Islamic university – Gaza Final exam 2008/2009 international accounting
College of commerce Sunday 21/06/2009
Name: …………………………………………………… Id.:………………………………..
Question 1 : Choose the best answer :( 20 marks)
A US firm has a Belgian subsidiary that uses the British pound as its functional currency. The
US dollar from Belgian unit’s point of view will be
a. a foreign currency.
b. its local currency
c. its current rate method currency
d. its reporting currency
Selvey Inc. is a completely owned subsidiary of Parsfield Incorporated a US firm. The
2. country where Selvey operates is deemed to have a highly inflationary economy . Therefore,
the functional currency is
a. its reporting currency.
b. its current rate method currency.
c. the US dollar.
d. its local currency.
3. All of the following factors would be used to define a functional currency, except
a. High volume of intercompany transactions.
b. expenses primarily driven by local factors.
c. financing denominated in local currency.
d. status as a local tax haven for transfer pricing purposes.
When the financial statements of a foreign subsidiary one year after acquisition are
consolidated with the parent company, Retained Earnings is
a. translated at the current exchange rate.
b. Remeasured at the current exchange rate.
c. Remeasured at the historical exchange rate.
d. None of the above answers is correct.
Peachey has a foreign subsidiary, Schrivener Corporation of Germany, whose functional
5. currency is the euro. On December 31, 19X2, Schrivener has an account receivable
denominated in British pounds. Which one of the following statements is true?
a. Because all accounts of the subsidiary are translated into US dollars at the current rate,
the Account Receivable is not adjusted on the subsidiary’s books before translation.
b. The Account Receivable is remeasured into the functional currency and remeasurement
c. The Account Receivable is first adjusted to reflect the current exchange rates in euros
and then translated at the current rate into dollars.
d. The Account Receivable is adjusted to euros at the current exchange rate and any
resulting gain or loss is included as a translation adjustment in the stockholders’ equity
section of the subsidiary’s separate balance sheet.
Paskin’s Corporation’s wholly-owned Canadian subsidiary has a Canadian dollar functional
6. currency. In translating its account balances into US dollars for reporting purposes, which one
of the following accounts would be translated at historical exchange rates?
a. Accounts Receivable.
b. Notes Payable.
c. Capital Stock.
d. Retained Earnings.
A foreign entity is a subsidiary of a US parent company and has always used the current rate
7. method to translate its foreign financial statements on behalf of its parent company. Which one
of the following statements is incorrect?
a. The US dollar will be the functional currency of this company.
b. Changes in exchange rates between the subsidiary’s country and the parent’s country are
not expected to affect the foreign entity’s cash flows.
c. Translation adjustments are shown in stockholders’ equity as increases or decreases in
other comprehensive income.
d. Translation adjustments are not shown on the income statement.
8. The objective of remeasurement is to
a. produce the same results as if the books were maintained in the currency of the foreign
entity’s largest customer.
b. produce the same results as if the books were maintained solely in the local currency.
c. produce the same results as if the books were maintained solely in the functional
d. produce the results reflective of the entity’s economics in the local currency.
9. Which of the following assets and/or liabilities are considered monetary?
a. Intangible Assets and Plant, Property, and Equipment.
b. Bonds Payable and Common Stock.
c. Cash and Accounts Payable.
d. Notes Receivable and Inventories carried at cost.
Which one of the following accounts would be translated at the historical exchange rate when
the local currency is the functional currency?
a. Deferred Income Taxes.
b. Accumulated Depreciation on Equipment.
c. Prepaid Insurance.
d. Additional paid-in capital.
Similar operating segments may be combined if the segments have similar economic
characteristics. Which one of the following is a similar economic characteristic ?
a. The segments’ management teams.
b. The tax reporting law sections.
c. The distribution method for products or services.
d. The expected rates of return and risk for the segment’s productive assets.
Which of the following conditions would not indicate that two business segments should be
classified as a single operating segment?
a. They have similar amounts of intersegment revenues or expenses.
b. They have a similar distribution of products.
c. They have similar production processes.
d. They have similar products or services.
On June 7, 2006, Hawk Corporation sold a tract of land for $70,000 that resulted in a $30,000
gain on the sale. Hawk agreed to accept one payment of $35,000 on August 15 and a second
payment of $35,000 on December 15. Hawk had a calendar year-end. What amount of gain
was reported during the second, third, and fourth quarters of the year from this sale?
a. $30,000, $0 and $0.
b. $10,000, $10,000 and $10,000.
c. $0, $15,000 and $15,000.
d. $7,500 for each of four quarters.
14. What is the threshold for reporting a major customer?
a. 5 percent of revenues.
b. 5 percent of profits.
c. 10 percent of revenues.
d. 10 percent of profits.
Pratincole has the following 2005 financial data:
Consolidated revenue per income statement $1,800,000
Intersegment sales 270,000
15. Intersegment transfers 120,000
Combined revenues of all segments 2,190,000
Pratincole should add segments if
a. the sum of its segments external revenue does not exceed 1,350,000
b. the sum of its segments external revenue does not exceed 1,620,000
c. the sum of its segments revenue including intersegment revenue does not exceed
d. the sum of its segments revenue including intersegment revenue does not exceed
16. Which of the following is not a quantitative threshold for defining a segment’s materiality?
a. Segment assets are 10% or more of the combined assets of all operating segments.
b. The segment absolute value of its profit or loss is 10% or more of the greater of (1) the
combined reported profit of all operating segments that reported a profit or (2) the
absolute value of the combined reported loss of all operating segments that reported a
c. Segment reported revenue, including intersegment revenues, is 10% or more of the
combined revenue of all operating segments.
d. Segment residual profit after the cost of equity is 10% or more of the combined residual
profit of all operating segments.
For an operating segment to be considered a reporting segment under the “reported revenue”
threshold, its reported revenue must be 10% or more of
a. the combined enterprise revenues, eliminating all relevant intracompany transfers and
b. the combined revenues, excluding intersegment revenues, of all operating segments.
c. the combined revenues, including intersegment revenues, of all operating segments.
d. the consolidated revenue of all operating segments.
An enterprise has eight reporting segments. Five segments show an operating profit and three
18. segments show an operating loss. In determining which segments are classified as reporting
segments under the “reported profits” test, which of the following statements is correct?
a. The test value for all segments is 10% of consolidated net profit.
b. The test value for profitable segments is 10% or more of those segments reporting a
profit, and the test value for loss segments is 10% or more of those segments reporting a
c. The test value for loss segments is 10% of the greater of (a) the absolute value of the sum
of those segments reporting losses, or (b) 10% of consolidated net profit.
d. The test value for all segments is 10% of the greater of (a) the absolute value of the sum
of those segments reporting profits, or (b) the absolute value of the sum of those
segments reporting losses.
Dotteral Corporation experienced a $100,000 extraordinary loss in the second quarter of 2006
in their bird operating segment. The loss should be recognized
a. Only at the consolidated report level at the end of the year.
b. entirely in the second quarter of 2006 in the bird operating segment.
c. in equal amounts allocated to the remaining three quarters of 2006 at the corporate level.
d. in equal amounts allocated to the remaining three quarters of 2006 of the bird segment.
20. How should a discontinued operation loss made during the third quarter be recognized?
a. The effect is deferred until year-end before it is recognized.
b. The effect is recognized from the beginning of the third quarter.
c. The effect is recognized from the beginning of the year.
d. The effect is recognized from the beginning of the fourth quarter.
Q 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
A D C D D C C A C C D C A A C A D C D B
Question 2: (18 marks)
Seakam Corporation, a British subsidiary of Pearce Corporation (a US company) was formed by Pearce
on January 1, 20X7 in exchange for all of the subsidiary's common stock. Seakam has now ended its
second year of operations on December 31, 20X8. Relevant exchange rates are:
January 01, 20X7 = 1£ = $1.40
April 01, 20X7 = 1£ = $1.42
December 31, 20X8 = 1£ = $1.37
20X8 average rate = 1£ = $1.36
The US dollar is Seakam’s functional currency, but it keeps its records in pounds.
Seakam's adjusted trial balance is presented below for the calendar year 20X8.
Cash £ 172,000
Accounts receivable 308,000
Notes receivable 98,000
Depreciation expense 10,000
Other expenses 117,000
Salary expense 376,000
Total debits £ 1,581,000
Accumulated depreciation £ 17,500
Accounts payable 200,000
Common stock 550,000
Retained earnings 213,500
Sales revenue 600,000
Total credits £ 1,581,000
Required: Prepare Seakam's:
1. Translated income statement; and
2. Translated balance sheet.
Name: …………………………………………………… Id.:………………………………..
Solution : Requirement 1 ( identify used method …………………………………)
Translated Income Statement
For the Year Ended December 31, 20X8
amount Ex. rate Translated
Sales revenue 600.000 1.36 816,000
Salary expense 376,000 1.36 511,360
Depreciation expense 10,000 1.42 14,200
Other expenses 117,000 1.36 159,120
Income before exchange gains or losses 131,320
Exchange loss -20,610
Net income 110,710
Retained earnings, January 1, 20X8 322,300
Retained earnings, December 31, 20X8 433,010
Translated Balance Sheet
December 31, 20X8
amount Ex. rate Translated
Cash 172,000 1.37 235,640
Accounts receivable 308,000 1.37 421,960
Notes receivable 98,000 1.37 134,260
Building-net 400,000 1.42 net 543,150
Land 100,000 1.42 142,000
Total assets 1,477,010
Accounts payable 200,000 1.37 274,000
Common stock 550,000 1.4 770,000
Retained earnings 213,500 433,010
Total liabilities & equities 1,477,010
Question 3: ( 6 marks)
The following data relate to Plover Corporation’s industry segments:
Sales to Inter-
External segment Segment
Industry Segment Customers Sales Assets
Oil Exploration $ 40,000 $ 156,000
Refinery 120,000 360,000
Plastics 10,000 $ 10,000 60,000
Chemicals 110,000 80,000 570,000
Solar Power 10,000 36,000 138,000
Totals $ 290,000 $ 126,000 $ 1,284,000
1. Which of Plover's operating segments would be considered reporting segments under the “revenue” test?
2. Which of Plover's operating segments would be considered reporting segments under the “asset” test?
The test value is 10% of the combined revenues of all operating segments including intersegment
revenues, or, 10% x $416,000 or $41,600. Based on this test value, Refinery, Chemicals, and Solar
Power would be the reporting segments because each of these segments has more than $41,600 in total
The test value is 10% of the combined identifiable assets or 10% x $1,284,000 or $1,284. Based on this
test value, Oil Exploration, Refinery, Chemicals, and Solar Power would be the reporting segments
because each of these segments has more than $1,284 in segment assets.
Question 4: (8 marks)
Rail Corporation is preparing its interim financial statements for the third quarter of calendar 2006. The
following information was gathered for the third quarter:
1. Credit sales for the quarter $2,000,000
2. Cash sales for the quarter 500,000
3. Inventories, July 1 (FIFO cost method) 250,000
4. Cash purchases of inventory during the quarter 400,000
5. Inventory purchases made on account for the quarter 650,000
6. Estimated cost of goods sold ratio (per cent of sales) 45%
7. Selling and general administrative expenses paid 111,000
8. Effective corporate tax rate 28%
9. Loss on sale of securities sold on June 30, 2006 75,000
10. Annual insurance premiums paid on the August 1 84,000
(the anniversary date of the policy)
At the end of the year, Rail accrues its annual pension and depreciation expenses which amount
to $40,000 and $62,000, respectively.
Prepare Rail's interim income statement for the third quarter of calendar 2006.
Interim Income Statement
For the Calendar Quarter Ending on September 30, 2006
Sales Revenue ($2,000,000 + $500,000) $ 2,500,000
Cost of Goods Sold (2,500,000 x 45%) 1,125,000
Selling and general and administrative expenses paid 111,000
Insurance expense ($84,000/12 months x 2 months) 14,000
Depreciation expense (62,000/4) 15,500
Estimated pension expense ($40,000/4) 10,000
Income before taxes $ 1,224,500
Income tax expense ($1,224,500 x 28%) 342,860
Net income $ 881,640
2 bonus marks for all students
With best wishes
Mohammad Marwan Al ashi