CPA Financial Accounting and Reporting (FAR) : Derivatives, Hedging, and Foreign Currency Transactions
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Derivatives, Hedging, And Foreign Currency Transactions
Giant Company buys all outstanding shares of Little Company on October 1, Year 1 for $450,000. In Year 1, Little earned revenue of $15,000 per month and incurred expenses of $12,000 per month. On the date of the sale, Little had only one asset, a piece of land, with a book value of $350,000 and a fair value of $400,000. It had no liabilities. By the end of Year 1, the land had appreciated in value and was worth $410,000. Which of the following statements is true regarding the consolidated financial statements at the end of Year 1?
A gain of $160,000 will be reported in Year 1 on the land owned by Little
Consolidated net income will include $9,000 earned by Little
Goodwill at the end of Year 1 is reported as $45,000
The land owned by Little will be reported in the Year 1 balance sheet at $410,000
Consolidated net income will include $9,000 earned by Little
Little had net income of $3K per month ($15K in revenue - $12K in expenses). The consolidated financial statements will only include the net income earned after the purchase of the business, which will include October-December. The net income of Little included in the consolidated statements will be $3K per month x 3 months.
Example Question #2 : Derivatives, Hedging, And Foreign Currency Transactions
During Year 1, the James Company buys all outstanding shares of the Holmes company for $4 million even though Holmes has net assets with a fair value of only $3.5 million. One reason for this excess payment is that Homes owns land worth $1.5 million with a book value of only $800,000. Prior to the purchase of Holmes, James owned its own land with a book value of $400,000 and a fair value of $700,000. Two years later, both companies still own this land and both have acquired additional acreage. James reports land at a book value of $1 million and fair value of $1.1 million; Holmes reports land with a book value of $2 million and a fair value of $2.5 million. At what amount will land be reported at the end of Year 3 in the consolidated balance sheet?
$3 million
$3.1 million
$3.5 million
$3.6 million
$3 million
The consolidated statements will include the combined book values of the land owned by each company ($1M in land owned by James + $2M in land owned by Holmes).
Example Question #3 : Derivatives, Hedging, And Foreign Currency Transactions
Hope Company owns 100% of the outstanding shares of Howard Company. During the current year, Hope sold inventory costing $80,000 to Howard for $90,000. This inventory has since been sold to a third party and Howard has not paid Hope for the purchase. At the balance sheet date, Hope has total current assets of $850,000 and Howard has total current assets of $550,000. Assume that there were no allocations established at the date of acquisition. What is the total amount of current assets reported in the consolidated balance sheet?
$850,000
$1,320,000
$1,400,000
$1,310,000
$1,310,000
The consolidated statements will include the combined book values of each company's current assets, but outstanding intercompany balances will be removed. Thus the consolidated statements include $850K owned by Hope + $550K owned by Howard - $90K receivable due for the inventory.
Example Question #4 : Derivatives, Hedging, And Foreign Currency Transactions
Which of the following financial instruments is not considered a derivative financial instrument?
Currency futures
Bank certificate of deposit
Stock index options
Interest rate swaps
Bank certificate of deposit
A bank certificate of deposit is not a derivative financial instrument. The other options are.
Example Question #5 : Derivatives, Hedging, And Foreign Currency Transactions
A derivative financial instrument is best described as:
A contract that conveys to a second entity a right to receive cash from a first entity
Evidence of an ownership interest in an entity such as shares of common stock
A contract that has its settlement value tied to an underlying notional amount
A contract that conveys to a second entity a right to future collections on A/R from a first entity
A contract that has its settlement value tied to an underlying notional amount
A derivative is an instrument that derives its value from the value of some other instrument.
Example Question #6 : Derivatives, Hedging, And Foreign Currency Transactions
Of the following hedge examples, which would likely be a fair value hedge?
Insurance on inventory obsolescence
Both
Flood insurance on building
None of the answer choices are correct
Insurance on inventory obsolescence
A fair value hedge protects the user from decreases in the fair value of an asset such as their inventory. Obsolescence is a common decrease in fair value.
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