Q1. Distinguish between an upstream sale of inventory and a downstream sale. Why is it important to know whether a sale is upstream or downstream?
Q2. What factors are used to determine a reporting entity’s functional currency? Provide at least one example for which a company’s local currency may not be its functional currency.
Q3. On December 1, 20X1, Rone Imports, a U.S. company, purchased clocks from Switzerland for 15,000 francs (SFr), to be paid on January 15, 20X2. Rone’s fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are:
December 1, 20X1 1 SFr = $0.70
December 31, 20X1 1 SFr = 0.66
January 15, 20X2 1 SFr = 0.68
1. In which currency is the transaction denominated?
2. Prepare journal entries for Rone to record the purchase, the adjustment on December 31, and the settlement.
Q4. Debra and Merina sell electronic equipment and supplies through their partnership. They wish to expand their computer lines and decide to admit Wayne to the partnership. Debra’s capital is $200,000, Merina’s capital is $160,000, and they share income in a ratio of 3:2, respectively.
Record Wayne’s admission for each of the following independent situations:
a. Wayne directly purchases half of Merina’s investment in the partnership.
b. Wayne invests the amount needed to give him a one-third interest in the capital of the partnership if no goodwill or bonus is recorded.
c. Wayne invests $110,000 for a one-fourth interest if Goodwill is to be recorded.
$120,000 = $480,000 total resulting capital x 1/4