Essay Questions

Explain how the computation of non controling interest share effected by

downstream and upstream sale of inventory ?
There is no effect on the non cotrolling profit share of the down stream as
the claculation of income of the non cotrolling share will be the percentage
of ownership * net income of the subsidiary.
While on the other hand in the upstream transaction the non controlling
calculation differs as the net income of the non controling will be claculated
base on ( net income – unrealized profit) * % of ownership

Discuss four basic types of hedging contract.

Forward contract:
Forward contract are negotiated contract between two parties for the delivery
or purchase of a commodity or foreign currency at a pre-agreed price, quantity
and delivery date. The agreement may require actual physical delivery of
goods or may allow net settlement.
Net settlement allows the payment of money so that the parties are I the same
economic conditions as they would have been if delivery has acquired. The
payment of settlement is calculated as follows:
(Market price – Contract price)* quantity

Future contract
Forward contract and future contract have essentially the same contracting
characteristics, except futures differ from forward contracts in ways that allow
them to be traded easily in the market.
Future contract are very standardized. futures exchanged not the trading
parties, determines the contract termination dates the exact quantity and
quality of goods to be delivered and delivery location.

Option
There are two type of option either call or put option. A call option gives the
holder the right to buy an asset and a put gives them the right to sell the asset.
The holder of the option has the right but not the obligation to carry out the
transaction, at a stick price and pre-determined amount.
 Option is traded on equities, commodities foreign currency and interest rates.
Option prices can be determined by using a variety of option pricing models.
The common is the black-SC-holes option pricing model
Swaps
they are contract to exchange an ongoing stream of cash flows the most
common swap is interest rate swaps, but swaps can be designed around any
corresponding price or rate a common use of swap is to look fixed rate on
liabilities.

Under the functional currency concept, the consolidation of the financials may
require translation or remeasurement or both . berifly explain the two methods
Translation:
a. When the foreign entity books are maintained in its functional
currency, the statement are translated into reporting entity currency
b. Translation involves expressing functional currency measurement
in the reporting currency
c. All elements in the financial statement except for shareholder
equity account are translated using a current exchange rate.
d. Current rate method
e. The effect of the exchange rate change is reported as shareholder
equity adjustment in other comprehensive income
f. The equity adjustments from translating are accumulated in the
other comprehensive income until sale or liquidation of the foreign
entity investment at which time they are reported as adjustment of
the gain or loss on sale
 Remeasurement:
a. When foreign entity's books are not maintained in its functional
currency, the foreign currency financial statement must be
remeasured into the functional currency.
b. If the foreign currency financial statement are remeasured into a
US dollar functional currency no translation is necessary because
the reporting currency of the parent investor is the US dollar
c. The objective is to produce the same financial statement as if the
books has been maintained in the functional currency.
 d. temporal method
e. Both current and historical exchange rate are used in the process of
remeasuring
f. Monetary asset and liabilities are remeasured using the current
exchange rate, while other asset and equity are remeasured using
the historical exchange rate
g. The remeasurement produce exchange rate adjustments that are
included in income because a direct impact in the enterprise cash
flow is expected

GAAP has identified six factors management should consider when determining
the functional currency , please elaborate.
1. if the cash flow related to the foreign entity's assets and liabilities are
denominated and settled in the foreign currency rather than parent's
currency then foreign entity local currency may be the functional
currency.
2. if the sale process of the foreign entity products are determined by
local competition or local government regulation rather than by short
run exchange rate changes or worldwide market then the foreign
entity local currency may be the functional currency
3. a sales market that is primarily in the parent company's country or
sales contracts that are normally denominated in the parents currency
may indicate that the parent s currency is the functional currency
4. expense such as labor and materials that are primarily local costs
provide some evidence that the foreign entity's local currency is the
functional currency.
5. If financing is denominated primarily in the foreign entity local
currency and funds generated by its operations are sufficient to
service existing and expected debt then foreign entity local currency
is likely to be the functional currency
A high volume of intercompany transaction and arrangement indicate that the
parent's currency is to be the functional currency.

Define the spot rate, current rate, and historical rate?

Spot rate is the exchage rate for immediate delivery of currenecies exchanged
 Current rate is the rate at which oe unit of currency can be exchanged for
another currency at the balacnce sheet date or the transaction date
Hositorical rate is the rate in effect at the date of specidic tansaction or event.

Define the functional currency concept.

An entity functional currency is the currency of the primary economic
enviroment in which it operates. Normally a forieng entuty functional
currency is the currency it received from customer and spend to pay its
liabiliies.

Practical Questions
Chapter 5
 Below are the income statement information for 2012 of Pug and its 60%
owned subsidiary "Sub".

Pug Sub
Sales 900,000 350,000
Cost of goods sold 400,000 250,000
Gross profit 500,000 100,000
Operating expense 250,000 50,000
Net income 250,000 50,000

Intercompany sales for 2012 are upstream and total $100,000. Pug's December 31,
2011 and December 31, 2012 inventories contain unrealized profit of $5,000 and
$10,000 respectively.
Required
 Compute non-controlling interest share of profit for 2012
Non controlling net income share 50,000
Add: unrealized profit deferral 5000
Less: unamortized profit end (10,000)
= 45,000 * 40% = 18,000

 Compute consolidated sales, cost of sale and total income for 2012.
 1. Eliminating the reciprocal sales

Dr. sales 100,000

Cr. Cost of goods sold 100,000
2. eliminating unrealized profit ending

Dr. Cost of goods sold 10,000

Cr. Inventory 10,000
3. Adjusting for unrealized beg

Dr. investment in subsidiary 3,000

Dr. non -controlling interest - equity 2,000
Cr. Cost of goods sold 5,000
4. Eliminating net income investment of subsidiary
Dr. income from subsidiary 27,000
Cr. Investment from subsidiary 27,000
Net income share 50,000 * 60% = 30,000
Add: unrealized profit deferral 5000 * 60% = 3,000
Less: unamortized profit end (10,000) * 60% = (6,000)
=27,000
5. Eliminating non controlling share
Dr. non controlling – income 18,000
Cr. Non controlling – equity 18,000

Pug Sub Dr Cr Consolidated

Sales 900,000 350,000 100,000 1,150,000
Income form 27,000 27,000 -
subsidiary
Cost of goods sold 400,000 250,000 10,000 100,000 555,000
5,000
Gross profit 527,000 100,000 595,000
Operating expense 250,000 50,000 300,000
Net income 277,000 50,000 295,000
Non controlling 18,000 (18,000)
Controlling share 277,000
 Below are the income statement information for 2012 of Pug and its 80%
owned subsidiary "Sub".

Pug Sub
Sales 1,000,000 600,000
Cost of goods sold 500,000 400,000
Gross profit 500,000 200,000
Operating expense 250,000 80,000
Net income 250,000 120,000

During 2012, Pug sold to its subsidiary inventory for $200,000 at a gross profit
$40,000. The remaining inventory on the hand of subsidiary is 40%.
Required
 Compute the unrealized profit – ending
Cost of goods sold = sale – profit

= 200,000√ – 40,000 = 160,000√

Remaining end inventory at cost = 160,000 * 40% = 64,000√
Remaining inventory at transfer price= 200,000 * 40% = 80,000√
Unrealized profit ending= 80,000 – 64,000 = 16,000 √
 Compute profit for 2012 for the
o Non-controlling interest
o Parent profit
 Non- controlling profit
o Net income share 120,000* 20% = 24,000 √
 Parent profit
o net income share 120,000 * 80% = 96,000
o Less: unamortized profit end = (16,000)
=80,000 √

 Compute consolidated income statement for 2012, show the elimination

entries.
  Eliminating the reciprocal sales

Dr. sales 200,000

Cr. Cost of goods sold 200,000
Eliminating unrealized profit ending
Dr. cost of goods sold 16,000
Cr. Inventory 16,000
Eliminating net income investment of subsidiary
Dr. income from subsidiary 80,000
Cr. Investment from subsidiary 80,000

Eliminating non controlling share

Dr. non controlling – income 24,000
Cr. Non controlling – equity 24,000

Pug Sub Dr Cr Consolidated

Sales 1,000,000 600,000 200,000 1,400,000
Income form 80,000 80,000 -
subsidiary
Cost of goods sold 500,000 400,000 16,000 200,000 716,000

Gross profit 580,000 200,000 684,000

Operating expense 250,000 80,000 330,000
Net income 330,000 1200,000 354,000
Non controlling 24,000 (24,000)
Controlling share 330,000
 A. Below are the income statement information for 2015 of Orange and its 75%
owned subsidiary “Gold”.

Parent Subsidiary
Sales 6,000,000 3,600,000
Cost of goods sold 3,000,000 2,400,000
Gross profit 3,000,000 1,200,000
Operating expense 1,500,000 480,000
Net income 1,500,000 720,000

During 2015, Parent sold to its subsidiary inventory for $ 1,200,000 with a gross
profit $300,000. The remaining inventory on the hand of subsidiary is 45%.
Required
 Compute the unrealized profit – ending
 Compute profit for 2015 for the
o Non-controlling interest
o Parent profit

 Prepare the consolidated income statement for 2015, show the elimination
entries.
Unrealized GP = 300,000 * 45% = 135,000

Net Income 720,000

 Parent 75% = 540,000

 NCI 25% = 180.000
Parent’ NI = 540,000 -135,000 = $ 405,000

Eliminate intercompany profits and losses

Sales 1,200,000

Cogs 1,200,000

Cogs 135,000

Inventory 135,000
Income from gold 405,000

Investment in gold 405,000

NCI – Income 180,000

NCI-Share 180,000

Parent Subsidiary Adj. Consolidated

Sales 6,000,000 3,600,000 1,200,000 8,400,000
Cost of goods 3,000,000 2,400,000 135,000 1,200,000 4,335,000
sold
Gross profit 3,000,000 1,200,000 4,065,000
Operating 1,500,000 480,000 1,980,000
expense
Net income 1,500,000 720,000 2,085,000
Income from 405,000 405,000 0
sub.
NCI share 180,000 180,000
Controlling 1,905,000
Income
 Chapter 6
 Sal is a 90% owned subsidiary of Pal corporation, acquired at book value
several years ago. Comparative separate compay income statements for
2012 is shown below:

Pal Sal
Sales 1,500,000 700,000
Income from Sal 108,000 -
Gain on building 30,000 -
Total income 1,638,000 700,000
Cost of goods sold 1,000,000 400,000
Operating expenses 300,000 150,000
Total expense 1,300,000 550,000
Net income 338,000 150,000

On January 5, 2012 Pal sold a building with a 10 year remaining useful life
to Sal at a gain of 30,000. Sal paid dividends of $100,000 during 2012.
Required:
 Prepare journal entries prepared by Pal during 2012 to account for its
investment in Sal (equity methd).
1. recording income from subsidiary
Dr. investment in subsidairy 135,000
Cr. Income from subsidiary 135,000
2. recording of dividends
Dr. cash 90,000
Cr. Investment from subsidiary 90,000
3. Ellimination of unrealized profit
Dr. income from subsidiray 30,000
Cr. Investment from subsidiary 30,000
4. Recording unrealized profit
Dr. investment in subsidiary 3,000
Cr. Income form subsidiary 3,000
30,000/10 = 3,000
  Prepare a consolidated income statement for Pig and Sal for 2012.

Dr. Gain from sale 30,000

Cr. Building 30,000
Dr. Accumulated depreciation 3,000
Cr. Depreciation expense 3,000
Dr. income from subsidairy 108,000
Cr. Investment from subsidiary 108,000
Pal Sal Dr Cr Consolidated
Sales 1,500,000 700,000 2,200,000
Income from Sal 108,000 - 108,000 -
Gain on building 30,000 - 30,000 -
Total income 1,638,000 700,000 2,200,000
Cost of goods sold 1,000,000 400,000 1,400,000
Operating expenses 300,000 150,000 3,000 420,000
Total expense 1,300,000 550,000 1,820,000
Net income 338,000 150,000 380,000
 Sal is a 75% owned subsidiary of Pal corporation, acquired at book value
several years ago. Comparative separate company income statements for
2013 is shown below:

Pal Sal
Sales 1,500,000 640,000
Gain on sale of building - 40,000
Cost of goods sold 1,000,000 400,000
Operating expenses 200,000 150,000
Total expense 1,200,000 550,000
Net income 300,000 150,000
On January 1, 2013 Sal "subsidary" sold a building for 90,000 (cost of builing
70,000 and accumulated depreciation 20,000) with a 10 year remaining useful life
to pal "parent" at a gain of 40,000.
Required:
 Prepare journal entries prepared by Pal "parent" during 2013 to
account for its investment in Sal( equity methd).
1. Recoding the purchase
Dr. Building 90,000
Cr. Cash 90,000
2. Recording the depreciation expense

Dr. depreciation expense 9,000

Cr. Accumulated depreciation 9,000
3. recording income from subsidiary
Dr. investment in subsidairy 85,500
Cr. Income from subsidiary 85,500

Share of subsidary net income (150,000* 75%) 112,500

Less: unrealized gain on building ( 40,000*75%) (30,000)
Add: recognized gain ((40,000/10)*75%) 3,000
=Investment income 85,500
  Prepare a consolidated income statement for Pig and Sal for 2013.

Dr. Gain from sale 40,000

Cr. Building 40,000
Dr. Accumulated depreciation 4,000
Cr. Depreciation expense 4,000
((40,000/10)
Dr. income from subsidairy 85,500
Cr. Investment from subsidiary 85,500
Dr. non controling interest income 28,500
Cr. Non- controling interest – equity 28,500
Share of subsidary net income (150,000* 25%) 37,500
Less: unrealized gain on building ( 40,000*25%) (10,000)
Add: recognized gain ((40,000/10)*25%) 1,000
=NCI income 28,500

Pal Sal Dr Cr Consolidated

Sales 1,500,000 660,000 2,160,000
Income from Sal 85,500 - 85,500 -
Gain on building 40,000 40,000 -
Total income 1,585,500 700,000 2,160,000
Cost of goods sold 1,000,000 400,000 1,400,000
Operating expenses 200,000 150,000 4,000 346,000
Total expense 1,200,000 550,000 1,748,000
Net income 385,500 150,000 414,000
NCI income 28,500 28,500
385,500
 Sun Company is a 90% owned subsidiary of Power Corporation, acquired
at book value several years ago. Comparative separate company income
statements for 2015 is shown below:

Power Sun
Sales 1,500,000 700,000
Income from Sal 135,000 -
Gain on land 30,000
Total income 1,635,000 730,000
Cost of goods sold 1,000,000 400,000
Operating expenses 300,000 150,000
Total expense 1,300,000 550,000
Net income 335,000 180,000

On January 5, 2012 subsidairy sold a land for 90,000 to its parent.

Required:

Prepare journal entries prepared by Pal "parent" to arecord:

1. The purchase of the land:

Dr. Land 90,000

Cr. Cash 90,000

2. Income from subsidiary:

Dr. investment in subsidairy 162,000

Cr. Income from subsidiary 162,000
180,000 * 0.90
3. Recording unrealized profit
Dr. income from subsidiray 27,000
Cr. Investment from subsidiary 27,000

30,000*0.9
 Chapter 12
 XYZ company is a U.S company which purchased inventory item from ABC
company a UK company for £240,000 on May 1, 2012 when the spot rate was
0.600 US dollar. The invoice was paid to ABC company on 31 July 2012 when
the spot rate was 0.605 US dollar.

Required
 Did the dollar weaken or strengthening against the pound between May
to July 2012? Explain.
It had weakened, because a dollar needs a more unit of the weakening
to purchase one unit of the other
 At what amount XYZ company recorded the account payable to ABC
company
Account payable is (240,000* .6) = 144,000
 Prepare journal entries that XYZ recorded for the purchase from ABC
company on 1 May and the payment of £240,000 on July 31.
Dr. inventory 144,000
Cr. Account payable 144,000

Dr. account payable 144,000

Dr. exchange loss 1,200

Cr. Cash 145,200

 XYZ company is a U.S company, sold inventory items to ABC a UK
company for 200,000 pound on May 1, 2012, when the spot rate as 0.600 US
dollar. The invoice was paid by ABC on May 30, 2012, when the spot rate
was .6050 US dollar.

Required
 Prepare journal entries that XYZ recorded for the sale to ABC company
on 1 May and the payment of 200,000 pound on May 31.
Dr. AR 120,000
Cr. Sale revenue 120,000
Dr. cash 121,000
Cr. exchange gain 1,000

Cr. AR 120, 00

B. Peper company is a U.S company, sold inventory items to Pill Inc. a UK company
for 400,000 pound on October 1,2014, when the spot rate as 0.530 US dollar.
 The invoice was paid by pill on January 15, 2015, when the spot rate was 0.580
US dollar. On December 31,2014 spot rate was 0.520 US dollar.
Required:
 Prepare journal entries of Paper that relate to the sale, end of the year
and the receipt of the cash.

October 1,2014 :
Dr. AR 212,000
Cr. Sale revenue 212,000
(400,000 * 0.530)

December 31,2014 :
Dr. Exchange loss 4,000
Cr. AR 4,000
(400,000 * (0.530-0.520))

January 15, 2015:

Dr. Cash (400,000 * 0.580) 232,000
Cr. AR 208,000
(400,000 * 0.520)
Cr. Exchange Gain 24,000

 Did the dollar weakened or strengthened against the pound between

February to January 2015? Explain.