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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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