provides that Hanes is to r
eceive a bonus of 20% of net income (after the bonus) and that the remaining net
income is to be divided equally. If the partnership income before the bonus for
the year is $57,600, Hanes' share of this pre-bonus income is:
B. $33,600
38. The partners of Apple, Bere and Carroll LLP share net income and losses in a
5:3:2 ratio, respectively. The capital account balances on January 1, 2008, wer
e as follows:
The carrying amounts of the assets and liabilities of the partnership are the sa
me as their current fair values. Dorr will be admitted to the partnership with a
20% capital interest and a 20% share of net income and losses in exchange for a
cash investment. The amount of cash that Dorr should invest in the partnership
is:
C. $37,500
39. The appropriate format of the January 31, 2008 closing entry for John & Hope
Limited Liability Partnership, whose two partners had withdrawn their salaries
from the partnership during January is
D. D Above
40. When Danny withdrew from John, Daniel, Harry and Danny LLP, he was paid $80,
000, although his capital account balance was only $60,000. The four partners sh
ared net income and losses equally. The journal entry of the partnership to reco
rd Danny's withdrawal preferably should include:
A. $6,667 debit to John, Capital
41. Max, Jones and Waters shared profits and losses 20%, 40% and 40% respectivel
y and their partnership capital balance is $10,000, $30,000 and $50,000 respecti
vely. Max has decided to withdraw from the partnership. An appraisal of the busi
ness and its property estimates the fair value to be $200,000. Land with a book
value of $30,000 has a fair value of $45,000. Max has agreed to receive $20,000
in exchange for her partnership interest. What amount should land be recorded on
the partnership books?
C. $45,000
The capital account balances for Donald & Hanes LLP on January 1, 2008, were as
follows:
Donald and Hanes shared net income and losses in the ratio of 3:2, respectively.
The partners agreed to admit May to the partnership with a 35% interest in part
nership capital and net income. May invested $100,000 cash and no goodwill was r
ecognized.
42. What is the balance of May's capital account after the new partnership is c
reated?
C. $140,000
43. What is the balance of Donald's capital account after the new partnership is
created?
D. $176,000
44. What is the balance of Hane's capital account after the new partnership is c
reated?
A. $84,000
45. What is the new total balance of the partnership accounts?
E. $400,000
46. Which of the following could be used as a basis to allocate profits among pa
rtners who are active in the management of the partnership?
1) allocation of salaries.
2) the number of years with the partnership.
3) the amount of time each partner works.
4) the average capital invested.
E. 1, 2, 3 and 4
Peter, Roberts and Dana have the following capital balances; $80,000, $100,000 a
nd $60,000 respectively. The partners share profits and losses 20%, 40% and 40%
respectively.
47. Roberts retires and is paid $160,000 based on the terms of the original part
nership agreement. If the goodwill method is used, what is the capital balance o
f Peter?
C. $110,000
48. Roberts retires and is paid $160,000 based on the terms of the original part
nership agreement. If the goodwill method is used, what is the capital balance o
f Dana?
D. $120,000
49. What is the total partnership capital after Roberts retires receiving $160,0
00 and using the goodwill method?
E. $230,000
Donald, Anne and Todd have the following capital balances; $40,000, $50,000 and
$30,000 respectively. The partners share profits and losses 20%, 40% and 40% res
pectively.
50. Anne retires and is paid $80,000 based on the terms of the original partners
hip agreement. If the goodwill method is used, what is the capital of the remain
ing partners?
A. Donald, $55,000; Todd, $60,000
51. Anne retires and is paid $80,000 based on the terms of the original partners
hip agreement. If the bonus method is used, what is the capital of the remaining
partners?
B. Donald, $30,000; Todd, $10,000
52. What is the total partnership capital after Anne retires receiving $80,000 a
nd using the bonus method?
B. $40,000