Chapter 11

A debit balance in a parent's cumulative translation adjustment after the first year of owning a foreign subsidiary suggests which of the following is true? The exchange rate has strengthened relative to the U.S. dollar. The exchange rate has weakened relative to the U.S. dollar. The foreign entity had net income but there was not a change in exchange rates. The foreign entity had a net loss but there was not a change in exchange rates.

The exchange rate has weakened relative to the U.S. dollar.

Exchange gains and losses resulting from translating (not remeasuring) foreign currency financial statements into U.S. dollars should be included as a(an) a component of other comprehensive income. extraordinary item in the income statement for the period in which the rate changes. ordinary gain/loss item in the income statement. component of operating income.

a component of other comprehensive income.

Changes in the functional currency of a subsidiary are not permitted. are accounted for retroactively. are accounted for prospectively. are reported as extraordinary items.

are accounted for prospectively.

The adjustment resulting from the remeasurement of an entity operating in a highly inflationary environment would appear in the stockholders' equity section of the balance sheet. as a component of other comprehensive income. as an ordinary income statement item. as an extraordinary item on the income statement.

as an ordinary income statement item.

When Palm, Inc. acquired its 100% investment in Star Co, a foreign entity, the excess of cost over book value was 10,000FC. This excess was traceable to a 10-year patent. The elimination entry to amortize the excess will include a(n) debit to amortization expense for 1,000FC multiplied by the current exchange rate debit to amortization expense for 1,000FC multiplied by the weighted-average exchange rate credit to Patent for 1,000FC multiplied by the historical exchange rate credit to Cumulative Translation Adjustment for 1,000FC multiplied by the difference between the historical and weighted-average exchange rate

debit to amortization expense for 1,000FC multiplied by the weighted-average exchange rate

When Palm, Inc. acquired its 100% investment in Star Co, a foreign entity, the excess of cost over book value was 10,000FC. This excess was traceable to a 10-year patent. The elimination entry to distribute the excess will include a(n) debit to Patent for 10,000FC multiplied by the current exchange rate debit to Patent for 10,000FC multiplied by the historical exchange rate credit to Investment in Star for 10,000FC multiplied by the average exchange rate credit to Cumulative Translation Adjustment for 10,000FC multiplied by the historical exchange rate

debit to Patent for 10,000FC multiplied by the current exchange rate

FASB standards require which of the following disclosures from firms involved in foreign currency transactions? Beginning cumulative translation adjustments. Ending cumulative translation adjustments. The amount of income taxes for the period allocated to translation adjustments. All are required disclosures.

All are required disclosures.

When the functional currency is the foreign entity's currency: exchange rate changes do not affect the economic well being of the parent the subsidiary operates as an entity, independent of the parent exchange rate changes do not have immediate impact on the cash flows of the parent All of the above are correct

All of the above are correct

As part of the consolidation process for a partially-held foreign subsidiary, the elimination entry to distribute the excess of cost over book value will include a credit to Cumulative Translation Adjustment-Parent A. for the amount of excess attributable to identifiable net assets multiplied by the difference between historical and current exchange rates B. for the amount of excess attributable to identifiable net assets multiplied by the difference between average and current exchange rates C. for the Parent's portion of the excess attributable to identifiable net assets multiplied by the difference between historical and current exchange rates D. for the Parent's portion of the excess attributable to identifiable net assets multiplied by the difference between average and current exchange rates

C. for the Parent's portion of the excess attributable to identifiable net assets multiplied by the difference between historical and current exchange rates

The functional currency approach adopted by FASB 52 requires: A. separate statements be maintained by the domestic parent company and the foreign branch both in their own currencies B. separate statements be maintained by the domestic parent company and the foreign branch with the foreign branch translated into the functional currency C. results from foreign currency changes to be ignored D. a focus on whether the domestic reporting entity's cash flows will be indirectly or directly affected by changes in the exchange rates of the foreign entity's currency

D. a focus on whether the domestic reporting entity's cash flows will be indirectly or directly affected by changes in the exchange rates of the foreign entity's currency

Consider the consolidation process for a foreign subsidiary: When the excess of cost over book value is attributable to identifiable assets, those assets are adjusted in the "distribution" elimination entry by an amount that is calculated as A. the difference between cost and fair value as measured in the foreign currency B. the difference between cost and fair value as measured in the foreign currency multiplied by the historical exchange rate C. the difference between cost and fair value as measured in the foreign currency multiplied by the weighted-average exchange rate D. the difference between cost and fair value as measured in the foreign currency multiplied by the current exchange rate

D. the difference between cost and fair value as measured in the foreign currency multiplied by the current exchange rate

A U.S. parent purchased a foreign subsidiary last year at a price in excess of the subsidiary's book value. The subsidiary's functional currency is the foreign currency. This excess is assumed to be traceable to undervalued equipment. When the parent company prepares its elimination entries for the excess, which of the following combinations of exchange rates should be used? Equipment: Current Depreciation Expense: Average

Equipment: Current Depreciation Expense: Average

In most cases, which of the following is not a component of translated retained earnings? Translated retained earnings at the end of the prior period Income from the period translated at the historical rate The value of dividends translated at the exchange rate on the date of declaration All are components of translated retained earnings

Income from the period translated at the historical rate

Which of the following best describes the measurement of a gain or loss from the sale of a depreciable asset by a foreign subsidiary whose functional currency is not the local currency? A. Reconstruct the journal entry on the date of the sale using the historical rate for cash and the depreciable asset and its accumulated depreciation. B. Reconstruct the journal entry on the date of the sale using the current rate for cash and the historical rate for the depreciable asset and its accumulated depreciation. C.Translate the gain or loss using the historical rate. D.Translate gains at the current rate and losses at the historical rate.

Reconstruct the journal entry on the date of the sale using the current rate for cash and the historical rate for the depreciable asset and its accumulated depreciation.

Which of the following procedures would be necessary when a Swiss subsidiary maintains its books in euros and its functional currency is Japanese Yen and its parent is a U.S. company? Remeasurement from euros to U.S. Dollars Remeasurement from euros to Japanese Yen; translate from Yen to U.S. Dollars Remeasurement from Yen to euros; translate from euros to U.S. Dollars none of the above

Remeasurement from euros to Japanese Yen; translate from Yen to U.S. Dollars

Exchange rates will not usually directly affect the cash flows of the parent entity in which of the following cases? The foreign entity operates in a currency other than its own. The foreign entity operates in its local currency. The foreign entity functions in a currency other than its local currency. The foreign entity functions in the parent's currency.

The foreign entity operates in its local currency.

Which of the following best describes the normal required method of accounting for statements of foreign entities whose functional currency is the foreign entity's local currency, and in which a U.S. firm has an equity interest? The functional method The monetary-nonmonetary method The current-noncurrent method The temporal method

The functional method

Which of the following best describes the accounting for a foreign entity requiring translation or remeasurement if the local economy is classified as highly inflationary? The entity's financial statements are first adjusted for inflation and then translated into the domestic currency. The entity's financial statements are first adjusted for inflation and then remeasured into the domestic currency. The unadjusted trial balance is translated if the functional currency is the local currency. The unadjusted trial balance is remeasured regardless of the functional currency.

The unadjusted trial balance is remeasured regardless of the functional currency.

When may the translation adjustment resulting from translating financial statements using the current or functional method be recognized in income? When there is an accumulated other comprehensive deficit that exceeds retained earnings. When the parent disposes of its interest in the subsidiary. When the functional currency changes to the reporting currency. None of the above is correct.

When the parent disposes of its interest in the subsidiary.

The translation (remeasurement) adjustment reported in a translation when the functional currency is not the foreign currency is included as a separate component of other comprehensive income in the current liability section of the balance sheet as deferred revenue in the calculation of net income none of the above

in the calculation of net income

When an U.S. investor entity acquires interest in a foreign entity with the payment of foreign currency, the determination of excess is calculated: in dollars in the foreign currency in dollars if remeasurement (historical rate/temporal method) is indicated in the foreign currency if translation (current rate/functional method) is indicated

in the foreign currency

If the translation process is sound, it should: provide information that is compatible with the expected economic effects of rate changes. reflect in the financial statements the financial results of the company in conformity to the accounting principles of the country in which the subsidiary is located. result in translation adjustments that are relatively consistent in amount. None of the above is correct.

provide information that is compatible with the expected economic effects of rate changes.

In a company's disclosure of foreign currency transactions and hedges and translation adjustments, all of the following items should be disclosed except: beginning and ending cumulative translation adjustments. the amount of income taxes for the period allocated to translation adjustments. the amount transferred from cumulative translation adjustment due to changes in foreign exchange rates. the aggregate adjustment for the period resulting from translation adjustment.

the amount transferred from cumulative translation adjustment due to changes in foreign exchange rates.

Assuming that a foreign entity is deemed to be operating in an environment dominated by the local currency, the entity's assets are translated using the current rate. a simple average rate. a weighted average rate. a historical rate.

the current rate.

If a subsidiary's functional currency is not the local currency in which it operates, but the parent's reporting currency: the foreign subsidiary's translated financial statements are identical to the statements that would have resulted if the transactions had been recorded in dollars. the translation adjustment is recorded as a component of other comprehensive income. there is no indication that exchange rate changes will impact the subsidiary's or the parent's cash flows or equity. None of the above is correct.

the foreign subsidiary's translated financial statements are identical to the statements that would have resulted if the transactions had been recorded in dollars.

If currency exchange rate changes impact potential cash flows available to the parent and the parent's economic well being: the functional currency of the subsidiary is the foreign currency. translation gains or losses should be included in net income. the financial relationships as measured in the translated statements are the same as those measured in the foreign currency. the parent may adopt a change in the subsidiary's functional currency.

translation gains or losses should be included in net income.