Islamic university – Gaza Final exam 2009/2010 international accounting

College of commerce Tuesday 15/06/2010

Accounting department
50 marks
Name: …………………………………………………… Id.:………………………………..

Question 1 : Choose the best answer :( 20 marks)

A group is organized into a number of business divisions across the world. The group has two
main classes of business: insurance and banking. The Management Board receives information
1. from each business division on a quarterly basis and wishes to report segmental information on
the basis of these divisions. What should be the basis of the group’s reporting of the primary
segmental information?
a. The worldwide business divisions.
b. The classes of business.
c. The entity should make full disclosures on the basis of the worldwide divisions and the
classes of business.
# d. The entity should make full disclosures on the basis of the worldwide divisions and the
classes of business.

A chemical entity has no overseas sales. The entity produces different products from the process.
The entity sells its product to small businesses, to larger national businesses, and to multinational
2.
entities. The management of the entity proposed to disclose just one business segment. Can the
entity disclose just one business segment because it sells all of Its products nationally?
a. Yes, IAS 14 will allow the entity to disclose a single business segment.
# b. No, the entity can identify three different sets of customers and should, therefore disclose
information on that basis.
c. Yes, even though there are three different groups of customers, they all present the same
risks to the entity.
d. IAS 14 is silent on this matter.

An entity has created a new market research division that will be financed internally. The entity
has two business segments: domestic electrical goods and computer products. The segments will
3.
not receive any apparent benefits from the new division. Will the new division be disclosed
under IAS 14 as a separate business segment?
# a. The segment should not be separately reported or combined with the corporate segments
and should be disclosed as part of the unallocated items.
b. The new business division should be included with the electrical segment.
c. The new business division should be included with the computer segment.
d. The new business division should be separately reported.

An entity is in the entertainment industry and organizes outdoor concerts in four different areas
of the world: Europe, North America, Australasia, and Japan. The entity reports to the board of
directors on the basis of each of the four regions. The management accounts show the
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profitability for each of the four regions, with allocations for that expenditure which is difficult
to directly charge to a region. The concerts are of two types: popular music and classical music.
What is the appropriate basis for segment reporting in this entity?
a. The segments should be reported by class of business, that is, popular and classical music.
b. The segments should be reported by region, so Australasia and Japan would be combined.
c. The segment information should be reported as North America and the rest of the world.
# d. Segment information should be reported for each of the four different regions.

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 An entity has split its business segments on the basis of the law governing its different types of
business. Two business segments that the entity has identified are insurance and banking. Within
the banking group, several different services are provided: retail banking, merchant banking, and
5. small business advisory service. The insurance entities sell travel insurance, health insurance,
and property insurance. The entity operates throughout the world in several countries and
continents. What basis should the entity report its segmental information?

a. On the basis of its business divisions

b. By geographical location.
# c. On the basis of the services it offers within those divisions.
d. The entity should just show one segment, entitled banking and insurance.

Which of these considerations would not be relevant in determining the entity’s functional
6.
currency?
a. The currency that influences the costs of the entity.
b. The currency in which finance is generated.
c. The currency in which receipts from operating activities are retained.
# d. The currency that is the most internationally acceptable for trading.

Foreign operations that are an integral part of the operations of the entity would have the same
7. functional currency as the entity. Where a foreign operation functions independently from the
parent, the functional currency will be
a. That of the parent.
# b. Determined using the guidance for determining an entity’s functional currency.
c. That of the country of incorporation.
d. The same as the presentation currency.

An entity started trading in country A, whose currency was the dollar. After several years the
entity expanded and exported its product to country B, whose currency was the euro. The
8. functional currency of the entity was deemed to be the dollar but by the end of 20X7, 80% of the
business was conducted in country B using the euro. At the end of 20X6, 30% of the business
was conducted in the euro. The functional currency should
a. Remain the dollar.
b. Change to the euro at the beginning of 20X7.
c. Change to the euro at the end of 20X7.
# d. Change to the euro at the end of 20X7 if it is considered that the underlying transactions,
events, and conditions of business have changed.

An entity started trading in country A, whose currency was the dollar. After several years the
entity expanded and exported its product to country B, whose currency was the euro. The
9. business was conducted through a subsidiary in country B. The subsidiary is essentially an
extension of the entity’s own business, and the directors of the two entities are common. The
functional currency of the subsidiary is
# a. The dollar.
b. The euro.
c. The dollar or the euro.
d. Difficult to determine.

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 An entity purchases plant from a foreign supplier for €3 million on January 31, 20X6, when the
exchange rate was €2 = $1. At the entity’s year-end of March 31, 20X6, the amount has not been
10. paid. The closing exchange rate was €1.5 = $1. The entity’s functional currency is the dollar.
Which of the following statements is correct?

a. Cost of plant $2 million, exchange loss $0.5 million, trade payable $1.5 million.
b. Cost of plant $1.5 million, exchange loss $0.6 million, trade payable $2 million.
# c. Cost of plant $1.5 million, exchange loss $0.5 million, trade payable $2 million.
d. Cost of plant $2 million, exchange loss $0.5 million, trade payable $2 million.

An entity has several subsidiaries that operate in a hyperinflationary economy which uses the
zloty as its local currency. Management wishes to show the financial statements in U.S. dollars.
11. Many of the operations of the entity are within countries that are not hyperinflationary, and these
subsidiaries use the euro as their functional currency. What currency should the entity use to
present its consolidated financial statements?
a. U.S. dollars.
b. The zloty.
c. The euro.
# d. The entity may use any currency.

An entity has a subsidiary that operates in a hyperinflationary economy. The subsidiary’s

financial statements are measured in terms of the local currency, which is the zloty. The
subsidiary’s financial statements have been restated in accordance with IAS 29. The parent is
12.
located in the United States and prepares the consolidated financial statements in U.S. dollars.
Which of the following accounting procedures is correct in terms of the consolidation of the
subsidiary’s financial statements?
a. The subsidiary’s financial statements should be prepared using the zloty and then
retranslated into U.S. dollars.
# b. The subsidiary’s financial statements should be prepared using the zloty, then restated
according to IAS 29, and then retranslated into U.S. dollars at closing rates.
c. The subsidiary’s financial statements should be remeasured in U.S. dollars, then restated
according to IAS 29 and consolidated.
d. The subsidiary’s financial statements should be deconsolidated and not included in the
Consolidated financial statements.

An entity is trying to determine which assets and which liabilities are monetary and
13.
nonmonetary. Which of the following assets or liabilities are nonmonetary?
a. Trade receivables.
# b. Deferred tax liabilities.
c. Accrued expenses and other payables.
d. Taxes payable.

14. Property was purchased on December 31, 20X5, for 20 million zlotis. The general price index in
the country was 60.1 on that date. On December 31, 20X7, the general price index had risen to
240.4. If the entity operates in a hyperinflationary economy, what would be the carrying amount
in the financial statements of the property after restatement?
a. 20 million zlotys
b. 1,200.2 million zlotys
# c. 80 million zlotys
d. 4,808 million zlotys

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 The following “equity” relates to an entity operating in a hyperinflationary economy:
After
Before IAS 29 restatement

15. Share capital 100 170

Revaluation reserve 20 --
Retained earnings 30 --
150 270
What would be the balances on the revaluation reserve and retained earnings after the
restatement for IAS 29?
# a. Revaluation reserve 0, retained earnings100.
b. Revaluation reserve 100, retained earnings0.
c. Revaluation reserve 20, retained earnings80.
d. Revaluation reserve 70, retained earnings30.

16. Under IAS 34, interim financial reports should be Published

a. Once a year at any time in that year.
b. Within a month of the half-year-end
c. On a quarterly basis.
# d. Whenever the entity wishes.

17. The IASB encourages publicly traded entities to provide interim financial reports
# a. At least at the end of the half-year and within 60 days of the end of the interim period.
b. Within a month of the half-year-end.
c. On a quarterly basis.
d. Whenever the entity wishes.

18. If an entity does not prepare interim financial reports, then

a. The year-end financial statements are deemed not to comply with IFRS.
# b. The year-end financial statements’ compliance with IFRS is not affected.
c. The year-end financial statements will not be acceptable under local legislation.
d. Interim financial reports should be included in the year-end financial statements.

19. Interim financial reports should include as a minimum

a. A complete set of financial statements complying with IAS 1.
# b. A condensed set of financial statements and selected notes.
c. A balance sheet and income statement only.
d. A condensed balance sheet, income statement, and cash flow statement only.

20. IAS 34 states a presumption that anyone reading interim financial reports will
a. Understand all International Financial Reporting Standards.
b. Have access to the records of the entity.
# c. Have access to the most recent annual report.
d. Not make decisions based on the report.

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Question 2: (10 marks)
On November 1, 20X3, Darter Corporation, a US corporation, purchased from Jacana Corporation, a
Mexican company, some machinery that cost 1,000,000 pesos. The invoice was payable in pesos on
January 30, 20X4. To hedge against rapid changes in the peso, Darter entered into a forward exchange
contract on November 1, 20X3 with AB Trader & Company, a US brokerage and investment firm. The
contract specified that AB Trader would sell 1,000,000 pesos to Darter at $0.102 per peso for settlement
on January 30, 20X4.

Assume that all three companies are subject to the same accounting standards and have December 31st
year-ends. The spot rates for pesos on November 1, December 31, and January 30, are $0.100, $0.098,
and $0.107, respectively. The 30-day forward rate for pesos on December 31, 20X3 is $0.101.

Required:
Record General Journal entries for Darter Corporation on November 1, December 31, and January 30.
If no entry is required on a particular date, indicate “No entry” in the General Journal.

Date Account Name Debit Credit

11/01/X1 Machinery 100,000
Accounts Payable: Jacana(pesos) 100,000

11/01/X1 Contract Receivable-pesos 102,000

Contract Payable:AB Trader 102,000

12/31/X1 Accounts Payable: Jacana(pesos) 2,000

Exchange Gain 2,000

12/31/X1 Unrealized Loss on Contract 1,000

Contract Receivable-pesos 1,000
{($.101 - $.102)(1,000,000)}

01/30/X2 Exchange Loss 9,000

Accounts Payable: Jacana(pesos) 9,000

Contract Receivable-pesos 6,000

Unrealized Gain on Contract 6,000

Cash-pesos 107,000
Contract payable:AB Trader 102,000
Contract Receivable-pesos 107,000
Cash 102,000

Accounts Payable:Jacana(pesos) 107,000

Cash-pesos 107,000

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Question 3: (9 marks)
Seagull Corporation is preparing its interim financial statements for the second quarter of calendar 2006.
The following trial balance information is available for third quarter:
Account Debit Credit
Cash $ 98,000
Accounts Receivable 285,000
Inventory 750,000
Fixed assets 600,000
Accounts Payable 300,000
Common Stock 50,000
Retained Earnings 80,000
Sales $ 4,400,000
Administrative expense 312,000
Cost of goods sold 2,650,000
Loss on sale of securities sold on
July 30 75,000
Annual equipment overhaul costs
paid on August 1 60,000
Totals $ 4,830,000 $ 4,830,000
Additional information
At the end of the year, Seagull distributes annual employee bonuses and charitable donations that are
estimated at $50,000, and $6,000, respectively. The cost of goods sold includes the liquidation of a
$50,000 base layer in inventory that Seagull will restore in the fourth quarter at a cost of $90,000.
Effective corporate tax rate for 2006 is 32%.
Required:
Prepare Seagull's interim income statement for the second quarter of calendar 2006.

Solution:
Seagull Corporation
Interim Income Statement
For the Calendar Quarter Ending on June 30, 2006

Sales Revenue ($4,400,000) $ 4,400,000

Less:
Cost of Goods Sold ($2,650,000 + $40,000 LIFO base 2,690,000
replacement)
Selling and general and administrative expenses paid 312,000
Loss on sale of securities 75,000
Bonus expense (50,000/4) 12,500
Charitable contribution expense ($6,000/4) 1,500
Maintenance expense ($60,000/4) 15,000

Income before taxes $ 1,294,000

Income tax expense ($1,294,000 x 32%) 414,080
Net income $ 879,920

Notes:
………………………………………………………………………………………………………………
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………………………………………………………………………………………………………………
………………………………………………………………………………………………………

Question 4: (8 marks)
Pelican Corporation, a US company, owns 100% of Swiftlet Corporation, an Australian company.
Swiftlet's equipment was acquired on the following dates (amounts are stated in Australian dollars):
Jan. 01, 20X1 Purchased equipment for A$40,000
Jul. 01, 20X1 Purchased equipment for A$80,000
Jan. 01, 20X2 Purchased equipment for A$50,000
Jul. 01, 20X2 Sold equipment purchased on Jan. 01, 20X1 for A$35,000
Exchange rates for the Australian dollar on various dates are:
Jan. 01, 20X1 1A$ = $.500 Jan. 01, 20X2 1A$ = $.530
Jul. 01, 20X1 1A$ = $.520 Jul. 01, 20X2 1A$ = $.505
Dec. 31, 20X1 1A$ = $.530 Dec. 31, 20X2 1A$ = $.490
20X1 avg. rate 1A$ = $.515 20X2 avg. rate 1A$ = $.510
Swiftlet's equipment has an estimated 5-year life with no salvage value and is depreciated using the
straight-line method. Swiftlet's functional currency is the US dollar, but the company uses the Australian
dollar as its reporting currency.
Required:
1. Determine the value of Swiftlet's equipment account on December 31, 20X2 in US dollars.
2. Determine Swiftlet's depreciation expense for 20X2 in US dollars.
3. Determine the gain or loss from the sale of equipment on July 1, 20X2 in US dollars.

Requirement 1:
Equipment:
Jul. 01, 20X1 (A$80,000 x $.520/A$) = $41,600

Jan. 01, 20X2 (A$50,000 x $.530/A$) = 26,500

Total $68,100

Requirement 2:

Depreciation expense:

{(A$40,000 x 1/5 x .5 yr.)x ($.500/A$)} = $ 2,000

{(A$80,000 x 1/5 x 1 yr.)x($.520/A$)} = 8,320

{(A$50,000 x 1/5 x 1 yr.)x($.530/A$)} = 5,300

Total $15,620

Requirement 3:
Equipment sold:
(A$40,000 x $.500/A$) = $20,000

Accumulated Depreciation on equipment sold:

{(A$40,000 x 1/5 x 1.5 yrs.)x($.500/A$)} = 6,000

Net book value of equipment sold $14,000

Cash received on July 1, 20X2:

(A$35,000 x $.505/A$) = 17,675

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 Gain on sale of equipment $ 3,675

Question 5: (7 marks)
Z operates in a hyperinflationary economy. Its balance sheet at December 31, 20X5,follows:
m.zlotis The general price index had moved in this way:
Property, plant, and equipment 900 December 31
Inventory 2,700 20X1 100
Cash 350 20X2 130
Share capital (issued 20X1) 400 20X3 150
Retained earnings 2,350 20X4 240
Noncurrent liabilities 500 20X5 300
Current liabilities 700

The property, plant, and equipment was purchased on December 31, 20X3, and there is six months’
inventory held. The noncurrent liabilities were a loan raised on March 31, 20X5.

Required: Show the balance sheet of Z after adjusting for hyperinflation.

Account Amount
Property, plant, and equipment 1800
Inventory 3000
Cash 350
Total 5150
Share capital 1200
Retained earnings 2750
Concurrent liabilities 500
Current liabilities 700
Total 5150

With best wishes

Mohammad Marwan Al Ashi