Question Two.

Write a short note on the following:

a. Business Expansion: is a stage where the business reaches the point for growth and
seeks out for additional options to generate more profit.

b. Gain on Purchase:If the net identified asset fair value of the business acquired
exceeds the consideration transferred, a gain on a bargain purchase is recognized +

c. Goodwill:is recognized if the fair value of the consideration transferred exceeds the
net identified asset fair value.

d. Net assets: are the total assets of the company minus the total liabilities.

e. Subsidiary: is a corporation that another corporation, referred to as a parent

company, controls, usually through majority ownership of its common stock.

 Because a subsidiary is a separate legal entity, the parent’s

risk associated with the subsidiary’s activities is limited.

f. Parent company: is a company that has a controlling interest in another company,

giving it control of its operations. Parent companies can be either hand on or hands
off owners of its subsidiaries, depending on the amount of managerial control given
to subsidiary managers, but will always maintain a certain level of active control.

g. business combination :

 A business combination occurs when one party acquires control over one or
more businesses.

 This usually involves two or more separate businesses being joined together
under common control.

h. Direct Exchange rate: The DER is the number of local currency units (LCUs) needed
to acquire one foreign currency unit (FCU).

DER = LCU– equivalent value/ 1FCU

i. Indirect Exchange Rates: The IER is the reciprocal of the direct exchange rate.
From the viewpoint of a US entity,
 The indirect exchange rate is: DER = 1FCU/ LCU– equivalent value

j. Spread: The difference between the forward rate and the spot rate on a given date

k. Spot exchange rate: is the price at which a foreign currency can be purchased or sold
today.

Question Three

Discuss the following:

 Ownership - Level of Influence

Deep explanation about this topic is on slide number 74( part 1)

 Exchange Rate Mechanisms:

 Several different currency arrangements exist:

 Independent float: The value of the currency is allowed to fluctuate freely

according to market forces with little or no intervention from the central
bank.

 Pegged to another currency: The value of the currency is fixed (pegged) in

terms of a particular foreign currency and the central bank intervenes as
necessary to maintain the fixed value.

 Change in an exchange rate:

 A change in an exchange rate is referred to as:

 a strengthening (appreciation)- The direct Exchange rate decreasing –

 or weakening (depreciation) - The direct Exchange rate increasing –

 Of one currency against another.

 Derivatives: is a financial instrument or other contract whose value is “derived

from” some other item that has a variable value over time.
  Reportable Operating Segments

OPERATING SEGMENT

The objective of segment reporting is to provide information about the different business
activities in which an enterprise engages and the different economic environments in which
it operates to help users of financial statements

Question Four

The legal characteristics of a business combination have a significant impact on the approach
taken to the consolidation process. Given the approaches illustrated in this module, answer the
below 3 questions.

1. What is to be consolidated?

• If dissolution takes place, appropriate account balances are physically consolidated in the
surviving company’s financial records.

• If separate incorporation is maintained, only the financial statement information (not the
actual records) is consolidated.

2. When does the consolidation take place?

• If dissolution takes place, a permanent consolidation occurs at the date of the

combination.

• If separate incorporation is maintained, the consolidation process is carried out at regular

intervals whenever financial statements are to be prepared.

3. How are the accounting records affected?

• If dissolution takes place, the surviving company’s accounts are adjusted to include
appropriate balances of the dissolved company.

• The dissolved company’s records are closed out.

• If separate incorporation is maintained, each company continues to retain its own

records. • Using worksheets facilitates the periodic consolidation process without
disturbing the individual accounting systems.
Question Five

What is the difference between?

 One-transaction perspective: assumes that an export sale is not complete until the
foreign currency receivable has been collected and converted into local currency.

 The two-transaction perspective: treats the export sale and the subsequent collection
of cash as two separate transactions.