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Chapter 10 Translation of Foreign Currency Financial Statements

File: Chapter 10 Translation of Foreign Currency Financial Statements Multiple Choice [QUESTION] 1. In accounting, the term translation refers to A) the calculation of gains or losses from hedging transactions. B) the calculation of exchange rate gains or losses on individual transactions in foreign currencies. C) the procedure required to identify a company's functional currency. D) the calculation of gains or losses from all transactions for the year. E) a procedure to prepare a foreign subsidiary's financial statements for consolidation. Answer: E Difficulty: Easy [QUESTION] 2. What is a company's functional currency? A) the currency of the primary economic environment in which it operates. B) the currency of the country where it has its headquarters. C) the currency in which it prepares its financial statements. D) the reporting currency of its parent for a subsidiary. E) the currency it chooses to designate as such. Answer: A Difficulty: Easy [QUESTION] 3. According to SFAS 52, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency? A) the temporal method. B) the current rate method. C) the current/noncurrent method. D) the monetary/nonmonetary method. E) the noncurrent rate method. Answer: B Difficulty: Easy [QUESTION] 4. In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities? A) the exchange rate in effect when each asset or liability was acquired. B) the average exchange rate for the current year. C) a calculated exchange rate based on market value. D) the exchange rate in effect as of the balance sheet date. E) the exchange rate in effect at the start of the current year. Answer: D Difficulty: Easy [QUESTION] 5. The translation adjustment from translating a foreign subsidiary's financial statements should be shown as A) an asset or liability (depending on the balance) on the consolidated balance sheet. B) a revenue or expense (depending on the balance) on the consolidated income statement.

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Chapter 10 Translation of Foreign Currency Financial Statements

C) a component of stockholders' equity on the consolidated balance sheet. D) a component of cash flows from financing activities on the consolidated statement of cash flows. E) an element of the notes which accompany the consolidated financial statements. Answer: C Difficulty: Easy REFERENCE: Ref. 10_01 Westmore, Ltd. is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling. The following exchange rates were in effect during 2008:

Jan. 1 June 30 Dec. 31 Weighted average rate for the year

$1 = £.625 $1 = £.610 $1 = £.620 $1 = £.630

[QUESTION] REFER TO: Ref. 10_01 6. Westmore reported sales of £1,500,000 during 2008. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales? A) $2,380,952. B) $2,400,000. C) $2,429,150. D) $2,419,355. E) $2,425,876. Answer: A Difficulty: Medium [QUESTION] REFER TO: Ref. 10_01 7. On December 31, Westmore had accounts receivable of £280,000. What amount (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable? A) $444,444. B) $451,613. C) $142,600. D) $176,400. E) $452,830. Answer: B Difficulty: Medium [QUESTION] 8. Gunther Co. established a subsidiary in Mexico on January 1, 2008. The subsidiary engaged in the following transactions during 2008:

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Chapter 10 Translation of Foreign Currency Financial Statements

Jan. 1

Dec. 31

Sold common stock to Gunther for 5,000,000 pesos. Purchased inventory throughout the year, 8,000,000 pesos (¼ remained at yearend). Sales throughout the year totaled 12,000,000 pesos. Purchased equipment for 1,000,000 pesos.

Gunther concluded that the subsidiary’s functional currency was the dollar. Exchange rates for 2008 were: Jan. 1 1 peso = $.20 31 1 peso = $.19 Dec. 31 1 peso = $.16 Weighted average rate for the year 1 peso = $.18 What amount of foreign exchange gain or loss would have been recognized on Gunther's consolidated income statement for 2008? A) $200,400 loss. B) $90,000 loss. C) $226,000 loss. D) $235,600 loss. E) $250,000 loss. Answer: E Difficulty: Hard REFERENCE: Ref. 10_02 Darron Co. was formed on January 1, 2009 as a wholly owned foreign subsidiary of a U.S. corporation. Darron's functional currency was the stickle (§). The following transactions and events occurred during 2007:

Jan. 1 June 30 Dec. 31

Darron issued common stock for §1,000,000. Darron paid dividends of §20,000. Darron reported net income of §80,000 for the year.

Exchange rates for 2009 were: Jan. 1 June 30 Dec. 31 Weighted average rate for the year

$1 = §.48 $1 = §.46 $1 = §.42 $1 = §.44

[QUESTION] REFER TO: Ref. 10_02 9. What exchange rate should have been used in translating Darron's revenues and expenses for 2009? A) $1 = §.48. B) $1 = §.44. C) $1 = §.46. D) $1 = §.42. E) $1 = §.45. Answer: B

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Chapter 10 Translation of Foreign Currency Financial Statements

Difficulty: Easy [QUESTION] REFER TO: Ref. 10_02 10. What was the amount of the translation adjustment for 2009? A) $293,479 increase in relative value of net assets. B) $302,137 increase in relative value of net assets. C) $300,160 increase in relative value of net assets. D) $187,418 increase in relative value of net assets. E) $270,800 increase in relative value of net assets. Answer: B Difficulty: Hard [QUESTION] 11. Which of the following translation methods was originally mandated by SFAS No. 8? A) Current/Noncurrent Method. B) Monetary/Nonmonetary Method. C) Current Rate Method. D) Temporal Method. E) Indirect Method. Answer: D Difficulty: Easy [QUESTION] 12. Which accounts are remeasured using current exchange rates? A) all revenues and expenses. B) all assets and liabilities. C) all monetary assets and liabilities. D) all current assets and liabilities. E) all noncurrent assets and liabilities. Answer: D Difficulty: Medium [QUESTION] 13. For a foreign subsidiary that uses the US dollar as its functional currency, what translation method is required? A) Current/Noncurrent Method. B) Monetary/Nonmonetary Method. C) Current Rate Method. D) Temporal Method. E) Indirect Method. Answer: D Difficulty: Medium REFERENCE: Ref. 10_03 Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. [QUESTION] REFER TO: Ref. 10_03 14. Which one of the following statements would justify this conclusion?

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Chapter 10 Translation of Foreign Currency Financial Statements

A) Most of the subsidiary's sales and purchases were with companies in the U.S. B) Dilty's functional currency is the dollar and Dilty is the parent. C) Dilty's other subsidiaries all had the dollar as their functional currency. D) Generally accepted accounting principles require that the subsidiary's functional currency must be the dollar if consolidated financial statements are to be prepared. E) Dilty is located in the U.S. Answer: A Difficulty: Medium [QUESTION] REFER TO: Ref. 10_03 15. What must Dilty do to ready the subsidiary's financial statements for consolidation? A) first translate them, then remeasure them. B) first remeasure them, then translate them. C) state all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the balance sheet date. D) translate them. E) remeasure them. Answer: E Difficulty: Easy REFERENCE: Ref. 10_04 Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows:

Accounts receivable — current Accounts receivable — long-term Prepaid insurance Goodwill Totals

Stated at Current Historical Rates Rates $ 280,000 $ 308,000 140,000 154,000 70,000 77,000 112,000 119,000 $ 602,000 $ 658,000

[QUESTION] REFER TO: Ref. 10_04 16. If a foreign currency is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the preceding items? A) $609,000. B) $658,000. C) $602,000. D) $630,000. E) $616,000. Answer: C Difficulty: Easy [QUESTION] REFER TO: Ref. 10_04 17. If the U.S. dollar is the functional currency of this subsidiary, what total should have been included in Page 5

Chapter 10 Translation of Foreign Currency Financial Statements

Tulip's balance sheet for the items above? A) $609,000. B) $658,000. C) $602,000. D) $630,000. E) $616,000. Answer: E Difficulty: Medium REFERENCE: Ref. 10_05 A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional currency of this subsidiary was the stickle (§). The subsidiary acquired inventory on credit on November 1, 2008, for §120,000 that was sold on January 17, 2009 for §156,000. The subsidiary paid for the inventory on January 31, 2009. Currency exchange rates between the dollar and the stickle were as follows: November 1, 2008 December 31,2008 January 1, 2009 January 31, 2009 Average for 2009

$.19 = §1 $.20 = §1 $.22 = §1 $.23 = §1 $.24 = §1

[QUESTION] 18. What figure would have been reported for this inventory on Porter's consolidated balance sheet at December 31, 2008? A) $24,000. B) $26,400. C) $22,800. D) $27,600. E) $28,800. Answer: A Difficulty: Easy [QUESTION] REFER TO: Ref. 10_05 19. What figure would have been reported for cost of goods sold on Porter's consolidated income statement at December 31, 2009? A) $24,000. B) $26,400. C) $22,800. D) $27,600. E) $28,800. Answer: E Difficulty: Medium [QUESTION] 20. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2009:

Cost of goods sold Ending inventory Beginning inventory

§ 12,000,000 600,000 240,000

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Chapter 10 Translation of Foreign Currency Financial Statements

The average exchange rate during 2009 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2009 was §1 = $.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2009 U.S. dollar income statement? A) $11,253,600. B) $11,577,600. C) $11,649,600. D) $11,613,600. E) $11,523,600. Answer: D Difficulty: Hard [QUESTION] 21. A historical exchange rate for a foreign subsidiary is best described as A) The rate at date of acquisition for a purchase transaction. B) The rate when the common stock was originally issued for a purchase transaction. C) The average rate from date of acquisition to the date of balance sheet. D) The rate from the prior year’s balances. E) The January 1 exchange rate. Answer: A Difficulty: Medium [QUESTION] 22. A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true? A) There is no translation adjustment. B) There is a transaction loss. C) There is a transaction gain. D) There is a negative translation adjustment. E) There is a positive translation adjustment. Answer: E Difficulty: Medium [QUESTION] 23. A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true? A) There is no translation adjustment. B) There is a transaction loss. C) There is a transaction gain. D) There is a negative translation adjustment. E) There is a positive translation adjustment. Answer: D Difficulty: Medium [QUESTION] 24. A net liability balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true? A) There is no translation adjustment. B) There is a transaction loss.

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Chapter 10 Translation of Foreign Currency Financial Statements

C) There is a transaction gain. D) There is a negative translation adjustment. E) There is a positive translation adjustment. Answer: D Difficulty: Medium [QUESTION] 25. A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true? A) There is no translation adjustment. B) There is a transaction loss. C) There is a transaction gain. D) There is a negative translation adjustment. E) There is a positive translation adjustment. Answer: E Difficulty: Medium [QUESTION] 26. Which method of translating a foreign subsidiary's financial statements is correct? A) Historical rate method. B) Working capital method. C) Current rate method. D) Remeasurement. E) Temporal method. Answer: C Difficulty: Easy [QUESTION] 27. Which method of remeasuring a foreign subsidiary's financial statements is correct? A) Historical rate method. B) Working capital method. C) Current rate method. D) Translation. E) Temporal method. Answer: E Difficulty: Easy [QUESTION] 28. Under the temporal method, inventory at market would be restated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: C Difficulty: Medium [QUESTION] 29. Under the current rate method, inventory at market would be restated at what rate? A) Beginning of the year rate. B) Average rate.

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Chapter 10 Translation of Foreign Currency Financial Statements

C) Current rate. D) Historical rate. E) Composite amount. Answer: C Difficulty: Medium [QUESTION] 30. Under the temporal method, common stock would be restated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: D Difficulty: Easy [QUESTION] 31. Under the current rate method, common stock would be restated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: D Difficulty: Easy [QUESTION] 32. Under the current rate method, property, plant & equipment would be restated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: C Difficulty: Medium [QUESTION] 33. Under the temporal method, property, plant & equipment would be restated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: D Difficulty: Medium [QUESTION] 34. Under the current rate method, retained earnings would be restated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate.

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Chapter 10 Translation of Foreign Currency Financial Statements

D) Historical rate. E) Composite amount. Answer: E Difficulty: Medium [QUESTION] 35. Under the temporal method, retained earnings would be restated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: E Difficulty: Medium [QUESTION] 36. Under the current rate method, depreciation expense would be restated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: B Difficulty: Medium [QUESTION] 37. Under the temporal method, depreciation expense would be restated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: D Difficulty: Medium [QUESTION] 38. Under the temporal method, how would cost of goods sold be restated? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: E Difficulty: Medium [QUESTION] 39. Under the current rate method, how would cost of goods sold be restated? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate.

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Chapter 10 Translation of Foreign Currency Financial Statements

E) Composite amount. Answer: B Difficulty: Medium [QUESTION] 40. How is the disposition of the translated gain or loss reported on the parent company's financial statements? A) Net income/loss on the income statement. B) Cumulative translation adjustment as a deferred asset. C) Cumulative translation adjustment as a deferred liability. D) Other comprehensive income. E) Retained earnings. Answer: D Difficulty: Medium [QUESTION] 41. How is the disposition of the remeasurement gain or loss reported on the parent company's financial statements? A) Net income/loss on the income statement. B) Cumulative translation adjustment as a deferred asset. C) Cumulative translation adjustment as a deferred liability. D) Other comprehensive income. E) Retained earnings. Answer: A Difficulty: Medium [QUESTION] 42. A highly inflationary economy is defined as A) Cumulative 5-year inflation in excess of 100%. B) Cumulative 3-year inflation in excess of 100%. C) Cumulative 5-year inflation in excess of 90%. D) Cumulative 3-year inflation in excess of 90%. E) Any country designated as a company operating in an underworld economy. Answer: B Difficulty: Medium [QUESTION] 43. If a subsidiary is operating in a highly inflationary economy, how are the financial statements to be restated? A) Historical rate. B) Working capital rate. C) Translation. D) Remeasurement. E) Current rate. Answer: D Difficulty: Medium [QUESTION] 44. When consolidating a foreign subsidiary, which of the following statements is true? A) Parent reports a cumulative translation adjustment using the equity method. B) Parent's reports a gain or loss in net income using the equity method.

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Chapter 10 Translation of Foreign Currency Financial Statements

C) Subsidiary's cumulative translation adjustment is carried forward to the consolidated balance sheet. D) Subsidiary's income/loss is carried forward to the consolidated balance sheet. E) All foreign currency gains/losses are eliminated on the consolidated income statement and balance sheet. Answer: A Difficulty: Hard [QUESTION] 45. When preparing a consolidating statement of cash flows, which of the following statements is false? A) Subsidiary dividends are deducted as a financing activity. B) Noncontrolling interest in subsidiary dividends are deducted as a financing activity. C) Parent dividends are deducted as a financing activity. D) Amortization of cost over book value of the investment in subsidiary is added to net income as an operating activity using the indirect method. E) Intercompany gains do not appear on the consolidated statement of cash flows. Answer: A Difficulty: Medium REFERENCE: Ref. 10_06 The following account balances are available for Esposito, an Italian U.S. subsidiary for 2009:

Beginning inventory Purchases Ending inventory

€ 20,000 400,000 15,000

Relevant exchange rates follow: 4th quarter average, 2008 December 31, 2008 Average 2009 4th quarter average, 2009 December 31, 2009

$.93 = €1 . 94 = 1 .96 = 1 .99 = 1 1.01 = 1

[QUESTION] REFER TO: Ref. 10_06 46. Compute the cost of goods sold for 2009 in U.S. dollars using the temporal method. A) $376,650. B) $387,750. C) $388,800. D) $400,950. E) $409,050. Answer: B Difficulty: Medium [QUESTION] REFER TO: Ref. 10_06 47. Compute the cost of goods sold for 2009 in U.S. dollars using the current rate method. A) $376,550. B) $387,750. C) $388,800. Page 12

Chapter 10 Translation of Foreign Currency Financial Statements

D) $400,950. E) $409,050. Answer: C Difficulty: Medium [QUESTION] REFER TO: Ref. 10_06 48. Compute ending inventory for 2009 under the temporal method. A) $13,950. B) $14,100. C) $14,400. D) $14,850. E) $15,150. Answer: D Difficulty: Medium [QUESTION] REFER TO: Ref. 10_06 49. Compute ending inventory for 2009 under the current rate method. A) $13,950. B) $14,100. C) $14,400. D) $14,850. E) $15,150. Answer: E Difficulty: Medium REFERENCE: Ref. 10_07 The following inventory balances for 2008 in local currency units (LCU) are given:

Inventory at cost Inventory at replacement cost Inventory at net realizable value Inventory at net realizable value Less normal profit margin

320,000 LCU 300,000 420,000 400,000

The following exchange rates are given for 2008: January 1, 2008 Average, 2008 4th quarter average, 2008 December 31, 2008

$1.50 = 1 LCU 1.48 = 1 1.43 = 1 1.42 = 1

[QUESTION] REFER TO: Ref. 10_07 50. Compute the December 31, 2008, inventory balance using the lower of cost or market method under the temporal method. A) $429,000. B) $457,600. C) $596,000. Page 13

Chapter 10 Translation of Foreign Currency Financial Statements

D) $568,000. E) $473,600. Answer: A Difficulty: Medium [QUESTION] REFER TO: Ref. 10_07 51. Compute the December 31, 2008, inventory balance using the current rate method. A) $454,400. B) $457,600. C) $596,000. D) $568,000. E) $473,600. Answer: A Difficulty: Medium REFERENCE: Ref. 10_08 Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2009. The equipment was purchased on January 1, 2008, when the exchange rate for the peso was $.11. Relevant exchange rates for the peso are as follows:

January 1, 2008 March 1, 2009 December 31, 2009 Average, 2009

$ .1071 .106 .102 .105

[QUESTION] REFER TO: Ref. 10_08 52. The financial statements for Perez are translated by its U.S. parent. What amount of gain or loss would be reported in its translated income statement? A) $1,530. B) $1,575. C) $1,590. D) $1,090. E) $1,650. Answer: C Difficulty: Medium [QUESTION] REFER TO: Ref. 10_08 53. The financial statements for Perez are remeasured by its U.S. parent. What amount of gain or loss would be reported in its translated income statement? A) $1,530. B) $1,575. C) $1,465. D) $1,090. E) $1,650. Answer: D Difficulty: Hard

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Chapter 10 Translation of Foreign Currency Financial Statements

REFERENCE: Ref. 10_09 Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2008, have been restated into U.S. dollars as follows:

Cash Accounts receivable Inventory, at market Land Equipment (net) Total

Restated at Current Rates Historical Rates $ 47,500 $ 45,000 95,000 90,000 76,000 72,000 57,000 54,000 142,500 135,000 $418,000 $396,000

[QUESTION] REFER TO: Ref. 10_09 54. Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included in Parker's consolidated balance sheet at December 31, 2008, for the above items? A) $407,500. B) $418,000. C) $396,000. D) $403,500. E) $398,500. Answer: A Difficulty: Medium [QUESTION] REFER TO: Ref. 10_09 55. Assuming the functional currency of the subsidiary is the local currency, what total should be included in Parker's consolidated balance sheet at December 31, 2008, for the above items? A) $407,500. B) $418,000. C) $396,000. D) $403,500. E) $398,500. Answer: B Difficulty: Easy [QUESTION] REFER TO: Ref. 10_09 56. If the current rate used to restate these balances is $.95, what was the historical rate used to restate the same balances? A) $.90. B) $1.00. C) $.95. D) $.9474. E) $1.0556. Answer: A Difficulty: Medium

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Chapter 10 Translation of Foreign Currency Financial Statements

REFERENCE: Ref. 10_10 Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for US$350,000 on January 1, 2009, when the exchange rate for the Canadian dollar was US$.70. The fair value of the net assets of Hastie was equal to their book value of C$450,000 (Canadian dollars) on the date of acquisition. Any excess cost over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2009, Hastie's translated net income was $25,000. The average exchange rate for the Canadian dollar during 2009 was US$.68, and the 2009 year-end exchange rate was US$.65. [QUESTION] REFER TO: Ref. 10_10 57. Calculate the US$ amount allocated to the patent at January 1, 2009. A) $50,000. B) $35,000. C) $34,000. D) $32,500. E) $28,200. Answer: B Difficulty: Medium [QUESTION] REFER TO: Ref. 10_10 58. Amortization of the patent, translated, for 2009 would be A) $7,000. B) $10,000. C) $6,800. D) $9,000. E) $6,500. Answer: C Difficulty: Medium [QUESTION] REFER TO: Ref. 10_10 59. Compute the amount of the patent reported on the consolidated balance sheet at December 31, 2009. A) $28,200. B) 428,000. C) $35,000. D) $27,200. E) $26,000. Answer: E Difficulty: Medium [QUESTION] REFER TO: Ref. 10_10 60. Kennedy's share of Hastie's net income for 2009 would be A) $18,000. B) $15,000. C) $18,200. D) $16,000. E) $18,500.

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Chapter 10 Translation of Foreign Currency Financial Statements

Answer: C Difficulty: Medium REFERENCE: Ref. 10_11 Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2007. Selected account balances are available for the year ended December 31, 2008, and are stated in euro, the local currency.

Sales Inventory (bought on February 1, 2008) Equipment (bought on January 1, 2007) Dividends (paid on September 1, 2008) Accumulated depreciation – Equipment 12/31/08 Depreciation expense – Equipment, 2008

€400,000 20,000 90,000 20,000 45,000 9,000

Relevant exchange rates are given below: January 1, 2007 January 1, 2008 February 1, 2008 September 1, 2008 December 31, 2008 4th quarter average, 2007 4th quarter average, 2008 Average, 2008

$ .91 .93 .94 .97 1.01 .90 .98 .95

[QUESTION] REFER TO: Ref. 10_11 61. Assume the functional currency is the euro, compute the restated amount for sales for 2008. A) $364,000. B) $372,000. C) $380,000. D) $360,000. E) $404,000. Answer: C Difficulty: Easy [QUESTION] REFER TO: Ref. 10_11 62. Assume the functional currency is the euro, compute the restated amount for inventory for 2008. A) $18,600. B) $19,600. C) $18,000. D) $20,200 E) $19,000. Answer: D Difficulty: Easy [QUESTION] REFER TO: Ref. 10_11

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Chapter 10 Translation of Foreign Currency Financial Statements

63. Assume the functional currency is the euro, compute the restated amount for equipment for 2008. A) $81,900. B) $90,900. C) $83,700. D) $88,200. E) $85,500. Answer: B Difficulty: Medium [QUESTION] REFER TO: Ref. 10_11 64. Assume the functional currency is the euro, compute the restated amount for dividends for 2008. A) $19,000. B) $20,200. C) $18,600. D) $19,400. E) $19,600. Answer: D Difficulty: Easy [QUESTION] REFER TO: Ref. 10_11 65. Assume the functional currency is the euro, compute the restated amount for accumulated depreciation for 2008. A) $40,950. B) $41,850. C) $45,450. D) $42,750. E) $44,100. Answer: C Difficulty: Medium [QUESTION] REFER TO: Ref. 10_06 66. Assume the functional currency is the euro, compute the restated amount for depreciation expense for 2008. A) $8,190. B) $8,370. C) $8,820. D) $9,090. E) $8,550. Answer: E Difficulty: Medium [QUESTION] REFER TO: Ref. 10_11 67. Assume the functional currency is the U.S. dollar, compute the restated amount for sales for 2008. A) $364,000. B) $372,000. C) $380,000. D) $360,000.

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Chapter 10 Translation of Foreign Currency Financial Statements

E) $404,000. Answer: C Difficulty: Easy [QUESTION] REFER TO: Ref. 10_11 68. Assume the functional currency is the U.S. dollar, compute the restated amount for inventory for 2008. A) $18,600. B) $19,600. C) $18,000. D) $20,200. E) $19,000. Answer: B Difficulty: Medium [QUESTION] REFER TO: Ref. 10_11 69. Assume the functional currency is the U.S. dollar, compute the restated amount for equipment for 2008. A) $81,900. B) $90,900. C) $83,700. D) $88,200. E) $85,500. Answer: A Difficulty: Medium [QUESTION] REFER TO: Ref. 10_11 70. Assume the functional currency is the U.S. dollar, compute the restated amount for dividends for 2008. A) $19,000. B) $20,200. C) $18,600. D) $19,400. E) $19,600. Answer: D Difficulty: Easy [QUESTION] REFER TO: Ref. 10_11 71. Assume the functional currency is the U.S. dollar, compute the restated amount for accumulated depreciation for 2008. A) $40,950. B) $41,850. C) $45,450. D) $42,750. E) $44,100. Answer: A Difficulty: Medium

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Chapter 10 Translation of Foreign Currency Financial Statements

[QUESTION] REFER TO: Ref. 10_11 72. Assume the functional currency is the U.S. dollar, compute the restated amount for depreciation expense for 2008. A) $8,190. B) $8,370. C) $8,820. D) $9,090. E) $8,550. Answer: A Difficulty: Medium [QUESTION] REFER TO: Ref. 10_11 73. When translating Quadros' financial statements, which of the following statements is true? A) There will be a remeasurement gain reported on the consolidated income statement. B) There will be a remeasurement loss reported on the consolidated income statement. C) There will be a positive cumulative translation adjustment reported on the consolidated balance sheet. D) There will be a positive cumulative translation adjustment reported on the consolidated income statement. E) There will be a transaction gain reported on the consolidated income statement. Answer: C Difficulty: Medium Essay [QUESTION] 74. A foreign subsidiary was purchased on January 1, 2008. Determine the exchange rate used to restate the following accounts at December 31, 2008. Land was purchased on October 1, 2008. Relevant exchange dates follow: (A) January 1, 2008 (B) October 1, 2008 (C) December 31, 2008 (D) Average, 2008 (E) Composite, using multiple dates. Identify the exchange rate used to translate items 1-5: ____ 1. Land. ____ 2. Equipment. ____ 3. Bonds payable. ____ 4. Common stock. ____ 5. Retained earnings. Identify the exchange rate used to remeasure the items 6-10: ____ 6. Land. ____ 7. Equipment. ____ 8. Bonds payable. ____ 9. Common stock. ____ 10. Retained earnings. Answer: (1.) C; (2) C; (3.) C; (4.) A; (5.) E; (6.) B; (7.) A; (8.) C; (9.) A; (10.) E Difficulty: Medium

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Chapter 10 Translation of Foreign Currency Financial Statements

[QUESTION] 75. In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses? Answer: The historical rate that was in effect when the revenues and expenses were incurred should be used unless those revenues and expenses occur throughout the year, then a weighted average exchange rate for the year may be used. Difficulty: Medium [QUESTION] 76. How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country? Answer: If the foreign subsidiary has distinct and separable operations in different countries, each of these operations can use a different currency. If the subsidiary does not have distinct operations in different countries, the currency in which the most transactions are carried out should be selected. Difficulty: Medium [QUESTION] 77. What exchange rate should be used to translate (a) revenues and expenses that occur throughout the year and (b) a gain or loss that occurs on a specific day? Answer: Revenues and expenses occurring throughout the year may be translated using the average exchange rate for the year. A gain or loss occurring on a specific date should be translated using the rate in effect on that day. Difficulty: Easy [QUESTION] 78. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2009, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for? Answer: Any effect on the contract resulting from exchange rate fluctuations is classified as a translation adjustment, rather than as a foreign exchange gain or loss. Difficulty: Easy [QUESTION] 79. Under what circumstances would the translation of a foreign subsidiary's financial statements not be required? Answer: The translation of a foreign subsidiary's financial statements is not required in the following two situations: (A.) when the subsidiary's functional currency is the U.S. dollar. (B.) when the subsidiary operates in a highly inflationary economy. Difficulty: Medium [QUESTION] 80. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2005. (A.) How would depreciation expense on the equipment be translated for 2008? (B.) How would depreciation expense on the equipment be remeasured for 2008? Answer: (A.) Depreciation expense would be translated using the average exchange rate for 2008. (B.) Depreciation expense would be remeasured using the exchange rate in effect when the equipment was purchased. Difficulty: Medium

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Chapter 10 Translation of Foreign Currency Financial Statements

[QUESTION] 81. What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary? What justification can be given for using this exchange rate? Answer: Assets and liabilities are translated using the current exchange rate, the rate in effect at the balance sheet date. This rate is chosen because assets and liabilities are expected to affect future cash flows. Therefore, they should be translated using the most up-to-date exchange rates available. Difficulty: Easy [QUESTION] 82. Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be the functional currency for this subsidiary? Answer: To determine the subsidiary's functional currency, Farley Brothers should look at the volume of the subsidiary's transactions in various currencies. If most of the subsidiary's sales and purchases are in dollars, the dollar may be the logical choice for the functional currency. If there are many transactions between the subsidiary and the parent, and if most of the subsidiary's financing comes from the U.S., the dollar may be a better choice than the lira or other European currencies. Difficulty: Easy [QUESTION] 83. What is the justification for the remeasurement of foreign currency transactions? Answer: Remeasurement is needed for transactions denominated in a currency other than the entity's functional currency. A U.S. company which engages in transactions in other countries may have to remeasure some of its transactions. The implicit justification for remeasurement is that foreign currency transactions which affect monetary assets and liabilities have a direct effect on the entity's cash flows. There will be direct effects on future cash flows in the functional currency, and thus an effect on net income. Difficulty: Medium [QUESTION] 84. Contrast the purpose of remeasurement with the purpose of translation. Answer: The purpose of translation is to transform a subsidiary's financial statements, prepared in its functional currency, into the reporting currency of the parent. The purpose of remeasurement is to restate transactions from one currency into the functional currency of the entity. Remeasurement is also required when a subsidiary's financial statements have been denominated in a currency other than the subsidiary's functional currency. Difficulty: Medium [QUESTION] 85. On January 1, 2008, Fandu Corp. started a foreign subsidiary. On April 1, 2008, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of 2008 while 40% of the liability from the purchase had not yet been paid. The pertinent exchange rates were:

January 1, 2008 April 1, 2008 Average for 2008 December 31, 2008

$1 = §3.0 $1 = §3.4 $1 = §3.2 $1 = §3.6

Required: What should have been the December 31, 2008 inventory and accounts payable balances for this foreign

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Chapter 10 Translation of Foreign Currency Financial Statements

subsidiary as translated into U.S. dollars? (Round your answers to the nearest whole dollar.) Difficulty: Medium Answer:

Inventory (§150,000 x ¼ x (1 ÷ 3.6))

$ 10,417

Accounts payable (§150,000 x 40% x (1 ÷ 3.6))

$ 16,667

[QUESTION] 86. On January 1, 2008, Veldon Co., a U.S. corporation with the U.S. dollar as its functional currency, established Malont Co. as a subsidiary. Malont is located in the country of Sorania, and its functional currency is the stickle. Malont engaged in the following transactions during 2008:

January 1, 2008 July 14, 2008 October 1, 2008

Issued common stock for §500,000 Sold equipment at a loss of §40,000 Paid dividends of §60,000

Malont’s operating revenues and expenses for 2008 were §800,000 and §650,000, respectively. The appropriate exchange rates were: January 1, 2008 July 14, 2008 October 1, 2008 December 31, 2008 Average for 2008

$1 = §2.5 $1 = §2.1 $1 = §2.6 $1 = §2.7 $1 = §2.4

Required: Calculate the translation adjustment for Malont. (Round your answers to the nearest whole dollar.) Answer: Stickles Rate U.S. Dollars Net assets, 1/1/08 §0 Change in net assets, 2008: Common stock issuance 500,000 $1 ÷ §2.5H $200,000 Operating income 150,000 $1 ÷ §2.4A 62,500 Loss on sale of equipment (40,000) $1 ÷ §2.1H (19,048) Dividends paid (60,000) $1 ÷ §2.6H (23,077) Net assets, 12/31/08 § 550,000 $(220,375) Net assets, 12/31/08 at current exchange rate § 550,000 $1 ÷ §2.7C 203,704 Translation adjustment , 2008 (negative) $ (16,671) Difficulty: Hard REFERENCE: Ref. 10_12 Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2008 by acquiring all of the common stock for §50,000. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2008. A building was then purchased for

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Chapter 10 Translation of Foreign Currency Financial Statements

§170,000. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been made. On October 1, §5,000 were paid for a repair made on that date. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2008. The functional currency for the subsidiary was the stickle. Currency exchange rates were as follows:

January 1, 2008 October 1, 2008 Average for 2008 December 31, 2008

$2.40 = §1 $2.22 = §1 $2.28 = §1 $2.16 = §1

[QUESTION] REFER TO: Ref. 10_12 87. Prepare an income statement for this subsidiary in stickles and then translate these amounts into U.S. dollars. Answer:

Ginvold Co. Subsidiary Income Statement For the Year Ended December 31, 2008 Rent revenue Interest expense Depreciation expense Repair expense Net income

Stickles § 72,000 ( 12,000) ( 17,000) ( 5,000) § 38,000

Rate x $2.28 A = x $2.28 A = x $2.28 A = x $2.22 H =

U.S. Dollars $ 164,160 ( 27,360) ( 38,760) ( 11,100) $ 86,940

Difficulty: Medium [QUESTION] REFER TO: Ref. 10_12 88. Prepare a statement of retained earnings for this subsidiary in stickles and then translate these amounts into U.S. dollars. Answer: Ginvold Co. Subsidiary Statement of Retained Earnings For the Year Ended December 31, 2008 Retained earnings, 1/1/08 Net income Dividends paid Retained earnings, 12/31/08

Stickles § 0 38,000 (6,000) §32,000

Rate (above) x $2.16H=

Difficulty: Medium

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U.S. Dollars $ 0 86,940 (12,960) $73,980

Chapter 10 Translation of Foreign Currency Financial Statements

[QUESTION] REFER TO: Ref. 10_12 89. Prepare a balance sheet for this subsidiary in stickles and then translate these amounts into U.S. dollars. Answer: Ginvold Co. Subsidiary Balance Sheet December 31, 2008

Cash Accounts receivable Building Accumulated depreciation Total assets Interest payable Note payable Common stock Retained earnings Translation adjustment Total liabilities and equities Calculation of Translation Adjustment Net assets, 1/1/08 Change in net assets, 2008: Common stock issuance Net income Dividends paid Net assets, 12/31/08 Net assets, 12/31/08 at current exchange rate Translation adjustment, 2008 (negative)

Stickles § 49,000 12,000 170,000 (17,000) §214,000

x x x x

§ 12,000 120,000 50,000 32,000

x $2.16C = x $2.16C = x $2.40H = (above)

$ 25,920 259,200 120,000 73,980

_______ §214,000

(below)

(16,860) $462,240

§

Rate $2.16C = $2.16C = $2.16C = $2.16C =

0

U. S. Dollars $ 105,840 25,920 367,200 (36,720) $ 462,240

$

0

50,000 38,000 (6,000) § 82,000

x $2.40 = (above) x $2.16 =

120,000 86,940 (12,960) $(193,980)

§ 82,000

x $2.16 =

177,120 $ (16,860)

Difficulty: Medium [QUESTION] REFER TO: Ref. 10_12 90. Prepare a statement of cash flows for this subsidiary in stickles and then translate these amounts into U.S. dollars. Answer: Ginvold Co. Subsidiary Statement of Cash Flows For the Year Ended, December 31, 2008 Stickles

Rate

Operating activities:

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U. S. Dollars

Chapter 10 Translation of Foreign Currency Financial Statements

Net income Depreciation Increase in accounts receivable Increase in interest payable Net cash from operations Investing activities: Purchase of building Financing activities: Proceeds from common stock Proceeds from note payable Dividend paid Net cash from financing Increase in cash Effect on exchange rate change on cash Cash at December 31, 2007 Cash at December 31, 2008

§ 38,000 17,000 (12,000) 12,000 55,000

(Above) x $2.28A = x $2.28A = x $2.28A =

$ 86,940 38,760 (27,360) 27,360 125,700

(170,000) x $2.40H =

(408,000)

50,000 120,000 (6,000) 164,000 49,000

120,000 288,000 (12,960) 395,040 112,740

0 § 49,000

x $2.40H = x $2.40H = x $2.16H =

x $2.16C =

(6,900) 0 $105,840

Difficulty: Medium REFERENCE: Ref. 10_13 Boerkian Co. started 2008 with two assets: cash of §26,000 (stickles) and land that originally cost §72,000 when acquired on April 4, 2004. On May 1, 2008, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2008, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year. Currency exchange rates were as follows:

April 4, 2004 January 1, 2008 May 1, 2008 October 1, 2008 Average for 2008 December 31, 2008

§1 = $.28 §1 = $.29 §1 = $.30 §1 = $.31 §1 = $.32 §1 = $.35

[QUESTION] REFER TO: 10_13 91. Assume (1) that Boerkian was a foreign subsidiary of a U.S. multinational company that used the U.S. dollar as its functional currency and (2) that the stickle was the functional currency of the subsidiary. What was the translation adjustment for this subsidiary for 2008? Answer:

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Chapter 10 Translation of Foreign Currency Financial Statements

The translation adjustment is based on changes in the net assets of the subsidiary. Net assets, 1/1/08 Change in net assets, 2008: Rendered services Incurred expense Net assets, 12/31/08 Net assets, 12/31/08 at current exchange rate Translation adjustment, 2008 (positive)

§

98,000

x $.29 =

36,000 x $.30 = ( 22,000) x $.31 = § 112,000 § 112,000

$

28,420 10,800 6,820) 32,400

( $

x $.35 =

39,200 $

6,800

Difficulty: Medium [QUESTION] REFER TO: Ref. 10_13 92. Assume (1) that Boerkian was a foreign subsidiary of a U.S. multinational company that used the U.S. dollar as its reporting currency and (2) that the U.S. dollar was the functional currency of the subsidiary. What was the remeasurement gain or loss for 2008? Difficulty: Medium Answer:

The remeasurement gain or loss is based on changes in the net monetary assets of the subsidiary. Net monetary assets, 1/1/08 Change in net monetary assets, 2008: Rendered services Incurred expense Net monetary assets, 12/31/08 Net monetary assets, 12/31/08 at current exchange rate Remeasurement gain

§

26,000

x $.29 =

36,000 x $.30 = ( 22,000) x $.31 = § 40,000 §

40,000

$

7,540

$

10,800 6,820) 11,520

$

14,000 2,480

(

x $.35 =

Difficulty: Hard [QUESTION] REFER TO: Ref. 10_13 93. Required: Assume that Boerkian was a foreign subsidiary of a U.S. multinational company. On the December 31, 2008 balance sheet, what was the translated value of the Land account? Difficulty: Medium Answer:

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Chapter 10 Translation of Foreign Currency Financial Statements

Translated value of land

§

72,000

x $.35 =

$

25,200

[QUESTION] REFER TO: Ref. 10_13 94. Assume that Boerkian was a foreign subsidiary of a U.S. multinational company. On the December 31, 2008 balance sheet, what was the remeasured value of the Land account? Answer:

Remeasured value of land

§

Difficulty: Medium

Page 28

72,000

x $.28 =

$

20,160