Exam 19: Derivatives, Contingencies, Business Segments, and Interim Reports

On June 18, Edwards Corporation entered into a firm commitment to purchase specialized equipment from the Okazaki Trading Company for ¥80,000,000 on August 20. The exchange rate on June 18 is ¥100 = $1. To reduce the exchange rate risk that could increase the cost of the equipment in U.S. dollars, Edwards pays $12,000 for a call option contract. This contract gives Edwards the option to purchase ¥80,000,000 at an exchange rate of ¥100 = $1 on August 20. On August 20, the exchange rate is ¥93 = $1. How much did Edwards save by purchasing the call option (answers rounded to the nearest dollar)?

Reporting in the body of the financial statements is required for

Hall, Inc., enters into a call option contract with Bennett Investment Co. on January 2, 2011. This contract gives Hall the option to purchase 1,000 shares of WSM stock at $100 per share. The option expires on April 30, 2011. WSM shares are trading at $100 per share on January 2, 2011, at which time Hall pays $400 for the call option. The $400 paid by Hall, Inc., to Bennett Investment is referred to as the

Alpha Company purchases a call option to hedge an investment of 20,000 shares of Beta Company stock. The option agreement provides that if the prices of a share of Beta Company stock is greater than $30 on October 25, Alpha receives the difference (multiplied by 20,000 shares). Alternatively, if the price of the stock is less than $30, the option is worthless and will be allowed to expire. Which of the following statements regarding this call option is correct?

In May 2011, the Marlins Company became involved in litigation. As a result of this litigation, it is probable that Marlins will have to pay $700,000. In July 2011, a competitor commenced a suit against Marlins alleging violation of antitrust laws seeking damages of $1,100,000. Marlins denies the allegations, and the likelihood of Marlins paying any damages is remote. In September 2011, Braves County brought action against Marlins for $900,000 for polluting Lake Tomahawk. It is reasonably possible that Braves County will be successful, but the amount of damages Marlins will have to pay is not reasonably determinable. What amount, if any, should be accrued by a charge to income in 2011?

Yokochan Bakeries specializes in making cakes, cookies, and other pastries out of rice flour which they grind themselves. Yokochan anticipates purchasing 40,000 pounds of rice in January 2012. On November 1, 2011, Yokochan entered into a futures contract with Sagara Growers to purchase 40,000 pounds of rice on January 1, 2012, at $0.50 per pound. On December 31, 2011, and January 1, 2012, the prevailing market price for rice is $0.55 per pound. Yokochan purchases the rice and settles the futures contract on January 1, 2012. Make the necessary entries on Yokochan's books at

The reported identifiable assets of a reportable segment exclude which of the following?

The sum of reportable segment sales must be a least equal to what percent of total company sales?

Which of the following statements is correct regarding APB Opinion No. 28, "Interim Financial Reporting," and IAS No. 34, "Interim Financial Reporting"?

On July 1, 2011, Cahoon Company sold some limited edition art prints to Sitake Company for ¥47,850,000 to be paid on September 30 of that year. The current exchange rate on July 1, 2011, was ¥110=$1, so the total payment at the current exchange rate would be equal to $435,000. Cahoon entered into a forward contract with a large bank to guarantee the number of dollars to be received. According to the terms of the contract, if ¥47,850,000 is worth less than $435,000, the bank will pay Cahoon the difference in cash. Likewise, if ¥47,850,000 is worth more than $435,000, Cahoon must pay the bank the difference in cash. Using the information above and assuming the exchange rate on September 30 is ¥115=$1, what amount will Cahoon pay to, or receive from, the bank (rounded to the nearest dollar)?

A contract giving the owner the right, but not the obligation, to buy or sell an asset at a specified price any time during a specified period in the future is referred to as a(n)

Disclosure usually is not required for

A significant industry segment (for segment reporting purposes) is one which meets any of the three criteria relating to The percent that is used to measure each of these criteria is the same. Which of the following is the percent used to measure each of these criteria?

Which of the following statements regarding requirements for segment disclosures is most accurate?

For which type of derivative are changes in the fair value deferred and recognized as an equity adjustment?

Hall, Inc., enters into a call option contract with Bennett Investment Co. on January 2, 2011. This contract gives Hall the option to purchase 1,000 shares of WSM stock at $100 per share. The option expires on April 30, 2011. WSM shares are trading at $100 per share on January 2, 2011, at which time Hall pays $100 for the call option. Using the information above, assume that the price of the WSM shares has risen to $120 per share on March 31, 2011, and the Hall is preparing financial statements for the quarter ending March 31. As regards this option, Hall, Inc., would report which of the following?

Which choice best describes the information that should be disclosed related to derivative contracts?

A truck owned and operated by Abbott Company was involved in an accident with an auto driven by L. Costello on January 12, 2011. Abbott received notice on April 24, 2011, of a lawsuit for $800,000 damages for a personal injury suffered by L. Costello. Abbott's counsel believes it is reasonably possible that L. Costello will be successful against the company for an estimated amount in the range between $100,000 and $400,000. No amount within this range is a better estimate of potential damages than any other amount. It is expected that the lawsuit will be adjudicated in the latter part of 2012. What amount of loss should Abbott accrue at December 31, 2011?

A company enters into an interest rate swap in order to hedge a $5,000,000 variable-rate loan. The loan is expected to be fully repaid this year on June 10. The contract requires that if the interest rate on April 30 of next year is greater than 11%, the company receives the difference on a principal amount of $5,000,000. Alternatively, if the interest rate is less than 11%, the company must pay the difference. Which of the following statements is correct regarding this contract?

During 2011, Jackson Company became involved in a tax dispute with the IRS. At December 31, 2011, Jackson's tax adviser believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was $500,000 but could be as much as $650,000. After the 2011 financial statements were issued, Jackson received and accepted an IRS settlement offer of $550,000. What amount of accrued liability would Jackson have reported in its December 31, 2011, balance sheet?