Hyperinflation

HYPERINFLATION (THEORIES) 1.

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Hyperinflation is indicated by characteristics of the economic environment of a country which include all of the following, except a. The general population prefers to keep wealth in nonmonetary assets or in relatively stable foreign currency. b. Interest rates, wages and prices are linked to a price index. c. The cumulative inflation rate over three years is approaching or exceeds 100%. d. All of these indicate hyperinflation. All of the following would indicate that hyperinflation exists, except a. The general population regards monetary amounts in terms of relatively stable foreign currency. b. The cumulative inflation rate over three years is approaching, or exceeds 100%. c. Inflation rates have exceeded interest rates in three successive years. d. The general population prefers to keep wealth in nonmonetary assets. In a hyperinflationary economy, monetary items a. Are not restated because they are already expressed in terms of the measuring unit current at the end of reporting period. b. Are not restated because they do not represent money held and items to be received or paid in money. c. Are restated applying the general price index. d. Are restated applying the specific price index. Which of the following would indicate that hyperinflation exists? a. Sales on credit are at lower prices than cash sales. b. Inflation is approaching or exceeds 20% per year. c. Monetary items do not increase in value, d. People prefer to keep their wealth in nonmonetary assets or a stable foreign currency. All of the following are monetary items, except a. Trade payables b. Trade receivables c. Administration costs paid in cash d. Loan repayable at par value The financial statements of an entity that reports in the currency of a hyperinflationary economy shall be stated in terms of a. Historical cost b. Current cost c. Fair value d. Measuring unit current at the end of reporting period The gain of loss on the net monetary position in a hyperinflationary economy shall be included in a. Profit of loss and separately disclosed b. Retained earnings c. Equity d. Comprehensive income In a hyperinflationary economy, amounts in the statement of financial position not expressed in the measuring unit current at the end of reporting period are restated by applying the a. General price index b. Specific price index c. Both the general price index and the specific price index d. Either the general price index or the specific price index ANSWER 64-10 1.d 5.c 2.c 6.d

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3.a 7.a 4.d 8.a When computing information on a constant peso basis, which of the following is classified as nonmonetary? a. Allowance for doubtful accounts b. Accumulated depreciation – equipment c. Unamortized premium on bonds payable d. Advances to unconsolidated subsidiaries When computing information on a constant peso basis, which of the following is classified as nonmonetary? a. Obligation under warranty b. Accrued expense c. Unamortized discount on bonds payable d. Refundable deposit When computing information on a constant peso basis, which of the following is classified as nonmonetary? a. Cash surrender value b. Long-term receivable c. Accrued loss on firm purchase commitment d. Inventory When computing information on a constant peso basis, which of the following is classified as monetary? a. Goodwill b. Equipment c. Patent d. Allowance for doubtful accounts During a period of inflation, an account balance remains constant. With respect to this account, a purchasing power loss will be recognized if the account is a a. Monetary asset b. Monetary liability c. Nonmonetary asset d. Nonmonetary liability During a period of deflation, an entity would have the greatest gain in general purchasing power by holding a. Cash b. Property, plant and equipment c. Accounts payable d. Mortgage payable During a period of deflation in which a liability account balance remains constant, which of the following occurs? a. A purchasing power loss if the item is a nonmonetary liability b. A purchasing power gain if the item is nonmonetary liability c. A purchasing power loss if the item is a monetary liability d. A purchasing power gain if the item is a monetary liability During a period of inflation in which a liability account balance remains constant, which of the following occurs? a. A purchasing power loss if the item is a nonmonetary liability b. A purchasing power gain if the item is a nonmonetary liability c. A purchasing power loss if the item is a monetary liability d. A purchasing power gain if the item is a monetary liability During a period of inflation, an account balance remains constant. With respect to this account, a purchasing power gain will be recognized if the account is a a. Monetary liability

b. Monetary asset c. Nonmonetary liability d. Nonmonetary asset ANSWER 64-11 1.b 6.a 2.a 7.c 3.d 8.d 4.d 9.a 5.a 1.

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An entity that wishes to present information about the effect of changing prices in a hyperinflationary economy should report this information in a. The body of the financial statements b. The notes to financial statements c. Supplementary information to the financial statements d. Management report Which of the following arguments in favor of price level adjusted financial statements is not valid? a. Price level adjusted financial statements use historical cost b. Price level adjusted financial statements compare uniform purchasing power among various periods c. Price level adjusted financial statements measure current value d. Price level adjusted financial statements measure earnings in terms of a common peso An accountant who recommends the adjustment of financial statements for price level changes should not support the recommendation by stating that a. Purchasing power gains or losses are recognized b. Historical pesos are not comparable to present-day pesos c. The restatement of asset cost to a common peso basis is a useful extension of the original cost basis of asset valuation d. Assets are measured at current cost A general price level statement of financial position is prepared and presented in terms of a. The general purchasing power of the peso at the latest end of reporting period b. The general purchasing power of the peso in the base period c. The average general purchasing power of the peso for the latest reporting period d. The general purchasing power of the peso at the time the financial statements are issued Which of the following methods of reporting attempts to eliminate the effect of the changing value of the peso? a. Discounted net present value of future cash flows b. Historical cost restated for change in the general price level c. Replacement cost d. Exit value The restatement of historical peso financial statements to reflect the general price level change results in presenting assets at a. Lower of cost and net realizable value b. Fair value c. Cost adjusted for purchasing power change d. Current replacement cost For purposes of adjusting financial statements for the changes in the general price level, monetary items consist of a. Assets and liabilities whose amounts are fixed by contract or otherwise in terms of pesos regardless of price level change b. Assets and liabilities which are classified as current in the statement of financial position

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c. Cash and cash equivalents plus all receivables with a fixed maturity date d. Cash, other assets expected to be converted into cash, and current liabilities Purchasing power gain or loss results from a. Monetary asset b. Monetary liability c. Monetary asset and monetary liability d. Nonmonetary asset and nonmonetary liability ANSWER 1.a 2.c 5.b 6.c

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3.d 7.a

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The realized holding gain for inventory sold is equal to a. Excess of cost of goods sold at average current cost over cost of goods sold at historical cost b. Excess cost of goods sold at historical cost over cost of goods sold at average current cost c. Excess of cost of goods sold at current cost over cost of goods sold at historical cost d. Excess cost of goods sold at historical cost over cost of goods sold at current cost The unrealized holding gain for ending inventory is equal to a. Excess of ending inventory at average current cost over ending inventory at historical cost b. Excess of ending inventory at historical cost over ending inventory at average current cost c. Excess of ending inventory at current cost over ending inventory at historical cost d. Excess of ending inventory at historical cost over ending inventory at average current cost What is the basis of depreciation under current cost accounting? a. Current cost b. Average current cost c. Historical cost d. Carrying amount The realized holding gain for depreciable asset is equal to a. Excess of depreciation on average current cost over depreciation on historical cost b. Excess of depreciation on historical cost over depreciation on average current cost c. Excess of depreciation on current cost over depreciation on historical cost d. Excess of depreciation on historical cost over depreciation on current cost What is the net current cost of depreciable asset? a. Current cost less accumulated depreciation based on current cost b. Average current cost less accumulated depreciation based on average current cost c. Historical cost less accumulated depreciation based on historical cost d. Current cost less accumulated depreciation based on average current cost The unrealized holding gain for depreciable asset is equal to a. Excess of net current cost of asset over the carrying amount b. Excess of carrying amount of asset over the net current cost c. Excess of current cost over historical cost d. Excess of historical cost over current cost The realized holding gain for nondepreciable asset is equal to a. Excess of current cost at year-end over historical cost b. Excess of current cost at the date of sale over historical cost c. Excess of historical cost over current cost at year-end d. Excess of historical cost over current cost at the date of sale The unrealized holding gain for nondepreciable asset is equal to a. Excess of current cost at year-end over historical cost b. Excess of historical cost over current cost at year-end

c. Excess of average current cost at year-end over historical cost d. Excess of historical cost over average current cost at year-end ANSWER 1.a 2.c 6.a .7.b

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In current cost financial statements a. General price level gains or losses are recognized on net monetary items b. Amounts are always stated in common purchasing power unit of measurement c. All items in the statement of financial position are different from historical cost d. Holding gains are recognized An entity prepared financial statements on a current cost basis. How should the entity compute cost of goods sold on a current basis? a. Number of units sold times average current cost of units during the year b. Number of units sold times current cost of units at year-end c. Number of units sold times current cost of units at the beginning of the year d. Beginning inventory at current cost plus cost of goods purchased less ending inventory at current cost Current cost financial statements should report holding gains during the period for which of the following? a. Goods sold b. Inventory c. Goods sold and inventory d. Neither goods sold nor inventory ANSWER 64-14 1.d 2. A 3. c

PROBLEMS 47-1 Gardenia Company reported the following assets in the statement of financial position: Cash in bank Accounts receivable Inventory Financial asset at fair value Patent Loans to employees Advances to suppliers Prepaid expenses

2,000,000 4,000,000 1,500,000 500,000 1,000,000 200,000 400,000 100,000

In preparing financial statements in a hyperinflationary economy, what total amount should be classified as monetary assets? A. 6,200,000 B. 6,600,000 C. 6,700,000

D. 7,700,000 SOLUTION: A. Cash in bank Accounts receivable Loans to employees Total monetary assets

2,000,000 4,000,000 200,000 6,200,000

47-2 Sunflower Company reported the following liabilities in the statement of financial position: Accounts payable Accrued expenses Bonds payable Finance lease liability Unearned revenue Advances from customers Estimated warranty liability Deferred tax liability

1,000,000 500,000 3,000,000 4,000,000 300,000 1,200,000 200,000 400,000

In preparing financial statements in a hyperinflationary economy, what total amount should be classified as monetary liabilities? A. B. C. D.

4,500,000 8,500,000 9,700,000 8,900,000

SOLUTION: B. Accounts payable 1,000,000 Accrued expenses 500,000 Bonds payable 3,000,000 Finance lease liability 4,000,000 Total monetary liabilities 8,500,000 47-3 Dahlia Company was formed on January 1, 2011. Selected balances from historical cost statement of financial position on December 31, 2017 were: Land purchased on January 1, 2011 Investment in long-term bonds purchased on January 1, 2014 Long term debt issued on January 1, 2011

2,400,000 1,200,000 1,600,000

The general price index was 120 on January 1, 2011, 150 on January 1, 2014 and 300 on December 31, 2017. 1.

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What amount should be reported in a hyperinflationary statement of financial position for land? A. 2,400,000 B. 6,000,000 C. 4,800,000 D. 3,000,000 What amount should be reported in a hyperinflationary statement of financial position for investment in bonds? A. 3,000,000 B. 2,400,000 C. 1,200,000

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D. 1,500,000 What amount should be reported in a hyperinflationary statement of financial position for long-term debt? A. 4,000,000 B. 3,200,000 C. 2,000,000 D. 1,600,000

SOLUTION #1: B Land – nonmonetary (2,400,000 x 300/120) SOLUTION #2: C Investment in bonds – monetary SOLUTION #3: D Long-term debt – monetary

6,000,000 1,200,000 1,600,000

47-4 Veranus Company provided the following information on December 31, 2017: Property, plant and equipment Inventory Cash Share capital issued December 31, 2013 Noncurrent liabilities Current liabilities Retained earnings

900,000 2,700,000 350,000 400,000 500,000 700,000 2,350,000

The index numbers on December 31 of each year are 2013 – 100, 2014 – 130, 2015 – 150, 2016 – 240, and 2017 – 300. The property, plant and equipment were purchased on December 31, 2015. The noncurrent liabilities were raised on December 31, 2016.

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What is the amount of total assets after restatement for hyperinflation? A. 5,150,000 B. 3,950,000 C. 4,800,000 D. 4,850,000 What is the amount of total liabilities after restatement for hyperinflation? A. 2,400,000 B. 1,200,000 C. 1,325,000 D. 1,500,000 What is the balance of retained earnings after adjusting for hyperinflation? A. 2,350,000 B. 2,750,000 C. 3,550,000 D. 2,625,000

SOLUTION #1: A Property, plant and equipment (900,000 x 300/150) Inventory (2,700,000 x 300/270)

1,800,000 3,000,000

Cash Total assets SOLUTION #2: B Noncurrent liabilities Current liabilities Total liabilities SOLUTION #3: B Total assets Total liabilities Total shareholder’s equity Share capital as restated (400,000 x 300/100) Retained earnings

350,000 5,150,000 500,000 700,000 1,200,000 5,150,000 (1,200,000) 3,950,000 (1,200,000) 2,750,000

47-5 Maximus Company provided the following liabilities and equity before and after restatement for hyperinflation:

Liabilities Share capital Revaluation surplus Retained earnings Total liabilities and equity

Before restatement 2,000,000 5,000,000 1,000,000 1,500,000 9,500,000

After restatement 2,500,000 8,500,000 ? ? 16,000,000

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What is the revaluation surplus after adjustment? A. 5,000,000 B. 1,000,000 C. 3,500,000 D. 0 2. What amount should be reported as retained earnings after restatement? A. 4,000,000 B. 5,000,000 C. 1,500,000 D. 0 SOLUTION #1: D SOLUTION #2: B Liabilities 2,500,000 Share capital 8,500,000 Retained earnings (balancing figure) 5,000,000 Total liabilities and equity 16,000,000 47-6- Camia Company provided the following information about the inventory during 2017: Inventory – Jan 1 Purchases Inventory – December 31

1,575,000 5400,000 4800,000

The relevant index numbers are: January 1, December 31,

2017 2017

110 370

Average index for Average index for

201 2016

What is the cost of goods sold in a hyperinflationary income statement?

240 105

a.7,315,909 b.3,353,125 c.6,475,000 d.2,250,000 Solution 47-6 Answer C\ Inventory – Jan 1 Purchases Goods available for sale Inventory – Dec 31 Cost of goods sold

Historical 1,575,000 5,400,000 6,975,000 (4,800,000) 2,175,000

Fraction 370/105 370/240 370/240

Restated 5,550,000 8,325,000 13,875,000 (7,400,000) 6,475,000

47-7- Smallville Company reported the following historical income statement for 2017: Sales Inventory – Jan 1 Purchases Inventory – Dec 31 Expenses Depreciation

500,000 350,000 500,000 500,000 2,000,000 2,000,000

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Sales are earned and expenses are incurred evenly throughout the year. Inventory was acquired during the last week of each year Depreciable assets have a 5-year life and were acquired on Jan 1 2014 The general index numbers were 125 on Jan 1, 2014, 140 on Jan 1, 2017, 360 on Dec 31 2017

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What is the amount of sales after restatement for hyperinflation? a. 7,200,000 b. 5,000,000 c. 7,000,000 d. 9,000,000 What is the cost of goods sold after restatement for hyperinflation? a. 2,350,000 b. 4,000,000 c. 3,384,000 d. 3,780,000 If the entity is operating in a hyperinflationary economy, what amount should be reported as net loss? a. 5,440,000 b. 1,350,000 c. 1,944,000 d. 4,824,000

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Solution 47-7 Question 1 Answer: a Question 2 Answer: b Question 3 Answer: a

Sales Cost of goods sold:

Historical 5,000,000

Fraction 360/250

Restated 7,200,000

Inventory- Jan 1 Purchases GAS Inventory- Dec 31 Cost of Goods sold 4,000,000

350,000 2,500,000 2,850,000 (500,000) 2,350,000

Gross income

2,650.000

Expenses Depreciation Total expenses

(2,000,000) (2,000,000) (4,000,000)

Net loss

(1,350,000)

360/140 360/250 360/360

900,000 3,600,000 4,500,000 (500,000)

3,200,000 360/250 360/125

(2,880,000) (5,760,000) (8,640,000) (5,440,000)

47-8- Mariposa Company reported the following property, plant and equipment on Dec 31, 2017 Year acquired

Percent depreciated

Cost

Index number

2015 2016 2017

30 20 10

3,000,000 2,000,000 1,000,000

100 125 300

Depreciation is calculated at 10% straight line. A full year depreciation is charged in the year of acquisition and no depreciation in the year of disposal. What amount of depreciation should be included in the 2017 income statement adjusted for hyperinflation? a. b. c. d.

1,480,000 1,800,000 1,620,000 600,000

Solution 47-8 Answer: a 2015 (300000 x 300/100) 2016 (200000 x 300/125) 2017 (100000 x 300/300) Total depreciation for 2017

900000 480000 100000 1480000