CPA Financial Accounting and Reporting (FAR) : Consolidated Financial Statements
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Example Questions
Example Question #1 : Consolidated Financial Statements
On December 1, Year 1, the Fairfax Company signs a contract to receive 1 million Euros on January 31, Year 2 at a price of $1.1 million in a two month forward contract. On December 1, the spot rate for Euros is $1.1 in US dollars. Why would Fairfax enter into this contract?
Fairfax believes that the European economy will grow at a rate faster than that of the US economy
Fairfax could be hedging a future need to make a payment in Euros or speculating that Euros will increase in value
Fairfax believes that the value of Euros will decrease in relation to the US dollar
Fairfax believes that the value of Euros will increase at the same rate as the US dollars
Fairfax could be hedging a future need to make a payment in Euros or speculating that Euros will increase in value
If a company enters into a forward contract to pay a fixed price for a currency on a future date, they are hoping that the market price on that date is higher than the price they are agreeing to pay. They may also be looking to lock in a fixed price to reduce the risk of exchange rate fluctuation on an existing obligation.
Example Question #2 : Consolidated Financial Statements
A US company is in the process of consolidating a subsidiary operating in China. The two companies have different functional currencies, so the Chinese accounts are being translated into US dollars. Some accounts are translated at historical rates while others are translated at the current rate as of the balance sheet date. Which of the following is true about the subsidiary's accounts?
Inventory and accounts receivable are translated at the current rate
Inventory and accounts receivable are translated at historical rates
Accounts receivable is translated at the current rate and inventory is translated at historical rates
Inventory is translated at the current rate and accounts receivable is translated at historical rates
Inventory and accounts receivable are translated at the current rate
When translating financial statements of companies with different functional currencies, inventory and accounts receivable are translated at the current rate as of the balance sheet date.
Example Question #3 : Consolidated Financial Statements
The Robinson Company produces a balance sheet that shows a large figure in accumulated other comprehensive income within stockholder's equity. Which of the following could not have led to this figure?
Robinson has invested in a bond that was issued at a discount from its face value and is reported as a trading security
Robinson has invested in debt securities that are listed as available-for-sale
Robinson has a subsidiary in Mexico whose functional currency is Pesos
Robinson has a defined benefit pension plan where the projected benefit obligation recently increased as a result of a plan amendment
Robinson has invested in a bond that was issued at a discount from its face value and is reported as a trading security
Investments reported as trading securities do not affect other comprehensive income; all other items are included in other comprehensive income.
Example Question #4 : Consolidated Financial Statements
Consolidated financial statements are typically prepared when one company has a controlling financial interest in another unless:
The subsidiary is a financial company
The fiscal year ends of the two companies are more than three months apart
The two companies are in unrelated industries, such as manufacturing and real estate
The subsidiary is in bankruptcy
The subsidiary is in bankruptcy
The exceptions to not consolidating a majority owned subsidiary are when the subsidiary is in legal reorganization or bankruptcy and or the subsidiary operates under severe foreign currency exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the subsidiary.
Example Question #5 : Consolidated Financial Statements
Of the following is not a characteristic that is used to determine the primary beneficiary of a variable interest entity under US GAAP?
The right to receive the expected VIE losses
Greater than 50% ownership of the VIE
The power to direct the activities of the VIE
The obligation to absorb expected VIE losses
Greater than 50% ownership of the VIE
Under the VIE model, the primary beneficiary is not required to have greater than 50% ownership of the VIE. The primary beneficiary is the entity that has the power to direct the activities of a VIE that most significantly impact the entity's economic performance and absorbs the expected VIE losses and/or receives the expected VIE residual returns.
Example Question #1 : Consolidated Financial Statements
Of the following characteristics, which would be used to determine the primary beneficiary of a variable interest entity under US GAAP?
Ability to receive VIE residual returns
More than a 50% ownership of the VIE
None of the answer choices are correct
A liability to accept VIE losses
More than a 50% ownership of the VIE
The VIE model states that the primary beneficiary is not required to maintain more than a 50% ownership of the VIE, rather the primary beneficiary would be the entity which has the ability to direct the activities of the ViE which most significantly impact the entity's performance and absorb expected VIE losses and receive returns.
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