Deck 19: Derivatives, contingencies, business Segments, and Interim Reports

Question 1

According to FASB ASC Topic 280 (Segment Reporting)how do firms identify reportable segments?

A) By designations used inside the firm
B) By product lines
C) By industry classification
D) By geographic regions

Answer 1

A

Question 2

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

A) Fair value
B) Notional amount
C) Both of these
D) Neither of these

Answer 2

C

Question 3

A company enters into a futures contract with the intent of hedging an account payable of DM350,000 due on December 31.The contract requires that if the U.S.dollar value of DM350,000 is greater than $175,000 on December 31,the company will be required to pay the difference.Alternatively,if the U.S.dollar value is less than $175,000,the company will receive the difference.Which of the following statements is correct regarding this contract?

A) The Deutsche mark futures contract effectively hedges against the effect of exchange rate changes on the U.S.dollar value of the Deutsche mark payable.
B) The futures contract is a contract to buy Deutsche marks at a fixed price.
C) The futures contract is a contract to sell Deutsche marks at a fixed price.
D) The contract obligates the company to pay if the value of the U.S.dollar increases.

Answer 3

C

Question 4

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)

A) interest rate swap.
B) forward contract.
C) futures contract.
D) option.

Question 5

An agreement between two parties to exchange a specified amount of a commodity,security,or foreign currency at a specified date in the future with the price or exchange rate being set now is referred to as a(n)

A) interest rate swap.
B) forward contract.
C) futures contract.
D) option.

Question 6

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?

A) Interest rate swap
B) Forward contract
C) Option
D) Futures contract

Question 7

Uncertainty that the party on the other side of an agreement will abide by the terms of the agreement is referred to as

A) credit risk.
B) exchange rate risk.
C) interest rate risk.
D) price risk.

Question 8

A contingent loss should be disclosed in a note to the financial statements but should not be recorded as a liability if the

A) possibility of loss is remote.
B) actual incurrence of a loss is reasonably possible.
C) outcome is uncertain.
D) contingency involves pending or threatened litigation.

Question 9

On February 1,Rapido Corporation entered into a firm commitment to purchase specialized equipment from the Yamasake Trading Company for ¥65,000,000 on April 1.Rapido would like to reduce the exchange rate risk that could increase the cost of the equipment in U.S.dollars by April 1,but Rapido is not sure which direction the exchange rate may move.What type of contract would protect Rapido from an unfavorable movement in the exchange rate while allowing them to benefit from a favorable movement in the exchange rate?

A) Interest rate swap
B) Forward contract
C) Call option
D) Put option

Question 10

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)

A) interest rate swap.
B) option.
C) futures contract.
D) forward contract.

Question 11

In considering interim financial reporting,how does FASB ASC Topic 270 conclude that such reporting should be viewed?

A) As reporting for a basic accounting period
B) As reporting for an integral part of an annual period
C) As a "special" type of reporting that need not follow generally accepted accounting principles
D) As useful only if activity is evenly spread throughout the year so that estimates are unnecessary

Question 12

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

A) Fair value hedge
B) Cash flow hedge
C) Operating hedge
D) Notional value hedge

Question 13

When gains or losses on derivatives designated as fair value hedges exceed the gains or losses on the item being hedged,the excess

A) affects reported net income.
B) is recognized as an equity adjustment.
C) is recognized as part of comprehensive income.
D) is not recognized.

Question 14

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?

A) The swap agreement effectively hedges the variable interest payments.
B) The timing of the swap payment matches the timing of the interest payments and,therefore,the variable interest payments are hedged.
C) The timing of the swap payment does not match the timing of the interest payments and,therefore,the variable interest payments are not hedged.
D) This swap represents a fair value hedge.

Question 15

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?

A) Interest rate swap
B) Fixed commodities contract
C) Futures contract
D) Option

Question 16

Uncertainty about the future market value of an asset is referred to as

A) price risk.
B) credit risk.
C) interest rate risk.
D) exchange rate risk.

Question 17

An obligation that is contingent on the occurrence of a future event should be reported in the balance sheet as a liability if the

A) future event is likely to occur.
B) amount of the obligation can be reasonably estimated.
C) occurrence of the future event is at least reasonably possible and the amount is known.
D) occurrence of the future event is probable and the amount can be reasonably estimated.

Question 18

A company enters into a futures contract with the intent of hedging an expected purchase of some equipment from a German company for DM350,000 on December 31.The contract requires that if the U.S.dollar value of DM700,000 is greater than $350,000 on December 31,the company will receive the difference.Alternatively,if the U.S.dollar value is less than $350,000,the company will pay the difference.Which of the following statements is correct regarding this contract?

A) The Deutsche mark futures contract effectively hedges against the effect of exchange rate changes on the U.S.dollar value of the Deutsche mark commitment.
B) The futures contract exceeds the amount of the commitment and thus hedges movements in the Deutsche mark exchange rate.
C) The futures contract is a contract to sell Deutsche marks at a fixed price.
D) The extra DM350,000 would be accounted for as a speculative investment.

Question 19

Which of the following tests may be used to determine if an industry segment of an enterprise is a reportable segment under FASB ASC Topic 280?

A) Its revenue (both from external customers and internal segments)is equal to or greater than 10 percent of total revenue (external and internal).
B) The absolute value of its operating profit is equal to or greater than 10 percent of the total of the operating profit for all segments that reported profits (or the total of the losses for all segments that reported losses).
C) The segment contains 10 percent or more of the combined assets of all operating segments.
D) All of these.

Question 20

In exchange for the rights inherent in an option contract,the owner of the option will typically pay a price

A) only when a call option is exercised.
B) only when a put option is exercised.
C) when either a call option or a put option is exercised.
D) at the time the option is received regardless of whether the option is exercised or not.

Question 21

When a company with reportable segments issues interim condensed financial statements,current GAAP requires that the interim reports provide all of the following for each reportable segment except

A) revenues for external customers.
B) intersegment revenues.
C) total assets.
D) a measure of segment profit or loss.

Question 22

Allman,Inc. ,enters into a call option contract with Betts Investment Co.on January 2,2014.This contract gives Allman the option to purchase 1,000 shares of Upmann stock at $100 per share.The option expires on April 30,2014.Upmann shares are trading at $100 per share on January 2,2014,at which time Allman pays $200 for the call option.
Using the information above,assume that the price of the Upmann shares has risen to $130 per share on March 31,2014,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?

A) A $30,000 realized gain
B) A $30,000 unrealized gain
C) A deferred gain of $29,800
D) Nothing would be reported in the financial statements or the notes thereto.

Question 23

On January 1,2014,Panther Company received a two-year $600,000 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 1,2014,was 10 percent.Aegean company also has a two-year $600,000 loan,but Aegean's loan carries a fixed interest rate of 10 percent.
Panther Company does not want to bear the risk that interest rates may increase in year two of the loan.Aegean 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 Aegean agrees to make Panther's interest payment in 2015 and Panther likewise agrees to make Aegean's interest payment in 2015.The two companies agree to make settlement payments,for the difference only,on December 31,2015.If the interest rate on January 1,2015,is 12 percent,what will be Panther's settlement payment to/from Aegean?

A) $6,000 payment
B) $6,000 receipt
C) $12,000 payment
D) $12,000 receipt

Question 24

Allman,Inc. ,enters into a call option contract with Betts Investment Co.on January 2,2014.This contract gives Allman the option to purchase 1,000 shares of Upmann stock at $100 per share.The option expires on April 30,2014.Upmann shares are trading at $100 per share on January 2,2014,at which time Allman pays $200 for the call option.
Using the information above,the 1,000 shares of Upmann stock in this contract is referred to as the

A) collateral.
B) notional amount.
C) option premium.
D) derivative.

Question 25

Which of the following is not required under current GAAP for disaggregated information relating to geographic area information?

A) Revenues from external customers from the home country of the firm and from all foreign countries in total.
B) The total of long-lived assets located in the firm's home country and located in foreign countries.
C) Operating profits from external customers from the home country of the firm and from all foreign countries in total.
D) Revenues for any foreign country for which the revenues from that country are material to the firm.

Question 26

An inventory loss from market decline of $1,200,000 occurred in April 2014.Discus Company recorded this loss in April 2014 after its March 31,2014,quarterly report was issued.None of this loss was recovered by the end of the year.How should this loss be reflected in the quarterly income statements of Discus Company? Three months ended (2014):
March 31 June 30 September 30 December 31

A) 0 0 0 $900,000
B) 0 $400,000 $400,000 $400,000
C) 0 $1,200,000 0 0
D) $300,000 $300,000 $300,000 $300,000

Question 27

On January 1,2014,Panther Company received a two-year $600,000 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 1,2014,was 10 percent.Aegean company also has a two-year $600,000 loan,but Aegean's loan carries a fixed interest rate of 10 percent.
Panther Company does not want to bear the risk that interest rates may increase in year two of the loan.Aegean 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 Aegean agrees to make Panther's interest payment in 2015 and Panther likewise agrees to make Aegean's interest payment in 2015.The two companies agree to make settlement payments,for the difference only,on December 31,2015.If the interest rate on January 1,2015 is 8 percent,what will be Panther's settlement payment to/from Aegean?

A) $6,000 payment
B) $6,000 receipt
C) $12,000 payment
D) $12,000 receipt

Question 28

Bingo,Inc. ,enters into a call option contract with Racer Investment Co.on January 2,2014.This contract gives Bingo the option to purchase 1,000 shares of Saloon stock at $100 per share.The option expires on April 30,2014.Saloon shares are trading at $100 per share on January 2,2014,at which time Bingo pays $100 for the call option.Assume that the price per share of Saloon stock is $115 on April 30,2014,and that the time value of the option has not changed.In order to settle the option contract,Bingo,Inc. ,would most likely

A) pay Racer Investment $15,000.
B) purchase the shares of Saloon at $100 per share and sell the shares at $115 per share to Racer.
C) receive $15,000 from Racer Investment.
D) receive $400 from Racer Investment.

Question 29

Which of the following is NOT true regarding standards for interim reporting?

A) Declines in inventory value should be deferred to future interim periods.
B) Use of the gross margin method for computing cost of goods sold must be disclosed.
C) Costs and expenses not directly associated with interim revenue must be allocated to interim periods on a reasonable basis.
D) Gains and losses that arise in an interim period should be recognized in the interim period in which they arise if they would not normally be deferred at year-end.

Question 30

Allman,Inc. ,enters into a call option contract with Betts Investment Co.on January 2,2014.This contract gives Allman the option to purchase 1,000 shares of Upmann stock at $100 per share.The option expires on April 30,2014.Upmann shares are trading at $100 per share on January 2,2014,at which time Allman pays $200 for the call option.
Using the information above,the call option would be recorded in the accounts of Allman as

A) an asset.
B) a liability.
C) a gain.
D) would not be recorded in the accounts (memorandum entry only).

Question 31

Asolo 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 Asolo in 2014.Asolo's counsel believes it probable that the insurance company will settle out of court for an estimated amount of $550,000.At December 31,2014,Asolo should report an accrued liability of

A) $550,000.
B) $350,000.
C) $200,000.
D) $0.

Question 32

On July 1,2014,Stagger Company sold some limited edition art prints to Wakaramas Company for ¥38,500,000 to be paid on September 30 of that year.The current exchange rate on July 1,2014,was ¥110=$1,so the total payment at the current exchange rate would be equal to $350,000.Stagger 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 ¥38,500,000 is worth less than $350,000,the bank will pay Stagger the difference in cash.Likewise,if ¥38,500,000 is worth more than $350,000,Stagger 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 Stagger pay to,or receive from,the bank (rounded to the nearest dollar)?

A) $15,217 payment
B) $15,217 receipt
C) $16,667 payment
D) $16,667 receipt

Question 33

Inca Company purchases a call option to hedge an investment of 20,000 shares of Limbaugh Company stock.The option agreement provides that if the prices of a share of Limbaugh Company stock is greater than $30 on October 25,Inca 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?

A) The call option effectively hedges the investment in the shares of Limbaugh stock.
B) The call option is an option to sell Limbaugh Company stock at a fixed price.
C) The call option represents a speculative option rather than a hedge.
D) Inca could have purchased a put option or a call option to effectively hedge the investment in the shares of Limbaugh stock.

Question 34

Sanford,Inc. ,enters into a call option contract with Sons Investment Co.on January 2,2014.This contract gives Sanford the option to purchase 1,000 shares of MAX stock at $100 per share.The option expires on April 30,2014.MAX shares are trading at $100 per share on January 2,2014,at which time Sanford pays $400 for the call option.The $400 paid by Sanford,Inc. ,to Sons Investment is referred to as the

A) option premium.
B) notional amount.
C) strike price.
D) intrinsic value.

Question 35

During 2014,Ongoing Company became involved in a tax dispute with the IRS.At December 31,2014,Ongoing's tax adviser believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was $450,000 but could be as much as $650,000.After the 2014 financial statements were issued,Ongoing received and accepted an IRS settlement offer of $550,000.What amount of accrued liability would Ongoing have reported in its December 31,2014,balance sheet?

A) $650,000
B) $550,000
C) $450,000
D) $0

Question 36

On June 18,Burger Corporation entered into a firm commitment to purchase specialized equipment from the Hyabuza 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,Burger pays $12,000 for a call option contract.This contract gives Burger 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 Burger save by purchasing the call option (answers rounded to the nearest dollar)?

A) $12,000
B) $48,215
C) $60,215
D) Burger would have been better off not to have purchased the call option.

Question 37

On January 1,2014,Panther Company received a two-year $600,000 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 1,2014,was 10 percent.Aegean company also has a two-year $600,000 loan,but Aegean's loan carries a fixed interest rate of 10 percent.
Panther Company does not want to bear the risk that interest rates may increase in year two of the loan.Aegean 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 Aegean agrees to make Panther's interest payment in 2015 and Panther likewise agrees to make Aegean's interest payment in 2015.The two companies agree to make settlement payments,for the difference only,on December 31,2015.If the interest rate on December 31,2014 is 12 percent,what amount will Panther report as the fair value of the interest rate swap at December 31,2014 (answers rounded to the nearest dollar)?

A) $0
B) $10,715
C) $12,000
D) $600,000

Question 38

Stellar Corporation sells five different types of products.The company is divided for internal reporting purposes into five different divisions based on these five different product lines.The company should prepare the note disclosure for disaggregated information based upon the

A) five types of products.
B) five different divisions.
C) materiality of each product line based on the revenue or operating profits generated by each product line or the assets utilized by each product line.
D) geographic areas in which the 5 products are sold.

Question 39

On July 1,2014,Stagger Company sold some limited edition art prints to Wakaramas Company for ¥38,500,000 to be paid on September 30 of that year.The current exchange rate on July 1,2014,was ¥110=$1,so the total payment at the current exchange rate would be equal to $350,000.Stagger 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 ¥38,500,000 is worth less than $350,000,the bank will pay Stagger the difference in cash.Likewise,if ¥38,500,000 is worth more than $350,000,Stagger must pay the bank the difference in cash.
Using the information above and assuming the exchange rate on September 30 is ¥105=$1,what amount will Stagger pay to,or receive from,the bank (rounded to the nearest dollar)?

A) $15,217 payment
B) $15,217 receipt
C) $16,667 payment
D) $16,667 receipt

Question 40

On March 1,Suki Corporation entered into a firm commitment to purchase specialized equipment from the Sashimi 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,Suki pays $20,000 for a call option contract.This contract gives Suki 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 Suki save by purchasing the call option (answers rounded to the nearest dollar)?

A) $20,000
B) $27,619
C) $47,619
D) Suki would have been better off not to have purchased the call option.

Question 41

A loss contingency that is remote and cannot be reasonably estimated

A) may be disclosed in a note to the financial statements.
B) must be disclosed in a note to the financial statements.
C) must be reported in the body of the financial statements.
D) is permitted to be reported in the body of the financial statements.

Question 42

Which of the following is most likely to require only a note disclosure as a contingency?

A) Cash discounts given for early payment by customers (which are almost always taken)
B) Remote chance of loss from a lawsuit in process
C) Probable claim for an income tax refund
D) Loss from an investment in equity securities that is certain

Question 43

Which of the following liabilities is NOT contingent?

A) A liability to replace a specific defective television set already returned to the manufacturer
B) A liability to pay pension benefits if a specific employee lives to retirement
C) A liability to pay any adverse judgment for a product liability case currently on appeal
D) A liability to pay for books received by a college bookstore under terms that allow for the return for full refund of any books not sold

Question 44

A truck owned and operated by Roadhog Company was involved in an accident with an auto driven by M.Sore on January 12,2014.Roadhog received notice on April 24,2014,of a lawsuit for $750,000 damages for a personal injury suffered by M.Sore.Roadhog's counsel believes it is reasonably possible that M.Sore will be successful against the company for an estimated amount in the range between $200,000 and $500,000.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 2015.What amount of loss should Roadhog accrue at December 31,2014?

A) $400,000
B) $250,000
C) $100,000
D) $0

Question 45

Information obtained prior to the issuance of the current period's financial statements of a company indicates that it is probable that,at the date of the financial statements,a liability will be incurred for obligations related to product warranties on products sold during the current period.During the past three years,product warranty costs have been approximately 1 1/2 percent of annual sales revenue. An estimated loss contingency should be

A) neither accrued nor disclosed in the financial statements.
B) recognized as an appropriation of retained earnings.
C) accrued in the accounts and reported in the financial statements.
D) disclosed in the financial statements but not accrued.

Question 46

On January 17,2014,an explosion occurred at an Boondocks Fireworks plant causing extensive property damage to area buildings.Although no claims had yet been asserted against Boondocks by March 10,2014,Boondocks' management and counsel concluded that it is reasonably possible Boondocks will be responsible for damages and that $2,500,000 would be a reasonable estimate of its liability.Boondocks' $10,000,000 comprehensive public liability policy has a $500,000 deductible clause.In Boondocks' December 31,2014,financial statements,which were issued on March 25,2015,how should this item be reported?

A) As a footnote disclosure indicating the possible loss of $500,000
B) As an accrued liability of $500,000
C) As a footnote disclosure indicating the possible loss of $2,500,000
D) As an accrued liability of $2,500,000

Question 47

Contingent liabilities will or will not become actual liabilities depending on

A) whether they are probable and estimable.
B) the degree of uncertainty.
C) the present condition suggesting a liability.
D) the outcome of a future event.

Question 48

On November 1,2014,Balloon Company sold some limited edition art prints to Sitake Company for ¥47,850,000 to be paid on January 1,2015.The current exchange rate on November 1,2014,was ¥110=$1,so the total payment at the current exchange rate would be equal to $435,000.Balloon 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 Balloon the difference in cash.Likewise,if ¥47,850,000 is worth more than $435,000,Balloon must pay the bank the difference in cash.Assuming the exchange rate on December 31,2014 is ¥115=$1,what amount will Balloon disclose as the fair value of the forward contract on December 31,2014 (answers rounded to the nearest dollar)?

A) $0
B) $18,913
C) $20,714
D) $416,087

Question 49

Gain contingencies that are remote and can be reasonably estimated

A) must be disclosed in a note to the financial statements.
B) may be disclosed in a note to the financial statements.
C) must be reported in the body of the financial statements.
D) should not be reported or disclosed.

Question 50

Danbury Corporation was involved in a lawsuit with the EPA alleging inadequate air pollution control facilities at its Lafayette plant site during 2011.At December 31,2014,it appeared probable that the EPA would settle for approximately $150,000.This event should be recognized in 2014 as a(n)

A) extraordinary loss.
B) disclosure of a contingency loss only in a note.
C) should not be disclosed or recognized..
D) loss on the lawsuit (operating expense).

Question 51

Which of the following is an example of a contingent loss (expense)likely to be recognized in the accounts on a regular basis each year? lawsuit loss warranty expense bad debt expense

A) yes no no
B) no yes no
C) no yes yes
D) yes yes yes

Question 52

On November 5,2014,a Longhaul Rental truck was in an accident with an auto driven by Alana Rodriguez.Longhaul Rental received notice on January 12,2015,of a lawsuit for $700,000 damages for personal injuries suffered by Rodriguez.Longhaul Rental's counsel believes it is probable that Rodriguez will be awarded an estimated amount in the range between $300,000 and $550,000,and that $400,000 is a better estimate of potential liability than any other amount.Longhaul's accounting year ends on December 31,and the 2014 financial statements were issued on March 2,2015.What amount of loss should Longhaul accrue at December 31,2014?

A) $0
B) $300,000
C) $400,000
D) $550,000

Question 53

A contingency must be accrued in the accounts and reported in the financial statements when

A) the amount of the loss can be reliably estimated and it is probable that an asset is impaired or a liability incurred.
B) it is evident that an asset has been impaired or a liability has been incurred even though the amount of the loss cannot be reliably estimated.
C) it is not certain that funds will be available to settle damages that may arise from a pending lawsuit.
D) a loss is expected and its amount is uncertain.

Question 54

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

A) The company is forcefully contesting a personal injury lawsuit and a loss is possible and reasonable estimable.
B) An accommodation endorsement involving a remote loss
C) It is probable that a company will receive $50,000 in settlement of a lawsuit.
D) The estimated expenses of a one-year product warranty.

Question 55

In May 2014,the Sailfish Company became involved in litigation.As a result of this litigation,it is probable that Sailfish will have to pay $800,000.In July 2014,a competitor commenced a suit against Sailfish alleging violation of antitrust laws seeking damages of $1,100,000.Sailfish denies the allegations,and the likelihood of Sailfish paying any damages is remote.In September 2014,Urchins County brought action against Sailfish for $900,000 for polluting Lake Kissimmee.It is reasonably possible that Urchins County will be successful,but the amount of damages Sailfish will have to pay is not reasonably determinable.What amount,if any,should be accrued by a charge to income in 2014?

A) $2,800,000
B) $1,700,000
C) $800,000
D) $0

Question 56

Reporting in the body of the financial statements is required for

A) loss contingencies that are probable and can be reasonably estimated.
B) gain contingencies that are probable and can be reasonably estimated.
C) loss contingencies that are possible and can be reasonably estimated.
D) all loss contingencies.

Question 57

Which of the following is the most likely candidate for a contingent liability that must be accrued?

A) Potential liability for a lawsuit in which the firm is a defendant
B) Property tax payable
C) Potential liability on a product that is still in the planning stages (no items have been sold)
D) Warranty liability

Question 58

A company that receives 10 percent or more of its revenue from sales to a single customer must disclose the

A) identity of the customer.
B) identity of the customer and the amount of revenue from that customer.
C) type of revenues earned from that customer only.
D) amount of revenue from that customer only.

Question 59

Disclosure usually is NOT required for

A) contingent gains that are probable and can be reasonably estimated.
B) contingent losses that are reasonable possible and cannot be reasonably estimated.
C) contingent gains that are reasonably possible and cannot be reasonably estimated.
D) contingent losses that are remote and can be reasonably estimated

Question 60

A truck owned and operated by Mingus Company was involved in an accident with an auto driven by S.Nara on January 12,2014.Mingus received notice on April 24,2014,of a lawsuit for $800,000 damages for a personal injury suffered by S.Nara.Mingus's counsel believes it is probable that S.Nara 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 2015.What amount of loss should Mingus accrue at December 31,2014?

A) $400,000
B) $250,000
C) $100,000
D) $800,000

Question 61

Interim income tax expense is based on

A) an estimate of the annual tax rate.
B) four times the interim period's pretax earnings if the interim period is a quarter.
C) the interim period's pretax earnings and tax rate applicable in that period.
D) the average income tax for all previous interim periods and the current interim period.

Question 62

Blind Faith Company reported the following data with regard to its first quarter of operations: The expected annual income tax rate is 40 percent.Blind Faith should report net income on the first quarter interim financial statements of

A) $0.
B) $61,425.
C) $63,225.
D) $65,925.

Question 63

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

A) Segment disclosures must include most of the items found in financial statements for the entire enterprise.
B) Segment reporting is generally applied in a similar fashion in various companies,since the requirement are detailed and inflexible.
C) Segment reporting requirements are so flexible that firms can often resist disclosing information they would prefer to keep confidential.
D) Segment reporting is not required for any entities;the standards are concerned with determination of segment information if a company wishes to disclose it.

Question 64

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

A) 3 only
B) 3 and 4 only
C) 4 only
D) None are reportable segments

Question 65

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

A) 100%
B) 75%
C) 50%
D) 65%

Question 66

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

A) 1 and 2 only
B) 1 and 3 only
C) 1,2,and 3 only
D) all four

Question 67

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

A) The annual rate multiplied by the third quarter pretax earnings.
B) The estimated tax for the first three quarters based on an annual rate,less a similar estimate for the first two quarters.
C) The rate applicable during the third quarter multiplied by four times the third quarter pretax earnings.
D) One-half of the difference between total estimated annual income tax expense and the income tax for the first two quarters.

Question 68

Which of the following measures is NOT used to determine whether a subunit of a business is a reportable segment?

A) Revenue
B) Owners' equity
C) Earnings
D) Assets

Question 69

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

A) All are reportable segments
B) All but 1 and 2
C) 3 and 5 only
D) All but 2

Question 70

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

A) Corporate costs allocated to the segment on a reasonable basis
B) Segment sales
C) Segment wage expense
D) Segment income tax expense

Question 71

The following segments have been identified for an enterprise,along with each segments sales.No segment qualifies on any other criterion for determining reportable segments except possibly for sales.Sales for each segment,and the total for the enterprise follow: What is the minimum number of reportable segments for this firm?

A) 2
B) 3
C) 4
D) 5

Question 72

Which of the following need not be disclosed on a segmental basis for a subunit identified as a reportable segment?

A) Net assets
B) Sales
C) Identifiable assets
D) Total depreciation,depletion,and amortization

Question 73

Stern Fitness Enterprises uses soybeans to make one of their nutritional supplement products.Stern anticipates a need of 700,000 pounds of soybeans in January of 2015.On November 1,2014,Stern purchased a call option for 700,000 pounds of soybeans on January 1,2015,at a price of $0.40 per pound,which is the market price on November 1.Stern paid $1,300 for the call option and designated this option as a hedge against price fluctuations for their January purchase of soybeans.On December 31,2014,and January 1,2015,the prevailing market price for soybeans is $0.45 per pound.On January 1,2015,Stern purchased 700,000 pounds of soybeans.
Make the necessary entries on Stern's books at

Question 74

On January 1,2014,Hannah Ventures,Inc. ,received a three-year,$1 million loan with interest payments due at the end of each year and the principal to be repaid on December 31,2016.The interest rate for the first year is the prevailing market rate of 9 percent,and the rate each succeeding year will be equal to the prevailing market rate on January 1 of that year.Hannah also entered into an interest rate swap agreement related to this loan.Under the terms of the swap agreement,in the years 2015 and 2016,Hannah will receive a swap payment based on the principal amount of $1 million.If the January 1 interest rate is greater than 9 percent,Hannah will receive a swap payment for the difference;and if the January 1 interest rate is less than 9 percent,Hannah will make a swap payment for the difference.The swap payments are made on December 31 of each year.On January 1,2015,the interest rate is 8 percent,and on January 1,2016,the interest rate is 12 percent.
Make all the journal entries necessary on Hannah's books at the dates shown below.For purposes of estimating future swap payments,assume that the current interest rate is the best forecast of the future interest rate (round all entries to the nearest dollar).

Question 75

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

A) Segment patents
B) Segment receivables
C) Portion the segment uses of corporate assets used by all segments
D) Allowance for doubtful accounts on segment receivables

Question 76

Which of the following statements is correct regarding FASB ASC Topic 270,"Interim Financial Reporting," and IAS No.34,"Interim Financial Reporting"?

A) Both pronouncements view each reporting interval as a separate accounting period.
B) Only IAS No.34 views each reporting interval as a separate accounting period.
C) Only FASB ASC Topic 270 views each reporting interval as a separate accounting period.
D) Only IAS No.34 views each interim period as an integral part of each annual period.

Question 77

A company identified four industry segments as reportable out of a total of eight subunits of the company based on the identifiable asset criterion.Total company sales excluding intersegment sales are $3,000,000 for the year,and the sum of sales for the four identified segments is $2,300,000. Given these facts,the company

A) need not report on a segment basis this period.
B) must disclose only the four subunits as segments.
C) must identify one or more additional segments for segmental disclosure purposes.
D) treat all subunits of the firm as reportable.

Question 78

Ondular Technologies is involved in cancer research.Ondular is involved in a number of lawsuits related to their operations.For each case,indicate the disclosure that should be provided by Ondular Technologies in the annual financial statement.

Question 79

On January 1,2014,Suppose Company paid property taxes on its plant for the calendar year 2014 amounting to $70,000.In March 2014,Suppose made its annual major repairs to its machinery amounting to $210,000.These repairs will benefit the entire calendar year's operations. How should these expenses be reflected in Suppose's quarterly income statements for 2014?
Three Months Ended (2014)
March 31 June 30 September 30 December 31

A) $280,000 $0 $0 $0
B) $130,000 $ 50,000 $ 50,000 $50,000
C) $ 70,000 $ 70,000 $ 70,000 $70,000
D) $ 87,500 $ 87,500 $ 87,500 $87,500