Chapter 09
Foreign Currency Transactions and Hedging Foreign Exchange Risk

1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British company 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 amount 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 payment 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 31?
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, on 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 would take place in 90 days. CamCo immediately signed a 90-day forward contract to 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 was to be made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot rate was $1 = §2.80 and the 60-day forward rate was $1 = §2.60. On December 31, the spot rate was $1 = §2.90 and the 30-day forward rate was $1 = §2.62. Assume an annual interest rate of 12% and a fair value hedge. 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 when the spot rate was $.24 per stickle. A one-month forward contract was signed on 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 impact 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 on Car Corp.'s 2008 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.
E. $295.05 loss

13. Assuming a forward contract was entered into on December 16, what would be the 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 §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2009, the U.S. dollar equivalent was $144,000. In Mills' 2009 consolidated income statement, how much should have been reported 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 future

17. Which statement is true regarding a foreign currency option?
D. A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future

18. A U.S. company sells merchandise to a foreign company denominated in U.S. dollars. 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 foreign 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. dollars. 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 foreign 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 foreign 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 forward 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 discount 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 purchases

28. All of the following hedges are used for future purchase/sale transactions except
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 Company of Spain for 150,000 euro. Payment is due on February 1, 2008. Keenan entered 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 exchange 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 following 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 denominated in pesos. On December 31, 2008, this receivable for 75,000 pesos was correctly 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 December 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 dollar 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 and a British pound payable resulting from imports from England. Angela recorded foreign 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 recorded foreign exchange loss related to both its ruble receivable and euro payable. Did 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 during 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 evidenced by a non-interest-bearing note payable in euros on October 1, 2009. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2009 and $881,000 on October 1, 2010.

40. What amount should be included as a foreign exchange gain or loss from the two transactions for 2009?
C. $10,000 gain

41. What amount should be included as a foreign exchange gain or loss from the two transactions for 2010?
D. $21,000 loss

Winston Corp., a U.S. company, had the following foreign currency transactions during 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 evidenced 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 two transactions for 2008?
D. $13,000 gain

43. What amount should be included as a foreign exchange gain or loss from the two transactions for 2009?
E. $4,000 loss

44. Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting 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 resulting from an export sale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023 and the forward rate was $.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 foreign supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward 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 100,000 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 bahts 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 at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are received, the spot rate is $.028. What is the amount of accounts payable that will be paid at this date?
E. $28,000


48. On December 1, 2009, Joseph Company, a U.S. company, entered into a three-month 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 following is included in Joseph's December 31, 2009 balance sheet for the forward contract?
E. $490.15 liability

49. On April 1, Quality Corporation, a U.S. company, expects to order merchandise 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-month 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 the merchandise, paying 400,000 euros. What are the effects on net income from these transactions?
C. $4,000 Premium Expense plus a $4,000 negative Adjustment to Net Income when the 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. On August 31, the spot rate is $1.19 per euro and Quality enters into a three-month 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 merchandise, paying 600,000 euros. What are the effects on net income from these transactions?
C. $6,000 Premium Expense plus a $6,000 negative Adjustment to Net Income when the merchandise is sold

51. Woolsey Corporation, a U.S. company, expects to order goods from a British supplier at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month call option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply:

What amount will Woolsey include as an option expense in net income during the period July 24 to October 24?
A. $4,000

52. Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier 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 transaction. 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 payment 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 firm 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 for 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 value 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 value 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 customer 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 value 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 value 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 British supplier on February 1, 2008, at a price of 100,000 British pounds. On October 1, 2007, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow 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 for 2008 from these transactions?
A. $1,000

63. What is the amount of Cost of Goods Sold for 2008 as a result of these transactions?
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 consolidation

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 foreign 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 rate 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 during 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 (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable?
B. $451,613


8. Gunther Co. established a subsidiary in Mexico on January 1, 2008. The subsidiary engaged in the following transactions during 2008:


What amount of foreign exchange gain or loss would have been recognized on Gunther's consolidated income statement for 2008?
E. $250,000 loss

 Darron Co. was formed on January 1, 2009 as a wholly owned foreign subsidiary of a U.S. corporation. Darron's functional currency was the stickle (§). The following 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 No. 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 currency, 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 consolidation?
E. Re-measure them

 Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows:

16. If a foreign currency is the functional currency of this subsidiary, what total 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 acquired inventory on credit on November 1, 2008, for §120,000 that was sold on January 17, 2009 for §156,000. The subsidiary paid for the inventory on January 31, 2009. 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 consolidated balance sheet at December 31, 2008?
A. $24,000

19. What figure would have been reported for cost of goods sold on Porter's consolidated income statement at December 31, 2009?
E. $28,80020. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2009:


The average exchange rate during 2009 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when 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 in 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 appreciates. 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 depreciates. 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 appreciates. 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 depreciates. 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 correct?
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 rate?
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 rate?
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 what rate?
B. Average rate

37. Under the temporal method, depreciation expense would be restated at what rate?
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 parent 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 financial statements to be restated?
D. Re-measurement

44. When consolidating a foreign subsidiary, which of the following statements is true?
A. Parent reports a cumulative translation adjustment using the equity method

45. When preparing a consolidating statement of cash flows, which of the following statements is false?
A. Subsidiary dividends are deducted as a financing activity

The following account balances are available for Esposito, an Italian U.S. subsidiary for 2009:

46. Compute the cost of goods sold for 2009 in U.S. dollars using the temporal method.
B. $387,750

47. Compute the cost of goods sold for 2009 in U.S. dollars using the current rate 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 given:

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 method.
A. $454,400
 Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 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 amount 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 December 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, what total should be included in Parker's consolidated balance sheet at December 31, 2008, for the above items?
B. $418,000

56. If the current rate used to restate these balances is $.95, what was the historical 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 Canadian dollar was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of C$450,000 (Canadian dollars) on the date of acquisition. 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 and 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 and 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 amount for sales for 2008.
C. $380,000

68. Assume the functional currency is the U.S. dollar, compute the restated amount for inventory for 2008.
B. $19,600

69. Assume the functional currency is the U.S. dollar, compute the restated amount for equipment for 2008.
A. $81,900

70. Assume the functional currency is the U.S. dollar, compute the restated amount for dividends for 2008.
D. $19,400

71. Assume the functional currency is the U.S. dollar, compute the restated amount for accumulated depreciation for 2008.
A. $40,950

72. Assume the functional currency is the U.S. dollar, compute the restated amount 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 admit Quincy to the partnership. The accountant for the partnership believed that the dissolved partnership and the newly formed partnership were two separate entities. What method would the accountant have used for recording the admission of Quincy to the partnership?
C. The goodwill method
2. When the hybrid method is used to record the withdrawal of a partner, the partnership.
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 unable to pay $30,000 in liabilities currently due. What recourse was available to the 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 investments of $100,000, $150,000 and $200,000, respectively. For division of income, they 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 income or loss in a ratio of 20% for Cleary and 40% each for Wasser and Nolan. Net 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 income sharing ratio of 2:3. They admitted Zell to a 30% interest in the partnership 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 balances:
Young, Capital: $143,000
Eaton, Capital: $104,000
Thurman, Capital: $143,000
The Articles of Partnership stipulated that profits and losses be assigned in the 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 balance 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 income of $52,000 in the second year. Assume further that each partner withdrew the 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 year?
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 year?
A. $133,380

30. What was the balance in Eaton's Capital account at the end of the second year?
E. $71,760

31. What was the balance in Thurman's Capital account at the end of the second year?
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 except:
C. Subchapter S Corporation

34. Which of the following type of organization is classified as a partnership or 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 new partner?
C. The right to participate in management of the business can be conveyed without 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 receive 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, were as follows:

The carrying amounts of the assets and liabilities of the partnership are the same 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 shared net income and losses equally. The journal entry of the partnership to record 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% respectively and their partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to withdraw from the partnership. An appraisal of the business 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 partnership capital and net income. May invested $100,000 cash and no goodwill was recognized.
 42. What is the balance of May's capital account after the new partnership is created?
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 created?
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 partners 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 and $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 partnership agreement. If the goodwill method is used, what is the capital balance of Peter?
C. $110,000

48. Roberts retires and is paid $160,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of Dana?
D. $120,000

49. What is the total partnership capital after Roberts retires receiving $160,000 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% respectively.
50. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital of the remaining partners?
A. Donald, $55,000; Todd, $60,000

51. Anne retires and is paid $80,000 based on the terms of the original partnership 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 and using the bonus method?
B. $40,000