Due in 3 hours

University of Maryland University College

Final Examination

Acct425: International Accounting

Question 1: Suggested time 40 minutes: 20% points:

Corcovado Company was created as a wholly owned subsidiary of Campinhas Corporation on January 1, 2012. On that date Campinhas invested $42,000 in Corcovado’s capital stock. Given the exchange rate on that date of $0.84 per cruzeiro, the initial investment of $42,000 was converted into 50,000 cruzeiros (Cz). Other than the capital investment in January 1, there were no transactions involving stockholder’s equity for 2012. Corcovado’s Cz denominated financial statements for December 31, 2013 are as follows:

Income Statement

For the year ended December 31, 2013

(in Cz)

Sales	540,000
COGS	310,000
Gross Profit	230,000
Operating expenses	108,000
Income before tax	122,000
Income taxes	40,000
Net Income	82,000

Statement of Retained Earnings

December 31, 2013

(in Cz)

Retained earnings, January 1, 2013	154,000
Net Income	82,000
Dividends paid, December 1, 2013	20,000
Retained earnings, December 31, 2013	216,000

Balance Sheet

December 31, 2013

(in Cz)

Cash	50,000
Receivables	100,000
Inventory	72,000
Plant and equipment, net	300,000
Accumulated Depreciation	70,000
TOTAL ASSETS	452,000
Liabilities	186,000
Capital stock	50,000
Retained earnings, December 31, 2013	216,000
TOTAL LIABILITIES AND EQUITY	452,000

The Cz is the primary currency that Corcovado uses in its day to day operations. The Cz has steadily fallen in value against the USD since Campinhas made the investment Corcovado on January 1, 2012. Relevant exchange rates for 2012 and 2013 are as follows:

January 1, 2012	$0.84
Average for 2012 (year)	$0.80
December 31, 2012	$0.75
Average for 2013 (year)	$0.72
December 1, 2013	$0.71
December 31, 2013	$0.70

Instructions

a) Translate Corcovado’s Year 2013 financial statements into dollars.

b) Compute the translation adjustments for Year 2012 and Year 2013 and reconcile these amounts to the cumulative translation adjustment reported in the translated balance sheet at December 31, 2013.

Question 2: Suggested time 20 minutes: 10% points:

Cinchcast Company begins its operations on January 1, 2012. The company’s unadjusted financial statements for the year ended December 31, 2012 are as follows:

Balance Sheet	January 1, 2012	December 31, 2012
Cash and receivables	$20,000	$35,000
Fixed assets, net	$50,000	$45,000
TOTAL	$70,000	$80,000
Payables	$15,000	$15,000
Capital	$55,000	$55,000
Retained earnings	$0	$10,000
TOTAL	$70,000	$80,000

Income Statement	December 31, 2012
Revenues	$50,000
Depreciation	$5,000
Other expenses	$35,000
Income	$10,000

Revenues and expenses occur evenly throughout the year, revenues and other expenses are realized in terms of monetary assets (cash and receivables).

General price indexes for 2012 are as follows:

January 1, 2012 …………….100

Average (year) 2012 …..…...120

December 31, 2012…………150

Instructions

a) Calculate Cinchcast Company’s 2012 purchasing power gain or loss on net monetary items.

b) Determine Cinchast Company’s 2012 income on a general purchasing power basis (ignore income taxes).

Question 3: Suggested time 40 minutes: 20% points:

Kaptiva Company contributes cash of $170,000 and Hyundai Company contributes net assets of $170,000 to create KH Company on January 1, 2012. Kaptiva and Hyundai each receive a 50% equity interest in the KH. KH’s financial statements for its first year of operations are as follows:

Income Statement	December 31, 2012
Revenues	$80,000
Expenses	$50,000
Income before tax	$30,000
Tax expense	$10,000
Net income	$20,000

Balance Sheet	December 31, 2012
Cash	$40,000
Inventory	$60,000
PP&E, net	$320,000
TOTAL	$420,000
Payables	$60,000
Common stock	$340,000
Retained earnings	$20,000
TOTAL	$420,000

Before making any accounting entries related to its investment in KH, Kaptiva’s financial statements for the year ended December 31, 2012, are as follows:

Income Statement	December 31, 2012
Revenues	$800,000
Expenses	$450,000
Income before tax	$350,000
Tax expense	$120,000
Net income	$250,000

Balance Sheet	December 31, 2012
Cash	$130,000
Inventory	$200,000
PP&E, net	$650,000
Investment in Grand (cost)	$170,000
TOTAL	$1,150,000
Payables	$250,000
Common stock	$600,000
Retained earnings	$300,000
TOTAL	$1,150,000

Instructions

a) Restate Kaptiva’s December 31, 2012 financial statements to properly account for its investment in KH under (1) the proportionate consolidation method and (2) equity method.

b) Calculate and compare the following ratios for Kaptiva under the two different methods of accounting for its investment in KH: (1) profit margin (net income/revenues) and (2) debt to equity (total liabilities/total equity).

Question 4 and 5: Suggested time 30 minutes: 15% points:

Shake Shack Burger, a US based company, establishes an operation in the UK in January 1, 2012, when the exchange rate is USD $1.50 per GBP (pound). During Year 1, the UK branch generates GBP 5,000,000 of pretax income. On October 15, 2012, GBP 2,000,000 is repatriated to Shake Shack Burger and converted to USD. Assume the effective income tax in the UK is 30 percent. Taxes were paid in the UK on December 31, 2012. Relevant exchange rates for 2012 year are provided here (USD per GBP)

January 1 …………1.50

Average 30 ……….1.45

October 15………..1.35

December 31……..1.30

Assume a US tax rate of 35 percent.

Instructions

a) Assuming that Shake Shack’s operation in the UK is registered with the UK government as branch, determine the amount of US taxable income, US foreign tax credit and net US tax liability related to the UK branch (all in US dollars).

b) Assuming that Shake Shacks’s operation in the UK is incorporated as a subsidiary, determine the amount of US taxable income, US foreign tax credit and net US tax liability related to the UK branch (all in US dollars).

Question 1: Suggested time 10 minutes: 5% points:

The Cool Corporation has three finished products in its ending inventory at December 31, 2012. The following table provides information about each product:

Product	Cost	Replacement Cost	Selling Price	Normal Profit Margin
101	$130	$140	$160	20%
202	$160	$135	$140	20%
303	$100	$80	$100	15%

The Cool Corporation expects to incur selling costs equal to 5% of the selling price on each of the products.

Instructions: Determine the amount at which The Cool should report its inventory on the balance sheet under:

(a) FIRS

Question 6: Suggested time 15 minutes: 5% points:

We Are Social Corporation acquires a one-year old building at a cost of $500,000 at the beginning of January 2012. The building has an estimated useful life of 50 years. However, based on reliable historical data, the company believes the carpeting will need to be replaced in 5 years, the roof will need to be replaced in the HVAC system will need to be replaced in 10 years. On the date of acquisition, the cost to replace these items would have been carpeting, $10,000; roof $15,000; HVAC $30,000. Assume no residual value.

Instructions: Determine the amount to be recognized as depreciation expense in December 31, 2012.

Question 7: Suggested time 15 minutes: 10% points:

The Monsanto Company has a defined benefit pension plan for its employees. At December 31, 2012, the following information is available regarding Monsanto’s plan:

Fair value of plan assets	$30,000,000
PV of defined benefit obligation	$38,000,000
Interest costs	$1,200,000
Net unrecognized actuarial gains	$300,000
Recognized actuarial gains	$150,000
Unrecognized past service costs	$375,000

Instructions: Determine the amount that Monsanto will report on the balance sheet as of December 31, 2012 for this pension plan under:

(a) IFRS

(b) US GAAP.

Question 8: Suggested time 15 minutes: 5% points:

The Monitor Company sells a powder coating equipment at a sales price of $50,000 per unit. The sales price includes delivery, installation and initial testing of the equipment, as well as a monthly service call for one year in which the a techinician checks to make sure the equipment is working properly and makes adjustments as needed. After the first year, customers are given the opportunity to enter into an extended service agreement. The Monitor Company prices these extended service agreements to earn an expected gross profit of 50 percent. Given the wages paid to technicians and the time required to make a service call, the company estimates that the cost of providing each monthly service call is $200.

Instructions: Develop a revenue recognition policy consistent with IAS 18 for the Monitor Company for tis sales of powder coating equipment.

Question 9: Suggested time 15 minutes: 10% points:

On December 1, 2012, The Only One Company purchases inventory from a foreign supplier for 40,000 corunas. Payment will be made in 90 days after Number One has sold this merchandise. Sales are made rather quickly and Only One pays the entire obligation on February 15, 2013. The following exchange rates for 1 corona apply:

Date	USD per Corona
December 1, 2012	$0.87
December 31, 2012	$0.82
February 15, 2013	$0.91

Instructions

Prepare all the journal entries for Only One in connection with the purchase and payment.