Acct 4352 - Final Exam

If a subsidiary's financial statements are translated, the translation gain (loss) is related to changes in: The subsidiary's operating profit The subsidiary's net monetary assets The subsidiary's stockholders' equity The subsidiary's working capital

The subsidiary's stockholders' equity The Cumulative Translation Adjustment is a component of Accumulated Other Comprehensive Income (AOCI), a stockholders' equity account.

Gains and losses from remeasuring a foreign subsidiary's financial statements should be reported: a. In current income b. In other comprehensive income c. As a one-time item, net of income taxes d. As a prior period adjustment

a. In current income The net gain or loss from the remeasurement process is reported in Net Income rather than in Other Comprehensive Income.

Assume that your subsidiary operated independently of the parent company. Which if the following is true? Translation adjustmentshave an immediate effect oncash flows Translation adjustmentsshould be reflected inearnings a. No No b. No Yes c. Yes No d. Yes Yes

a. No No The debit or credit necessary to balance the translated trial balance is the amount of Cumulative Translation Adjustment (this amount can be positive or negative). The Cumulative Translation Adjustment is a component of Accumulated Other Comprehensive Income (AOCI), a stockholders' equity account, not in current earnings, and does not affect cash flows.

A foreign subsidiary's functional currency is its local currency, which has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating: Salaries expense. Sales to external customers a. Yes Yes b. Yes No c. No Yes d. No No

a. Yes Yes

Which of the following best describes the cumulative translation adjustment? Select one: A. The cumulative translation adjustment is a plug figure to balance the trial balance. B. Changes in the cumulative translation adjustment are reflected in net income for the period. C. The cumulative translation adjustment reflects changes in the fair values of marketable securities on the balance sheet. D. The cumulative translation adjustment can only be a positive dollar amount.

A. The cumulative translation adjustment is a plug figure to balance the trial balance.

On October 1 of the current year, a U.S. company sold merchandise on account to a British company for 3,000 pounds (exchange rate, 1 pound = $1.41). At the company's December 31 fiscal year end, the exchange rate was 1 pound = $1.38. The exchange rate was 1 pound = $1.36 on collection in January of the subsequent year. The functional currency for the U.S. company is the $US. What amount would the company recognize as a gain(loss) from foreign currency translation when the receivable is collected? (($1.36 - $1.38) x 3,000 = $(60)) $60 $(150) $150

$(60) (($1.36 - $1.38) x 3,000 = $(60))

One of our subsidiary companies maintains its accounting records in Euros and designates the British pound as its functional currency. Your computations yield a translation loss of $7,000 and a remeasurement gain of $5,000. What amount should you report as a gain (loss) in your income statement? $0 $5,000 ($7,000) ($2,000)

$5,000 The net gain or loss from the remeasurement process is reported in Net Income rather than in Other Comprehensive Income as is the case in the translation process.

The functional currency is the currency: a. Of the country in which the parent is located b. Of the county in which the subsidiary is located c. Of the country in which the subsidiary maintains its accounting records d. Of the environment in which a subsidiary primarily generates and expends cash

d. Of the environment in which a subsidiary primarily generates and expends cash The functional currency is the currency of the primary economic environment in which the subsidiary operates. Normally, that is the currency of the environment in which a subsidiary primarily generates and expends cash (FASB ASC 830-10- 20 Glossary).

A derivative financial instrument is best described as: Evidence of an ownership interest in an entity such as shares of common stock. A contract that conveys to a second entity a right to receive cash from a first entity A contract that conveys to a second entity a right to future collections on accounts receivable from a first entity.

A contract that has its settlement value tied to an underlying notional amount.

Our company uses the $US as its functional currency and purchased merchandise from a vendor in England on November 20 for 260,000 British pounds. Payment was due in British pounds on January 20. The spot rates to purchase one pound were as follows: November 20 $1.27 December 31 1.30 January 20. 1.32 How should the foreign currency transaction gain or loss be reported on our company's financial statements at December 31? A gain of $7,800 in the income statement A loss of $7,800 in the income statement A gain of $13,000 in the income statement A loss of $13,000 in the income statement

A loss of $7,800 in the income statement ($1.30 - $1.27) x 260,000 British pounds = $7,800.

Which of the following best describes current GAAP with respect to the translation process? Select one: A. Assets and liabilities are translated at the exchange rate at the balance sheet date regardless of when they arose. B. Assets and liabilities are translated at the exchange rate in effect when they arose. C. Assets are translated at the exchange rate at the balance sheet date, but liabilities are translated at the exchange rate in effect with the liabilities were incurred. D. Revenues and expenses must be translated at the exchange rate in effect then they are recognized.

A. Assets and liabilities are translated at the exchange rate at the balance sheet date regardless of when they arose.

Gordon Ltd., a 100% owned British subsidiary of a U.S. parent company, reports its financial statements in local currency, the British pound. A local newspaper published the following U.S. exchange rates to the British pound at year end: Current Rate $1.70 Historical rate (acquisition). $1.50 Average rate $1.60 Inventory (FIFO) $1.55 Which currency rate should Gordon use to convert its income statement to U.S. dollars at year end? $1.50 $1.55 $1.60 $1.70

Average rate $1.60 The translation approach technically requires the use of current exchange rates on the dates that each item of revenue and expense is recognized and FASB ASC 830-10-55-10 allows companies to "use averages and other methods of approximation" in the translation of income statement accounts.

Which of the following best describes the accounting for nonmonetary assets and liabilities? Select one: A. They are reported at fair value. B. Revenues and expenses arising from these assets are translated at historical cost. C. They are reported at fair value only if less than historical cost. D. None of the above are true.

B. Revenues and expenses arising from these assets are translated at historical cost.

Which of the following best describes the translation of financial statements? Select one: A. All asset, liability and equity accounts are translated at the current exchange rate on the financial statement date. B. All asset, liability and equity accounts are translated at an average exchange rate for the period. C. Common stock and APIC accounts are translated at their respective historical exchange rates. D. All equity accounts are translated at their respective historical exchange rates.

C. Common stock and APIC accounts are translated at their respective historical exchange rates.

Which of the following is not a factor that must be considered in determining the functional currency? Select one: A. In which currencies does the subsidiary transact sales and ultimately generate its cash? B. In which currencies does the subsidiary purchase labor, materials, and other goods and services and ultimately expend cash? C. In which currencies does the subsidiary obtain its financing? D. In which currency will fluctuations in $US value be minimized?

D. In which currency will fluctuations in $US value be minimized?

Which of the following statements is true regarding the cumulative translation adjustment? Select one: Changes in the cumulative translation adjustment account are added back in the computation of net cash flow from operating activities since they are non-cash income or expense. The cumulative translation adjustment account is reported in accumulated other comprehensive income and is transferred into reported earnings when the transaction to which it relates affects reported earnings. The cumulative translation adjustment account affects the amount of gain or loss reported upon the sale of a foreign subsidiary. Changes in the cumulative translation adjustment are reported in the income statement at each statement date.

The cumulative translation adjustment account is reported in accumulated other comprehensive income and is transferred into reported earnings when the transaction to which it relates affects reported earnings. The cumulative translation adjustment account affects the amount of gain or loss reported upon the sale of a foreign subsidiary.

Which of the following best describes the accounting for nonmonetary assets and liabilities? Select one: A. They are reported at their historical cost. B. They are reported at market value. C. Declines in market value are recognized, but only if other than temporary. D. We recognize decreases in fair value, but not increases.

A. They are reported at their historical cost.

A highly inflationary economy is best defined as? Select one: A. one which has a cumulative inflation of over 100% over a three-year period. B. one in which the rate of inflation is greater than that of the parent company. C. one with inflation that is greater than its neighboring countries. D. None of the above.

A. one which has a cumulative inflation of over 100% over a three-year period.

On June 19, a U.S. company sold and delivered merchandise on a 30-day account to a German corporation for 150,000 Euros. On July 19, the German company paid the U.S. company in full. Relevant currency rates were: June 19. July 19 Spot rate. $1.157. $1.160 30-day forward rate. 1.170 1.173 What amount should the U.S. company record on June 19 as an account receivable for its sale to the German company? $175,500 $175,950 $174,000 $173,550

$173,550 (150,000 Euros x $1.157/euros = $173,550)

Which of the following statements is correct? Select one: A. The functional currency must always be the currency of the US parent company. B. Non-US subsidiaries always record transactions in $US. C. If the foreign-currency-denominated subsidiary financial statements are already in the functional currency, but not in the parent's currency, then the financial information must be "translated" into the parent's currency. D. None of the above

C. If the foreign-currency-denominated subsidiary financial statements are already in the functional currency, but not in the parent's currency, then the financial information must be "translated" into the parent's currency.

Which of the following statements is true? Select one: A. Direct computation of the translation adjustment only involves the current year and begins at a zero amount. B. Net income is multiplied by the difference between the end-of-year exchange rate and the beginning-of-year exchange rate. C. Net income is multiplied by the difference between the end-of-year exchange rate and the average exchange rate. D. The cumulative translation adjustment computation contains an adjustment to reflect changes in the fair value of the net assets of the company.

C. Net income is multiplied by the difference between the end-of-year exchange rate and the average exchange rate.

Which of the following statements is not true? Select one: A. Gains and losses arising from remeasurement are reflected in current income. B. Cost of Goods Sold is not computed as the product of the foreign currency amount and an exchange rate. C. There is no cumulative translation adjustment arising from the remeasurement process. D. Remeasurement gains and losses are reflected in Other Comprehensive Income (OCI).

D. Remeasurement gains and losses are reflected in Other Comprehensive Income (OCI).

Which of the following statements is true about the treatment of the AAP in the consolidation process? Select one: A. The $US value of the beginning-of-year balance carries over from the previous year. B. The AAP relating to foreign acquisitions is not amortized like that related to US acquisitions. C. There is no gain or loss resulting from the translation of the AAP. D. The translation of the AAP requires both amortization and the recognition of gains or losses on the translation.

D. The translation of the AAP requires both amortization and the recognition of gains or losses on the translation.

During the translation process, the current year change to the cumulative translation adjustment is a function of which of the following relationships of the subsidiary? Its operating cash flows Its monetary assets minus monetary liabilities Its current assets minus current liabilities Its total assets minus total liabilities

Its total assets minus total liabilities The debit or credit necessary to balance the translated trial balance is the amount of Cumulative Translation Adjustment (this amount can be positive or negative). It, therefore, related to the translated amounts to total assets less total liabilities.

An item that should be remeasured using the historical exchange rate is: Accounts receivable Long-term notes payable Cash Prepaid expenses

Prepaid expenses Nonmonetary assets and liabilities are restated at historical exchange rates (i.e., the exchange rates in effect when the nonmonetary assets and liabilities were initially recognized). Prepaid expenses are a nonmonetary asset.

Our company has two derivatives related to two different financial instruments, instrument A and instrument B, both of which are debt instruments. The derivative related to instrument A is a fair value hedge, and the derivative related to instrument B is a cash flow hedge. During the current year, our company experienced gains in the value of instruments A and B due to a change in interest rates. Both of these debt instruments and their related derivatives are still outstanding at the end of the current year. Which of the gains on these hedged financial instruments should be reported by our company in its income statement during the current year? Gain in Value ofDebt Instrument A Gain in Value ofDebt Instrument B a. No No b. No Yes c. Yes No d. Yes Yes

c. Yes No If a derivative instrument qualifies as a fair value hedge, both the derivative and the asset or liability to which it relates are reported at fair value at each statement date. Gains or losses on the hedged assets or liabilities are offset (in whole or in part) by losses or gains in the derivative financial instrument. So, for the fair value hedge, the gain will be recognized on the debt instrument during the current year. If a derivative instrument qualifies as a cash flow hedge, the after-tax gain or loss on fair value remeasurement of the derivative is included as a component of Other Comprehensive Income (OCI). This means that these gains and losses are deferred until the transaction to which the derivative relates occurs and affects net income. Then, these deferred gains or losses are reclassified from Accumulated Other Comprehensive Income (AOCI) into current net income to offset (in whole or in part) the hedged transaction's effect on reported profit. Thus, in the current year, the gains on the debt instrument will not be recognized in income.