Zoom Company, a Distiller of Liquors, Ages Its Whiskeys for Approximately

question 106

Multiple Choice

Zoom Company, a distiller of liquors, ages its whiskeys for approximately 10 years.The firm must pay the costs to produce the whiskey and to store it during the aging process.Using the whiskey as collateral, Zoom could borrow to finance the costs incurred during the aging process; doing so would, however, lead to Zoom reporting increased liabilities.Instead, Zoom sells the whiskey to a bank and agrees to oversee the aging process on the bank's behalf.At the completion of the aging, Zoom Company guarantees an ultimate selling price that pays the lender both the original purchase price and a reasonable return over that amount.Zoom

• A)bears the economic risks and must show a liability on its balance sheet.
• B)bears the economic risks and but does not show a liability on its balance sheet.
• C)does not bear the economic risks and must show a liability on its balance sheet.
• D)does not bear the economic risks and does not show a liability on its balance sheet.
• E)will likely record the transaction as a sale and not a loan.

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Definitions:

Exchange Rate

The amount one currency is worth in the units of another currency.

Relative Purchasing Power Parity

A theory that states the rate of appreciation or depreciation of one currency relative to another will equal the rate of inflation differentials between the two countries.

Expected Inflation

The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is expected to fall.

Absolute Purchasing Power Parity

A theory that suggests that the price of goods in different countries should be equal when measured in a common currency.