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

A company enters into a futures contract with the intent of hedging an expected purchase of some equipment from a German company for DM400,000 on December 31. The contract requires that if the U.S. dollar value of DM800,000 is greater than $400,000 on December 31, the company will receive the difference. Alternatively, if the U.S. dollar value is less than $400,000, the company will pay the difference. Which of the following statements is correct regarding this contract?

On March 1, Chow Corporation entered into a firm commitment to purchase specialized equipment from the Gifu Trading Company for ¥80,000,000 on June 1. The exchange rate on March 1 is ¥100 = $1. To reduce the exchange rate risk that could increase the cost of the equipment in U.S. dollars, Chow pays $20,000 for a call option contract. This contract gives Chow the option to purchase ¥80,000,000 at an exchange rate of ¥100 = $1 on June 1. On June 1, the exchange rate is ¥105 = $1. How much did Chow save by purchasing the call option (answers rounded to the nearest dollar)?

A loss contingency that is remote and cannot be reasonably estimated

The following segments were identified for an enterprise: Which of the four segments is a reportable segment?

A contract, traded on an exchange, that allows a company to buy a specified quantity of a commodity or a financial security at a specified price on a specified future date is referred to as a(n)

How is income tax expense for the third quarter interim period computed?

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. Assume that the price per share of WSM stock is $120 on April 30, 2011, and that the time value of the option has not changed. In order to settle the option contract, Hall, Inc., would most likely

Interim income tax expense is based on

Quest Company began operations five years ago. The company produces and sells software. The company's primary market is in the United States, where 60% of sales occur. Ten percent of the company's sales occur in Japan and 30% of sales occur in Europe. Foreign sales are denominated in local currencies. Major software purchases may be paid over a one-year period. Quest Company has obtained its long-term financing from U.S., Japanese, and German banks. Approximately one-half of the loans from U.S. banks are variable-rate loans, with the remainder of the company's loans being fixed-rate obligations. Quest Company has seen dramatic fluctuations in earnings during its five years of existence. Identify the types of risk faced by Quest Company.

If a cannery wanted to lock in the price they would pay for peaches in August four months before harvest (in April of the same year), they would be most likely to enter into which kind of agreement?

On January 17, 2011, an explosion occurred at an Orioles Fireworks plant causing extensive property damage to area buildings. Although no claims had yet been asserted against Orioles by March 10, 2011, Orioles' management and counsel concluded that it is reasonably possible Orioles will be responsible for damages and that $2,500,000 would be a reasonable estimate of its liability. Orioles' $10,000,000 comprehensive public liability policy has a $500,000 deductible clause. In Orioles' December 31, 2011, financial statements, which were issued on March 25, 2012, how should this item be reported?

In considering interim financial reporting, how does APB Opinion No. 28 conclude that such reporting should be viewed?

The calculation of a reportable segment's operating income or loss excludes which of the following?

Which type of contract is unique in that it protects the owner against unfavorable movements in the prices or rates while allowing the owner to benefit from favorable movements?

The following segments were identified for an enterprise: Which of the four segments is a reportable segment?

Which of the following contingencies should be accrued in the accounts and reported in the financial statements?

On January 1, 2011, Cougar Company received a two-year $500,000 loan. The loan calls for payments to made at the end of each year based on the prevailing market rate at January 1 of each year. The interest rate at January 1, 2011, was 10 percent. Aggie company also has a two-year $500,000 loan, but Aggie's loan carries a fixed interest rate of 10 percent. Cougar Company does not want to bear the risk that interest rates may increase in year two of the loan. Aggie Company believes that rates may decrease and they would prefer to have variable debt. So the two companies enter into an interest rate swap agreement whereby Aggie agrees to make Cougar's interest payment in 2012 and Cougar likewise agrees to make Aggie's interest payment in 2012. The two companies agree to make settlement payments, for the difference only, on December 31, 2012. If the interest rate on December 31, 2011 is 12 percent, what amount will Cougar report as the fair value of the interest rate swap at December 31, 2011 (answers rounded to the nearest dollar)?

Which of the following tests may be used to determine if an industry segment of an enterprise is a reportable segment under FASB Statement No. 131?

Landon Construction Co. carries $10,000,000 comprehensive public liability insurance with a $200,000 deductible clause. A suit for personal injury damages was brought against Landon in 2011. Landon's counsel believes it probable that the insurance company will settle out of court for an estimated amount of $550,000. At December 31, 2011, Landon should report an accrued liability of

On February 1, Shoemaker Corporation entered into a firm commitment to purchase specialized equipment from the Okazaki Trading Company for ¥80,000,000 on April 1. Shoemaker would like to reduce the exchange rate risk that could increase the cost of the equipment in U.S. dollars by April 1, but Shoemaker is not sure which direction the exchange rate may move. What type of contract would protect Shoemaker from an unfavorable movement in the exchange rate while allowing them to benefit from a favorable movement in the exchange rate?