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Question 1

On July 1, Year 5, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, Year 5 and mature on April 1, Year 15. Interest is payable semiannually on April 1 and October 1.

What amount did Eagle receive from the bond issuance?

: A. $579,000
: B. $594,000
: C. $600,000
: D. $609,000

D is Correct

The total amount received, which is called proceeds on the bond issue, is:

.99($1,000)(600) + .10(3/12)(600)($1,000) = $609,000.

The first factor is the total bond price, exclusive of accrued interest. The second factor is the accrued interest since 4/1/Y5.

When bonds are issued between interest dates, the cash interest since the most recent past interest payment date must be collected from the
bondholders because a full six months’ interest is paid on the following interest date.

Question 2

Which one of the following is least likely an advantage associated with a wholly owned foreign subsidiary?

: A. Protection of proprietary information.
: B. Ability to coordinate activities of the subsidiary with other activities.
: C. Ability to maintain quality control.
: D. Minimizes capital investment required.

D is Correct

Minimizing capital investment required is not likely to be an advantage associated with a wholly owned foreign subsidiary. Acquiring or establishing a wholly owned foreign subsidiary typically is a costly and time consuming undertaking. Other forms of international business are likely to require less capital investment than a wholly owned foreign subsidiary.

Question 3

Which one of the following would constitute a highly inflationary economy when determining the functional currency of a foreign entity?

: A. 20% inflation for each of the past 5 years.
: B. 30% inflation for each of the past 3 years.
: C. 35% inflation for each of the past 3 years.
: D. 20%, 35%, and 40% inflation, respectively, for each of the past 3 years.

C is Correct

For determining a functional currency, a highly inflationary (hyperinflationary) economy is one that has experienced a cumulative inflation of 100% or more over the past 3 years. Inflation of 35% per year over the past three years is a cumulative 105% and constitutes a highly inflationary economy.

Question 4

A corporation’s penalty for underpaying federal estimated taxes is

: A. Not deductible.
: B. Fully deductible in the year paid.
: C. Fully deductible if reasonable cause can be established for the underpayment.
: D. Partially deductible.

A is Correct

Even though a corporation’s penalty for underpay-ing federal estimated taxes is in the nature of interest, it is treated as an addition to tax, and as such, the penalty is not deductible.

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